January 5, 2011, 4:45 PM

A court ruling could ease the sting for defendants in patent lawsuits

The nation’s patent court throws out a common formula for calculating damages.

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Good news from the gavel for online retailers:  A federal court ruling this week could reduce the amount of damages companies deemed to have infringed on patents must pay out.

The U.S. Court of Appeals for the Federal Circuit, which focuses on patent appeals, handed down the ruling Tuesday in a case involving Microsoft Corp. While the court found that Microsoft had infringed on a patent related to software piracy prevention that was held by Uniloc USA—affirming an earlier jury decision—the court threw out the jury's $388 million award to the software security vendor.

That rejection of damages is what matters for online retailers.

 

During the original infringement trial, Uniloc argued that it was entitled to 25% of what Microsoft would earn in profits from using the disputed technology. Uniloc, using the 25% formula, which is a common calculation in patent-infringement cases, said it was entitled to $560 million in damages. The jury reduced that to $388 million.

The appeal court said it would stop using the 25% formula, calling it “fundamentally flawed” because it wasn’t tightly connected to the facts in individual infringement cases. The court ordered a new trial to figure out damages owed to Uniloc. The appeals court’s decisions generally are binding throughout the United States for patent issues, though the rulings can be eclipsed by the U.S. Supreme Court or Congressional action.

The ruling addresses what some patent lawyers view as an arbitrary way to measure damages for infringement claims. In turn, the prospect of large payouts to patent-holding firms, along with hefty legal fees, pressure e-commerce companies to settle infringement cases.

“This is significant because plaintiffs have been tossing around a ‘rule of thumb’ on damages for quite some time that had no basis in reality,” says Peter Brann, a partner with Lewiston, MD-based law firm Brann & Isaacson, who defends online retailers. “No rational Internet retailer would agree to give anyone 25% of their revenues or profits to license any technology.”

Uniloc had no immediate comment.

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