Here, a California court rejects the use of a 50-50 profit split to determine a royalty rate (under Nash Equilibrium theory) and calls for an apportionment of the royalty base because the selected claims and patents only cover incremental improvements of the patented system.
In this case, the court scheduled for early expert reports, thus allowing a vetting/adjustment period before trial. The court acknowledges the error in that plan (since it resulted in overreaching opinions) and rejects a number of opinions of plaintiff’s expert Iain Cockburn. The case entails patent and copyright infringement involving features of Java and Android, as implemented on Google’s Android mobile devices. The asserted patent claims cover incremental improvements to the efficiency and security of the Java system; only part of Java embodies the claims, and Android further has many non-Java elements as well.
The court first faults Dr. Cockburn’s opinion that Google would agree to pay a royalty of $2.6 billion (net present value) because he assumed the negotiation would cover “Java” or “Android,” without any basis to equate the asserted claims with either all of Java or all of Android. This despite the fact that Sun normally licenses the Java platform, not individual patents. By including the entirety of Android, the court faults Dr. Cockburn for running astray of the requirements of the entire market value rule – he should have apportioned the demand for Android. The court then rejects Dr. Cockburn hypothetical negotiation date of October 2008 (Google’s Android launch), stating that the U.S. development and testing prior to that would be acts of infringement. The court also faults Dr. Cockburn for hypothesizing a negotiation between Google and Oracle, apparently because the negotiation would be, at latest, 2008, yet Oracle did not purchase Sun until 2010. The court also rejects Dr. Cockburn’s inclusion of future damages, which must be split out for the jury.
Finally, the court takes the significant step of rejecting Dr. Cockburn’s use of the Nash bargaining solution, described thus: “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.” In other words, this says that a royalty rate would be based on a 50-50 profit split (plus the adjustment above), similar to the 25% rule-of-thumb that calls for a royalty of 25% of profits. Since the Federal Circuit’s rejection of the 25% Rule, IP experts (well, me at least) have been awaiting guidance from the courts on the inevitable use of the Nash theory, which at least has some basis in economic theory. Here, the court cites two problems: (1) Dr. Cockburn failed to tie the Nash theory to the facts of the case, and (2) “[t]he Nash bargaining solution would invite a miscarriage of justice by clothing a fifty-percent assumption in an impenetrable facade of mathematics.”
The court also rejected an assertion by defendants that Sun’s 2006 licensing offer to Google of roughly $100 million, which Google rejected, constitutes an upper limit to a reasonable royalty, because in 2006 the offer would presumably include discounts for the risks of litigation over validity and non-infringement.
Interestingly, the court actually suggests how to determine the reasonable royalty: start with Sun’s 2006 $100 million offer and adjust it up and down based on several factors.
A couple thoughts on this case:
- Lesson for the attorneys: even if the parties in the real world would negotiate for a bundle/package/platform of rights, the hypothetical negotiation may not cover that whole package unless it’s shown that the asserted claims cover the enough of the features and functionality that they create the basis for customer demand. So pick the patents to assert carefully.
- By discarding the Nash equilibrium solution, the courts are discarding yet another possible tool for experts. While it is possibly susceptible to even more abuse than the 25% rule, the Nash theory may well be a useful tool if properly applied. But “properly applied” is the key. There’s very little, if any, guidance on properly applying it, so the courts probably have little choice but to reject it, at least for now.
Case: Oracle America, Inc. v. Google Inc., c10-03561 WHA (N.D. CA, July 22, 2011, Order) (Alsup)