Federal Circuit Orders Production of License Negotiation Documents in Patent Litigation

A patentee’s settlement negotiations with other parties can be very important information to an accused infringer, and plaintiff-patentees will typically fight to avoid disclosure of those negotiations. In a ruling of first impression earlier today, the Federal Circuit granted a victory to accused infringers in this area, rejecting any “settlement negotiation privilege” protecting such negotiations from discovery. In re MSTG, Inc., Misc. Docket No. 996 (Fed. Cir. April 9, 2012) (found here).

MTSG sued multiple cell phone providers for infringement of patents covering 3G mobile technology. MTSG ultimately settled with all the defendants except AT&T. During discovery, MTSG produced all of the licenses and settlement agreements it reached with the other defendants but refused to produce documents related to the negotiations leading to those agreements.

The magistrate judge initially denied AT&T’s motion to compel production of the negotiation documents on the grounds that AT&T had not shown that the negotiations were relevant. Shortly thereafter, MTSG’s damages expert issued a report in which he considered, but rejected, the royalty rates in the settlement agreements because they were litigation related companies. The court found “no showing that the expert had access to the negotiation documents.”

AT&T renewed its motion to compel, arguing that the negotiations leading to the license could undermine the expert’s opinion. The magistrate agreed, ruling that “the negotiations 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 basis for calculating a reasonable royalty.”

After the District Court affirmed the magistrate’s ruling, MTSG filed a petition for mandamus asking the Federal Circuit “to invoke [Fed. R. Evid. 501] to fashion a new privilege in patent cases that would prevent discovery of litigation settlement negotiations related to reasonable royalties and damages.”

The Federal Circuit flatly declined the invitation, finding that “[a]dopting a settlement privilege would require us to go further than Congress thought necessary to promote the public good of settlement.” Other tools, such as Rule 26, already existed to provide any necessary protections for settlement discussions.

MTSG’s decision to petition for mandamus reminds us of the old saying that “you should be careful what you ask for because you just might get it.” MTSG traded an adverse decision by one court in a single discovery dispute into a precedential ruling that could lead to wide-ranging discovery in all patent litigation. While the court reserved “for another day the issue of what limits can appropriately be placed on discovery of settlement negotiations,” the MTSG ruling should be an effective tool for patent defendants to obtain a significant amount of information about settlement negotiations that could be very helpful in rebutting claims for high reasonable royalty rates.