CAFC—The 25% Rule of Thumb is Fundamentally Flawed

On January 4, 2011, the Federal Circuit found the “25% Rule” to be inadmissible as a basis for reasonable royalty damages in its Uniloc USA v. Microsoft opinion.

The court said:

“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.”

The Federal Circuit did an about-face in January of this year when it reversed course on the 25% Rule.

Prior to the Uniloc v. Microsoft decision, the Federal Circuit had upheld use of the 25% Rule as a benchmark for establishing a beginning point for hypothetical license negotiations, a method commonly used to calculate reasonable royalty damages arising from patent infringement.