December 2013

The Federal Circuit ruled in Uniloc USA, Inc. v. Microsoft Corp. that the widely used (but fatally flawed) 25 percent rule can no longer be part of reasonable royalty damages calculations.  This article provides the details of this reasonable royalty damages decision.  Since that time, plaintiffs have advanced the Nash Bargaining Solution, a theoretical mathematical construct that argues (under certain conditions) that a reasonable royalty rate should be an even split of the infringer’s profits. If so, the Nash Bargaining Solution would replace the 25% rule of thumb rejected in Uniloc, with an even higher rule of thumb.

John Nash, the Nobel Prize–winning mathematician whose life was memorialized in the movie A Beautiful Mind, introduced game theory in 1950.  The Nash bargaining solution is a mathematical model that purports to define the most mutually beneficial outcome of a two-party bargaining scenario. Some damage experts have used his theoretical construct to argue that the starting point of any licensing negotiation is a 50%/50% split of the incremental contribution of the patent to the licensee’s product.

Those advocating the 50%/50% profit split have not looked at the details of the mathematical framework within the Nash Bargaining Solution that provides this simplistic result. Section 284 of Title 35 of the United States Code provides that patent infringement damages shall “in no event [be] less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.” Specifically, the 50%/50% split suggested by some would require that both parties have an equal bargaining position, which is what provides the equal profit division.

However, equal bargaining position is rarely the case.  Assymetric negotiating power is for more frequent.  In order to help assess the likelihood of unequal bargaining positions, the 15 Georgia Pacific factors address a hypothetical negotiation and the respective bargaining strength of the patentee and infringer. When the patentee is capable of producing products using the patented technology, or the infringer has non-infringing alternative(s), the results of the Nash Bargaining solution will not necessarily result in a 50%/50% split.  Instead of a 50%/50% split, the more comprehensive and typical analysis of the Georgia Pacific factors will almost always deliver a different result.

The Georgia Pacific factors, which have been highly paraphrased and shortened from the original case language, are as follows:

  1. Royalties received by the patent owner for the licensing of the patent-in-suit;
  2. Royalties paid by the licensee for the use of other comparable patents;
  3. The nature, scope and terms of the license;
  4. The licensor’s established licensing policy;
  5. The commercial relationship between the licensor and the licensee, such as whether they are competitors;
  6. The effect of selling the patented specialty in promoting derivative or convoyed sales;
  7. The duration of the patent and license;
  8. The established profitability of the product made under the patent; its commercial success; and its current popularity;
  9. The utility and advantages of the patent property over the old modes or devices;
  10. The nature of the patented invention and how it is owned and produced by the licensor;
  11. The extent to which the infringer has made use of the invention;
  12. The portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions;
  13. The portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements;
  14. The opinion testimony of qualified experts; and
  15. The amount that a prudent licensor and licensee and would have agreed upon at the time the infringement began if both had been reasonably and voluntarily trying to reach an agreement.

One somewhat mechanical calculation that is sometimes used to address the economic considerations of the licensee is called the analytical approach.  In TWM Manufacturing Co. v. Dura Corp., 789 F. 2d 895 (Fed. Cir. 1986), the Court allowed a royalty to be determined based on a comparison of the profit rate that is anticipated using the patented product, vs. the profit rate earned on non-patented products.  Although the Dura court specifically stated that one need not use the full hypothetical negotiation process anticipated by the Georgia Pacific factors, the analytical approach is consistent with Georgia Pacific factor 13, and can be part of this factor 13.

The problem with the Nash Bargaining solution is not be the model itself, but the simplistic interpretation used by certain damage analysts that equal negotiating power exists.  If one could practically modify the Nash Bargaining model in actual practice, then perhaps the disparity would not exist between (i) a full and complete application of the Nash Bargaining solution and (ii) the results achieved by the more complete Georgia Pacific analysis described above.

In criticizing the Nash Bargaining simplistic assumption, the district court noted in Oracle Am., Inc. v. Google Inc., 798 F. Supp. 2d 1111 (N.D. Cal. 2011),

“It is no wond