Generally speaking, settlement communications are inadmissible under Federal Rule of Evidence 408, with few exceptions. However, that’s not to say they aren’t discoverable for certain purposes, as was decided in a recent precedential patent case. On April 9, 2012, the Federal Circuit ruled that, “settlement negotiations related to reasonable royalties and damages calculations are not protected by settlement negotiations privilege.” In In re MSTG, the plaintiff sued multiple defendants and all but one settled out. Plaintiff produced those settlement agreements in litigation with the final defendant, but refused to produce documents and communications regarding negotiations leading to each of those agreements. Specifically, MSTG sued AT&T and other companies for infringing patents related to 3G communications technology. When AT&T sought to rely on those settlements, MSTG argued that those licenses were not reliable for determining damages in the present case as they arose under threat of litigation (note: the settlement royalty rates were low instead of high, as they were agreed to before major court decisions in those cases).

MSTG’s damages expert based his position solely on deposition testimony from an MSTG executive regarding MSTG’s “business reasons” for entering into the license agreements. The Court sided with AT&T, ruling that, “because MSTG’s expert relied on the testimony of MSTG’s executive regarding [those business reasons for entering into the license agreements], it would be unfair for MSTG to ‘then shield those reasons from further examination.” Stated otherwise, “[a]s a matter of fairness MSTG cannot at one and the same time have its expert rely on information about the settlement negotiations and deny discovery as to those same negotiations.”

So, the Federal Circuit determined that MSTG could not have its cake (claim the licenses are unreliable) and eat it too (not provide evidence only it has to back up that claim). However, its ruling in MSTG does not necessarily declare open season on discovery of settlement negotiations. The Court cautioned that restrictions may still exist: “Because the issue is not before us, we reserve for another day the issue of what limits can appropriately be placed on the 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.”

The Court hints that in certain cases, a party relying on a settlement agreement to determine a reasonable royalty may have to open the door for settlement negotiations to be discoverable. That is, the party may have to refer to something outside of the agreement itself to trigger discovery of settlement negotiations as happened in this case: “While typically settlement negotiations that are admissible under Federal Rule of Evidence 408 or disclosed to a party’s expert 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.” The Federal Circuit ruling in MSTG follows a split in the district courts. Notably, the Eastern District of Texas had thus far avoided taking sides, with Judge Davis declaring “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.’” In Clear with Computers v. Bergdorf Goodman, the plaintiff again settled with all but one defendant, produced those settlement agreements, and defendant moved to compel the underlying settlement negotiations. Judge Davis found that the settlement communications were 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. He reasoned:

“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.”

Interestingly, Judge Davis suggests that discovery of settlement communications may be of increased importance in cases involving non-practicing entities (“NPEs”). He opined: “Moreover, in this case, the settlement agreements will likely be the only licenses of the patents-in-suit, making an accurate understanding of them more important. 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.”

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