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Litigation Settlement Negotiations Related to Reasonable Royalties and Damage Calculations Are Not Protected by a Settlement Negotiation Privilege

April 09, 2012

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Last Month at the Federal Circuit - May 2012

Judges: Rader, Dyk (author), Moore

[Appealed from: N.D. Ill., Judge Chang]

In In re MSTG, Inc., No. 11-M996 (Fed. Cir. Apr. 9, 2012), the Federal Circuit denied MSTG, Inc.’s (“MSTG”) petition for a writ of mandamus directing the district court to vacate its order compelling MSTG to produce documents related to license negotiation discussions between MSTG and other companies. In so doing, the Court determined that such license negotiation discussions are not protected from discovery based on a settlement negotiation privilege and that the district court did not clearly abuse its discretion by ordering the production of such documents.

MSTG filed suit against AT&T Mobility, LLC (“AT&T”) and other cell phone service providers and mobile device manufacturers, claiming infringement of patents covering third-generation (“3G”) mobile telecommunications technologies. MSTG eventually settled with all defendants other than AT&T. As part of the settlement agreements, most defendants were granted licenses under the patents-in-suit, and one defendant entered into an agreement giving it an option to license the patents-in-suit at a predetermined rate.

MSTG produced six license agreements and an option agreement (collectively the “settlement agreements”) to AT&T. AT&T then sought further discovery into the negotiations of the settlement agreements on the theory that those negotiations could be pertinent to an amount of any reasonable royalty. After MSTG objected on relevancy, AT&T moved to compel production of the documents. A magistrate judge denied AT&T’s motion to compel under Fed. R. Civ. P. 26.

Later, MSTG’s expert opined on a reasonable royalty, relying on deposition testimony of an MSTG executive to determine that the settlement agreements reflected “litigation-related compromises” and, as such, the royalty rates in the settlement agreements were not reflective of hypothetical negotiations between MSTG and AT&T.

AT&T subsequently sought reconsideration of the magistrate judge’s order, arguing that the discussion of the license agreements in the expert report constituted new evidence supporting discovery of the settlement negotiations. Granting the motion, the magistrate judge found that the negotiation documents could shed light on why the parties reached their royalty agreements, and could provide guidance on whether some or all of the licenses could be considered a basis for calculating a reasonable royalty between AT&T and MSTG. The district court adopted the magistrate judge’s conclusions and issued a final discovery order that compelled MSTG to produce the negotiation documents leading up to the settlement agreements.

MSTG petitioned the Federal Circuit for a writ of mandamus to vacate the discovery order, asserting that the license negotiations between it and its other licensees are protected by a settlement negotiation privilege.

After noting that mandamus is extraordinary relief and usually an inappropriate remedy for review of discovery orders, the Court noted that review was appropriate here because this was a matter of first impression and the district courts are split. Slip op. at 7. In analyzing the privilege issue, the Court noted that Rule 501 of the Federal Rules of Evidence authorizes federal courts to recognize new testimonial privileges through a process of “evolutionary development.” Id. at 9 (citing Jaffee v. Redmond, 518 U.S. 1, 8-9 (1996)). The Federal Circuit subsequently analyzed the factors outlined in Jaffee to conclude that settlement negotiations related to reasonable royalties and damage calculations are not protected by a settlement negotiation privilege.

With respect to the Jaffee factors, the Court first noted that no state consensus exists as to a statutory privilege for settlement negotiations conducted absent mediation. Due to the lack of such a consensus, the Court found that a failure to recognize a federal privilege for MSTG’s settlement negotiations will not “frustrate the purposes” of any state legislation.

Second, in determining whether a new privilege should be adopted for settlement negotiations, the Court looked to whether Congress had considered that or related questions. The Court noted that Congress, in adopting Rule 408 of the Federal Rules of Evidence, directly addressed the admissibility of settlements and settlement negotiation, but in doing so did not take the additional step of protecting settlement negotiations from discovery. Thus, the Court found that “[a]dopting a settlement privilege would . . . go further than Congress thought necessary to promote the public good of settlement, or in other words, to strike the balance differently from the one Congress has already adopted.” Id. at 12-13.

Third, the Court noted that in determining whether new privileges should be recognized, the Supreme Court has been influenced by the list of evidentiary privileges recommended by the Advisory Committee of the Judicial Conference in its proposed Federal Rules of Evidence. Here, the Court found that the absence of a settlement negotiation privilege from the nine specific privileges recommended by the Advisory Committee cuts against MSTG’s arguments.

Fourth, the Court noted that “[t]he Supreme Court requires that a party seeking judicial recognition of a new evidentiary privilege under Rule 501 demonstrate . . . that the proposed privilege will effectively advance a public good.” Id. at 14 (alterations in original) (quoting In re Sealed Case, 148 F.3d 1073, 1076 (D.C. Cir. 1998)). In analyzing MSTG’s assertion that settlement negotiations are rooted in an “imperative need for confidence and trust” and thus serve a public good, the Court noted that the need for confidence and trust alone is an insufficient reason to create a new privilege, and in other circumstances, the Supreme Court has rejected new privileges under Rule 501, even though recognition of a privilege would foster a relationship based on trust and confidence. Id. Further, while there is clearly an important public interest in favoring the compromise and settlement of disputes, the Court observed that disputes are routinely settled without the benefit of a settlement privilege. Thus, the Court found that “an across-the-board recognition of a broad settlement negotiation privilege is not necessary to achieve settlement.” Id. at 15.

Finally, the Court noted that a privilege for settlement negotiations would necessarily be subject to numerous exceptions, and the existence of such exceptions would distract from the effectiveness, clarity, and certainty of such privilege. After examining the authority of the federal courts to impose heightened standards for discovery to protect confidential settlement discussions, the Court found that the public policy goals asserted by MSTG in support of a privilege can more appropriately and effectively be achieved by limiting the scope of discovery.

Accordingly, the Federal Circuit denied MSTG’s petition for writ of mandamus and held that settlement negotiations related to reasonable royalties and damage calculations are not protected by a settlement negotiation privilege.