In light of the recent trend in patent cases towards
permitting discovery of patent licenses granted as part of settlement
agreements ("settlement licenses") on the grounds that such licenses
are pertinent to a reasonable royalty award for the infringement of the subject
patent, it was just a matter of time before courts turned to the question of
whether the negotiations leading to such licenses are subject to discovery. In
this Analysis, Eric E. Bensen discusses In
re MSTG, Inc., 2012 U.S. App. LEXIS 7092 (Fed. Cir. Apr. 9, 2012) [enhanced version available to lexis.com subscribers],
which held that settlement negotiations with a third party respecting the
patent in suit may be discoverable. He writes:
Summary of the Case
MSTG, Inc. had
brought a pair of patent infringement suits against a number of defendants, but
eventually entered into settlement agreements with all of them-other than
AT&T Mobility, LLC ("AT&T")-in which it granted licenses to a
group of its patents, including the patents asserted against AT&T. During
discovery, in response to AT&T's discovery requests, MSTG produced the
settlement agreements. AT&T later requested and sought an order to compel
production of discovery respecting the negotiations leading to the settlement
agreements on the theory that the negotiations would be pertinent to a
reasonable royalty award. That motion was denied.
Subsequently,
MSTG served its damages expert report. The expert indicated that he had
reviewed the settlement licenses, but did not find that the royalty rates in
those agreements (which would have indicated a reasonable royalty award lower
than that opined to by the expert) were relevant to a reasonable royalty for
the patents in suit because the royalty rates in the settlement licenses were
"litigation related compromises" and covered additional patents
beyond the patents in suit. There was no indication that the expert had access
to any of the negotiation documents, but he did rely on deposition testimony of
an MSTG executive to the effect that the agreements reflected litigation
related compromises.
AT&T then
sought reconsideration of its motion to compel arguing that the expert report
constituted newly discovered evidence supporting discovery of the settlement
negotiations. This time, AT&T was successful. The magistrate granted the
motion on the grounds that the discovery could shed light on whether the
settlement agreements could be considered a basis for calculating a reasonable
royalty if infringement were found. The district court adopted the magistrate's
order adding that inasmuch as the expert had relied on testimony regarding the
business reasons for entering into the settlement agreements, it would be
unfair for MSTG to shield those reasons from further examination.
MTSG sought a
writ of mandamus on the grounds that the negotiations were protected from
disclosure by a "settlement negotiation privilege" and that the
district court abused its discretion by ordering the production of the
settlement negotiations because the fully integrated settlement agreements were
already part of the record.
Pertinent Legal
Principles
Real World Licenses and Reasonable Royalty
Awards. The potential relevance of settlement license negotiations to a
reasonable royalty for the subject patent has its roots in the significant role
that real world licenses for a patent play in reasonable royalty analyses.
By way of background,
the Patent Act provides that a successful claimant is entitled to "in no
event less than a reasonable royalty for the use made of the invention by the
infringer," The concept of a "reasonable royalty" as a form of
recovery for patent infringement, which predates the statute, has its roots in Suffolk Co. v. Hayden, 70 U.S. 315, 320
(1866) [enhanced version available to lexis.com subscribers].
At the time of the Suffolk decision (and later), an established royalty for
patent infringement was considered the "primary and true criterion of damages
in the action at law." This was so because an established royalty for a
license to a patent represented the market value of such a license and, thus,
the value of what was taken by the infringer. However, as the Court would later
clarify in Rude v. Wescott [enhanced version available to lexis.com subscribers],
to prove an established royalty, a patentee would have to prove that the
purported royalty (i) had been paid before infringement occurred, (ii) had been
paid by such a number of persons as to indicate a general acquiescence in its
reasonableness, and (iii) was uniform in places where licenses were issued. Because
of that high standard, patentees were rarely able to prove an established
royalty.
(citations omitted)
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