In April of last year, the Federal Circuit in In re MSTG (“MSTG”) opened the door for parties to obtain the underlying facts of prior settlement negotiations during discovery.1 In MSTG, the Federal Circuit resolved a circuit split against the patent holder that was ordered to produce all communications with parties that had previously taken licenses.
In rejecting the existence of a settlement negotiations privilege, the Federal Circuit noted that district and circuit courts are divided on the issue, with the Sixth Circuit being the only circuit to recognize a settlement negotiations privilege.2 The Seventh Circuit, in which MSTG was pending, had expressly declined to adopt such a privilege.3 The Federal Circuit adopted the majority view and held that “settlement negotiations related to reasonable royalties and damages calculations are not protected by a settlement negotiation privilege.”4
Relying on the factors identified by the Supreme Court decision for defining a new privilege,5 the Federal Circuit reasoned that the factors did not weigh in favor of creating a new settlement privilege. In rejecting the privilege, the Federal Circuit offered license holders a remedy by concluding that there are other effective methods to limit the scope of discovery to achieve the public policy goals of protecting the sanctity of settlement discussions and promoting the compromise and settlement of disputes.6
The Federal Circuit concluded that at least when settlement negotiations relate to reasonable royalties and damages calculations, such communications are not privileged and should be produced.7 Despite the Federal Circuit’s guidance, district courts have not followed a bright line approach in broadly compelling parties to produce such communications, and district court decisions in this area have varied. Indeed, some district courts have limited discovery of settlement communications to instances in which a party can demonstrate a particularized relevance of such communications.
For example, in ABT Systems, LLC, v. Emerson Electric Co., the court denied Defendant Emerson’s motion to compel the settlement negotiations and concluded that the holding of MSTG applied only to the narrow circumstance presented in that case.8 The court in its analysis essentially implied that MSTG requires a party to make a heightened showing of relevance to obtain settlement communications. Emerson argued in its motion to compel that settlement-related correspondence was generally relevant to the issue of damages and may have some relevance to invalidity and prior art.9 The court noted first that it agreed with the MSTG decision, which permitted the disclosure of settlement negotiations in certain instances.10 The court explained that Federal Rule of Evidence 408 protects settlement negotiations from admissibility for impeachment purposes or to prove or disprove the validity of a disputed claim, but does not create a settlement negotiation privilege.11 However, according to the court, this did not mean that routine discovery of such communications would be allowed.12 The court found that the Federal Circuit in MSTG properly ordered production of settlement communications for the narrow set of circumstances in which the patent owner’s expert relied on facts related to the settlement negotiations not contained in the final agreement.13 Further, the court emphasized the Federal Circuit’s focus on the imposition of heightened standards for discovery of settlement discussions.14 The court concluded that it had “discretion to limit discovery of material that is not itself admissible and that was not utilized by the opposing party in order to protect settlement confidentiality.”15 Having found that disclosure of settlement negotiations requires a heightened showing of relevance, the court concluded that Emerson had not identified any particularized relevance for this information except for the limited instance of prior art and ordered production limited to documents relating to undisclosed prior art.16
However, in Barnes and Noble, Inc. v. LSI Corporation, the court disagreed that MSTG requires parties to make a heightened showing to obtain discovery pertaining to draft licenses and licensing communications.17 The district court there analyzed the reasoning in MSTG but rejected the notion that a party seeking settlement communications must make a heightened, more particularized showing of relevance.18 The court reasoned that the Federal Circuit in MSTG only identified one appellate court that had employed such a heightened standard, and did not actually adopt such a standard for discoverability of settlement negotiations.19 Thus, reasoned the court, the MSTG decision did not impact the analytical framework regarding discovery of settlement communications and draft license agreements.20
Though certain courts have narrowly interpreted MSTG, other districts have yet to directly address the issue.21 Thus, parties engaging in settlement and licensing discussions—even under the protection of an agreement under Fed. R. Civ. P. 408—should proceed with care, and with the expectation that the discussions could be discoverable in future litigation. Additionally, parties entering into agreements in litigation regarding discovery issues should also tread with caution. In particular, counsel should carefully consider, for example, working with their damages experts to ensure that the opinions the experts express regarding settlement agreements do not rely on materials outside of the four corners of those agreements. On the opposing side, parties should consider establishing a record that enables them to demonstrate some particularized relevance in seeking these types of communications when seeking to compel production of communications relating to settlement negotiations.