Patent Damages: How Much is Too Much?

First Publication Date: 6th January 2011
When the US sneezes, the world catches cold!

This statement holds absolutely true for debates over patent infringement damages. It has been just two days that United States Court of Appeals for the Federal Circuit (CAFC) pronounced the judgment in the much hyped Uniloc v. Microsoft case and the world is already drooling over the reincarnated debate. The facts, in a nutshell, involve Uniloc suing Microsoft over infringement of their patent related to software registration system (the unique id that you enter when you buy and use a legitimate copy of any  software). During the trial in the US District Court for the District of Rhode Island, the jury granted Uniloc damages to the tune of USD 388 million (one of the highest in the history of patent damages). The damages were based on the 25% thumb rule followed in the US for a long time. This 25 % rule of thumb is a tool that has been used to approximate the reasonable royalty rate that the manufacturer of a patented product will be willing to offer to pay to the patentee during a hypothetical negotiation.

In post trial motion the District Court granted Microsoft’s motion of new trial for damages as the 25% rule is unjust and unfair in this case. Perturbed by this Uniloc filed an appeal in CAFC , their primary point of contention being that the 25% rule is the right way of calculating damages and that the CAFC has passively tolerated the use of this rule in earlier cases. The CAFC for the first time gave the following observation with respect to the calculation of damages using the 25% rule-
“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.”
Having said the aforementioned the court observed that evidence relying on the 25 percent rule of thumb is inadmissible under Federal rules of evidence, because it fails to tie a reasonable royalty base to the facts of the case at issue. CAFC upheld the District Court’s judgment that Microsoft is entitled to a new trial on damages.
This judgment has brought alive the debate on patent damages the world over. Due to lack of enough jurisprudence and precedents on the subject we expect that this case will be used by a lot of litigants around the world in patent suits. Also the result of the new trial on damages will be interesting to note as it may shape atleast the way US looks at patent infringement damages.
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