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Think Settlement Negotiations Are Confidential? Think Again.

By Jannis E. Goodnow, Litigation News Associate Editor – June 8, 2012

 

Lawyers all know that settlement negotiations in litigation are protected by an evidentiary rule intended to encourage resolution of disputes by the litigants and not the courts. A recent Federal Circuit decision, however, raises an important consideration for “confidential” settlements in multiparty litigation.


In a case of first impression, the U.S. Court of Appeals for the Federal Circuit held that settlement negotiations between a plaintiff and settling defendants in a patent dispute were discoverable by a non-settling defendant in the same case. The Federal Circuit’s opinion In re MSTG declined MSTG’s request to create a new settlement negotiation privilege under Fed. R. Evid. 501. It also found that the district court had not abused its discretion in ordering MSTG to produce discovery related to its prior settlement negotiations with other defendants in a patent dispute regarding 3G telecommunication technology.


The Expert Did It
MSTG initially sued several defendants for patent infringement. Eventually, it settled with all but AT&T.


MSTG’s damages, if it proved AT&T infringed MSTG’s patents, was the amount of a reasonable royalty. AT&T sought discovery not only of MSTG’s ultimate licensing settlement agreements with the other defendants, but also of its licensing and settlement negotiations.


After the magistrate ruled that the negotiations were not discoverable under Fed. R. Civ. P. 26, MSTG filed an expert’s report concerning the royalty rates. On reconsideration of AT&T’s motion to compel the negotiation documents, the district court ordered the discovery on the basis that, because MSTG’s expert relied on the testimony of an MSTG executive regarding MSTG’s reasons for entering into the license agreements, it would be “unfair to shield those reasons from further examination.”


MSTG filed a writ of mandamus with the Federal Circuit to block the discovery, arguing that its license negotiations with other licensees are protected by a “settlement negotiation privilege.” MSTG contended the district court abused its discretion in ordering production of the underlying settlement negotiations.


No Need for New Privilege
Federal Rule of Evidence 501 authorizes federal courts to recognize new privileges only by interpreting “the principles of the common law . . . in the light of reason and experience.” In addressing whether to recognize a settlement negotiation privilege under Rule 501, the court first noted a split among the Circuit Courts of Appeal and District Courts with the Sixth Circuit, Southern District of California, and Eastern District of Texas adopting a settlement negotiation privilege, and the Seventh Circuit, Northern District of California, and District of the District of Columbia refusing to do so.


Next, the court analyzed decades of Supreme Court jurisprudence and summarized six factors identified by the Court to assess the propriety of defining a new privilege under Rule 501: (1) the policy decisions of the states; (2) whether Congress had considered that or related questions; (3) the list of evidentiary privileges recommended by the Advisory Committee of the Judicial Conference in its proposed Federal Rules of Evidence; (4) whether the proposed privilege will effectively advance a public good; (5) potential exceptions to the new rule; and (6) other effective methods to limit the scope of discovery to protect settlement discussions and promote settlement.


The court concluded that none of the factors weighed in favor of adopting a new settlement negotiation privilege. Rather, courts’ discretionary ability to limit discovery under Fed. R. Civ. P. 26 should provide sufficient protection from abusive discovery.


The court also noted that many states have statutes creating a privilege for settlement negotiations that take place in the context of mediation. Finally, the court pointed out that while the settlement negotiations were discoverable, the court was specifically not ruling on whether they might be admissible under Fed. R. Evid. 408.


Disincentive to Early Settlement?
“There is a definite tension” between the In re MSTG decision and the federal courts’ interest in promoting settlement, says Joan Archer, Kansas City, MO, cochair of the ABA Section of Litigation’s Pretrial Practice and Discovery Committee. The decision “is a bit troubling because it creates a disincentive for early settlements in complex cases,” she adds. “You may become more cautious because you don’t know where the line will be drawn” regarding what is discoverable.


The decision should not have a chilling effect on negotiations, believes Joseph Drayton, New York, cochair of the Section of Litigation’s Intellectual Property Litigation Committee, because it maintains the status quo that there is no federal settlement negotiation privilege. The decision “gives practitioners a better idea of what they can seek in discovery,” Drayton adds, as settlement negotiations in the patent licensing context “are definitely probative on the issue of whether licenses are comparable for damages purposes.”


Protecting Negotiations After In re MSTG
In negotiating license agreements, attorneys may want to “get an upfront agreement with opposing counsel regarding the confidentially of settlement discussions,” suggests Archer. In addition, she cautions, “I would be careful with what I show an expert because it could become discoverable.” After In re MSTG, “every practitioner should reevaluate how and what you communicate in settlement negotiations, and consider using a mediator” to keep negotiations confidential, adds Drayton.


Decision Not Limited to IP Litigation
In re MSTG will be binding precedent only over the matters subject to the Federal Circuit’s limited jurisdiction. Nonetheless, practitioners may cite the case as persuasive authority on the absence of settlement negotiation privilege outside of the IP context, Drayton believes. “I might try to use it” beyond IP litigation, muses Archer, as the decision “was not limited to IP.”


Keywords: In re MSTG, privilege, intellectual property, multiparty litigation, confidential settlement


 
Related Resources

  • » In re MSTG, 675 F.3d 1337, 2012 U.S. App. LEXIS 7092 Fed. Cir. (Misc. Dkt. No. 996, Apr. 9, 2012).
  • » In re MSTG, ___ F.Supp.3d ___ (N.D. Ill. Jan. 20, 2011).
  • » ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 869–73 (Fed. Cir. 2010) (allowing discovery of licensing agreements).

Recognizing settlement negotiation privilege:

Not recognizing settlement negotiation privilege:


 

1. To protect the confidentiality of your negotiations, conduct them under the shelter of the mediation privilege, which in California is very strong. Do not use a settlement conference procedure or direct negotiations. Instead have a mediation agreement like the one used in the Facebook case, to protect your offers, counteroffers and rationales from discovery by third parties not involved in the settlement discussion.


 
 

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