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Patent litigators lose 25 percent damages rule

Federal Circuit judge throws out ‘arbitrary’ standard commonly used in infringement cases

The federal appellate court that hears all appeals in patent cases has chucked an oft-used method for calculating damages in patent infringement cases.

The Jan. 4 ruling threw out a 25 percent rule of thumb for damages, blasting that standard as a “legally inadequate methodology” courts have accepted tacitly for years without questioning the science behind it.

Defendants in patent infringement cases have lodged the same complaint about the 25 percent rule for years.

But the U.S. Court of Appeals for the Federal Circuit’s clear pronouncement in Uniloc USA Inc. v. Microsoft Corp. means federal judges now will be reluctant to allow any damage evidence based on the 25 percent rule, said Jeffrey Kass, a St. Louis intellectual property attorney at Gallop, Johnson  & Neuman.

The ruling also likely will drag down the possible damages that patent owners can secure in cases against patent infringers, Kass said.

Jeffery Kass

Now to come up with a damage amount, economic experts will have to look harder at the specific relationship between the patented technology and the infringing product at issue in the case, he said.

“That expert is going to have to do more than just regurgitate what another court has said,” Kass said. “He’ll have to … dig into the industry and the facts, and determine how important the patented technology is to the product.”

‘Reasonable’ royalty

In the case at issue, Uniloc, an Irvine, Calif.-based tech company, contended its patent was central to a security feature that Microsoft included in several software products, including Microsoft Office XP and Windows XP.

Uniloc had patented an anti-piracy technology that prevented the unlicensed use of software bought by a consumer. A federal jury in Rhode Island agreed with Uniloc that Microsoft used the technology without authority from Uniloc, and it awarded the company $388 million, one of the highest verdicts in patent law history.

But U.S. District Judge William E. Smith entered a judgment as a matter of law, siding with Microsoft and saying the jury “lacked a grasp of the issues” when it reached its finding.

In his ruling, Federal Circuit Judge Richard Linn said Smith erred in granting a post-trial judgment in favor of Microsoft. “Substantial evidence” supported the jury’s infringement verdict, Linn wrote.

Still, Linn ordered a new trial on damages. The jury’s verdict was “tainted” by its reliance on the arbitrary 25 percent rule, he wrote.

Uniloc’s economic expert, Joseph Gemini, didn’t directly use the 25 percent rule when calculating damages.

Instead, Gemini determined that Uniloc deserved just 2.9 percent of the $19.28 billion worldwide that Microsoft earned by selling software that included Uniloc’s anti-piracy technology. Gemini then pointed to the 25 percent standard — which in this case produced a $4.8 billion damage figure — to highlight the reasonableness of his original $565 million damage figure.

“The idea was tell the jury … ‘We only want $500 million. Look how reasonable we’re being,’” said Russ Jones Jr., a Kansas City intellectual property attorney with Polsinelli Shughart. Economic experts can’t do that anymore, Jones said.

Changes going forward

What experts will have to do is more closely tie their royalty rate calculations to the unique relationship between the patent and the infringing product, said Kass, the St. Louis intellectual property attorney.

For example, what role does the patented technology play in the product? If a company patents a new air conditioner and sues a carmaker for infringing on its patent, an expert can no longer begin his calculations by saying the patent-owner gets 25 percent of the profits from the sale of the car.

Instead, Kass said, “you would have to figure out what is the relationship of that air conditioner to the entire sale of that car.”

Kass extended his car metaphor. Con-sider the Corvette, he said. If a company patents a significant design element of the Corvette — say, its curvaceous body shape — and Chevrolet infringes on that patent, the patent-owner possibly could be entitled to more than 25 percent of profits.

“That look may be exactly why a person is buying the product, and therefore a higher royalty rate might apply,” Kass said.

Linn, the Federal Circuit judge, suggested experts return to the 15 Georgia Pacific factors, a list of 15 relevant facts set out in a 1970 federal court opinion that can help form the basis for a damage amount. In particular, Linn wrote, look to Factors 1, 2 and 12.

Factors 1 and 2 deal with the past royalties that the patent-owner received for the patent at issue, and the past royalty rates that the patent infringer paid to license a similar patent.

To that end, intellectual property attorneys may need to beef up their advisory roles for IP clients, said Penny Slicer, an intellectual property

Penny Slicer

attorney with Stinson Morrison Hecker in Kansas City.

Without the 25 percent rule, economic experts will look harder at companies’ past licensing deals for similar patents, Slicer said. Companies should respond by including in their licensing agreements more information about why they agreed to a certain royalty rate. Especially if, due to a preexisting relationship with the licensee, the rate is lower than normal.

“When your client is entering into a patent license, really advise them, ‘Whatever royalty you set is not only going to relate to this deal, it could potentially have an impact on the amount of damages in the future,’” Slicer said. “So we really need to think about what we’d want [the royalty] to be.”