A rule that lawyers and judges in Massachusetts and beyond have been using to determine damages in patent infringement cases has been abolished by the Federal Circuit Court.

In Uniloc USA, Inc. v. Microsoft Corp., the court struck down the so-called “25 percent rule of thumb,” a method commonly used by the patent bar over the past three decades to calculate damages. The ruling also reversed a trial judge’s decision to vacate a landmark $388 million jury award against Microsoft.

“It’s pretty rare for the Federal Circuit to say something so definitively,” said Nixon Peabody lawyer Maia H. Harris, who was not involved in Uniloc. “What this decision represents is the end point of a discussion that the court has been having over the course of the last 18 months about damages. The court clearly said the test does not pass muster under Daubert.”

Harris said the rule, which uses a hypothetical test that assumes an infringing party will pay 25 percent of a product’s profits to the patent holder, finds its way into the majority of expert reports prepared by patent owners.

“I think there is going to be a lot of scrambling with existing cases to see what needs to be changed,” the Boston lawyer said. “I don’t see how you can argue around this rule. There is no doubt this will affect how damages reports and damages theories are going to be constructed in the future.”

Jerry Cohen, co-chairman of Burns & Levinson’s intellectual property group in Boston, said it has been clear for years that the rule might be struck down at some point. He also said he believes the decision applies nationwide since the Federal Circuit is the country’s only appeals court for patent cases.

“That the Federal Circuit would reach out and say, categorically, that the 25 percent rule is out, rather than say it was inapplicable under the facts of this case, does raise some eyebrows,” he added. “Any analysis now that uses the rule will certainly be under a cloud. It will be important for counsel to show they weren’t blindly using it, but were instead arguing on evidence and principles other than the 25 percent rule.”

‘13th juror’

Damages in Uniloc will be decided at trial in U.S. District Court in Rhode Island, using a different test.

David Howard, deputy general counsel at Microsoft, said in a written statement that he looks forward to the upcoming trial now that the rule has been abolished.

“Expert testimony relying on the 25 percent rule was determined to be fundamentally flawed and inadmissible,” he wrote. “The Federal Circuit reinforced the basic concept of the trial court as gatekeeper by emphasizing that once a court determines an expert’s methodology is faulty, the court must exclude that testimony.”

Frank E. Scherkenbach of Fish & Richardson in Boston, who represented defendant Microsoft, did not return a call for comment before deadline.

Meanwhile, Paul J. Hayes of Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, who represented the plaintiff in Uniloc, dismissed Microsoft’s contention that the computer giant prevailed in the Federal Circuit ruling.

“I read Microsoft’s [press] release where they said that they are looking forward to a new trial on damages,” he said. “Well, so am I.”

Hayes said after the trial judge in Rhode Island set aside the $388 million jury verdict in 2009, he was contacted by numerous lawyers who questioned how a judge could vacate an award on what appeared to be a purely factual question.

“What [the Federal Circuit] decision does is demonstrate that judges cannot substitute as 13th jurors their view for the jury simply because they don’t like it,” he said. “This was a situation where you try the case and win the case by playing by the rules, and then they change the rules after you win.”

Hayes conceded that many experts will have to change their methodology for calculating damages in the wake of the Uniloc holding. But there are still plenty of other accepted tests that plaintiffs can use, he said.

“Simply eliminating the rule of thumb will not, as Microsoft wants to spin it, result in the idea that all these damages are now going to be a lot smaller,” he said. “In most of these cases, particularly this one, it can be demonstrated that, as a direct result of the infringements, [Microsoft] has benefited to the tune of $5 billion dollars.”

Record verdict vacated

The case evolved when Uniloc received a patent for a method of reducing unlicensed use of software through casual copying. The technology is intended to deter unauthorized copying by a purchaser of software by locking the software to a user and allowing it “to run in a use mode on a platform if and only if an appropriate licensing procedure has been followed.”

The process generates a “licensee unique ID.”

The infringement claim concerned Microsoft’s “Product Activation” system, a security feature contained in software products sold through retail distribution worldwide, including the accused Microsoft Office XP, Windows XP and Office 2003 products.

Microsoft’s system involves processing by means of a software algorithm.

Uniloc sued in 2003, eventually narrowing its case to “Claim 19,” contending that the output of the Product Activation algorithm constitutes a “licensee unique ID.”

After a two-week trial in U.S. District Court, the jury found that the claim was valid and that Microsoft had infringed the patent. It also determined that the infringement was willful and that Uniloc was entitled to $388 million in damages, the fifth largest verdict in patent law history.

But Judge William E. Smith entered judgment as a matter of law in favor of Microsoft based on his “firm belief (indeed a certitude) that the jury ‘lacked a grasp of the issues before it’ and reached a finding without a legally sufficient basis.”

‘Fundamentally flawed’

Judge Richard Linn, writing for the Federal Circuit, found that the infringement verdict was supported by “substantial evidence,” but he rejected the use of the 25 percent rule as a way to calculate the damages.

The rule’s admissibility, he said, had never been squarely presented to or addressed by the Federal Circuit.

“Nevertheless, this court has passively tolerated its use where its acceptability has not been the focus of the case, or where the parties disputed only the percentage to be applied (i.e. one-quarter to one-third),” Linn said.

The judge wrote that lower courts have invariably admitted such evidence based largely on the rule’s widespread acceptance or because its admissibility was uncontested.

But Linn pointed to several instances in which judges and scholars raised concerns about the rule’s reliability. Some criticized the arbitrary nature of the rule, while others questioned its inability to account for the unique relationship between the patent and the accused product, he said.

“The court now holds as a matter of Federal Circuit law that the 25 percent rule of thumb is a fundamentally flawed tool,” he wrote. “Evidence relying on the … rule is thus inadmissible under Daubert and the Federal Rules of Evidence.”