Federal Appeals Court Finally Rejects Silly Rules Of Thumb For Calculating Patent Damages

from the made-up-rules,-made-up-results dept

In the past, we’ve mocked the popular “25% rule,” which many patent system supporters have used in legal cases going back decades. The basic gist of this rule is that, in calculating “damages” for infringement, the patent holder should be entitled to 25% of the profits as an approximation of what a “reasonable license fee” would have been, while the company, who actually took on all the risk, should get the remaining amount. Patent system supporters have often pointed to this as being a generous solution, since it leaves 75% of the profits to the company who supposedly infringed. Of course, it leaves out the fact that any modern technology product today probably involves hundreds, or even thousands, of things that someone else will claim patents on. Still, the 25% rule is brought up regularly,and is rarely questioned by courts… until now.

In a ruling in a patent infringement lawsuit between Uniloc and Microsoft, the appeals court for the Federal Circuit (CAFC) finally pointed out just how ridiculous the 25% rule really is and suggested that it should die a quick death. The court noted how the 25% rule is widely used, and even how the district court was troubled by such a “rule of thumb” rather than any actual look into damages, but that since it was so widely used, the lower court effectively shrugged its shoulders, and let the 25% rule remain. The appeals court rejected this commonly used tool, however, noting serious problems with it. CAFC admits that it has been just as guilty in accepting the 25% rule in the past and many other courts have simply used it just because everyone else is using it — but no one’s ever really asked a court if it’s legitimate. But, no longer:

This court now holds as a matter of Federal Circuit law that the 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation. Evidence relying on the 25 percent rule of thumb is thus inadmissible under Daubert and the Federal Rules of Evidence, because it fails to tie a reasonable royalty base to the facts of the case at issue.

The court then points out that the patent holder has the responsibility for demonstrating what the actual damages are and they must sufficiently tie the damages estimates to the facts of the case — without doing that, and just using a rule of thumb, means that “the testimony must be excluded.” The court doesn’t beat around the bush here:

The meaning of these cases is clear: there must be a basis in fact to associate the royalty rates used in prior licenses to the particular hypothetical negotiation at issue in the case. The 25 percent rule of thumb as an abstract and largely theoretical construct fails to satisfy this fundamental requirement. The rule does not say any-thing about a particular hypothetical negotiation or reasonable royalty involving any particular technology, industry, or party. Relying on the 25 percent rule of thumb in a reasonable royalty calculation is far more unreliable and irrelevant than reliance on parties? unre-lated licenses, which we rejected in ResQNet and Lucent Technologies….

[…]

…. Beginning from a fundamentally flawed premise and adjusting it based on legitimate considerations spe-cific to the facts of the case nevertheless results in a fundamentally flawed conclusion….

Separately, CAFC also rejected the idea of using the “entire market value rule,” in determining a reasonable royalty rate. Again, the court dismisses this commonly used rule as not being tied to the specifics of the situation. This rule involves a patent holder trying to determine the reasonable royalty rate on the overall market value of a product, rather than figuring out the actual market value of the invention in question. This trick is useful for patent holders because they can toss out some huge number, to make any (otherwise huge) number sound reasonable. For example, in this case, the patent holder pointed out that Microsoft had made “approximately $20 billion” selling “the infringing product.” When you use an amount that large, then a few hundred million dollars seems “small.” The full market value is misleading, and CAFC makes that clear:

This case provides a good example of the danger of admitting consideration of the entire market value of the accused where the patented component does not create the basis for customer demand…. The disclosure that a company has made $19 billion dollars in revenue from an infringing product cannot help but skew the damages horizon for the jury, regardless of the contribution of the patented component to this revenue.

The court highlights how the patent holder’s lawyers played up the “approximately $20 billion,” and mocked a proposed $7 million royalty as only being “an effective royalty of approximately .000035%,” which ignored, of course, that the patent in question was a very, very, very minor part of the larger product. In fact, Uniloc’s lawyer specifically asked a witness:

And at the end of the day, the in-fringer, Microsoft, who violated the patent law, they get to keep 99.9999% of the box and the inventor, whose patent they in-fringed, he gets the privilege of keeping .00003%?

It’s not hard to see how that clearly biases the jury. But CAFC is thankfully rejecting that too. While I often find that CAFC sides too strongly with patent holders, it’s nice to see it pushing back a bit on some of the more ridiculous “rules of thumb” used for damages that are way out of scale with reality.

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Companies: microsoft, uniloc

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Comments on “Federal Appeals Court Finally Rejects Silly Rules Of Thumb For Calculating Patent Damages”

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22 Comments
Jay says:

!!!? Our government is getting smarter?!

I know it’s hard to believe but this could have implications in other types of IP litigation.

It could also have a very (finally!) positive effect on having people explain why we need to question statutory damages in copyright litigation.

Think about this for a second…

No more secret copyright boards…
No more Performance Rights Organizations…
No more DHS takedowns…

All this starts when prosecutors need proof of damages rather than some figure pulled out of thin air.

Jay says:

!!!? Our government is getting smarter?!

I’m thinking that if the court rejects this ruling, perhaps it can extend to other parts of IP law. Copyright could really use it, what, with the statutory damages proving far more harmful than what the trade industries can find and resolve on their own.

Both patents and copyrights suffer from similar concepts of giving money to the prosecutor regardless of actual damages shown. I’m thinking positively that this will create a higher burden of proof for damages instead of a default reliance on a standard of operation.

Anonymous Coward says:

There is one problem with the Judge’s logic on this one, which is that he is removing the deterrent factor of the current system.

If the settlements are only for the “likely license amount”, then there is no reason to license anything. Rather, you just steal whatever you want, reserve an amount of your sales as “pending litigation” and move on. As patents expire (and they do) you can then realize that as a gain, unless you get sued.

There needs to not only be recovery, but some form of punishment / financial pain inflicted to make sure that people follow the rules, rather than wandering around them.

attoman says:

Microsoft is a serial infringer, subject of criminal investigation and eventually determined to have committed federal antitrust violations. As such it deserves special treatment whenever it is caught infringing or acting to break the law by any other means. The judge in this case did not do his job or show concern for the society at large. A factor of ten should be used to increase any award against Microsoft while any suit by Microsoft as the plaintiff should be treated as tainted by a company whose leader is still an unindicted video taped liar.

Vic Kley says:

Masnick recaps his typical mindless performance by characterizing the world of invention as being about products incorporating many inventions. A product may well be partially or wholly the subject of a single invention and except for this invention be of little or no value. A good example is Velcro.

We are glad the recent court decision will allow such inventions to be awarded substantially more then 25% of the profits indeed by measuring the demand change in the overall functionality of the product even Masnick’s “modern technology” will give up the profits. For instance imagine the value of the iPhone and iPad with no touch capability – indeed this example points to core values as deserving a much higher share of the profits made by the exploiting “personalities” contributing little more then PR to the products success. It’s quite strange what makes a product a success. Certainly the iPhone manages sales success without working as a phone very often in very many places at all.

Sneeje (profile) says:

Re:

Hey, nice strawman there where you imply that the post and responses would be shocked if they realized this allows for damages to be higher.

In fact, I think everyone here would be overjoyed if the *actual* damages were presented openly and proven.

For example, in your example, perhaps touch did have an enormous impact on the iPhone. But those damages would have to calculated by demonstrating not the contribution to the overall invention, but in terms of what should have been a reasonable license fee–especially considering the owner of that patent had no reasonable manner (or intention) of creating a competing product.

RTFA, the damages are not “share of the profits” but “what should have been a reasonable license fee” given the context of the case.

staff says:

risk

“while the company, who actually took on all the risk, should get the remaining amount”

Anyone who has ever sought venture capital knows that early stage funding is the most expensive because that is where the greatest risk lies. Once a product or process is proven successful, the cost of capital shrinks considerably. That’s why large companies wait for a technology to become proven before they jump in. Of course by then others own it, but large infringers don?t care. Their attitude is “so sue me’. Occasionally they are, but not often enough as small entities seldom have to cash to take them on and must pull over and let the big boys through. Large companies know this and take advantage of it. A thief is a thief.

I will agree with you that the court’s efforts at fixing damages, certainly when it comes to future damages, is nonsensical. The best and only reasonable determination of a reasonable royalty is the market place. Infringers know what their costs are and what they can and are willing to pay. Until injunctions are restored to all patent holders large and small, the courts will continue to struggle with damages. They are in over their heads as a result of bad law -Mercexchange. The courts have played the fool for large infringers and left the hen house door open.

Anonymous Coward says:

risk

“That’s why large companies wait for a technology to become proven before they jump in.”

Large companies (ie: look at pharma but this applies accross the board as well) typically get patents before conducting any R&D. Hence, patents have no R&D value and there is nothing to suggest that what they contain has been “proven.” As a result what ends up getting patents are many obvious ideas in an effort to hope that something works. The patents are typically for

defensive purposes
A: So that you can get the patent before someone else does and sues you for infringing on an obvious idea

B: So you can counter-sue anyone who sues you

or they’re for the purpose of hoping that someone accidentally infringes and suing them.

Many patent holders are patent trolls who have conducted no R&D whatsoever to know what has been proven and what has not.

Ronald J Riley (profile) says:

!!!? Our government is getting smarter?!

“Am… am I being trolled?”

Of course you are. TechDIRT exists to troll. That is why they talk about patent trolls all the time, what better way to deflect attention from their trolling then accusing others of being trolls?

Ronald J. Riley,

President – http://www.PIAUSA.org – RJR at PIAUSA.org

Other Affiliations:
Executive Director – http://www.InventorEd.org – RJR at InvEd.org
Senior Fellow – http://www.PatentPolicy.org
President – Alliance for American Innovation
Caretaker of Intellectual Property Creators on behalf of deceased founder Paul Heckel
Washington, DC
Direct (202) 318-1595 – 9 am to 9 pm EST.

teka (profile) says:

!!!? Our government is getting smarter?!

i’m not a poopy head, you are all poopy heads, you poopy heads!

thanks for your input, ronny, but we were not even talking about you. Can’t you agree that when damages are justified they should be assigned according to some formula, some concept that actually makes sense from a legal standpoint?

Hey, i was wondering.. where can i buy some equipment containing your brand-new-to-the-world patented technology? Who has paid you, and what does it do? can i have one trucked over immediately, or does it have to be shipped in via monorail?

Or anything else you claim to have created? anything?

Ronald J Riley (profile) says:

risk

“Large companies (ie: look at pharma but this applies across the board as well) typically get patents before conducting any R&D.”

Typical TechDIRT lemming misinformation.

Patent are almost always based on research. Research continues which is one reason that there are continuations filed.

Infringement is rarely accidental. In all the cases where my inventions were infringed only one was accidental.

Many infringers claim to be independent inventors when in fact they copied the invention. It simply is not worthwhile litigating that issue.

It is a good thing that the idiot who posted this does not sign their name.

Ronald J. Riley,

President – http://www.PIAUSA.org – RJR at PIAUSA.org

Other Affiliations:
Executive Director – http://www.InventorEd.org – RJR at InvEd.org
Senior Fellow – http://www.PatentPolicy.org
President – Alliance for American Innovation
Caretaker of Intellectual Property Creators on behalf of deceased founder Paul Heckel
Washington, DC
Direct (202) 318-1595 – 9 am to 9 pm EST.

teka (profile) says:

risk

Ah, since you are the font of all knowledge can i ask for something small?

like a citation?
go on, prove everything you said and keep that moral high ground.

*Patents are almost always based on research
some statistics? press releases from an independent party?

*infringement is rarely accidental (ie: anyone claiming independent invention is a lying thief)
anything to back that up? Still waiting to hear more about your inventions, by the way. if someone is going to the trouble of Stealing them (meaning you no longer have them?) they must be vital. Do i have one of your inventions in my cell phone? in my car? in my entire state? was it.. gasp.. stolen?

And to round it all up, thanks for proving someone can sound like an idiot, even when posting their name and a list of credentials they feel make them important.

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