On April 9, 2012, the Federal Circuit decided In re MSTG, Inc., Misc. Docket No. 996, holding as a matter of first impression that license negotiation communications, even with other parties in the same case (including those who had dropped out of the case), are not privileged and thus may be discoverable.

MSTG filed two lawsuits against cellular service providers and mobile phone manufacturers for infringement of three patents. MSTG settled with all defendants except AT&T. MSTG produced six settlement agreements, and AT&T sought further discovery into the underlying negotiations. MSTG resisted discovery on the negotiations, and AT&T moved to compel. The magistrate judge denied the motion. But then in MSTG's damages expert report, the expert analyzed the six settlement agreements but did not find their royalty rates to be comparable to the hypothetical negotiation between MSTG and AT&T. AT&T renewed its motion to compel, which the magistrate judge granted, finding that the negotiation documents "might contain information showing that the grounds [the expert] relied on to reach his conclusion are erroneous." Slip op. at 4 (quoting the magistrate's order). The district court adopted the magistrate's order.

MSTG petitioned the Federal Circuit for a writ of mandamus to vacate the order. The Federal Circuit granted the petition, temporarily staying the discovery order. The court considered two arguments by MSTG: 1) that license negotiations between MSTG and its other licensees are protected by a settlement negotiation privilege, and 2) that the district court had abused its discretion in ordering production of underlying license negotiations where the settlement agreements were fully integrated. The Federal Circuit rejected both arguments.

First, the court rejected MSTG's plea to fashion a new privilege in patent cases that would prevent discovery of litigation settlement negotiations related to reasonable royalties and damages. Two circuit courts were split on this issue—the 6th Circuit had adopted such a privilege, while the 7th Circuit had declined to do so. The Federal Circuit sided with the 7th Circuit, holding "that settlement negotiations related to reasonable royalties and damage calculations are not protected by a settlement negotiation privilege." Slip op. at 19 (citing In re General Motors Corp. Engine Interchange Litigation, 594 F.2d 1106, 1124 n.20 (7th Cir. 1979)).

The court did note that it was not ruling on "the extent to which evidence of settlement negotiations would be admissible under Rule 408." Slip op. at 17 note 4. The court also reserved "for another day the issue of what limits can appropriately be placed on discovery of settlement negotiations. But the existence of such authority, whatever its scope, strongly argues against the need for recognition of a privilege. In other words, the public policy goals argued to support a privilege can more appropriately be achieved by limiting the scope of discovery." Slip op. at 19.

On the second issue, the Federal Circuit ruled that the district court had not abused its discretion in ordering production of settlement negotiation documents. The magistrate judge had reconsidered AT&T's motion and ordered discovery into the negotiations "because they might contain information showing that the grounds [MSTG's expert] relied on to reach his conclusion are erroneous." Slip op. at 20 (quoting the magistrate judge's order). As noted above, the district court adopted this ruling.

MSTG argued that its expert relied only on information in the four corners of the integrated settlement agreements and did not consider the negotiations. However, the Federal Circuit observed that AT&T had pointed to specific opinions offered by the expert that went beyond the agreements themselves. The court identified an example where the expert offered an opinion on the settlement agreements that relied on discussions with an MSTG executive concerning MSTG's reasons for entering into the agreements. The court reasoned, "as a matter of fairness," MSTG could not in one breath rely on information about the settlement negotiations and in another deny discovery of those same negotiations.

The Federal Circuit made an additional noteworthy observation: "Nor has MSTG attempted to show that the district court awarded overly broad discovery into the settlement negotiations, or that denial of discovery of the settlement negotiation documents was necessary here to encourage settlement." Slip op. at 20-21. This statement suggests that denial of or limits on discovery of settlement negotiations may be appropriate in the right circumstances.