Uniloc USA, Inc. v. Microsoft Corp.

January 12, 2011 – Blog Post

In a ruling affecting patent infringement damages calculations, the Federal Circuit issued its opinion in Uniloc v. Microsoft on Tuesday, January 4. The court reviewed the propriety of using the 25 percent rule and the application of the entire market value rule in calculating damages, affirming a district court grant of a new trial on damages.

Plaintiff Uniloc brought suit against Microsoft, alleging that Microsoft incorporated Uniloc’s patented software anti-piracy technology in its Office and Windows programs. The Federal Circuit here reversed a district court grant of Judgment as a Matter of Law of non-infringement, in favor of a jury’s infringement verdict, making damage calculations pertinent.

At trial, the jury awarded $388 million to Uniloc based on Uniloc’s expert witness’s opinion that reasonable royalty damages would amount to nearly $565 million. To calculate this number, the expert cited a Microsoft document valuing each technology use minimally at $10, applied a 25 percent rule of thumb to give a minimum per-use royalty value of $2.50, and multiplied that per-use royalty by Microsoft’s nearly 226 million accused sales of Office and Windows. The expert then used the entire market value rule and “checked” his $565 million figure against the accused products’ gross revenue of over $19 billion, finding that his royalty calculation was 2.9% of the gross revenue. Microsoft challenged both the 25 percent rule of thumb and the entire market value rule in a motion for a new trial on damages. The district court granted the motion, and Uniloc appealed the decision to the Federal Circuit.

The Federal Circuit noted that trial courts have often used the 25 percent rule of thumb as the district court did here to calculate a reasonable royalty, the minimum damages for infringement as required by 35 U.S.C. § 284. Then the Federal Circuit weighed various scholarly opinions concerning the positive and negative aspects of using a uniform 25 percent rule of thumb to calculate damages, ultimately holding that the 25 percent rule of thumb is fundamentally flawed. The court found that using this rule is “far more unreliable and irrelevant” than calculating damages based on the parties’ unrelated licenses, which at least consider the same general industry or some of the same parties, but which still cannot properly support damages calculations. Because courts must exclude expert testimony that applies a general theory that is not tied to the case, the Federal Circuit declared evidence relying on the 25 percent rule of thumb to be inadmissible. The court therefore held that Microsoft should receive a new trial on damages issues.

Because the patented software anti-piracy features here did not create the basis for consumer demand or the value of the component parts for Office and Windows, the Federal Circuit also agreed with the district court and Microsoft that the entire market value rule was inapplicable to this case. The court ruled that even with a very low royalty percentage of the entire market value or even used only as a “check,” the entire market value rule still improperly brings irrelevant valuations into damages determinations where the infringement does not create the basis for consumer demand. The Federal Circuit thus upheld the district court’s grant of a new trial on damages to exclude the entire market value evidence.

Plaintiffs to infringement suits cannot base the damage amounts they seek on generally-accepted but arbitrary percentages not connected to their case. Unless they can show a connection between a 25% royalty rate and their particular case, plaintiffs cannot use the previously common 25% rate to calculate the damages sought. Courts will much more likely award the plaintiff’s calculated infringement damages where those calculations invoke related licensing agreements, for which the royalty rates are probably negotiated, reasonable, market-price rates. Patent holders may even wish to consider these royalty-based methods of calculating damages when negotiating licenses, because the license royalty rates may later persuade a court to award infringement damages based on comparable rates. This ruling may also complicate damages arguments in litigation because parties will dispute the relevance of different license agreements, which would not be an issue with a standard 25% royalty rate. Regardless, as Microsoft deputy general counsel David Howard stated in a Wall Street Journal article on the case, the end of the 25 percent rule of thumb “may signal the end of unreasonable and outsized damages awards based on faulty methodology.”