Federal Circuit Finds "25% Royalty Damages" Rule Inadmissible

January.10.2011

In a ruling that likely will impact how damages are calculated in patent cases, the U.S. Court of Appeals for the Federal Circuit recently held that the so-called "25 percent rule of thumb" is a "fundamentally flawed tool" for determining a baseline royalty rate in a hypothetical negotiation, and is thus inadmissible under Supreme Court precedent and the Federal Rules of Evidence. See Uniloc USA, Inc. v. Microsoft Corp., No. 2010-1035 (Fed. Cir. Jan. 4, 2010).

The "25 percent rule of thumb," has been widely used by damages experts in patent infringement cases to establish the royalty rate that the manufacturer of a patented product should pay to the patentee during a hypothetical negotiation.  However, this rule, which is based on a purely hypothetical premise as to how companies calculate patent royalties, generated academic criticism for not being a reliable predictor of market behavior.

In reinstating a jury verdict of infringement, the Court of Appeals in Uniloc USA, Inc. v. Microsoft Corp simultaneously ordered a new trial on the issue of damages.  Of particular importance, the Court of Appeals ruled that as a matter of law, the 25 percent rule of thumb is a "fundamentally flawed tool" for determining a baseline royalty rate in a hypothetical negotiation.  Therefore, evidence relying on the 25 percent rule of thumb is now inadmissible in all future patent infringement cases.  In the future, for expert testimony regarding a reasonable royalty rate to be admissible, the Court of Appeals has clarified that it must "carefully tie proof of damages to the claimed invention's footprint in the market place."