On April 12, 2013, Judge Ellis of the Eastern District of Virginia issued an opinion in Suffolk Tech. LLC v. AOL Inc. and Google Inc., Case No. 1:12-cv-625 (Doc. No. 518), addressing use of the Nash Bargaining Solution (NBS) by Suffolk’s damages expert (Roy Weinstein). Google argued that Weinstein’s testimony was inadmissible because use of the NBS was not tied to the facts of the case. The court granted Google’s motion.
According to the court, Weinstein applied the Georgia-Pacific factors to the revenue stream associated with the accused product and then conducted a hypothetical negotiation based on the NBS. The court concluded that the NBS did not appear “to be tied to the facts of this case.” Slip op. at 3. According to the court, Weinstein appeared to “conclude summarily that the result of this hypothetical negotiation would be a ‘50/50 split of the incremental profits attributable to the patent-in-suit.’” Slip op. at 3 (quoting Weinstein’s report).
The court reasoned that Weinstein’s use of NBS was “not meaningfully distinguishable” from the 25% rule rejected in Uniloc. The court observed that, in Uniloc, the expert had first applied the 25% rule and then the Georgia-Pacific factors, whereas here Weinstein first applied Georgia-Pacific and then “applied a theoretical rule of thumb, albeit one clothed as the NBS.” Slip op. at 4 (footnote omitted). The court cited the “fundamental and fatal flow [sic, flaw]” to be the failure to tie the NBS “rule of thumb” to the facts of the case. Id. (citing Oracle America, Inc. v. Google Inc., 798 F. Supp. 2d 1111 (N.D. Cal. 2011) (Alsup, J.) (rejecting NBS because it “would invite a miscarriage of justice by clothing a fifty-percent assumption in an impenetrable façade of mathematics”)).
The court also rejected Suffolk’s argument that Weinstein’s use of NBS was tied to the facts, unlike the 25% rule in Uniloc. While the court did not spell out Suffolk’s argument, it did cite a portion of Weinstein’s expert report which stated that his calculation had “backed out” “apportionments for Google’s contributions, non-infringing functionality, and a hypothetical non-infringing alternative,” and that “the parties would have been willing to accept a 50/50 split of the incremental profits attributable to the patent-in-suit.” Slip op. at 4. The court stated that Weinstein had failed to explain “why these parties would have accepted a 50/50 split,” and therefore did not tie the 50/50 split to the facts of the case. Id.
It appears Weinstein was applying a methodology for computing reasonable royalty damages that apportions the incremental value of the patented feature over the remaining value-contributing components of the accused product, and then splits the incremental profits based on game theory (in this case, the NBS). Several commentators have advocated reasonable royalty damages based on the patented feature’s incremental value, which some argue can be derived by determining any additional value provided by the patented feature over the next best non-infringing alternative (NBNA). (In other words, if the patented feature provided an additional $2M in profit to the accused infringer over the NBNA, then the damages should be a split of the incremental $2M in extra profits. The profit split can be derived, for example, by applying the NBS.) See, for example:
- Brian J. Love, Patentee Overcompensation and the Entire Market Value Rule, 60 Stan. L. Rev. 263 (2007) (stating that when calculating reasonable royalty damages the rate should be applied to the incremental value added by the patented invention).
- Christopher B. Seaman, Reconsidering the Georgia-Pacific Standard for Reasonable Royalty Patent Awards, 2010 BYU L. Rev. 1661, 1711 (2010) (“In lieu of Georgia-Pacific, this Article proposes that courts should adopt an alternative standard for imposing a reasonable royalty: when an acceptable noninfringing substitute for the patented technology exists, the cost of that substitute should serve as a ‘ceiling’ on a reasonable royalty.”).
- Roger D. Blair & Thomas F. Cotter, Rethinking Patent Damages, 10 Tex. Intell. Prop. L.J. 1, 59 (2001) (stating that an infringer in a real negotiation “would have agreed to a royalty equal to or no more than the amount he could have expected to earn from using a non-infringing alternative”).
- Elizabeth M. Bailey, et al., Making Sense of Apportionment, 12 Colum. Sci. & Tech. L. Rev. 255 (2011) (advocating an economic approach to patent damages, but recognizing that in the absence of synergies between the patented technology and other technologies in the accused product, one may consider the incremental value of the patented technology over a noninfringing alternative).
- Eric E. Bensen & Danielle M. White, Using Apportionment to Rein in the Georgia-Pacific Factors, 9 Colum. Sci & Tech. L. Rev. 1 (2008) (arguing that “(i) apportionment should be the threshold question in every reasonable royalty analysis, and (ii) only factors relevant to approximating a fair market price for the patent should be used to determine the ‘reasonable’ royalty.”) (emphasis in original). Judge Posner, sitting by designation, recently espoused this approach in a Daubert ruling: “[Defendant] Keebler would not have paid a royalty higher than the cost to it of switching to a noninfringing substitute for the plaintiffs’ margarine in its cookies or otherwise reworking its manufacturing process to avoid making the infringing margarine.” Brandeis Univ. v. Keebler Co., Case No. 1:12-cv-01508, slip op. at 9 (N.D. Ill. January 18, 2013).
Judge Posner, sitting by designation, recently espoused a similar approach in a Daubert ruling: “[Defendant] Keebler would not have paid a royalty higher than the cost to it of switching to a noninfringing substitute for the plaintiffs’ margarine in its cookies or otherwise reworking its manufacturing process to avoid making the infringing margarine.” Brandeis Univ. v. Keebler Co., Case No. 1:12-cv-01508, slip op. at 9 (N.D. Ill. January 18, 2013).
It is possible that Judge Ellis in the Suffolk case was merely taking issue with Weinstein’s failure to consider whether the NBS would have yielded a 50/50 split, or some other split, based on the facts of the case. For example, one factor that may sway the NBS from the 50/50 split is relative bargaining power of the parties; a party with greater bargaining power can demand a larger split of the profits. It does not appear from Judge Ellis’ opinion that Weinstein conducted such an analysis.
On the other hand, it is also possible that Judge Ellis was taking issue in principle with the NBS as applied to reasonable royalty damages. The citation to Judge Alsup’s opinion in Oracle v. Google may support that conclusion.