MoneyWatch Tech

Microsoft Patent Case Loss Could Help Cap Future Infringement Damage Awards

By Erik Sherman

Updated on: January 4, 2011 / 8:05 PM EST / MoneyWatch

When the U.S. Court of Appeals for the Federal Circuit (CAFC) reinstated a patent infringement verdict against Microsoft (MSFT) that a lower court had overturned, it did more than cause heartburn for CEO Steve Ballmer. In the process, the court also tossed a long-standing rule of thumb for calculating baseline royalty rates. This decision may put some practical limits on the awards a company can get in U.S. patent litigation.

In 1993, Uniloc let Microsoft evaluate the small company's anti-piracy software. A user would have to install a program and then contact the vendor for a code to unlock it. Microsoft passed on the technology. Uniloc had success elsewhere, including with IBM (IBM).

In 2003, Uniloc noticed that the software giant seemed to use a similar locking scheme. And so started a multi-year suit. Eventually, in April 2009, a district court jury in Rhode Island handed Uniloc its victory and a $388 million judgment. However, Microsoft filed a motion with the trial judge, who overturned it the verdict and ruled that the company had not infringed Uniloc's patent.

The decision by the CAFC reinstated the verdict "[b]ecause the jury's verdict on infringement was sup-ported by substantial evidence," but agreed with the district judge that infringement had not been willful. The part of the decision that will interest many corporations is the following:

Because the jury's damages award was fundamentally tainted by the use of a legally inadequate methodology, this court affirms the grant of a new trial on damages.

The jury had considered an award based on the so-called "25 percent rule of thumb," in which a court could consider that 25 percent of a product's expected profit would go to the patent owner, while the infringer would keep the remaining 75 percent. However, the court noted that there have been some significant criticisms of this approach:

It fails to look at how important the patent is to the profits gained by the product.
The rule does not take into account the specific relationship between the two parties.
The rule is essentially arbitrary.

Although the 25 percent rule has been in use for years, the CAFC says that no one had so "squarely presented to this court" the question of whether its use is reasonable. By rejecting the 25 percent rule, the court may have effectively limited patent infringement monetary damages in patent cases in all industries, because patent owners will be unable to argue for a fixed percentage of the profits created by an infringing product.

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