The Federal Circuit recently addressed the discoverability of settlement negotiations related to reasonable royalties and damages calculations in In re MSTG. These negotiations, the Federal Circuit held, are not protected by a settlement-negotiation privilege. In a recent order, a California district court considered the relevance of In re MSTG in determining whether defendants were required to produce draft license agreements and related licensing communications during discovery. Under the district court's ruling, In re MSTG did not create a heightened standard of relevance for the discoverability of these kinds of materials. The defendants, therefore, had to produce the documents and communications.
In Barnes and Noble, Inc. v. LSI Corp.,1 Barnes & Noble sought a declaratory judgment of noninfringement and patent invalidity against LSI in the Northern District of California. During discovery, the court had previously addressed the relevance and discoverability of license agreements and draft license agreements, holding that the sensitive financial information needed for settlement purposes necessarily included LSI's agreements. Agreeing with Barnes & Noble, the court noted that these agreements could help determine potential damages by establishing a reasonable royalty. The court ruled that LSI's executed license agreements and any drafts of them (regardless of whether they were cross-licenses or not) were relevant to the current action as long as they involved the patents-in-suit or LSI's related patent portfolios.
In the present discovery dispute, LSI asked the court (1) to reconsider its previous ruling in light of both In re MSTG and a Northern District of California decision relying on In re MSTG, and (2) to consider LSI's argument that producing the draft licenses was unduly burdensome.
First, the court disagreed with LSI's argument that the Federal Circuit's opinion in In re MSTG required Barnes & Noble to make a heightened showing of relevance in order to discover draft licenses and related licensing communications. According to the court, the Federal Circuit did not hold that a party seeking licensing negotiations must make a "heightened, more particularized showing of relevance," but instead mentioned that one appellate court does use that standard when a party seeks confidential mediation communications. As the district court here pointed out, the Federal Circuit expressly did not address the discovery of settlement negotiations. Thus, the court here explained that In re MSTG did not change either its earlier reasoning supporting the relevance and discoverability of LSI's executed and draft license agreements or the legal authority underlying its reasoning.
The court also declined to prevent discovery of draft licenses and licensing communications in light of the Northern District of California decision in Implicit Networks, Inc. v. Juniper Networks, Inc., which relied on In re MSTG. In declining to reach the same result as Implicit Networks, the court here rejected the idea that In re MSTG held that license negotiations are discoverable only if they are placed "directly in dispute" by a party. It further noted that Implicit Networks considered In re MSTG and one other case, but did not consider other relevant cases.
Finally, the court addressed whether LSI's burden of producing the requested material substantially outweighed any possible benefits to Barnes & Noble. Because the materials were relevant to potential damages and because Barnes & Noble could not access them in a less-burdensome way, it permitted discovery, while expressing confidence in the parties' ability to reduce costs by narrowing the scope of the search. Accordingly, the court held that the intervening case law and potential burden on LSI failed to merit a change in the discoverability of draft license agreements and related licensing communications.
Strategy and Conclusion
This case illustrates that draft license agreements and related licensing communications remain discoverable and relevant for assessing reasonable-royalty damages. Neither agreements nor communications are subject to a heightened showing of relevance, and thus, even after In re MSTG, parties can aim to discover these kinds of materials to help prove reasonable royalties. This case also illustrates the need to be careful in communications that occur during license negotiations as they may be discoverable in future litigation.