Nash Bargaining Solution And Patent Damages: A 50 Percent 'Rule Of Thumb'?

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...