Impact of In re MSTG, Inc. on Experts’ Use of Settlement Agreements

Settlement agreements arising from litigation, or threatened litigation, are often benchmarks for calculating reasonable royalty damages in patent infringement cases. In April of 2012, the United States Court of Appeals for the Federal Circuit held in In re MSTG, Inc., 675 F.3d 1337 (Fed. Cir. 2012) that settlement negotiations are not protected by a settlement negotiation privilege, at least with regard to discovery associated with reasonable royalty calculations. The settlements in question involved only MSTG, Inc. (“MSTG”) and other cell phone service providers, not MSTG’s attorneys. The In re MSTG order should influence how damage experts use settlement agreements when forming opinions regarding reasonable royalties, and how attorneys manage settlement negotiations, in order to limit potential discovery of settlement negotiation information.

As in the past, the relevance of information requested often determines whether courts allow discovery of settlement negotiations. Damage experts may open the door to discovery of settlement negotiations by relying on written or oral evidence about the agreement but not included within the four-corners of a settlement agreement. Even providing evidence that a settlement agreement is not useful to a hypothetical license negotiation may open discovery of settlement negotiations, if the testifying expert relies on facts about a settlement negotiation not actually contained in the settlement agreement. A damage expert simply making general observations regarding prior settlements may give rise to discovery of settlement negotiations.

In 2008, MSTG sued AT&T Mobility along with other cell phone service providers and mobile device manufacturers claiming infringement of patents covering third-generation mobile telecommunications technologies. MSTG settled with all defendants except AT&T Mobility. At issue was the amount of a reasonable royalty for use of the patents-in-suit. In response to AT&T Mobility’s document requests MSTG produced license agreements. AT&T Mobility sought further discovery into the negotiations of the settlement agreements under the theory that the negotiations could be relevant to a reasonable royalty determination. MSTG objected on the grounds that the negotiations were not relevant. AT&T Mobility moved to compel MSTG’s production of all documents reflecting communications between MSTG (or its attorneys) and the licensees or parties threatened with enforcement by MSTG.

A magistrate judge denied AT&T’s motion to compel, finding that AT&T did not carry its burden by showing why the settlement negotiations were relevant and discoverable. Subsequently, MSTG’s damages expert relied on deposition testimony given by MSTG’s management regarding the settlement negotiations, which opened the door for full discovery of the settlement negotiations. MSTG’s expert had no access to actual negotiation documents. He simply relied on a MSTG executive’s testimony that the settlement agreements reflected litigation related compromises.

As a result of In re MSTG, plaintiff attorneys will likely limit damage experts’ access to information about settlement negotiations, and patent owners (and their attorneys) will likely treat settlement negotiations with greater care, always involving an attorney to maintain attorney-client privilege, and using verbal rather than written communications where possible. And, of course, defense attorneys will scrutinize expert reports for instances of the expert relying on information not contained within the four-corners of settlement agreements for opportunities to expand discovery to include settlement negotiations.

In the post MSTG world, district courts have not been entirely consistent in ordering parties to produce evidence of settlement negotiations. For example, in ABT Systems, LLC v. Emerson Electric Co., 2012 WL 6594996 (E.D. Mo. Dec. 18, 2012), the Court concluded that the disclosure of settlement negotiations requires a heightened showing of relevance, noting that it had “discretion to limit discovery of material that is not itself admissible and that was not utilized by the opposing party in order to protect settlement confidentiality.” Id. at *3 (quoting MSTG) The Court in Barnes and Noble, Inc. v. LSI Corp., 2012 WL 6697660 (N.D. Cal. Dec. 23, 2012) reached a different result, rejecting the notion that MSTG requires a heightened showing of relevance of discovery regarding draft license agreement discussions. Although the Federal Circuit has held that evidence of settlement negotiations is potentially discoverable, the decision in MSTG does not directly impact the attorney-client privilege because the settlement discussions in question involved only MSTG and other cell phone service providers, not MSTG’s attorneys. The Court also reminded practitioners that Rule 26 remains available to protect against discovery abuses on all damages issues.

In Memory Integrity, LLC v. Intel Corporation, 2015 (D. Or. July 29, 2015), it appears the Court determined parties may restrict access to settlement negotiations if the discovery could affect the result of ongoing negotiations; however, the fact that negotiations may be unconsummated had no bearing on the Court’s decision regarding negotiations being discoverable. In other words, it would seem that failed negotiations may be discoverable.

In the end, a party’s decision to expose its damages expert to information about settlement negotiations will depend on the facts of the particular case. In some instances, it actually may be advantageous to allow such evidence to be discoverable, for example to underscore the commercial value of the patent-in-suit, or perhaps to ensure that an opposing party cannot challenge the damages expert under Daubert. Practitioners should be very careful to evaluate the relevant facts, weigh advantages and disadvantages, and consider case law in their circuit before exposing their damages expert to such evidence.

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