Clayton Utz client Uniloc's claims of patent infringement against Microsoft have recently been upheld by the United States Court of Appeals for the Federal Circuit (CAFC), vindicating Uniloc's struggles against the software giant. Jim FitzSimons, a partner in the TMT/IT section of Clayton Utz, advised the inventor of the patent-in-suit, Ric Richardson, to patent the innovative software the subject of the patent in 1992. Obtaining this patent early has proven to be a valuable decision.
For over seven years, Uniloc USA, Inc and Uniloc Singapore Private Limited (together Uniloc) have been locked in litigation in the United States against Microsoft Corporation (Microsoft) for infringement by Microsoft of Uniloc's US Patent No. 5,490,216 ('216 Patent).
Uniloc's '216 Patent relates to a software registration system used to deter the copying of software - a significant problem for commercial software manufacturers. Uniloc claimed that Microsoft's Product Activation System, used on Microsoft software programs such as Word XP, Word 2003 and Windows XP software, infringed this patent.
In 2007, the District Court of Rhode Island granted summary judgment of non-infringement in favour of Microsoft. This decision was reversed on appeal by the CAFC, and was remitted back to the district court for trial. In August 2009, after a full trial, the jury found that Microsoft had infringed the patent and that this infringement had been wilful, and awarded Uniloc US$388 million in damages on the basis of a reasonable royalty calculation, the predominant measure of damages in United States patent infringement litigation, pursuant to which a reasonable royalty is determined on the basis of a hypothetical negotiation between the parties at the time the infringement began. At the time, this was said to be the fifth largest patent verdict in history.
Microsoft made a number of post-trial motions following this verdict. A number of these motions were successful, and resulted in Judge Smith overturning the jury's verdict and granting judgment as a matter of law (JMOL) of non-infringement and non-wilfulness in favour of Microsoft and, in the alternative, granting a new trial on infringement and wilfulness. Judge Smith denied Microsoft's motion for JMOL of invalidity of the '216 Patent.
Court of Appeals for the Federal Circuit
In a significant win for Uniloc, on 4 January 2011, the CAFC reversed Judge Smith's JMOL of non-infringement and Judge Smith's alternative grant of a new trial on infringement, on the basis that the jury's verdict of infringement was supported by substantial evidence. The CAFC also affirmed Judge Smith's denial of JMOL of invalidity, finding that the jury's verdict of no invalidity was supported by substantial evidence. The CAFC upheld Judge Smith's grant of JMOL of no wilful infringement. The CAFC also agreed with Judge Smith's decision in relation to damages, and ordered that the matter be remanded to the District Court of Rhode Island for a new trial on damages.
In reaching its decision in relation to damages the CAFC discussed in detail the 25 percent rule of thumb, under which a licensee pays a royalty rate equivalent to 25 percent of its expected profit on the product that incorporates the patented technology, that had been put forward by Uniloc's experts as a mechanism for calculating royalties in order to determine damages, stating that:
"The admissibility of the bare 25 percent rule has never been squarely presented to this court. Nevertheless, this court has passively tolerated its use where its acceptability has not been the focus of the case, or where the parties disputed only the percentage to be applied (i.e. one-quarter to one-third), but agreed as to the rule's appropriateness. Lower courts have invariably admitted evidence based on the 25 percent rule, largely in reliance on its widespread acceptance or because its admissibility was uncontested."
The CAFC concluded that the 25 percent rule of thumb is an inappropriate method for determining royalties in the assessment of damages:
"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 the 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 issues."
This has significant implications for any entity involved in patent litigation in the USA.
Uniloc will now have to head back to the courtroom to obtain a judgment for damages in line with the CAFC's decision.
The outcome of that case will be awaited with interest. While early speculation assumes that a rehearing on damages will likely lead to a reduction in the damages awarded, Uniloc has raised the possibility that it will seek greater damages second time around.
 This rule requires that all expert testimony be based upon firm scientific or technical grounding.
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