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Why Microsoft’s Patent ‘Loss’ Is A Boon For Many Media And Tech Companies

An appeals court ruling this week in Uniloc v. Microsoft means that patent holders who win in court will get smaller damage payouts. The ruling, while technically a loss for Microsoft (NSDQ: MSFT), is good news for most digital media companies and online retailers, as both groups are increasingly being targeted in patent lawsuits.

The court this week, while upholding Uniloc’s patent as valid and infringed by Microsoft, threw out a damages-calculation rule called the “25 percent rule” that’s been used by patent experts for more than 15 years. That means that the $388 million award that Uniloc, a small San Diego-based software company, was hoping to collect, is history.

It’s no surprise that Microsoft is the defendant in this important damages case. The company has been looking for the right opportunity to fight for a limit on patent damages for several years now. (The search for a juicy damages case is one reason why it’s still fighting off one very old patent attack by Alcatel-Lucent, despite the fact that it reached a global settlement on all other Alcatel patents back in 2008.)

The lower court in this case had let Microsoft off scot free, because even though a jury ordered it to pay $388 million, that award was overturned by the district court judge. Now the appeals court has said that Microsoft did indeed infringe the patent at issue, but at the same time gave it a very favorable ruling on damages and threw out the $388 million award. In the long run, this “loss” may well save Microsoft more money than the Uniloc case costs them.

The 25% rule, frequently used by patent-damages experts, basically held that a patent owner was entitled to 25% of the profits of a product that was using the patented technology, while the licensee should keep 75% of the profits. Critics of the rule have called it arbitrary, at best, especially in the software and high-tech world, where a product can incorporate thousands, if not tens of thousands, of inventions-many of which may be patented.

Uniloc, for example, portrayed its damage demand against Microsoft-a request for more than $500 million-to the jury with a pie chart showing the entire pie as more than $19 billion of revenue. That’s the grand total for the Windows XP and other Microsoft products it said had infringed its patents. Courtroom tactics like that aren’t going to fly with judges now that the Federal Circuit, the nation’s top patent court, has condemned the 25% rule.

The 25 percent rule was essentially created by a single patent expert, Bob Goldscheider, who first wrote about the rule in 1971.

In this case, Uniloc’s patent is on an anti-piracy system it calls “software activation.” The idea is that a registration key remotely validates software products as legitimate and non-pirated. Uniloc’s lawsuit against Microsoft is the San Diego company’s most high-value and closely watched lawsuit, but Uniloc has sued more than 70 smaller software companies for infringing its patent.

The case will now go back to a lower court where Microsoft will get a new trial on damages.

Microsoft deputy general cousel David Howard said in an email that the ruling found the 25% rule to be “flawed and inadmissible,” adding: “This is an important and helpful opinion with respect to the law of damages, and it may signal the end of unreasonable and outsized damages awards based on faulty methodology… We look forward to the new trial.”

Uniloc CEO Brad Davis was dismayed about the damages ruling, but noted that his company’s patent was still ruled infringed and that Microsoft will ultimately have to pay up.

Microsoft is also looking to make it easier to defeat bad patents in court in its upcoming Supreme Court case, Microsoft v. i4i. In that case, a large swath of corporations, many frequent sued for patent infringement, have voiced their support for Microsoft.

»  Full Order In Uniloc USA Inc. v. Microsoft Corp. [PDF]