The rousing cheer that erupted coast-to-coast on Jan. 4 had nothing to do with a college bowl game. It was actually the patent defense bar heralding the Federal Circuit's recent pronouncement on patent damages in the Uniloc v. Microsoft decision. In Uniloc, the Federal Circuit struck down two “trick plays” that had become part of every plaintiff lawyer's game plan on damages: the 25 percent rule and the Entire Market Value (EMV) End Run. In doing so, the Federal Circuit went a long way towards leveling the playing field in patent cases.

Flagging the 25 Percent Rule

The 25 percent rule is a “rule of thumb” that stands for the proposition that a licensee would typically be willing to license a patent for 25 percent of the profits the licensee would derive from the patent. The 25 percent rule was originally based on a mid-90s study of licenses entered into by a Swiss subsidiary of an American company. Over the years, expert after expert has relied on the 25 percent rule, adding to its apparent validity. Unfortunately, the 25 percent rule never made much sense for general application. The patent statue prescribes a reasonable royalty as an appropriate measure of damages for patent infringement. Under Federal Circuit case law, a reasonable royalty is determined by looking at a hypothetical negotiation that would have occurred between the parties at the time the infringement commenced. While past licensing practices of the parties would certainly be relevant to this hypothetical negotiation, it is hard to see how the decades old practices of a Swiss company should fit into the mix. Despite the obvious flaw of this “tool,” many courts accepted its use simply because it appeared to have achieved widespread acceptance.