01/25/2011
BUSINESS INSIGHTS FOR LAW DEPARTMENT LEADERS
OUTSIDE EXPERTS
MARK C. SCARSI
IP: Federal Circuit Flags
the 25 Percent Rule and
Penalizes the EMV End Run
The rousing cheer that erupted coast-tocoast 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.
In Uniloc, the Federal Circuit did not
mince words in benching the 25 percent
rule. The Court held “as a matter of Federal
Circuit law that the 25 percent rule 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.”
Penalizing the EMV End Run
Under the prevailing patent jurisprudence,
a plaintiff cannot claim damages based on
the entire market value of an end product
unless the patented technology creates
the basis for the market demand for the
product. For example, a plaintiff holding
a patent on an automobile battery can not
claim damages on the value of the entire
automobile, without first showing that
the battery created the market demand for
the car. Because plaintiffs typically cannot
meet this burden, they are unable, under
the law, to use the entire market value of a
product in damage calculations. Over the
years, however, wily plaintiffs lawyers have
developed a number of end runs around
the EMV rule. One typical practice is
to use the value of the end product as a
“check” on the plaintiff’s damages number.
For example, a plaintiff’s expert may
calculate a damages number based on an
appropriate royalty base and then compare
Reprinted with permission from InsideCounsel
that number to the EMV in an effort to
show the “reasonableness” of the expert’s
result. Another end run is to use the EMV
to criticize the defendant’s expert. That play
usually goes something like this:
Q : Now you understand that the defendant
made XXX billion dollars on sales of
the infringing products?
Q : And you are telling the jury that they
should only have to pay XXX thousand
dollars in damages?
Q : And you understand, don’t you that
your number amounts to .000001% of
the money the defendant made from
this product?
Neither of these end runs were fair for the
defendant, because they both interjected
the EMV into the jury’s deliberation without
first establishing that the patent was the
driver for the product sales.
Again, the Federal Circuit was swift in
calling a penalty on these tactics. Per Uniloc,
these tactics “are in clear derogation of the
entire market value rule, because the entire
market value of the accused products has not
been shown to be derived from the patented
contribution.
Although there was no trophy awarded on
Jan. 4, I think most members of the patent
defense bar will agree that the good guys
won the “Uniloc Bowl.”
Mark Scarsi is a partner in the Intellectual
Property Group of Milbank, Tweed, Hadley &
McCloy, LLP, resident in the Los Angeles office.