Patent Damages
5Aug/11Off

Oracle v. Google: NDCA Judge Alsup Rejects Nash Bargaining Solution and Grants Google’s Motion to Exclude Oracle’s Expert’s Report and Testimony Advocating $1.4B to $6.1B in Damages

The battle between Oracle and Google, concerning patent and copyright infringement relating to features of Java and Android, is approaching an October trial date. Damages is a huge issue in the case—in fact, in an opinion issued by Judge Alsup on July 22, 2011, Oracle’s expert has submitted a report advocating that Google should pay Oracle somewhere between $1.4 and $6.1 billion in damages. See Oracle America, Inc. v. Google Inc., No. C 10-03561 WHA (N.D. Cal. July 22, 2011).

On May 21, 2011, Oracle served the expert report of Dr. Iain M. Cockburn, who is a professor of finance and economics at Boston University. Dr. Cockburn provided an opinion on damages using the Nash bargaining solution and other economic analysis. Nash bargaining is named for its creator, Dr. John Nash, a Nobel Prize winning mathematician at Princeton, who was the subject of an Oscar-winning movie entitled “A Beautiful Mind.” Nash proposed that two people bargaining over a unit of some good (e.g., money) will get nothing unless their portions total no more than the total of the good, e.g., the total amount of money. A Nash bargaining solution is a “Pareto efficient” solution to a bargaining problem. Pareto efficiency, named after an Italian economist, can be summarized as follows: if an initial allocation of a good among two or more individuals can be changed to make one individual better off without making another individual worse off is a Pareto improvement, and a Pareto efficient (or Pareto optimal) allocation is achieved when no further Pareto improvements can be made. (See http://en.wikipedia.org/wiki/Pareto_efficiency.) Simply put, the Nash bargaining solution is the best possible result for both parties.

Oracle’s expert, Dr. Cockburn, arrived at what he considered a reasonable royalty. He opined that the fair market value of a license reached through hypothetical negotiations at the time infringement began would be between $1.4 and $6.1 billion, depending on different assumed fact
scenarios. He concluded that “the most likely hypothetical license negotiation outcome in this case would have been a total royalty with a net present value of approximately $2.6 billion,” structured as “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.” [Slip op. at 4 (quoting Cockburn’s report).]

The Court addressed a number of problems with Dr. Cockburn’s analysis, but we will focus on the Nash bargaining solution section in the opinion. The Court’s impression of the Nash bargaining solution—as a theory “that a patent plaintiff would love”—is evident at the outset of the discussion:

The Nash bargaining solution 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 Nash bargaining solution relies on “a few general assumptions” that “idealize the bargaining problem.” John F. Nash, Jr., The Bargaining Problem, Econometrica, Apr. 1950, at 155. Like any mathematical model, the Nash solution cannot describe real-world behavior unless the conditions on which it is premised are satisfied in the real world.

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 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. [Slip op. at 11.]

Turning to Dr. Cockburn’s analysis, the Court found that he failed to “adequately explain this method or tie it to facts in the record.” [Slip op. at 12.] The Court concluded that Dr. Cockburn took a shortcut on Nash’s assumptions, failing to show they were warranted on the particular facts of the case.

Perhaps more significant, the Court criticized the Nash bargaining solution in general as a methodology for computing reasonable royalty damages. The Court observed that Nash’s solution “has never been approved by a judge to calculate reasonable royalties in litigation, at least in the face of an objection. This is despite the fact that for decades it has been lurking in the field of economics.” [Slip op. at 12.] The Court also deemed the Nash bargaining solution unsuited to the courtroom—it “involves complex mathematical formulas and equations that would surely be incomprehensible to the average juror.” [Id.] To support this conclusion, the Court turned not to the actual Nash bargaining analysis advanced by Dr. Cockburn, but to an article from a legal journal that provided a generalized application of Nash’s model to reasonable royalty analysis. See William Choi & Roy Weinstein, An Analytical Solution to Reasonable Royalty Rate Calculations, 41 IDEA 49, 56–60 (2001). The Court quoted the mathematical analysis from the IDEA article—and concluded that it “includes much math”—but did not show how Dr. Cockburn’s analysis, in particular, also involved “much math.” The Court concluded its explanation of the Nash bargaining solution with this challenge:

No jury could follow this Greek [referring to the math from the IDEA article] or testimony trying to explain it. The Nash bargaining solution would invite a miscarriage of justice by clothing a fifty-percent assumption in an impenetrable facade of mathematics. See Uniloc, 632 F.3d at 1312–15 (holding that the 25 percent rule of thumb is inadmissible under Daubert and the Federal Rules of Evidence for determining a baseline royalty rate in a hypothetical negotiation). Such confusing evidence will be excluded under FRE 403. No expert testimony based on the Nash bargaining solution will be admitted. Instead, the normal Georgia-Pacific factors, which have been approved by the Court of Appeals for the Federal Circuit and which are more understandable to the average fact-finder, will guide our reasonable royalty analysis. See Uniloc, 632 F.3d at 1317 (“This court has sanctioned the use of the Georgia-Pacific factors to frame the reasonable royalty inquiry.”). [Slip op. at 13-14.]

In the Conclusion section, the Court issued a stern warning to Oracle that we quote here in full:

On reflection, the Court erred in inviting the damages report to be submitted earlier than normal. The Court’s express thinking was that allowing an earlier report would leave time to vet the analysis and then to adjust for the final report without trial delay. Instead, however, 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. While this order has not reached every possible criticism, Oracle must be aware that some of the unaddressed criticisms seem, at least on one reading, to have merit, so it should proceed with caution before overreaching again.

If Oracle believes that it cannot craft a report until it figures out what patent claims (of the many currently asserted) it will actually assert at trial, that is a problem of its own making. If Oracle needs to postpone the October trial date until it settles on which claims it truly believes are triable, then it should bring a prompt motion to do so; otherwise, Oracle’s revised damages report limited to the claims actually to be tried will be due 35 DAYS before the final pretrial conference and any responsive defense report will be due FOURTEEN DAYS before the final pretrial conference. The author of the report must, of course, sit for another deposition. [Slip op. at 15-16.]

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