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25 Percent Rule Axed for Patent Infringement Damages and Test for the Entire Market Value Rule Reaffirmed

On January 4, 2011, the Federal Circuit affirmed a district courts grant of a new damages trial for Microsoft in a patent infringement action, finding that the 25% rule of thumb to calculate damages was a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation. Uniloc USA, Inc. v. Microsoft Corp., Nos. 2010-1035, 2010-1055 (Fed. Cir. Jan. 4, 2011). In addition, the Federal Circuit found that the plaintiff'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% 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 in order to obtain damages based on the entire market value of the accused products.

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