Part 1: Patent Damages & the Demise of the 25% Rule

What is intellectual property worth?

It is notoriously difficult to ascertain damages for patent infringement.  In the US, the “25% Rule” has been used as a rule of thumb in countless cases and negotiations, as a way of determining fair compensation for infringement of a patent. The 25% Rule suggests that a licensee should pay a royalty rate equal to 25% of its expected profits for use of the licensed IP.  As recently as September, an article was published proclaiming The 25% Rule Lives On, IP Law 360, Sept. 8, 2010. In a decision that sent waves through the patent litigation world on January 4, 2011, the US Court of Appeals for the Federal Circuit in Uniloc USA, Inc. et al v Microsoft Corporation [PDF], has thrown out this rule as a method of measuring patent damages:

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.

In Canada, a patent owner whose patent has been infringed may elect, as a remedy, either an accounting of profits or an award in damages. In next week’s post, we review this in more detail.

Related Event: March 17, 2011 –  The Licensing Executives Society – Meeting of the Calgary Chapter on the topic of “IP Valuation in 2011” presented by Robert Doran, KPMG. Link to Register

Calgary – 07:00 MST

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