From time to time, it’s what’s behind the headlines that counts the most.
On Tuesday, the U.S. Court of Appeals for the Federal Circuit issued a ruling on a long-running patent case between Microsoft and plaintiffs Uniloc USA Inc. and Uniloc Singapore Private Limited.
While the Federal Circuit found in Uniloc’s favor concerning their accusations about patent infringement, the court granted Microsoft a new trial on the question of damages. More importantly, the court established important new guidelines for determining damages in patent infringement cases, effectively applying some of the same rules for assessing damages in patent cases as those that apply in other types of cases.
Quick background: At trial, the jury found in April 2009 that Windows XP-era product activation infringed Uniloc’s patent. The jury awarded $388 million in damages and found willful infringement. The trial judge then granted our motions in September 2009 to throw out the jury verdict, finding that Uniloc had not proven infringement, that Microsoft was not a willful infringer and that the damages award was unsound. Uniloc appealed.
In some ways, Tuesday’s Federal Circuit decision is a mixed result for Microsoft. On one hand, the court reversed the judge’s decision on non-infringement and reinstated the jury’s liability verdict. On the other hand, the court agreed with the trial court judge’s decisions in Microsoft’s favor on willfulness and damages. As a result, the Federal Circuit has remanded the case to the trial judge for a new trial on damages only. Most importantly, that retrial will be subject to important new rulings that put new and significant restraints on how to calculate damages in all patent infringement cases.
For example, patent plaintiffs in cases against Microsoft (and other companies with large-volume products) have argued that the damages they seek are just a tiny percentage of the total revenues we derive from the infringing products (relying on a concept known as the “entire market value” rule). They often present a pie chart to the jury showing their damages request is just a tiny sliver of a pie that represents total product revenues and is therefore “reasonable.”
On Tuesday, the court specifically disapproved of this approach and held that total product revenues cannot be disclosed to the jury unless the allegedly infringing feature is first determined to be the basis for consumer demand. This is a very important clarification of the “entire market value” rule that has direct implications for all patent cases.
Second, plaintiffs in patent infringement cases have often relied upon a damage analysis using the so-called “25 percent rule of thumb, ” which accorded to the owner of an allegedly infringed patent 25 percent of the value of the product in question without regard to other technologies or features the product may offer or whether there was any connection between customer demand for the product and the accused feature. The 25 percent rule had been widely applied in patent cases for years. On Tuesday, the Federal Circuit firmly rejected that rule, holding that it is “fundamentally flawed” and inadmissible.
Finally, the Federal Circuit on Tuesday reinforced the basic concept of the trial judge as gatekeeper by emphasizing that once a judge determines that an expert’s methodology is faulty, the judge must exclude that testimony. The circuit court did so specifically in reference to the testimony of a damages expert. This 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.