Judge Davis, EDTX, compels production of negotiation documents re license agreements

Since the Federal Circuit rendered its decision in ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 868-69 (Fed. Cir. 2010), numerous district court decisions have been faced with the issues of admissibility of litigation settlement agreements and discoverability of the underlying negotiation documents and communications. These issues have become increasingly important due to a statement from ResQNet, in which Judge Rader wrote that "the most reliable license in this record arose out of litigation."

Some plaintiffs have seized on this statement and begun to press the importance of prior settlement agreements in determining reasonably royalty damages. On the flip side, some defendants who suspect that the plaintiff settled prior suits for low numbers want to see those agreements and potentially show them to the jury to drive the damages down.

Judge Davis from the Eastern District of Texas recently wrestled with this issue in Clear Computers, LLC v. Bergdorf Goodman, Inc., Case No. 6:09CV481 (LEAD) Consol. With 6:09CV95 (E.D. Tex. Nov. 29, 2010). Plaintiff Clear with Computers ("CWC") had previously sued numerous third parties for infringement of the patents-in-suit and had settled with all but one, which proceeded to trial. CWC had produced the settlement agreements, which contained licenses to the patents-in-suit, to the defendants (Bergdorf Goodman and Hyundai). Defendants then moved to compel production of the negotiations communications related to the settlement agreements. CWC sought a protective order for those same communications. The court ruled in defendants' favor.

Initially, Judge Davis set forth the applicable law. He quoted the above statement from ResQNet and observed that some courts have relied on ResQNet to admit settlement agreements into evidence to prove a reasonable royalty, while others have held such agreements are not admissible. Slip op. at 2 (comparing Datatreasury Corp. v. Wells Fargo & Co., Case No. 2:06cv72, 2010 WL 903259 (E.D. Tex. Mar. 4, 2010) (Folsom, J.) (allowing into evidence litigation-related licenses because concerns regarding the reliability of the licensees are better directed towards weight) with Fenner Invs., Ltd. V. Hewlett-Packard & Co., Case No. 6:08cv273, 2010 WL 1727916 (E.D. Tex. April 28, 2010 (Love, Mag. J.) (granting motion in limine to preclude settlement agreements because their potential for prejudice and jury confusion substantially outweighed any probative value)). He concluded by stating that the admissibility of settlement agreements "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.'" Slip op. at 2-3 (emphasis added) (citing ReedHycalog UK, Ltd. V. Diamond Innovations Inc., 2010 WL 3021550, at *3 (E.D. Tex. Aug. 2, 2010) (Davis, J.)).

Judge Davis then turned to whether the settlement-related communications were discoverable, ruling that in this case they were. Defendants argued that, in order to determine whether the settlement agreements are admissible at trial, the related communications would need to be reviewed. Judge David indicated that his position is to take "a case-by-case approach to the issue" to the admissibility of settlement agreements (citing ReedHycalog), even though other courts in the EDTX have taken the position that such agreements are admissible. Noting that the admissibility of the agreements will depend on whether they accurately reflect the patented inventions' value, the court stated (slip op. at 3):

In this case, the settlement communications are likely to be key in determining whether the settlement agreements accurately reflect the inventions' value or were strongly influenced by a desire to avoid or end full litigation. See ReedHycalog UK, Ltd., ___ F. Supp. 2d at ____, 2010 WL 3021550 at *2. Defendants have demonstrated that, even within the same type of industry, different companies have settled for vastly different amounts. Companies with higher internet sales revenues have settled for less than companies with much lower internet sales revenues. Thus, the settlement amounts do not seem to be correlated to the companies' potential damages exposure. Additionally, some companies have had secondary agreements that have required them to pay less than the original settlement amount. The settlement communications will likely explain these inconsistencies.

Judge Davis also rejected plaintiff CWC's argument that the settlement-related communications should not be produced because the agreements themselves have merger clauses. The court noted that the question is not whether the communications impact the terms of the settlements, but rather whether they shed light on the admissibility of the agreements.

In another important point, Judge Davis stated that his conclusion to allow discovery of the communications in this case "will be the exception, not the rule." This case was different, he reasoned, because the settlement agreements were likely to be the only licenses of the patents-in-suit, which underscored the need to gain an understanding of the licenses from the related communications. The court stated:

CWC's business is to litigate and license the patents; it does not compete with Defendants in the marketplace. CWC has not shown that there are other non-litigation licenses that reflect the value of the invention. Therefore, the settlement negotiations have increased relevance, and the prejudice to CWC is of decreased significance. The Court expects that its finding here allowing discovery will be the exception, not the rule, and in most cases discovery of the negotiations will not be warranted. Additionally, communications that are privileged on grounds other than a claimed settlement privilege remain privileged. Thus, documents protected under a mediation privilege [footnote omitted] or as attorney-client communications are still not discoverable.

Judge Davis' ReedHycalog opinion is also instructive, and so we linked to it here. If you are facing questions about settlement agreements as supporting damages, we suggest you read both of these cases and others that have issued from EDTX. That court is at the forefront of this issue.