The Federal Circuit rejected the use of the 25 percent “rule of thumb” as a basis for establishing a reasonable royalty in the Uniloc case in 2011. Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011). Since that time, several defendants have challenged the use of a new method for determining a baseline royalty rate: the Nash bargaining solution.
The Nash bargaining solution—named for John Nash, the Nobel Prize–winning mathematician and subject of A Beautiful Mind—is based on the Nash bargaining game. The two players in the game are both seeking a portion of some good, such as money. If the total amount desired is less than the total good, each player will receive what he or she wants. If the total amount desired is greater than the total good, neither player will get what he or she wants. The Nash bargaining solution is a framework to solve the game by using a set of conditions reasonable to any bargaining situation. Although Nash described his game theory in 1950, damages experts have only recently begun using the Nash bargaining solution to argue that the starting point of any negotiation between the players would be a 50-50 split of the incremental contribution of the patent to the licensee’s product.
Reaction from the courts has been mixed. No court has wholeheartedly adopted the application of the Nash bargaining solution, while several courts have rejected it as an “abstract rule of thumb” comparable to the 25 percent “rule of thumb.”
In a 2011 opinion in Oracle v. Google, 798 F. Supp 2d 1111 (N.D. Cal. 2011), Judge Alsup rejected application of the solution under Daubert and Uniloc: Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993); Uniloc, 632 F.3d 1292. “The Nash bargaining solution would invite a miscarriage of justice by clothing a fifty-percent assumption in an impenetrable facade of mathematics.” In that case, the damages report was served five months after the Federal Circuit rejected the 25 percent rule. Judge Alsup noted: “It is no wonder that a patent plaintiff would love the Nash bargaining solution because it awards fully half of the surplus to the patent owner, which in most cases will amount to half of the infringer’s profits, which will be many times the amount of real-world royalty rates.” In a later case in the same district, Mformation Techs, Inc. v. Research in Motion Ltd, 2012 U.S. Dist. LEXIS 56784 (N.D. Cal. March 29, 2012), Judge Ware allowed the use of the Nash bargaining solution “as a check” on the reasonableness of the royalty rate where the expert had engaged in “extensive analysis of the Georgia-Pacific factors.”
Since that time, in VirnetX Inc. v. Cisco Systems, 2013 WL 789288 (E.D. Tex. Mar. 1, 2013) lined to exclude an expert’s application of Nash bargaining, while excluding the expert’s reasonable royalty analysis as unreliable. Most recently, in Suffolk Techs. LLC v. Aol Inc, 2013 U.S. Dist. LEXIS 64630 (E.D. Va. Apr. 12, 2013), Judge Ellis rejected application of the Nash bargaining solution, stating: “Weinstein’s use of the NBS to opine that the hypothetical negotiation of the parties would result in a ‘50-50 split of the incremental profits attributable to the patents-in-suit’ is not adequately tied to the facts of the case. This is indistinguishable from the 25 percent rule of thumb in issue in Uniloc, and accordingly, Dr. Weinstein’s expert report must be excluded.” Judge Ellis noted that in Uniloc, the “expert first applied a theoretical rule of thumb and then applied the Georgia-Pacific factors,” but “here, Weinstein first applied the Georgia-Pacific factors and then applied a theoretical rule of thumb, albeit one clothed as NBS.” The variation in the order did not meaningfully distinguish the expert’s opinion from the one distinguished in Uniloc.
The Federal Circuit rejected the 25 percent rule of thumb as inadmissible because it “fails to tie a reasonable royalty base to the facts of the case at issue.” Since that opinion, two district courts have rejected the Nash bargaining solution on the same basis. Courts have differed in whether “extensive” fact-based analysis of the Georgia-Pacific factors is sufficient to overcome the “theoretical” nature of Nash bargaining. Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp 1116 (S.D.N.Y. 1970). Until the Federal Circuit addresses the issue, plaintiff-side damages experts will continue to rely on the more generous 50 percent rule of thumb. And defendants who thought they were insulated from “rules of thumb” will continue to challenge the reliability of those opinions.