CAFC: Matter of First Impression Settlement—Negotiations Are Discoverable

On April 9, 2012, the Federal Circuit in In re MSTG, Inc., Misc. Docket No. 996, held 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 and thus may be discoverable.

Patentee MSTG argued two issues: 1) that license negotiations between it 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. There was a split in the circuits on this issue. The Federal Circuited sided with the 7^th Circuit, holding "that settlement negotiations related to reasonable royalties and damage calculations are not protected by a settlement negotiation privilege."

The Federal Circuit did note that it was not ruling on "the extent to which evidence of settlement negotiations would be admissible under Rule 408." See footnote 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 court had not abused its discretion in ordering production of settlement negotiation documents. The district court magistrate had initially refused to order production of these documents. But, after MSTG's expert issued his opinion on reasonable royalty damages, the magistrate reconsidered and ordered production "because they might contain information showing that the grounds [MSTG's expert] relied on to reach his conclusion are erroneous." The district court agreed and ordered production to allow AT&T the ability to test the accuracy of the expert's opinions.

MSTG argued that its expert relied only on information in the four corners of the settlement agreements. However, the Federal Circuit observed that AT&T had pointed out issues that went beyond the agreements themselves. The court reasoned, "as a matter of fairness," that 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 one further observation of note: "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 makes clear that denial of or limits on discovery of settlement negotiations may be appropriate in the right circumstances; unfettered discovery is not the holding in MSTG.