05 January 2011

Uniloc Wins Some, Loses Some, in Product Activation Litigation

Uniloc USA, Inc v Microsoft Corp _CAFC _ (Case No. 2010-1035, 4 January 2010)

Back in October last year, we reported on the status of litigation brought by Uniloc USA, Inc, in relation to a patent covering the software product activation system invented by Australian Ric Richardson.

The highest-profile case was against Microsoft, in which a jury initially awarded Uniloc damages of US$388 million, only for the presiding District Court judge to overturn the jury verdict in a "Judgement as a Matter of Law" (JMOL).  Uniloc appealed the judge's decision to the US Court of Appeals for the Federal Circuit (CAFC). 

Yesterday, the court issued its opinion in the case (penned by Judge Linn), with mixed outcomes for both Uniloc and Microsoft.

In particular, the appeals court overturned the District Court judge's JMOL ruling of non-infringement (contrary to the findings of the jury), and the grant of a new trial on infringement.  To Uniloc's benefit, therefore, its patent has been determined to be valid and infringed by Microsoft's product activation system.

However, Microsoft does not walk away empty-handed. 

The appeals court has upheld the District Court's JMOL ruling that Microsoft had not been willful in its infringement of the Uniloc patent, agreeing in particular that no reasonable jury would have concluded from the evidence presented that Microsoft's conduct was objectively reckless.  As many readers will no doubt be aware, a finding of no willfulness prevents the application of a multiplier (of up to three times) to any damages ultimately awarded against Microsoft.

The appeals court also upheld the District Court's grant of a new trial on damages, agreeing that the jury's award of US$388 million was not based on any sustainable theory for the appropriate calculation of a reasonable royalty as a basis for damages.  In doing so, the Federal Circuit considered the so-called '25 percent rule-of-thumb' and the 'entire market value rule' theories relied upon by Uniloc at trial.


The 25 percent 'rule' suggests that a patentee should collect 25 percent of the anticipated profits from sale of a patented product, with 75 percent being retained by the manufacturer on the basis that it is the party that bears the majority of risks and costs associated with bringing the product to market.  It is allegedly justified by analysis of years of data relating to licensing and profits across a range of companies and industries.

However, the Federal Circuit court has now seemingly shot down the 25 percent rule once and for all, stating (at page 41 of the opinion):

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 a 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 issue.


The 'entire market value rule' consists essentially of determining the total value of all products sold that embody the patented invention, and then setting a reasonable royalty rate as a suitable percentage of this amount.  Uniloc argued, in part, that the 'entire market value rule' may be applied in any case, so long as the royalty rate is set at a sufficiently low level, and that, in any event, the rule had only been applied at trial as a 'check' on the damages determined by its expert under the 25 percent rule-of-thumb.

The appeals court was unimpressed by these arguments, pointing out (at page 51 of the opinion):

The Supreme Court and this court’s precedents do not allow consideration of the entire market value of accused products for minor patent improvements simply by asserting a low enough royalty rate. See ... Lucent Techs., 580 F.3d at 1336 ("In one sense, our law on the entire market value rule is quite clear. For the entire market value rule to apply, the patentee must prove that the patent-related feature is the basis for customer demand"); ... TWM Mfg. Co. v. Dura Corp., 789 F.2d 895, 901 (Fed. Cir. 1986) ("The entire market value rule allows for the recovery of damages based on the value of an entire apparatus containing several features, when the feature patented constitutes the basis for customer demand.")
The Federal Circuit court was also highly critical of the approach taken by Uniloc at trial noting (pages 51-52) that:

The disclosure that a company has made $19 billion dollars 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 this revenue. Uniloc exacerbated the situation in colloquies ... on cross-examination of Microsoft’s damages expert, in which it implied a relationship between the entire market value of the accused products and the patent...


Overall we see this as being, on balance, a win for Uniloc. 

Microsoft gets a new trial on damages, and it would be interesting to see how the parties now propose to calculate a reasonable royalty, considering that product activation in fact contributes nothing to customer demand for a product, and is primarily of benefit to the software provider.  We suspect, however, that a settlement is now likely.  Either way, Microsoft can expect to be up for substantially less than the US$388 million jury award.

But Uniloc now has a further favorable ruling on the validity of its patent, the scope of its claims, and the nature of relevant infringing acts.  In additional to payment for Microsoft's past infringement of its patent, it can also presumably look forward to a future royalty stream.  More significantly, however, this decision will bolster Uniloc's position in its ongoing litigation against over 70 other alleged infringers.


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