The Applicability of Game Theory to Legal Negotiations and Mediations
Game theory is a decision-making tool that analyzes the players, strategies, and payoffs of situations, which can be represented in payoff matrices. Such investigations can guide the behavior of individuals or entities, who seek the outcome that best satisfies their goals. In particular, the Nash bargaining theory defines an equilibrium at which a player’s payoff can only be increased at the expense of the other players’ payoffs. A Nash equilibrium is any pair of strategies that are best responses to each other. As surveyed in this course, Networks, soccer games, pricing strategies, and international relations are just a few of the areas in which game theory is pertinent. Another field to which this concept is quite relevant is law, specifically in regards to negotiations and mediations.
Published in The Legal Intelligence, the oldest law journal in the United States of America, the article “The Benefits of Game Theory in Negotiations and Mediations” states that game theory is useful in legal mediations but not so much in infringement matters. Mediations are attempts to resolve conflict between parties through compromise. Armed with an understanding of each party and its aims, a mediator facilitates this process of reconciliation and can do so by using the reasoning of game theory. In order to understand the significance of a mediator, one must realize that game theory calls for each player to take into consideration the other players’ strategies and desired outcomes, not just his own. In doing so, the players act in ways that maximize their payoffs. The mediator is the person who takes this information into consideration in mediations; essentially, he knows the payoff matrix for the specific case, interprets it, and uses the analysis to lead the parties to the most beneficial settlement. Game theory is not advantageous in settlement negotiations because each player is not fully aware of the others’ strategies, optimal payoffs, and the associated payoff matrix. Each party does not have enough information about the others to accurately influence its decisions. Hence, lawyers and clients can often reach much different conclusions by themselves than with the beneficial insight and prompting of mediator, who is informed by knowledge of the payoff matrix.
The application of game theory to infringement matters, however, has been rejected as unreliable by the Federal Circuit and some district courts. Consider a hypothetical infringement negotiation to determine the royalties that a willing licensee must pay to compensate for damages to a willing licensor. The players are the willing licensee, who is the alleged infringer, and the willing licensor, or patent owner. Unlike the individual parties in a mediation, the alleged infringer and patent owner are fully aware of each other’s strategies and desired payoffs. Hence, they have the necessary information to utilize game theory and the notion of Nash equilibrium. After considering cases in which the Nash bargaining strategy has been employed in analyses, most district courts have deemed the resulting 50/50 payoff split as biased and not considerate of each case’s circumstances and facts. Additionally, they have argued that the strategy can unjustly sway the jury’s opinions. In Federal Circuit in VirnetX v. Cisco Systems, 767 F.3d 1308 (Fed. Cir. 2014), the U.S. Court of Appeals first noted that the Nash theory is an “inappropriate rule of thumb.” The Federal Circuit Court permits the utilization of the strategy when a situation’s circumstances are studied before determining a profit split and “the premises of the theorem actually apply to the facts of a case.” In fact, the court still rejected the application of Nash equilibrium to infringement negotiations and regarded it as inaccurate when a damage expert showed that a 55/45 payoff split was merited by the circumstances of the aforementioned case. These rulings hold that the Nash theory is usually independent of the payoffs warranted by individual cases and is not be permitted in such analyses.
Source: http://www.thelegalintelligencer.com/latest-news/id=1202738825434/The-Benefits-of-Game-Theory-in-Negotiations-and-Mediations?mcode=1395262324557&curindex=51&slreturn=20150914150722