NDCA Allows Use of Nash Bargaining as “Check” on Royalty Rate; Rejects Use of EMVR Because Accused Products only “Capable” of Infringement
On March 29, 2012, in Mformation Techs., Inc. v. RIM, No. C 08-04990 JW (NDCA), Judge Ware ruled on motions to exclude expert testimony, including testimony from damages experts. The case addresses two interesting damages issues: 1) use of the Nash bargaining solution in determining a reasonable royalty rate, and 2) the entire market value rule for accused products that are only “capable” of infringement, i.e., that do not always infringe.
Defendant moved to exclude plaintiff’s expert’s reasonable royalty opinions as unreliable because they were based on the Nash bargaining solution, contending this is an impermissible rule of thumb for determining the rate. The Federal Circuit has not approved (and it appears has never even addressed) the Nash bargaining solution for royalty rate determinations. However, here the court was not forced to address the issue squarely, because it found that plaintiff’s expert had used the Georgia-Pacific methodology to arrive at the royalty rate, and had only used Nash bargaining as a “check” on that rate. NOTE: Nash bargaining was addressed at length in Oracle America, Inc. v. Google Inc., No. C 10-03561 WHA (NDCA July 22, 2011) (stating that Nash bargaining is a theory “that a patent plaintiff would love … 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”). This order from Oracle was briefed previously in this blog; click the category link for “Nash bargaining solution.”
The court also considered the entire market value rule (EMVR) where the accused products are only capable of infringement. Plaintiff’s expert applied the entire profit of the accused products to the royalty rate because he understood that all of the defendant’s products have the “capability to infringe the Patent-in-Suit when connected with a [certain] system.” The court found application of the EMVR to be unwarranted, however, because the expert did not attribute all of the defendant’s customer demand to use of the Patent-in-Suit—even if all of the accused products were capable of infringing, when connected to the system at issue, this does not prove that customer demand was driven by the patented capability as opposed to other features of the accused products. The court therefore excluded the expert’s testimony applying the royalty rate to the entire profit of the accused products.
Note that the court relied on Judge Rader’s three-part EMVR test from Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d 279, 285-87 (N.D.N.Y. 2009) (Rader, J., sitting by designation) (part one of the test holds that the infringing components of a larger machine must be “the basis for customer demand for the entire machine including the parts beyond the claimed invention”). Other district courts have used the Cornell three-part test for EMVR analysis. See also, e.g., Univ. of Pittsburg v. Varian Med. Sys., Inc., No. 08cv1307 (W.D. Pa. February 10, 2012).