2nd UPDATE: US Court Ruling In Microsoft Case Could Curb Patent Damages

A federal court ruling Tuesday in a case involving Microsoft Corp. (MSFT) could curb some of the huge damage awards that have hit big companies in patent litigation.

The U.S. Court of Appeals for the Federal Circuit, a specialized court that handles patent appeals, said it will now prohibit the use of a commonly used rule that says a patent infringer generally should pay 25% of expected profits on the product using the patent.

The ruling "is a huge change in the law that overturns existing precedent and calls many existing damages verdicts into question," said Edward Reines, a patent attorney with Weil, Gotshal & Manges LLP who is not connected to the case.

"The Federal Circuit has been moving toward confining excess damages in patent cases and this is another step in that direction," Reines said.

The appeals court, in a 59-page ruling, restored a jury's verdict that Microsoft infringed a patent held by Uniloc USA related to combating software piracy, but ruled that the software giant was entitled to a new trial on damages.

The court said the jury's $388 million award to Uniloc, a security software maker, was "fundamentally tainted." The jury award was one of the largest patent verdicts on record.

A Uniloc expert had used the so-called "25% rule" at trial to calculate the company's estimate of what Microsoft owed for infringing the patent.

But the appeals court said the rule was "fundamentally flawed" and inadmissible because it failed to tie a reasonably royalty rate to the facts of a given case.

David Howard, Microsoft's deputy general counsel, said in a statement that the ruling "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."

Uniloc USA Chief Executive Brad Davis the court's decision that Microsoft infringed the company's patent "illustrates how large corporations like Microsoft have knowingly infringed on our technology for financial gain."

He expressed disappointment at the court's rejection of the $388 million damages award, but said the company would work with the ruling.

Uniloc's patent deals with technology for software registration systems that deter the copying of software.

The Irvine, Calif.-based company filed suit against Microsoft in 2003, alleging the product activation feature on Windows XP and other Microsoft products infringed its technology. It initially sought $560 million in damages.

Tuesday's ruling reversed a federal judge in Rhode Island who ruled against Uniloc's patent infringement claims.

Uniloc has similar lawsuits pending against Adobe Systems Inc. (ADBE), McAfee Inc. (MFE), Symantec Corp. (SYMC) and Sony Corp. (SNE, 6758.TO), Davis said.

Stanford University law professor Mark Lemley said plaintiffs have attempted to use the 25% rule has in a wide array of cases, particularly technology cases.

He said the rule made little logical sense in the tech context because products usually are made of many different components that each embody many different patents.

The idea that the holder of one patent should be entitled to 25% of the product's profits "is arbitrary and almost certainly wrong," he said.

The case is Uniloc USA v. Microsoft, 2010-1035.

-By Brent Kendall, Dow Jones Newswires; 202-862-9222; brent.kendall@dowjones.com

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