CAFC rejects 25% Rule for calculating reasonable royalities

Yesterday, the Court of Appeals of the Federal Circuit (the CAFC if you're casual, Fed. Cir. if you're formal ;) ) released a big decision if you're interested in monetary remedies for patent infringement. Uniloc USA v. Microsoft.

The CAFC (Linn J., writing for a panel that included Justices Rader and Moore) ruled that evidence regarding the "25% Rule" is inadmissible under Daubert "because it fails to tie a reasonable royalty base to the facts of the case at issue."

To quote myself,

The 25 percent royalty rule recognizes as a benchmark that the licensor should be entitled to 25 percent of the predicted "profits". However, this 25 percent rule is only a starting point: the profit split should then be adjusted up or down to reflect the exact circumstances of the license, and it is not unreasonable for the ratio to be reversed.

Questions have been raised in the past about whether Courts and/or Juries are biased towards the "benchmark" 25%/75% split, regardless of the evidence presented that the split should be amended in a specific case.

Trial courts in the US often have admitted such evidence, as the CAFC states, "largely in reliance on its widespread acceptance or because its admissibility was uncontested."

The CAFC states that in the past it has "passively tolerated" its use; apparently it will no longer be tolerated ;).

Notably, the CAFC rules that since the 25%/75% split is "unreliable and irrelevant", the approach cannot be saved by adjusting the split up or down to reflect the exact circumstances of the case, say by applying the Georgia Pacific factors. Basically, the Court says you cannot start from an unfounded basis and then try to correct yourself.

In the Canadian context, the US Court that specializes in patents has rejected the reasoning applied in AlliedSignal, a leading Canadian case on patent damages. It will be interesting to see if Canadian courts follow the US lead, and if so whether they do so explicitly or implicitly.