Uniloc USA, Inc. v. Microsoft Corporation
632 F.3d 1292 (2011)
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Rule of Law:
The 25 percent rule of thumb is a fundamentally flawed and inadmissible methodology for determining a baseline reasonable royalty in patent infringement cases because it is not tied to the specific facts of the case. Furthermore, damages cannot be assessed based on the entire market value of a multi-component product unless the patented feature is the basis for customer demand.
Facts:
- Uniloc holds U.S. Patent No. 5,490,216 for a software registration system designed to prevent unauthorized copying.
- The patented system generates a unique ID on a user's computer and a corresponding ID on a remote server, and only grants full software access if the two IDs match.
- Microsoft implemented a 'Product Activation' feature in its Windows and Office software products to combat piracy.
- Microsoft's system requires users to enter a product key, which is used along with hardware information to generate a unique identifier on the user's computer.
- This identifier is sent to Microsoft's servers, which use a hashing algorithm (MD5 or SHA-1) to create a 'license digest'.
- The user's computer performs the same hashing algorithm, and if the locally-generated digest matches the one from Microsoft's server, the software is fully activated.
- Prior to successful activation, Microsoft's software operates in a 'grace period' with limited functionality, such as a finite number of uses or an inability to receive updates.
Procedural Posture:
- Uniloc sued Microsoft in the U.S. District Court for the District of Rhode Island for patent infringement.
- The district court issued a claim construction order and subsequently granted Microsoft's motion for summary judgment of non-infringement.
- On appeal, the U.S. Court of Appeals for the Federal Circuit reversed the summary judgment and remanded the case for trial.
- Following a trial, the jury found that Microsoft willfully infringed Uniloc's patent and that the patent was not invalid, awarding Uniloc $388 million in damages.
- Microsoft filed post-trial motions for judgment as a matter of law (JMOL) on all issues or, alternatively, for a new trial.
- The district court granted Microsoft's JMOL of non-infringement and no willfulness, and denied its JMOL of invalidity.
- In the alternative, the district court granted Microsoft's motion for a new trial on infringement, willfulness, and damages.
- Uniloc appealed the grants of JMOL and a new trial, and Microsoft cross-appealed the denial of its JMOL of invalidity to the U.S. Court of Appeals for the Federal Circuit.
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Issue:
Is expert testimony relying on the 25 percent rule of thumb admissible as a basis for determining a reasonable royalty in a patent infringement damages calculation?
Opinions:
Majority - Linn, Circuit Judge.
No. The 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate and is inadmissible under Daubert and the Federal Rules of Evidence because it fails to tie the reasonable royalty calculation to the specific facts of the case. This rule is an abstract, theoretical construct that does not account for the particular technology, industry, or parties involved in a hypothetical negotiation. Its use violates the requirement that expert testimony must be sufficiently tied to the case's facts. The court also held that using the entire market value of the accused products as a 'check' on the damages calculation was improper. Under the entire market value rule, damages can only be based on the total revenue of a product if the patented feature is the basis for customer demand, which was not the case here, as the anti-piracy feature was a minor component of Microsoft's software. For these reasons, the district court's grant of a new trial on damages was affirmed. The court reversed the judgment of non-infringement, finding substantial evidence supported the jury's verdict, but affirmed the judgment of no willful infringement.
Analysis:
This decision represents a landmark shift in patent damages jurisprudence by explicitly rejecting the long-used but frequently criticized 25 percent rule of thumb. It significantly elevates the standard for admissibility of expert testimony on damages, forcing experts to ground their royalty calculations in case-specific evidence, such as comparable licenses or detailed economic analysis, rather than relying on generalized heuristics. The ruling strengthens the gatekeeping role of district courts under Daubert and compels a more rigorous, fact-based approach to proving reasonable royalties. The case effectively ended the use of the 25% rule in federal patent litigation and reinforced the strict requirements of the entire market value rule.
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