The International Technology Network, Chairman, Delray Beach, Florida, USA
Fifty years ago, Robert Goldscheider helped pioneer the use of a methodology known as “the 25% Rule,” a tool for determining reasonable royalties in intellectual property licensing negotiations. The Rule holds that licensees of intellectual property normally deserve the lion’s share of the profit because they usually bear the bulk of the business risk associated with bringing the intellectual property to market. Experts familiar with the art of intellectual property licensing frequently rely on the 25% Rule to rationally determine reasonable royalties in litigation and transactional settings. The Rule’s prominence has been accompanied by unfortunate misunderstandings about its form and substance. It is not, as some suggest, intended to be a simple shortcut to determine patent royalties. Rather, it was developed as, and remains, a meticulous methodology inspired by significant private transactions and ultimately refined by brilliant judicial interpretation. As such, it is inappropriate to condescendingly diminish it to a mere “rule of thumb.” When properly understood and applied, the Classic 25% Rule is an effective discipline that achieves the high standards of reliability demanded by the U.S. Supreme Court in the Daubert and Kumho Tire cases.
On January 4, 2011, the Federal Circuit, in Uniloc v.Microsoft, held that “the 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation.” This decision is problematic for a variety of reasons: (1) it assumes that the 25% Rule, as it is classically understood, is a rule of thumb; (2) district courts could interpret it as prohibiting damages experts from applying the Classic 25% Rule as a tool for determining a baseline royalty rate, because of the court’s confusion between a baseline royalty rate and a “reasonable royalty” under § 284 of the Patent Act; and (3) it could denigrate the skills of true experts who have utilized, and continue to utilize, the Classic 25% Rule in a way that otherwise meets the admissibility standards of the Federal Rules of Evidence. This article attempts to correct these misunderstandings in the hope of restoring some certainty in an area of jurisprudence that, unfortunately, has become an unpredictable area of the law.
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