The United States Court of Appeals for the Federal Circuit’s January 4, 2011 Uniloc USA, Inc. v. Microsoft Corporation decision made (as a matter of law) the 25 percent rule of thumb a flawed tool for determining a baseline royalty rate in a hypothetical negotiation. The Uniloc decision also cast light on the Federal Circuit’s latest thinking regarding application of the entire market value rule.
The Court reiterated that for the entire market value rule to apply, the patentee must prove that the patent-related feature is the basis of customer demand. Uniloc’s expert performed a check to determine whether his royalty estimate was reasonable by comparing it to his calculation of Microsoft’s total revenue for Office and Windows of almost $19 million. Microsoft argued the reasonableness check invoked the entire market value rule. Uniloc supported its use of the reasonableness test by arguing that the entire market value of the products may appropriately be admitted into evidence if the royalty rate is low enough, relying on the following statement in the Lucent Technologies case:
Simply put, the base used in a running royalty calculation can always be the value of the entire commercial embodiment, as long as the magnitude of the rate is within an acceptable range (as determined by the evidence)… Microsoft surely would have little reason to complain about the supposed application of the entire market value rule had the jury applied a royalty rate of .1% (instead of 8%) to the market price of the infringing programs. [580 F.3d at 1338-39.]
The Court rejected Uniloc’s disclosure of the entire market value of the accused product, and said the Uniloc case provides a good example of the danger of admitting consideration of the entire market value of the accused product where the patented component does not create the basis for customer demand. The Court reasoned that the disclosure of $19 million in revenue from an infringing product cannot help but skew the damages horizon for the jury, regardless of the contribution of the patented component to the revenue. The Court may have ruled differently had Uniloc used the entire market value of the accused product as its royalty base, rather than disclosing the $19 million figure simply to show the reasonableness of its calculation.