September 20, 2012
The Federal Rules of Evidence can lead to a false sense of security about the confidentiality of settlement discussions. Rule 408 prohibits the introduction of evidence of “conduct or statements made in compromise negotiations regarding . . . [a] claim,” except in certain limited circumstances. However, just because conduct or statements in connection with settlement negotiations are inadmissible does not mean they are not discoverable by third parties. Under Rule 26 of the Federal Rules of Civil Procedure, discovery extends to “any non-privileged matter that is relevant to any party’s claim or defense.” Relevant, and therefore potentially discoverable, information does not have to be admissible. Relevant information is required to be non-privileged. A case this spring illustrates the point.
In In re MSTG, Inc., the United States Court of Appeals for the Federal Circuit determined whether settlement negotiations could be subject to discovery in the context of patent litigation. 675 F.3d 1337 (Fed. Cir. 2012). MSTG, Inc. had filed suit against cell phone service providers and mobile device manufacturers claiming violation of several patents and seeking recovery of reasonable royalties. Ultimately, MSTG reached settlements with all of the defendants other than AT&T Mobility, LLC. Some of the settlements resulted in licenses to use the patented technology in exchange for the payment of royalties. During discovery, MSTG produced copies of the licensing agreements that it entered into with the settling defendants. Not satisfied, AT&T requested discovery “into the negotiations of the settlement agreements on the theory that those negotiations too could be pertinent to a reasonable royalty.” MSTG resisted the request on the basis that the settlement negotiations were not relevant.
Initially, the lower court sided with MSTG, denying the request for discovery into the settlement negotiations. The court reversed its position and ordered the discovery when MSTG’s damages expert indicated that he reviewed the licensing agreements with the settling defendants in determining what constituted a reasonable royalty. In response, MSTG petitioned the United States Court of Appeals for the Federal Circuit for a writ of mandamus to vacate the order compelling the discovery. Among other things, MSTG argued that, even if they were relevant, the settlement negotiations should be considered privileged.
The Court of Appeals ruled that “settlement negotiations related to reasonable royalties and damage calculations are not protected by a settlement negotiation privilege.” The Court of Appeals noted that the United States Court of Appeals for the Sixth Circuit was the only circuit to have adopted a settlement privilege. The only other circuit to face the issue, the Seventh Circuit, had declined to adopt such a privilege, and the district courts were divided on the issue. After analyzing the factors to be considered in deciding whether to recognize a new privilege, the Court of Appeals for the Federal Circuit declined to adopt a settlement privilege.
In re MSTG, Inc. might be distinguished as only applying to patent cases. For instance, patent law has previously recognized that settlement agreements can be pertinent to the issue of reasonable royalties. However, In re MSTG, Inc. is a good reminder that your “confidential” settlement communications might not be so confidential after all.
— W. Neal McBrayer