Page 101 - Intellectual Property Disputes

Until January 2011, although this methodology had received criticism for being overly simplistic, it was
deemed useful to the courts as follows:

The 25% rule is a shorthand phrase for a method of dividing expected profit between a licensor
and licensee. It divides net pretax profit with normally 25% of that profit being paid to the
licensor as a reasonable royalty, while 75% is reserved to the licensee as its profit for the risks
attendant to manufacturing and marketing. Normally, the net profit that is divided is...that of the
licensee. Sometimes the licensor’s net profit rate may be used, however, where the licensee’s
profit rate is not known. While a trial court is not limited to selecting one or the other of the
specific royalty figures proposed by the opposing parties, SmithKline Diagnostics, Inc. v. Helena
Labs. Corp., 926 F.2d at 1168, the court here finds that the 25% rule is an appropriate rationale
for determining a base royalty rate. Defendant’s licensing expert, Mr. Robert Goldscheider,
noted that he first became familiar with the 75%/25% distribution of licensing profits when he
began to do licensing work in 1959 and 1960. Since that time, defendant’s expert has
participated in several hundred licensing negotiations involving intellectual property, and,
according to Mr. Goldscheider, he and "at least two other highly respected pioneers in the field
of licensing" have written published works concerning the 25% rule. In addition, the 25% rule or
a close variant of it has been recognized by a number of other federal courts as a "rule of thumb"
or "typical" in the licensing field. fn 155

In January 2011, in a case before Chief Judge Randall Rader, the U.S. Court of Appeals for the Federal
Circuit significantly limited the applicability of the 25 percent rule as a methodology to determine a
reasonable royalty. In Uniloc USA, Inc. v. Microsoft Corp., "[t]his 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." fn 156 The U.S. Court of Appeals granted a new trial on
damages to Microsoft due to Uniloc’s expert’s arbitrary use of the 25 percent rule. The U.S. Court of
Appeals, citing ResQNet.com, Lucent Technologies, and WordTech, fn 157 stated that

[t]he meaning of these cases is clear: there must be a basis in fact to associate the royalty rates
used in prior licenses to the particular hypothetical negotiation at issue in the case. The 25
percent rule of thumb as an abstract and largely theoretical construct fails to satisfy this
fundamental requirement. The rule does not say anything about a particular hypothetical
negotiation of reasonable royalty involving any particular technology, industry, or party. Relying
on the 25 percent rule of thumb in a reasonable royalty calculation is far more unreliable and
irrelevant than reliance on parties’ unrelated licenses . . .It is of no moment that the 25 percent
rule of thumb is offered merely as a starting point to which the Georgia-Pacific factors are then
applied to bring the rate up or down. Beginning from a fundamentally flawed premise and

Paragon Optical Inc., 7 U.S.P.Q.2d 1001, 1027 (D. Ariz. 1987); and Polaroid Corp. v. Eastman Kodak Co., 16 U.S.P.Q. 2d 1481,
1535 (D. Mass. 1990). See also, R. Goldscheider, J. Jarosz, and C. Mulhern, "Use of the 25 Per Cent Rule in Valuing IP," les
Nouvelles (December 2002), 123–133.

fn 155 Standard Mfg. Co., Inc. & DBP, Ltd. v. United States, 42 Fed. Cl. 748 (1999).

fn 156 Uniloc USA, Inc. v. Microsoft Corp., 10-1035, U.S. Court of Appeals for the Federal Circuit (Washington).

fn 157 Refer to the section, "Licensing Activity," in this chapter.

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