Suffolk Tech. v. AOL et al., In Search of a Reasonable Royalty Post-Uniloc

On April 12, United States District Judge Ellis of the Eastern District of Virginia excluded the testimony of patentee Suffolk’s damages expert directed to a reasonable royalty based on the Nash Bargaining Solution, a kind of negotiation model. Suffolk’s expert used the Nash Bargaining Solution to determine that damages should be based on a 50/50 split of incremental profits. The Court struck this analysis, finding that the 50/50 split was analogous to the 25% rule previously rejected by the Federal Circuit in Uniloc v. Microsoft. (See infra).

As a matter of law, a patent owner is entitled to no less than a reasonable royalty for the use made of the invention by the infringer. The amount of the reasonable royalty is determined based on a hypothetical negotiation between a willing licensor and a willing licensee at the time that infringement began. Prior to 2011, one traditional method for determining a reasonable royalty was the 25% rule, which operated under the presumption that the licensee was entitled to 25% of the infringer’s gross profits on the accused device or process. This number would then be adjusted up or down based on the 15 factor test set forth in Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970). In the past, such method may have been relied upon by an expert facing a situation where the patent owner had not licensed the patent in suit and there were no known license agreements covering the relevant technology of that patent.

Despite its long-standing use, the Federal Circuit in Uniloc v. Microsoft, 632 F.3d 1292 (Fed. Cir. 2011) struck down this approach — holding that “the 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation…, because it fails to tie a reasonable royalty base to the facts of the case at issue.” Id. at 1315.

Here, the Suffolk court found that the patentee’s expert’s use of the Nash Bargaining Solution suffered from the same deficiency. Whether or not this means that the Nash Bargaining Solution can never be used to assign a reasonable royalty for patents without comparable licenses, as required by law, remains to be seen. But, Suffolk exemplifies yet another challenge patent owners may face when attempting to prove reasonable royalty damages post-Uniloc.