A recent decision by the United States Court of Appeals for the Federal Circuit, In re MSTG, Inc., 675 F.3d 1337 (Fed. Cir. 2012) (In re MSTG), rejects the proposition that settlement negotiation discussions are privileged and protected from discovery. The Federal Circuit’s decision is a reminder that stamping negotiation and settlement communications “Subject to F.R.E. 408” does not protect those communications from discovery by other parties.

In In re MSTG, the Federal Circuit considered a petition for writ of mandamus arising out of an order by the United States District Court for the Northern District of Illinois compelling production of documents related to litigation settlement negotiations. The court of appeals denied the petition, requiring the petitioner, MSTG, Inc. (MSTG), to produce the documents at issue.

The underlying litigation involved MSTG’s allegations that AT&T Mobility, LLC (AT&T) and other cell phone service providers and mobile device manufacturers were infringing on three patents covering third-generation mobile telecommunications technologies. MSTG settled with each of the defendants except AT&T. As part of its settlement agreements with the other defendants, MSTG granted the settling parties licenses under the patents at issue. MSTG produced these settlement agreements, but objected to producing its settlement communications with those defendants.

A magistrate judge initially denied AT&T’s motion to compel the negotiation-related information, but later reconsidered that decision after MSTG served an expert report on damages in which its expert opined on a reasonable royalty if AT&T were found to have infringed the patents, and included an examination of “royalty rates from potentially comparable licenses.” The expert’s report contended that the licenses under the settlement agreements were not useful for comparison in determining a reasonable royalty in part because they were “litigation related compromises.” In granting the motion for reconsideration, the magistrate judge reasoned that the settlement negotiations might show that the grounds MSTG’s expert relied on to reach this conclusion were erroneous, because they “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 analysis and, in addition, found that because MSTG’s expert relied on testimony from the company’s executive about the “business reasons” for entering into the settlement agreements, it would be “unfair for MSTG to ‘then shield those reasons from further examination.’”

On MSTG’s petition for writ of mandamus, the Federal Circuit considered, first, whether a privilege protected the settlement negotiations from discovery and, second, whether on the facts of the case the district court clearly abused its discretion in ordering MSTG to produce documents relating to its settlement communications. The court of appeals examined several factors to determine whether a privilege should be recognized for settlement communications under Federal Rule of Evidence 501, and concluded that each factor weighed against the existence of a privilege.

First, the court noted that there is “no state consensus as to a settlement negotiation privilege,” so that the lack of recognition of such a privilege by the federal courts would not frustrate any state legislation or policy. Second, the court observed that Congress directly addressed the admissibility of settlements and settlement negotiations in Federal Rule of Evidence 408, yet did not adopt a settlement privilege, supporting the court’s view that no privilege for settlement negotiations should be recognized. Third, the court noted that a settlement 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, the court found that an “across-the-board recognition of a broad settlement negotiation privilege is not necessary to achieve settlement.” Fifth, the court found that a settlement privilege would be susceptible to a host of exceptions, which “would distract from the effectiveness, clarity, and certainty of the privilege.” Finally, the court observed that there are “other effective methods to limit the scope of discovery” to achieve the goals of protecting “the sanctity of settlement discussions and promote the compromise and settlement of dispute.” The Federal Circuit concluded that “settlement negotiations related to reasonable royalties and damage calculations are not protected by a settlement negotiation privilege.” The Federal Circuit also determined that on the facts of the case—including MSTG’s expert’s opinions as to the usefulness of the settlement agreements in determining a reasonable royalty—the district court did not abuse its discretion in ordering production of settlement negotiations.

There is a split of authority at the federal level concerning whether settlement negotiations are privileged. In 1979, in a decision reversing the approval of a class action settlement, the Seventh Circuit found “no convincing basis” for an objection that the “conduct of [] settlement negotiations is protected from examination by some form of privilege.” In re Gen. Motors Corp. Engine Interchange Litig., 594 F.2d 1106, 1124 n.20 (7th Cir. 1979). More recently, in Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 332 F.3d 976, 983 (6th Cir. 2003), the Sixth Circuit held that “any communications made in furtherance of settlement are privileged.” At the district court level as well, courts are split on whether to recognize a settlement negotiation privilege. Compare In re Subpoena Issued to Commodity Futures Trading Comm’n, 370 F. Supp. 2d 201, 212 (D.D.C. 2005) (declining to “recognize a federal settlement privilege”), with California v. Kinder Morgan Energy Partners, L.P., No. 07-1883-MMA (WVG), 2010 WL 3988448, at *4 (S.D. Cal. Oct. 12, 2010) (“There is a well-established privilege relating to settlement discussions.”).

The Federal Circuit’s decision in In re MSTG is in part based on considerations unique to patent cases. Nevertheless, for non-patent cases as well, the In re MSTG decision is an important reminder that caution should be used in settlement negotiations. Declaring a settlement communication “subject to F.R.E. 408” will not protect the communication from discovery in pending or related litigation. While F.R.E. 408 addresses the admissibility of such communications as evidence, it does not address parties’ ability to discover them in litigation. Federal Rule of Civil Procedure 26 allows parties to obtain discovery “regarding any nonprivileged matter that is relevant to any party’s claim or defense,” and such relevant information “need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.” F.R.C.P. 26(b)(1).

Other means of protecting settlement communications from discovery, or limiting their disclosure, may be available. For example, some settlement-related communications may be protected by the attorney-client communication privilege or work product doctrine, and it may be possible to secure a protective order under Federal Rule of Civil Procedure 26 depending on the circumstances of your case. There may also be statutory protections against discovery of settlement communications made in the context of mediation.