Litigation Settlement Negotiations Related To Reasonable Royalties And Damage Calculations Are Not Protected By A Settlement Negotiation Privilege

This article previously appeared in Last Month at the Federal Circuit, May, 2012.

Judges: Rader, Dyk (author), Moore

[Appealed from N.D. Ill., Judge Chang]

In In re MSTG, Inc., No. 11-M996 (Fed. Cir. Apr. 9, 2012), the Federal Circuit denied MSTG, Inc.'s ("MSTG") petition for a writ of mandamus directing the district court to vacate its order compelling MSTG to produce documents related to license negotiation discussions between MSTG and other companies. In so doing, the Court determined that such license negotiation discussions are not protected from discovery based on a settlement negotiation privilege and that the district court did not clearly abuse its discretion by ordering the production of such documents.

MSTG filed suit against AT&T Mobility, LLC ("AT&T") and other cell phone service providers and mobile device manufacturers, claiming infringement of patents covering third-generation ("3G") mobile telecommunications technologies. MSTG eventually settled with all defendants other than AT&T. As part of the settlement agreements, most defendants were granted licenses under the patents-in-suit, and one defendant entered into an agreement giving it an option to license the patents-in-suit at a predetermined rate.

MSTG produced six license agreements and an option agreement (collectively the "settlement agreements") to AT&T. AT&T then sought further discovery into the negotiations of the settlement agreements on the theory that those negotiations could be pertinent to an amount of any reasonable royalty. After MSTG objected on relevancy, AT&T moved to compel production of the documents. A magistrate judge denied AT&T's motion to compel under Fed. R. Civ. P. 26.

Later, MSTG's expert opined on a reasonable royalty, relying on deposition testimony of an MSTG executive to determine that the settlement agreements reflected "litigation-related compromises" and, as such, the royalty rates in the settlement agreements were not reflective of hypothetical negotiations between MSTG and AT&T.

AT&T subsequently sought reconsideration of the magistrate judge's order, arguing that the discussion of the license agreements in the expert report constituted new evidence supporting discovery of the settlement negotiations. Granting the motion, the magistrate judge found that the negotiation documents 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...