Patent Damages Rule of Thumb All Thumbs

January 10, 2011, 3:04 PM

Rules of thumb are easy ways to simplify complex issues. That is, until the effort to simplify actually distorts reality. Overturning a longstanding rule of thumb for patent damage analysis, the United States Court of Appeals for the Federal Circuit declared last week that:

as a matter of Federal Circuit law ... the 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation. Evidence relying on the 25 percent rule of thumb is thus inadmissible under Daubert and the Federal Rules of Evidence, because it fails to tie a reasonable royalty base to the facts of the case at issue.
Uniloc USA, Inc. v. Microsoft Corporation,.2010-1035, 2010-1055, 2011 WL 9738 (Fed. Cir. Jan. 4, 2011) (emphasis added).

In the past, many lower courts had admitted expert patent damage opinions based upon the 25 percent rule of thumb. The 2 percent rule of thumb assumes that, in a hypothetical negotiation, a licensee will pay a royalty rate of approximately 25 percent of its expected profits for the accused products. Over the years, the rule has been widely used as a way to arrive at a baseline royalty rate for purposes of patent infringement damage calculations. Given its ubiquity, the 25 percent rule of thumb was not questioned by the parties or courts. Indeed, the Federal Circuit concluded that the [l]ower courts have invariably admitted evidence based on the 25 [percent] rule, largely in reliance on its widespread acceptance or because admissibility was uncontested. Uniloc is the first case in which the Federal Circuit was squarely presented with the issue of whether the rule was an appropriate means by which to calculate damages in a patent case. The answer is a resounding no.

The moral of the story is to rely less on simplified rules of thumb in patent damage analysis and more upon verifiable, factual bases to arrive at and to test the accuracy of your alleged damages.

Stephen E. Noona is the head of Kaufman & Canoles Trial Section and Co-chair of its Intellectual Property Law and Franchising Practice Group. In his 24 years of practice, he has been counsel in hundreds of intellectual property cases in federal courts across the nation, including over sixty (60) patent cases in the Eastern District and is Fellow in the American College of Trial Lawyers. He regularly appears before the judges in all four Divisions of the Eastern District on intellectual property matters. --Stephen E. Noona