June 11, 2012
LES Insights
By John C. Paul; D. Brian Kacedon; Christopher L. McDavid
Authored by D. Brian Kacedon, Christopher L. McDavid, and John C. Paul
Under Rule 26 of the Federal Rules of Civil Procedure, a party may obtain discovery regarding any non-privileged matter relevant to any party's claim or defense. The Court of Appeals for the Federal Circuit has recognized that settlement agreements can be relevant to a reasonable royalty sought as compensation for patent infringement. In ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 869-73 (Fed. Cir. 2010), the Federal Circuit implied that settlement agreements may be not only discoverable, but also admissible as evidence of a reasonable royalty rate. Less clear, however, is the discoverability of the negotiations underlying settlement agreements. For example, district courts are divided on whether a settlement-negotiation privilege exists to protect such underlying negotiations from discovery.
In In re MSTG, Inc. Misc. Dkt. No. 996 (Fed. Cir. Apr. 9, 2012),1 the Federal Circuit, as a matter of first impression, addressed whether settlement agreement negotiations regarding proposed reasonable royalty payments should be protected from discovery based on a settlement-negotiation privilege. Relying on several factors identified by the U.S. Supreme Court to assess the propriety of defining a new privilege, the Federal Circuit declined to create a settlement-negotiation privilege.
In 2008 and 2009, MSTG, Inc. sued various cell-phone service providers and mobile-device manufacturers, including AT&T Mobility, LLC, for patent infringement. MSTG eventually settled with all defendants except AT&T, granting licenses to most defendants as part of the settlement agreements. Those licenses included rights under the patents asserted against AT&T. The parties disputed the reasonable royalty AT&T should pay if found to infringe. In discovery, AT&T sought production not only of the settlement agreements (which MSTG later produced) but also of documents reflecting the settlement negotiations. After AT&T moved to compel production, the magistrate judge ruled that AT&T had not carried its burden of showing why the settlement negotiations were relevant and discoverable.
Soon thereafter, AT&T sought reconsideration in light of statements in MSTG's expert report on the appropriate reasonable royalty rate to compensate MSTG for AT&T's alleged infringement. Although there was no indication that the expert had access to any settlement-negotiation documents, he did draw conclusions based on deposition testimony of an MSTG executive that the agreements reflected litigation-related compromises. For example, the expert concluded that the royalty rates in the settlement agreements were "discounted by at least 75%" because they were entered into before any substantive litigation rulings such as claim construction or summary judgment. Upon reconsideration, the district court granted AT&T's motion to compel production of negotiation documents, concluding that it would be unfair to allow MSTG's expert to rely on reasons relating to settlement negotiations while simultaneously "shield[ing] those reasons from further examination."
MSTG petitioned the Federal Circuit for a writ of mandamus to vacate the district court's order, arguing (1) that the license negotiations were protected by a settlement-negotiation privilege and (2) that the district court clearly abused its discretion by ordering their production.
As a preliminary matter, the Federal Circuit recited its earlier holdings that Federal Circuit law applies when deciding the discoverability of materials in a patent case, so long as those materials relate to an issue of substantive patent law. Here, the Federal Circuit applied its own law because the discovery had a significant bearing on patent damages. Further, the Court took exception to the general principle that reviewing discovery orders by mandamus is inappropriate, citing the fact that the issue raised was a matter of first impression on which district courts were split.
In determining that MSTG's settlement negotiations were not protected by a settlement-negotiation privilege, the Federal Circuit analyzed several factors identified by the U.S. Supreme Court. First, the Court noted that it was not aware of any state that recognizes a settlement-negotiation privilege outside the context of mediations.
Second, the Court found that Federal Rule of Evidence 408 suggests that a settlement-negotiation privilege is inappropriate. Rule 408 prohibits admitting into evidence, for certain purposes, settlement negotiations between the parties to a lawsuit or negotiations involving a third party. Congress, however, did not take the additional step of protecting settlement negotiations from discovery. In fact, Rule 408 specifically permits admitting evidence of settlement negotiations for purposes other than proving liability or the amount of a claim.
Third, the Federal Circuit observed that a settlement-negotiation privilege was not included among the nine specific privileges recommended by the Advisory Committee of the Judicial Conference in its proposed Federal Rules of Evidence.
Fourth, disputes are routinely settled without the benefit of a settlement-negotiation privilege. Thus, while acknowledging an important public interest in promoting settlement, the Court reasoned that such a privilege was unnecessary.
Fifth, the Court recognized that any settlement privilege would necessarily have many exceptions hindering its effectiveness, clarity, and certainty. For example, as previously stated, Rule 408 permits admitting evidence of settlement negotiations for purposes other than proving liability or the amount of a claim. The Federal Circuit adopted a statement from the U.S. Supreme Court that "[a]n uncertain privilege . . . is little better than no privilege at all."
Lastly, the Federal Circuit identified other effective methods of seeking to limit the discoverability of settlement negotiations. For example, the scope of discovery, while broad, has limitations under Rule 26, such as when circumstances indicate that the burden or expense of the proposed discovery outweighs its likely benefit. Furthermore, federal courts have wide discretion to control the discovery process. For example, the Court noted that many district courts require heightened showings for discovery of confidential settlement negotiations. Notably, the Court reserved for another day the issue of appropriate limits on the discovery of settlement negotiations, such as a particular showing required for discovery of such material.
After declining to create a settlement-negotiation privilege. the Federal Circuit ruled that the district court did not clearly abuse its discretion by ordering the production of negotiation documents. Referring to MSTG's expert report on damages, the Court emphasized, "as a matter of fairness, MSTG cannot at one and the same time have its expert rely on information about the settlement negotiations and deny discovery as to those same negotiations."
Settlement negotiations are not protected from discovery by a settlement-negotiation privilege. Although the Federal Circuit declined to create a settlement-negotiation privilege, it did not hold that settlement negotiations are presumptively discoverable. In fact, patentees should take note of the Court's discussion of methods to limit the scope of discovery, such as those described under Rule 26 and the potential requirement of a heightened showing for discovery of settlement negotiations. Of course, where a patentee relies on information about settlement discussions to support its positions, courts will likely allow discovery. Thus, patentees must make arguments carefully, aware that their positions may open the door to discovery of settlement negotiations.
Parties to a settlement should assume that their negotiations may be discoverable. As a result, parties may wish to conduct their negotiations as if any information exchanged may later be discoverable in litigation with third parties.
1The In re MSTG decision may be found at: http://www.cafc.uscourts.gov/images/stories/opinions-orders/11-m996%20order.pdf.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm’s clients.
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