Federal Circuit Finds 25 Percent Rule "Fundamentally Flawed"

For years, many trial courts have relied on the 25 percent rule of thumb, which calls for a 25 percent royalty rate in calculating patent infringement damages in cases such as Uniloc v. Microsoft, in which one party (in this case Microsoft) is accused of using a patented device as a component in one of its products. Calling the rule "fundamentally flawed," the Federal Circuit put an end to its use with the Jan. 4 ruling in Uniloc v. Microsoft.

The 25 percent rule relied on the supposition that the licensee would be willing to give up 25 percent of profits for the right to use a patented technology or device, keeping 75 percent. Although it was convenient and widely used, application of the 25 percent rule took little into consideration aside from the projected value of the products. Important facts of the case, such as the relationship between the parties in dispute and the value of the patented component in the offending product, were not considered.

Rule of Thumb

In Uniloc v. Microsoft, the patented technology in question is a product activation key. The patent Uniloc owns covers a mechanism that combats copying software by requiring a unique activation code, limiting the number of computers a licensed piece of software can be installed on. Microsoft uses these activation codes in much of the software it sells, including the popular Office suites.

Leveraging Licenses

One way to establish damages, which will likely become more common, is through licensing agreements. Experts warn that those looking to establish a royalty rate through a licensing agreement should aim for agreements that address the patented technology specifically, steering clear of licenses that address large patent portfolios.

Kayleigh Roberts

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