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Patent Baseline Royalty of 25% Thrown Out as Unreasonable By the Federal Circuit in Uniloc USA, Inc. v. Microsoft Corp., No. 2010-1035 (Fed. Cir., January 4, 2011)

By Andis Kaulins

We have not been writing much about patents in past months because we were appalled at the reasoning (not the decision) of the Supreme Court decision in Bilski, in a holding which merely continues the patent madness.

A recent very important decision by the Federal Circuit, Uniloc USA Inc. v. Microsoft Corp., No. 03-CV-0440 (Fed. Cir. Jan. 4, 2011), shows, nevertheless, that at least some semblance of sanity is returning to judicial treatment of patents, as the Federal Circuit has now thrown out the ridiculous 25% baseline patent royalty "rule of thumb" as not being reasonably tied to the facts of the patent infringement case in question.

Numerous articles and blogs have commented on the Federal Circuit Court's decision in the Uniloc case, where the jury had cluelessly awarded the Australian patent troll Uniloc $338 million in damages (patently absurd!) against Microsoft Corp. for some obscure "try and buy" activation software that was allegedly being infringed under the motto that the way to riches in our modern age is to sue some successful company for some kind of alleged intellectual property infringement.

Wilson, Sonsoni Goorich & Rosatti write at Uniloc v. Microsoft: Federal Circuit Confirms Necessity of Tying Damages Theory to Facts of the Case:

"Uniloc accused Microsoft's Product Activation feature, which acts as a gatekeeper to Microsoft's Word XP, Word 2003, and Windows XP software programs, of infringing the '216 patent."

Our attitude to those kinds of suits is to ask, Is that true? and if true to say, "Good. Give 'em a dollar and send the patent trolls on their way."

In CAFC Nixes 25% "Rule of Thumb" Application For Estimating Patent Damages, The 271 Patent Blog of Peter Zura states the prevailing law as follows:

"35 U.S.C. §284 provides that on finding infringement, damages shall "in no event [be] less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court." ...

The 25 percent rule of thumb is a tool that has been widely used to approximate the reasonable royalty rate that the manufacturer of a patented product would be willing to offer to pay to the patentee during a hypothetical negotiation."

At Federal Circuit Rejects 25 Percent Reasonable Royalty 'Rule of Thumb'"
Skadden, Arps, Slate, Meagher & Flom LLP (Daniel A. DeVito, James J. Elacqua, Edward V. Filardi, David W. Hansen, Douglas R. Nemec, P. Anthony Sammi, Andrew N. Thomases, Jonathan D. Baker) summarize the holding in Uniloc:

"[T]he Federal Circuit [rejected the 25 percent rule] as failing the Daubert standard, holding that the rule fails under the Daubert standard ?because it fails to tie a reasonable royalty base to the facts of the case at issue.?"

IP Watchdog.com - Microsoft Wins at Federal Circuit, 25 Percent Rule Dies
quoted the Court's holding:

"[T]he Court ruled:

"This court now holds as a matter of Federal Circuit law that 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." "

In addition, as written at The 271 Patent Blog, the Federal Circuit also expressly rejected the equally absurd practice of using the entire market value of products as the basis for damages, writing:

"In addition to challenging the 25% rule, Microsoft challenged the calculation of damages using the entire market value of Office and Windows and comparing the calculated royalty to the total revenue Microsoft earned through the accused products [$19 billion !]."

"The Supreme Court and this court?s precedents do not allow consideration of the entire market value of accused products for minor patent improvements simply by asserting a low enough royalty rate . . . This case provides a good example of the danger of admitting consideration of the entire market value of the accused where the patented component does not create the basis for customer demand." "

And how many years has it taken for many people in the patent world to come to that elementary understanding?!

Nevertheless, the Federal Circuit blew the case to begin with by not finding the Uniloc "invention" to be patently obvious and preceded by the prior invention of all kinds of "keys" used everywhere in society. That the courts are assisting some obscure company to try to get a monopoly on software keys is anathema to the human spirit and shows that the judges on the Federal Circuit still have no understanding of what a legitimately protectable patent looks like.

The American economy is CRUMBLING, in part because it is spending its time rewarding parasitic patent trolls with unearned millions or granting million-dollar bonuses out of bail-out money to gougers and speculators in finance who are ruining our economy, rather than rewarding the people who are working, inventing useful things and actually keeping the economy running.

Full post as published by LawPundit on February 06, 2011 (boomark / email).