In the United States, settlement negotiations have commonly been protected from discovery and inadmissible as evidence in litigation. While settlement agreements (as opposed to negotiations) are usually discoverable, such agreements have often been viewed in the context of determining patent damages as inherently unreliable and inadmissible as evidence of a reasonable royalty.
The U.S. Court of Appeals for the Federal Circuit stated recently in ResQNet.com, Inc. v. Lansa, Inc. that in determining a reasonable royalty award "the most reliable license in this record arose out of litigation."1 Accordingly, patent litigants have increased their efforts to discover settlement negotiations and to have them and the corresponding settlement agreements admitted as evidence. In turn, courts have been required to examine more closely the grounds for treating such negotiations as inviolable and such agreements as inadmissible.
Prior to ResQNet, the general consensus was that royalties paid to avoid litigation were not a reliable indicator of a reasonable royalty.2 As litigation-related licenses were generally viewed as inadmissible, settlement negotiations were largely not discoverable as they would be unlikely to lead to the discovery of admissible evidence or were protected based on a settlement negotiation privilege recognized in some jurisdictions.
The ResQNet decision did not specifically overrule prior case law, but clearly expressed a view that litigation-related royalties may be relevant and even persuasive evidence in determining a reasonable royalty in patent cases. The court, however, did not hold that litigation-related licenses were always the most reliable or the most comparable licenses for determining a reasonable royalty.3
U.S. district courts are now grappling with the legal effect of ResQNet. For example, different judges within the Eastern District of Texas have taken contrary views on the effect of ResQNet. The Honorable T. John Ward explained that "[t]his Court has in the past … adopted a bright-line rule that settlement negotiations are privileged while the resulting license agreement is discoverable," but ResQNet "causes the Court to shift its approach toward the discoverability of settlement negotiations" and the "privilege does not apply."4 Likewise, The Honorable David Folsom held that prior litigation-related licenses are admissible evidence and commented that "concerns about the reliability of litigationrelated licenses are better directed to weight, not admissibility."5
However, The Honorable John Love interpreted ResQNet differently and stated that ResQNet does not alter the settlement negotiations privilege and long-standing principles that settlements have little relevance to the patent damages analysis and that any relevance does not outweigh the risk of unfair prejudice and confusion.6 In recognizing the prior views of Judges Ward and Love, The Honorable Leonard Davis explained that "the admissibility of litigation licenses — like all evidence — must be assessed on a case-by-case basis, balancing the potential for unfair prejudice and jury confusion against the potential to be a reliable license."7 Accordingly, "[w]hether the settlement agreements are admissible will likely depend on whether they are an accurate reflection of the inventions’ value," and "settlement communications are likely to be key" to such determination.8
The effect of ResQNet remains to be seen, but patent litigants should be mindful of the potential significance of patent licenses resulting from prior litigation in determining a reasonable royalty award. In addition, patent owners and licensees should be mindful that license agreements they enter into could be used by or against them in determining a reasonable royalty and that they themselves could become involved in discovery relating to the license agreement.