Microsoft loses a patent case, but benefits from the tossing out of the 25% rule

Microsoft loses a patent case, but benefits from the tossing out of the 25% rule

Ivy Tsui is a JD candidate at Osgoode Hall Law School.

In Uniloc v. Microsoft, the U.S. Court of Appeals for the Federal Circuit restored a jury verdict from April 2009 that Microsoft infringed a Uniloc patent for anti-piracy technology. The good news for the software giant is that the court tossed out the "25 percent rule", which was a commonly used rule for calculating damage awards for patent infringement.

The legal battle between USA-based Uniloc and Microsoft began in 2003, when Uniloc argued that Microsoft's "product activation" system, which was used in Windows XP, Office XP, and Office 2003 programs to prevent unlicensed use of its software and operating system, infringed a Uniloc patent. In 2009, the jury awarded Uniloc an astounding $388 million in damages. The damages were calculated based on the testimony of Uniloc’s expert, who applied the 25% “rule of thumb”, a rule which assumes the infringing party would pay 25% of a product’s profits to the patent holder.

At the Court of Appeals, Judge Linn wrote that the 25% rule of thumb was “an arbitrary, general rule, unrelated to the facts of this case”, and the contribution of the software piracy tool could not justify such a 25% royalty.

The court also rejected the application of the entire market value rule, because there was no evidence that Uniloc’s patented component created the “basis for customer demand” or “substantially create[s] the value of the component parts.” The court agreed with Microsoft that the jury’s damage award “was fundamentally tainted by the use of a legally inadequate methodology.”

“This case provides a good example of the danger of admitting consideration of the entire market value of the accused where the patented component does not create the basis for customer demand.” Judge Linn wrote in the opinion.

David Howard, Microsoft’s deputy general counsel, said in a statement that the ruling “is an important and helpful opinion with respect to the law of damages, and it may signal the end of unreasonable and outsized damages awards based on faulty methodology.”

The Federal Circuit ruling is significant not only for its rejection of the 25 percent rule of thumb, but also because the court is steering towards restricting excess damage awards in patent infringement cases. A new trial will be held within a year to determine the appropriate amount of damages that should be awarded.