Federal Circuit Finds License Negotiations Discoverable

By: Joseph R. Carnicella, IP Associate with Picadio Sneath Miller & Norton, P.C.

In In Re MSTG, Inc., Misc. Doc. No. 996, 2012 U.S. App. LEXIS 7092 (Fed. Cir. April 9, 2012), the Federal Circuit found that license negotiations between a patent holder and its licensees relating to reasonable royalties and damages are not protected by a settlement negotiation privilege.

MSTG sued various cell phone service providers claiming infringement of two patents.  MSTG eventually settled with all but one of the defendants (AT&T), wherein most defendants entered into settlement agreements and were granted licenses under the patents-in-suit and other patents owned by MSTG.  MSTG also licensed the patents-in-suit to a technology consortium around the same time period.

As part of the litigation, the amount of a reasonable royalty was a primary issue to the extent AT&T was found to infringe the patents-in-suit.  AT&T sought discovery into the negotiations of the settlement agreements and argued that such information was relevant in calculating a reasonable royalty.  MSTG’s damages expert offered an opinion relating to a reasonable royalty based on comparable licenses, industry survey results, and other published rates for similar technology.  The expert reviewed but discounted the pertinent license agreements on the grounds that the royalty rates were “litigation related compromises” and not comparable to a hypothetical negotiation between MSTG and AT&T.  AT&T then moved to compel the license agreements reviewed by the expert as well as the underlying negotiations.  The magistrate judge determined that the negotiation documents could disclose reasons why the parties reached the royalty agreements, which could provide guidance on whether such licenses could be considered in a calculation of a reasonable royalty between MSTG and AT&T.  The district court denied MSTG’s objections and agreed with the magistrate judge.

MSTG petitioned the Federal Circuit for a writ of mandamus, and the district court’s discovery order was temporarily stayed pending review.  MSTG asserted that, under Rule 501 of the Federal Rules of Evidence, the Federal Circuit should create a new privilege in patent cases that would prevent discovery of litigation settlement negotiations related to reasonable royalties and damages.  The Federal Circuit analyzed the relevant rules of procedure, rules of evidence and case law and concluded that settlement negotiations related to reasonable royalties and damage calculations are not protected by a settlement negotiation privilege.  Also, MSTG asserted that the district court abused its discretion by ordering the production of negotiation documents underlying the settlement agreements.  The Federal Circuit agreed with AT&T that, because the expert offered opinions that went beyond the four corners of the settlement agreements, MSTG could not deny discovery of that same information to AT&T.  The Federal Circuit did not address whether such settlement negotiation materials would be admissible in front of a jury.