Well folks, it seems that another plaintiff-preferred damages model has bit the dust. First it was the time-honored 25% Rule (see our previous blog The Latest Thing in Damages Models). Now it’s the even more elderly, albeit less well known, Nash Bargaining Solution. Oracle America, Inc. v. Google Inc.
Google, of course, needs no introduction. Oracle America is the renamed Sun Microsystems, Inc. which was acquired by Oracle Corporation in January 2010.
In August 2005, Google had acquired Android, Inc. and had begun discussions with Sun concerning a possible license of certain Sun patents for use in Google’s Android platform. These discussions were unsuccessful, although there was evidence that Sun had offered a license at a royalty of approximately $100 million and that Google had rejected this offer.
In August 2010, Google, having concluded that the alternatives to use of the Oracle technology “all suck,” proceeded without a license. Oracle sued, claiming infringement of its patents. In due course, Oracle submitted the damages report of its expert, who opined, based upon the Nash Bargaining Solution, that “the most likely hypothetical license negotiation outcome … would have been a total royalty with a net present value of approximately $2.6 billion” … comprising “an up-front payment of $0.9 billion to $1.4 billion” plus “a share of revenues attributable to Android … between 10 and 15 percent.” Google filed a motion seeking to exclude the expert’s damages testimony.
For the benefit of those readers not familiar with the Nash Bargaining Solution – this would include almost everyone – it is:
“a mathematical model that purports to define the most mutually beneficial outcome of a two-party bargaining scenario. After identifying the profits each party could expect without a deal and the surplus created by their cooperation, the Nash model allocates the value of the deal in two steps: each party first receives the same profits it could expect without a deal, and then the remaining surplus is divided evenly between them."
The model was developed in 1950 and, seemingly for good reason, has been largely ignored since that time. As noted by the judge who granted Google’s motion to exclude this testimony, “[i]t 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 profit, which will be many times the amount of real-world royalty rates. There is no anchor for this fifty-percent assumption in the record of actual transactions. The Nash bargaining solution has never been approved by a judge to calculate reasonable royalties in litigation, at least in the face of objection. This is despite the fact that for decades it has been lurking in the field of economics.”
The judge went on to enumerate a whole host of other, fatal problems with the expert’s report. The point, however, is this: the so-called 25% Rule (also known as the Goldschiter Rule), which awarded the injured patentee 25% of the infringer’s profits, was struck down as unsupported by any real-world data. Did anyone really expect that the Nash model, which would award 50% of the infringer’s profits to the patentee, would pass muster?
The expert had included in his report a full page of equations chock full of Greek letters and squiggly lines, which did impress the Court, but not favorably. “No jury could follow this Greek or testimony trying to explain it. The Nash bargaining solution would invite a miscarriage of justice clothing a fifty-percent assumption in an impenetrable façade of mathematics.”
In its conclusion, the Court held, “the patent owner here simply served a report that overreached in multiple ways – each and every overreach compounding damages ever higher into the billions – evidently with the goal of seeing how much it could get away with, a ‘free bite,’ as it were. Please be forewarned: the next bite will be for keeps. If the next and final report fails to measure up in any substantial and unseverable way, including ways this order did not have time to reach, then it may be excluded altogether without leave to try yet again.”
THE LESSON TO BE LEARNED: Re-read above paragraph.
Experts should learn the theory before applying
Plainitff's experts, in search of a new 25% rule, have been misapplying the Nash bargaining theory, and rightfully deserve to be tossed. As painfully demonstrated by "patentadmin", a little understanding of Nash's theory is needed, and "patentadmin" appears to have no understanding. Nash's solution was developed in 1950, and to this day has been applied in academic studies in bargaining including patent licensing. Research Google Scholar, and you will numerous and current studies that rely on Nash's solution. Secondly, Nash and the 25% rule are world's apart. The 25% rule applies 25% of the operating profit as a starting point irrespective of technology and licensee. That warrants exclusion. The Nash solution is NOT 50% of the profit margin as some experts would have you believe. It is careful consideration of the licensee's opportunity costs and the the licensor's opportunity costs. If and once these costs can be calculated, those are removed from the accused profits. What is left over is the surplus to be divided. One solution is an even split of the surplus. That's it. It's not complicated nor is it controversial. Each party will receive what they could obtain outside of the bargain and what is left over is split. It entirely depends on facts and circumstances. Please get your facts and theory straight before posting.
The problem is that the courts, while invalidating prior patent damages models, have failed not only to present any new ones, but even to clarify or to define a baseline or standard for patent damages. Small wonder, then, that patentees resort to "overreaching," when the courts simply decide to determine damages on a case-by-case basis and offer little specific guidance.