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Jan 11

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Royalty Rule of Thumb Gets the Boot

The Federal Circuit ruled in Uniloc USA, Inc. v. Microsoft Corp. (January 4, 2011) that the widely used but fatally flawed 25 percent rule can no longer be part of reasonable royalty damages calculations. The rule has been widely used to calculate reasonable royalty damages for over two decades. Generally speaking, the rule pushed patent infringement damages higher. Because a reasonable royalty is the most frequently used measure of damages in patent infringement cases, this is a significant ruling that changes many patent infringement damage presentations.

Like any rule of thumb, the 25% percent rule sacrifices accuracy for ease. Because it is so flawed, neither this author nor anyone else in our firm has ever used the 25 percent rule of thumb for any substantial purpose. There is good economic reason why the rule of thumb fails to provide a reliable answer. The 25 percent rule fails to consider:

1. Differences in the classification of expenses
2. Expenses in cost of sales that are fixed
3. Impact of all selling, general and administrative costs that are affected by the product
4. Consequences to overall revenues and costs
5. Investment risks
6. Exclusivity, geographic or other limitations

Because of its widespread use, this ruling affects numerous cases that are in the process of being litigated. Those using the 25 percent rule who have already issued damage reports under FRCP 26(a)(2) should consider how to amend their damage calculation to remove consideration of the now-forbidden rule of thumb.

For additional information and discussion, see Reasonable Royalty 25% Rule Is Dead.

About the author

David Nolte

I am a founding principal of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA) and an Accredited Senior Appraiser (ASA), as well as having other professional credentials. I regularly serve as an expert witness involving damages measurement. My litigation-oriented resume is on Fulcrum's website.

Permanent link to this article: http://betweenthenumbers.net/2011/01/royalty-rule-of-thumb-gets-the-boot/

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