The U.S. Court of Appeals for the Federal Circuit recently affirmed the vacation of a $388 million judgment in favor of plaintiff, Uniloc, in a patent infringement case, and remanded for a new trial on damages. But what really raised eyebrows was the court's rejection of the "25 percent rule of thumb" for patent royalties, which continues a trend in the courts to eliminate "shortcuts" in proving various elements that arise in IP litigation.
In Uniloc, the plaintiff sought a reasonable royalty using the traditional factors laid out in Georgia Pacific. However, its expert applied a "25 percent rule of thumb" as his starting point, and then adjusted it up and down depending on the relative weight of the various Georgia Pacific factors. In the end, he found that the factors generally balanced out and did not change the royalty rate and testified that the reasonable royalty was 25 percent of his asserted "product key" value of $10, multiplied by the nearly 226 million products sold. In other words, the damages model introduced in evidence was $2.50 per product, and the expert testified to a reasonable warranty of nearly $565 million. The jury ultimately awarded $388 million.
The Federal Circuit 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."
Notwithstanding evidence of the widespread use and acceptance of the 25 percent rule of thumb as a starting point by parties in licensing negotiations, and by courts and litigants in IP litigation, the court determined that the rule is "essentially arbitrary."
The court also rejected evidence of a "check" on Uniloc's damages estimate based on application of the "entire market value rule." The court found that, because there was no evidence that the patented feature itself created the basis for customer demand or substantially created the value of the component parts, that rule did not apply. In essence, this left Uniloc back at square one on its damages evidence, even though the court affirmed the jury finding that Microsoft had indeed infringed on the Uniloc's patent. On remand, Uniloc will need to provide an entirely different damages theory.
On remand, the will be two major questions. First, how will Uniloc (or any other patent infringement plaintiff) meet this burden? And second, where is Uniloc to obtain evidence of other comparable royalty rates, especially if the product is unique? In any event, the ability of a plaintiff to prove damages has now become significantly more difficult as a result of the Federal Circuit's decision. That may be less of a problem where the parties, like Uniloc and Microsoft, have large litigation war chests, or there is a lot at stake. But the removal (however analytically proper) of this and other shortcuts and "rules of thumb" will substantially increase the costs of litigation and enhance the need for discovery.
The elimination of the 25 percent rule "shortcut" is consistent with the recent trend in intellectual property litigation. For example, not that long ago, a successful patentee plaintiff could expect that a permanent injunction would be issued against continued infringement. That changed when the U.S. Supreme Court ruled in eBay Inc v. MercExchange that the traditional rules for issuance of injunction (proof of irreparable injury, that money damages are inadequate, that the balance of harms favors an injunction and that an injunction is consistent with the public interest) apply to patent cases too. This was thought by many to primarily be a response to the entry of the "nonpracticing entity" into the patent litigation field, but it applies across the board. Some courts have also applied these principles to copyright and trademark litigation. Again, regardless of whether one agrees that the logic supporting the Court's elimination of the presumption that an injunction should issue is good, eBay represents a paradigm change in the nature of proof that an intellectual property litigant should be prepared to confront.
The trend applies to IP defendants, too. In Illinois Tool Works Inc. v. Independent Ink, Inc., the Supreme Court established a fundamental shift in the way that defendants must prove - at least in patent infringement cases - patent misuse as an affirmative defense. Many courts had previously held that proof of a tying arrangement between the patented product and an unpatented product could be a per se antitrust violation and evidence of misuse so as to defeat the patent infringement claim. But under Illinois Tool Works, an infringement defendant must prove the antitrust violation by the "rule of reason" approach - a much more difficult and expensive undertaking. Again, one can question the logic of this approach or whether it ought to apply to other kinds of intellectual property misuse, but it is consistent with the trend. Courts are rejecting presumptions, and instead requiring proof tied to the facts of each particular case.
The removal (however proper) of shortcuts and "rules of thumb" will substantially increase the costs of litigation and enhance the need for discovery. Intellectual property litigants and lawyers therefore ought to presume that they will not be permitted to rely on assumptions they may have traditionally made, and adjust both their expectations and their actions accordingly.
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