On January 4, 2011, the Federal Circuit affirmed a district court's decision to grant a new damages trial for Microsoft in a patent infringement action, finding that the 25 percent rule of thumb used to calculate damages was "a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation." Uniloc USA, Inc. v. Microsoft Corp., No. 03-CV-0440, slip op. (Fed. Cir. Jan. 4, 2011). In addition, the Federal Circuit found that the patent holder's use of the entire market value rule to "check" its damages calculation was unwarranted, rejecting the proposition that the entire market value can be used as long as the royalty percentage is "low enough." This decision has significant implications for patent infringement damages, marking the end of the debate over the blanket applicability of the 25 percent rule in reasonable royalty analyses and confirming that patentees must demonstrate that the patented feature forms the "basis for customer demand" or "substantially creates the value of the component parts" of a product to obtain damages based on the entire market value of the accused products.
The Federal Circuit's rejection of the 25 percent rule will require patent holders to more rigorously tie evidence proving their damages to the parties, patents, and accused products at issue in their cases. The Uniloc decision is representative of the Federal Circuit's recent decisions that have closely scrutinized the methodologies used by damages experts and demonstrates the court's willingness to reverse speculatively large damage awards.