Bensen on Settlement Negotiations with a Third Party May Be Discoverable

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.

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