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25 Fed. Cir. B.J. 125 (2015-2016)
An Application of Nash Bargaining to Intellectual Property Negotiations

handle is hein.journals/fedcb25 and id is 135 raw text is: An Application of Nash Bargaining to Intellectual Property Negotiations Richard Higgins and Jeffrey Klenk* Introduction In what follows we propose a solution to a hypothetical bargaining prob- lem that is likely to arise when the owner of an invention, which is assumed to lower the marginal cost of production, negotiates a patent license with producers.' We show that, under various assumptions about the downstream market structure, the solution that maximizes the Nash product in a specific market context need not require an even split of the available surplus.2 This * Richard Higgins is a Managing Director and Jeffrey Klenk is an Associate Director at Berkeley Research Group (BRG), an expert services firm focusing on intellectual property and antitrust issues among other areas of expertise. The opinions expressed herein are those of the authors and are not intended to reflect the opinions of other individuals at BRG. This paper benefitted tremendously from insight provided by Jeffrey Leitzinger. ' The authors have also benefitted from reviewing the pioneering paper by Choi and Weinstein. Choi and Weinstein demonstrate that a reasonable royalty can be determined by maximizing the Nash product when there is a single licensee and that it is feasible to view a royalty as a transfer payment. They also emphasize that a 50/50 split is the excep- tion, which applies only when the parties to the bilateral bargain have equal disagreement alternatives. Beyond this special case, we demonstrate that, in the case of a single licensee, the per-unit royalty that maximizes the Nash product is, contrary to Choi and Weinstein, not the first best solution, because the royalty rate chosen affects the single licensee's choice of price and output due to double marginalization. Choi and Weinstein also fail to analyze the case of multiple licensees and, to this end, we provide a method for selecting multiple per-unit royalty rates when the patentee uses non-exclusive licenses. See Wiliam Choi & Roy Weinstein, An Analytical Solution To Reasonable Royalty Rate Calculations, 41 J.L. & TECH 49 (2001). We have also reviewed a more recent article authored by Weinstein. See Douglas Fox & Roy Weinstein, Arbitration and Intellectual Property Disputes (Apr. 19, 2012), in MYTH BUSTING: ARBITRATION PERCEPTIONS, REALITIES AND RAMIFICATIONS (American Bar Association 14th Annual Spring Conference). 2 We use the term surplus in several ways, which should be evident from the context. Importantly, our use of the term is not limited to the incremental cost-savings attributable to the patented technology but in general depends on the nature of competition among licensees. For example, producer surplus-the excess of sales revenue above the total cost of production including royalties paid-inherently depends on the royalty rate itself and the responses of other potential suppliers to changes in production decisions. We thank Dr. Leitzinger for emphasizing this point in his review.

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