Commercial Litigation and Arbitration

Settlement Negotiations Are Not Privileged — Circuit Split — Utility of Rule 26 — Heightened Standard for Discovery

In re MSTG, Inc., 2012 U.S. App. LEXIS 7092 (Fed. Cir. April 9, 2012):

This [mandamus] petition arises out of an order of the United States District Court for the Northern District of Illinois compelling MSTG, Inc. ("MSTG") to produce documents related to license negotiation discussions between MSTG and six other companies, including previous defendants in this suit. We are asked to decide ..., as a matter of first impression, whether such communications related to reasonable royalties and damages are protected from discovery based on a settlement negotiation privilege***.


In 2008, MSTG sued AT&T Mobility, LLC ("AT&T") and other cell phone service providers and mobile device manufacturers claiming infringement of U.S. Patent Nos. 5,920,551, 6,198,936, and 6,438,113 (collectively, the "patents-in-suit") covering third-generation ("3G") mobile telecommunications technologies. In 2009, MSTG initiated another lawsuit against other cell phone service providers and mobile device manufactures, also alleging infringement of the patents-in-suit. 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 as well as under other patents owned by MSTG. One defendant entered into an agreement giving it an option to license the patents at a predetermined rate. Additionally, during this time period, MSTG licensed the patents-in-suit to a technology consortium, providing the consortium the right to grant a sublicense to its more than 50 members, a few of which were defendants in the pending litigation.

One of the issues in the litigation was the amount of a reasonable royalty if AT&T were found to infringe the patents-in-suit. License agreements can be pertinent to the calculation of a reasonable royalty. During discovery and in response to AT&T's document requests, MSTG produced six license agreements and the option agreement (collectively, the "settlement agreements"). AT&T then sought further discovery into the negotiations of the settlement agreements on the theory that those negotiations too could be pertinent to a reasonable royalty.***In a January 20, 2011, order, a magistrate judge denied AT&T's motion to compel, finding that "AT&T has not carried its burden of showing why the settlement negotiations are relevant and discoverable under the standards of Rule 26."***

On January 10, 2011, after AT&T had submitted its motion to compel, MSTG served an expert report by Frank Bernatowicz on the issue of damages. This report was not submitted to the magistrate judge before he issued his January 20, 2011, order. In this report,

Mr. Bernatowicz offered an opinion regarding a reasonable royalty for AT&T's alleged infringement of the patents-in-suit by "analyz[ing] royalty rates from potentially comparable licenses, industry survey results, licensing policies of the 3GPP, and other published licensing rates for similar technology." ... Although the expert had "reviewed the[] six agreements and taken them into consideration in [his] reasonable royalty analysis," he did not find the royalty rates in those agreements to "be comparable to the hypothetical negotiation between MSTG and AT&T." ... This was so because most of the royalty agreements were "litigation related compromises," id., and because they covered additional patents beyond the patents-in-suit. There was no showing that the expert had access to the negotiation documents, though he relied on deposition testimony of an MSTG executive that the agreements reflected litigation-related compromises.

AT&T sought reconsideration of the January 20, 2011, order on the grounds that the expert's discussion of the license agreements in his report constituted newly discovered evidence supporting discovery of the settlement negotiations. Granting the motion, the magistrate judge found that the negotiation documents "might contain information showing that the grounds Bernatowicz relied on to reach his conclusion are erroneous." MSTG, Inc. v. AT&T Mobility LLC ("Reconsideration Order"), No. 08-C-7411, 2011 U.S. Dist. LEXIS 23417, *8 (N.D. Ill. Mar. 8, 2011).... The effect was to require production of the negotiation documents leading up to the license agreements, the option agreement, and the agreement with the technology consortium.

The district court denied MSTG's objections and adopted the order. ***



***Just as we have applied our own law to issues of the scope of the attorney-client privilege and work product doctrine, we here apply our own law in determining whether a privilege or other discovery limitations protect disclosure of information related to reasonable royalties because that issue "implicates the jurisprudential responsibilities of this court within its exclusive jurisdiction," Advanced Cardiovascular Sys., Inc., 265 F.3d at 1303, and has a significant bearing on the substantive issue of patent damages, see In re EchoStar Commc'ns Corp., 448 F.3d 1294, 1298 (Fed. Cir. 2006). ***

III. ***


MSTG urges us to invoke Rule 501 of the Federal Rules of Evidence to fashion a new privilege in patent cases that would prevent discovery of litigation settlement negotiations related to reasonable royalties and damages. In this respect, MSTG urges us to adopt the reasoning of the United States Court of Appeals for the Sixth Circuit in Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 332 F.3d 976, 979-83 (6th Cir. 2003), which appears to be the only one of our sister circuits to adopt such a privilege. The Seventh Circuit declined to adopt a settlement privilege in In re General Motors Corp. Engine Interchange Litigation, 594 F.2d 1106, 1124 n.20 (7th Cir. 1979).

Footnote 2. District courts are divided on whether a settlement negotiation privilege exists. Compare Matsushita Electric Indus. Co. v. Mediatek, Inc., No. C-05-3148, 2007 U.S. Dist. LEXIS 27437, 2007 WL 963975 (N.D. Cal. Mar. 30, 2007), and In re Subpoena Issued to Commodity Futures Trading Comm'n, 370 F. Supp. 2d 201 (D.D.C. 2005), with California v. Kinder Morgan Energy Partners, L.P., No. 07-1883, 2010 U.S. Dist. LEXIS 108391, 2010 WL 3988448 (S.D. Cal. Oct. 12, 2010), and Software Tree, LLC v. Red Hat, Inc., No. 6:09-CV-097, 2010 U.S. Dist. LEXIS 70542, 2010 WL 2788202 (E.D. Tex. June 24, 2010).

Although parties to settlement may agree to keep settlement agreements confidential, MSTG does not contend that settlement agreements themselves would be covered by the proposed privilege. ***

The Supreme Court has identified several factors to be considered in assessing the propriety of defining a new privilege under Rule 501. These factors do not support recognition of a settlement privilege here.

First, "the policy decisions of the States bear on the question whether federal courts should recognize a new privilege or amend the coverage of an existing one." Jaffee, 518 U.S. at 12-13. I*** Although all states have apparently enacted a statutory mediation privilege, Jay M. Zitter, Annotation, Construction and Application of State Mediation Privilege, 32 A.L.R. 6th 285, § 2 (2008), the negotiations in this case did not result from mediation but from settlement negotiations between two sides without the assistance of a third-party mediator. We are not aware of any state that recognizes a settlement privilege outside the context of mediation. Thus, failure to recognize a federal settlement privilege will not "frustrate the purposes" of any state legislation as the failure to recognize a psychotherapist-patient privilege would have in Jaffee.

Second, in determining whether a new privilege should be adopted, courts look to whether Congress had considered that or related questions. See Univ. of Pa. v. EEOC, 493 U.S. 182, 189, 110 S. Ct. 577, 107 L. Ed. 2d 571 (1990). In adopting Rule 408 of the Federal Rules of Evidence, Congress directly addressed the admissibility of settlements and settlement negotiations but in doing so did not adopt a settlement privilege. *** Rule 408, as currently amended, provides that "[e]vidence of . . . (1) furnishing, promising, or offering — or accepting, promising to accept, or offering to accept — a valuable consideration in compromising or attempting to compromise the claim; and (2) conduct or a statement made during compromise negotiations about the claim" is "not admissible —on behalf of any party — either to prove or disprove the validity or amount of a disputed claim or to impeach by a prior inconsistent statement or a contradiction." Fed. R. Evid. 408(a) (emphasis added). The rule specifically permits such evidence, however, for any other purpose, including, but not limited to, "proving a witness's bias or prejudice, negating a contention of undue delay, or proving an effort to obstruct a criminal investigation or prosecution." Fed. R. Evid. 408(b).

The rule is clear by its text and history that it covers not only settlements and negotiations between the parties to the lawsuit, but also settlements and negotiations involving a third party. The advisory committee proposing the rule specifically stated:

While the rule is ordinarily phrased in terms of offers of compromise, it is apparent that a similar attitude must be taken with respect to completed compromises when offered against a party thereto. This latter situation will not, of course, ordinarily occur except when a party to the present litigation has compromised with a third person.

Fed. R. Evid. 408 advisory committee's note (1972 Proposed Rules). This understanding has been echoed by both courts, see, e.g., McInnis v. A.M.F., Inc., 765 F.2d 240, 247-48 (1st Cir. 1985), and commentators, see, e.g., 23 Charles Alan Wright & Kenneth W. Graham, Jr., Federal Practice and Procedure: Evidence § 5304 (1st ed. 1992) (collecting and commenting on cases). Third party settlement negotiations are admissible, but only for purposes other than proving liability or the amount of a claim.

In enacting Rule 408, Congress did not take the additional step of protecting settlement negotiations from discovery. Adopting a settlement privilege would require us to go further than Congress thought necessary to promote the public good of settlement, or in other words, to strike the balance differently from the one Congress has already adopted. This also suggests that it is not appropriate to create a new privilege for settlement discussions. ***

Third, in determining whether new privileges should be recognized, the Supreme Court has been influenced by the list of evidentiary privileges recommended by the Advisory Committee of the Judicial Conference in its proposed Federal Rules of Evidence. See Jaffee, 518 U.S. at 13-14; United States v. Gillock, 445 U.S. 360, 367-68, 100 S. Ct. 1185, 63 L. Ed. 2d 454 (1980). *** Here, a settlement negotiation privilege was not included among the nine specific privileges recommended by the Advisory Committee, thus cutting against MSTG's argument.

Fourth, "[t]he Supreme Court requires that a party seeking judicial recognition of a new evidentiary privilege under Rule 501 demonstrate . . . that the proposed privilege will effectively advance a public good." In re Sealed Case, 148 F.3d 1073, 1076, 331 U.S. App. D.C. 219 (D.C. Cir. 1998) (citing Gillock, 445 U.S. at 375). ***Th[e] need for confidence and trust alone ... is an insufficient reason to create a new privilege. In other circumstances, the Supreme Court has rejected new privileges under Rule 501 even though recognition of a privilege would foster a relationship based on trust and confidence. See, e.g., Univ. of Pa., 493 U.S. at 194-95 (rejecting privilege against disclosure of academic peer review materials). Also, while there is clearly an important public interest in favoring the compromise and settlement of disputes, disputes are routinely settled without the benefit of a settlement privilege. It is thus clear that an across-the-board recognition of a broad settlement negotiation privilege is not necessary to achieve settlement.

Fifth, any settlement privilege would necessarily have numerous exceptions. Rule 408 itself contemplates a host of scenarios under which documents related to settlement negotiations would be admissible for purposes other than "prov[ing] or disprov[ing] the validity or amount of a disputed claim or [] impeach[ing] by a prior inconsistent statement or a contradiction." For example, settlement negotiation evidence would be admissible where the settlement itself or its interpretation is at issue or where evidence of the ingredients of the settlement might be relevant to an issue of double recovery. See, e.g., Portugues-Santana v. Rekomdiv Int'l, 657 F.3d 56, 63-64 (1st Cir. 2011) (concluding the district court erred in not considering a settlement agreement in connection with a motion to offset damages); Catullo v. Metzner, 834 F.2d 1075, 1079 (1st Cir. 1987) (holding that testimony of settlement negotiations was admissible to "prove the terms of the agreement itself"); see also 2 Jack B. Weinstein & Margaret A. Berger, Weinstein's Federal Evidence § 408.08[5] (Joseph M. McLaughlin, ed., Matthew Bender 2d ed. 1997) ("If the settlement negotiations and terms explain and are a part of another dispute, they must often be admitted if the trier is to understand the case."). Documents related to settlement negotiations would typically be relevant and discoverable to the extent that such evidence would be admissible under Rule 408. Thus, a privilege for settlement negotiations would necessarily be subject to numerous exceptions. The existence of such exceptions would distract from the effectiveness, clarity, and certainty of the privilege. "An uncertain privilege . . . is little better than no privilege at all." Jaffee, 518 U.S. at 18 (quoting Upjohn Co. v. United States, 449 U.S. 383, 393, 101 S. Ct. 677, 66 L. Ed. 2d 584 (1981)).

Finally, to the extent we need to protect the sanctity of settlement discussions and promote the compromise and settlement of dispute, there are other effective methods to limit the scope of discovery to achieve those ends — primarily Rule 26 of the Federal Rules of Civil Procedure. ***

While typically settlement negotiations that are admissible under Federal Rule of Evidence 408

Footnote 4. We note here that we have not yet decided the extent to which evidence of settlement negotiations would be admissible under Rule 408. See generally, Inc. v. Lansa, Inc., 594 F.3d 860, 869-73 (Fed. Cir. 2010); Vanderlande Indus. Nederland BV v. Int'l Trade Comm'n, 366 F.3d 1311, 1322 (Fed. Cir. 2004); Snellman v. Ricoh Co., 862 F.2d 283, 289-90 (Fed. Cir. 1988); Medtronic Inc. v. Intermedics, Inc., 799 F.2d 734, 741 (Fed. Cir. 1986); Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1075, 1078-82 (Fed. Cir. 1983); Deere & Co. v. Int'l Harvester Co., 710 F.2d 1551, 1556-57 (Fed. Cir. 1983).

or disclosed to a party's expert

Footnote 5 See In re Pioneer Hi-Bred Int'l, Inc., 238 F.3d 1370, 1375 (Fed. Cir. 2001).

would be discoverable, the district court has discretion to limit discovery of material that is not itself admissible and that was not utilized by the opposing party to protect settlement confidentiality. Even as to such admissible or disclosed material, some protections may be appropriate. Significantly, citing the example of a tax return, the Advisory Committee proposing Rule 26 acknowledged that discovery could be limited where competing confidentiality interests are at stake. Id. The Advisory Committee recognized that although a party's tax return is generally held not privileged, an individual's "interests in privacy may call for a measure of extra protection." Id. (citing Wiesenberger v. W. E. Hutton & Co., 35 F.R.D. 556, 557 (S.D.N.Y. 1964) (holding in a Securities Act case that even though the plaintiff's tax return was relevant to show that certain tax savings by the plaintiff for investments that turned out to be fraudulent could be offset against any liability of the defendant, a party's income tax return should only be discoverable "where a litigant himself tenders an issue as to the amount of his income")). Under this authority, discovery in other areas has been limited because allowing broad discovery would undermine other important interests in confidentiality. See, e.g., In re Anonymous Online Speakers, 661 F.3d 1168, 1176 (9th Cir. 2011) [*25] (identity of anonymous speaker); Bruno & Stillman, Inc. v. Globe Newspaper Co., 633 F.2d 583, 598 (1st Cir. 1980) (identity of confidential sources); Keyes v. Lenoir Rhyne Coll., 552 F.2d 579, 581 (4th Cir. 1977), cert. denied 434 U.S. 904, 98 S. Ct. 300, 54 L. Ed. 2d 190 (1977) (peer review materials at universities); Hartley Pen Co. v. U.S. Dist. Court, 287 F.2d 324, 328 (9th Cir. 1961) (trade secrets).

We note that other courts have imposed heightened standards for discovery in order to protect confidential settlement discussions. In the context of confidential mediation communications, the Second Circuit has held that because "confidentiality in [mediation] proceedings promotes the free flow of information that may result in the settlement of a dispute," a party seeking discovery of confidential communications must make a heightened showing "demonstrat[ing] (1) a special need for the confidential material, (2) resulting unfairness from a lack of discovery, and (3) that the need for the evidence out-weighs the interest in maintaining confidentiality." In re Teligent, Inc., 640 F.3d 53, 57-58 (2d Cir. 2011) (internal quotation mark omitted). Many district courts also require heightened showings for discovery of settlement negotiations. See, e.g., Eisai Inc. v. Sanofi-Aventis U.S., LLC, No. 08-4168, 2011 U.S. Dist. LEXIS 128447, 2011 WL 5416334, at *8 (D.N.J. Nov. 7, 2011) (finding that party seeking discovery "failed to make a heightened, more particularized showing of relevance" (internal quotation mark omitted)); Atchison Casting Corp. v. Marsh, Inc., 216 F.R.D. 225, 226-27 (D. Mass. 2003); Young v. State Farm Mut. Auto. Ins. Co., 169 F.R.D. 72, 76 (S.D. W. Va. 1996); Servants of Paraclete, Inc. v. Great Am. Ins. Co., 866 F. Supp. 1560, 1576 (D.N.M. 1994). [*27] But see Vardon Golf Co. v. BBMG Golf Ltd., 156 F.R.D. 641, 650-51 (N.D. Ill. 1994) (rejecting the approach of placing a burden upon the proponent of discovery to make some "particularized showing" of a likelihood that admissible evidence will be generated by discovery of the information). Because the issue is not before us, we reserve 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.

Therefore, in light of reason and experience, we hold that settlement negotiations related to reasonable royalties and damage calculations are not protected by a settlement negotiation privilege. See In re Gen. Motors, 594 F.2d at 1124 n.20.

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