Your settlement negotiations may be discoverable according to a recent Federal Circuit decision. Parties often use settlement agreements in patent litigation to help determine one form of damages: reasonable royalty. A reasonable royalty is the amount that an infringer of a patent would have paid to obtain a license to that patent. In determining the royalty rate, courts look to a plethora of factors, one of which is license fees for similar patents, including the patents at issue in the litigation. As settlement agreements in patent litigation often contain patent licenses, courts have long held that signed settlement agreements are discoverable. However, district court opinions have been split on whether evidence pertaining to the negotiations that underlie settlement agreements is also discoverable.
The Federal Circuit’s decision in In re MSTG, Inc. resolves that split, holding that communications related to reasonable royalties and damages are not privileged. Misc. Dkt No. 996, 102 U.S.P.Q.2D (BNA) 1321 (Apr. 9, 2012). MSTG sued a number of companies in the 3G cell phone industry for infringing MSTG’s patents. Eventually, all defendants settled save one: AT&T. MSTG relied upon the settlement agreements with the other defendants in its calculation of what a reasonable royalty should be. While MSTG produced the settlement agreements, it refused to produce to AT&T communications about the underlying negotiations. The district court ordered MSTG to produce documents pertaining to the underlying negotiations. MSTG appealed to the Federal Circuit, which held that settlement negotiations related to reasonable royalties and damage calculations are not protected by a settlement negotiation privilege. After examining a variety of factors, including policy decisions of states and congressional consideration of the issue, the Federal Circuit declined to “fashion a new privilege in patent cases that would prevent discovery of litigation settlement negotiations related to reasonable royalties and damages.” The court did not address, however, whether evidence pertaining to the settlement negotiations is admissible at trial.
In re MSTG may influence parties’ behavior in settlement negotiations since the content in those discussions may be discovered by others. Settlement discussions often involve the disclosure of sensitive information, including financial data. While the negotiations will often be produced under a protective order, knowing that communications can be discovered may make parties reticent to disclose such sensitive information. Some parties may choose to conduct settlement negotiations in person or over the phone, rather than by email or letter. While oral communications are discoverable, practical reasons make their discovery less likely. Lastly, although settlement discussions are now generally discoverable, the Court recognized that settlement discussions made during mediation are protected from discovery. Parties wishing to disclose sensitive information may voluntarily enter mediation solely to protect any communications leading up to a signed settlement agreement.