Rules of Thumb

Rules of thumb are not permitted in a reasonable royalty calculation. This prohibition is part of a broader trend towards increasing economic rigour in patent damages analysis. Rules of thumb are not admissible, even when they are used as a starting point for a calculation.

even if an expert could identify all [factors that lead to a deviation from the] 50/50 baseline [there would nevertheless be] significant risk of inappropriately skewing the jury's verdict.

— VirnetX, Inc. v. Cisco Systems, Inc., 767 F. 3d 1308, 1333 (Fed. Cir. 2014).

Examples of rules of thumb include the 25% Rule and baseline Nash Bargaining. The 25% Rule states that a manufacturer would be willing to pay 25% of its expected profit as a reasonable royalty.

The 25 percent rule of thumb is a tool that has been used to approximate the reasonable royalty rate that the manufacturer of a patented product would be willing to offer to pay to the patentee during a hypothetical negotiation.

— Uniloc USA, Inc. v. Microsoft Corp., 632 F. 3d 1292, 1312 (Fed. Cir. 2011).

The rule was commonly applied in reasonable royalty calculations. Testimony that relies upon the 25% rule is no longer admissible.

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.

— Uniloc USA, Inc. v. Microsoft Corp., 632 F. 3d 1292, 1315 (Fed. Cir. 2011).

Nash Bargaining is an economic model of bargaining. The model predicts that parties will negotiate a split of gains from trade in proportion to parties’ relative bargaining strength. The baseline model assumes that parties enjoy equal bargaining strength. Thus, the baseline model predicts that parties split value evenly. The baseline model is similar to the 25% rule in that its prediction does not generally depend upon the facts and circumstances surrounding a case.

Testimony that relies upon the baseline Nash Bargaining model is not admissible unless that testimony ties the Nash Bargaining assumptions to the facts and circumstances of a case.

For the reasons that follow, we agree with the courts that have rejected invocations of the Nash theorem without sufficiently establishing that the premises of the theorem actually apply to the facts of the case at hand. The use here was just such an inappropriate rule of thumb.

— VirnetX, Inc. v. Cisco Systems, Inc., 767 F. 3d 1308, 1332 (Fed. Cir. 2014).