Settling on Settlement Negotiation Production

Settling on Settlement Negotiation Production

Background of Ruling

In v. Lansa, Inc., the Federal Circuit observed “that the most reliable license in [the] record arose out of litigation.”1 Since that ruling, many district courts have differed on the admissibility of not only settlement agreements, but also information related to the settlement negotiations.2 The Federal Circuit in MSTG, Inc. v. AT&T Mobility LLC (“MSTG”) resolved some of that uncertainty, ruling that settlement negotiation documents are admissible under the circumstances present in this case (this ruling will hereinafter be referred to as “the order”).

The Federal Circuit was asked to decide whether license negotiation discussions are protected from discovery based on settlement negotiation privilege and whether the district court erred in ordering their production. The Federal Circuit, for numerous reasons, concluded that the district court did not err in ordering the production of the underlying settlement documents due to, among other reasons, MSTG’s expert relying on information relating to the negotiations and that MSTG did not show that the district court permitted overly broad discovery relating to the settlement negotiations.

Background of the Case

In 2008, MSTG, Inc. (“MSTG”) accused various cell phone service providers and mobile device manufacturers of infringing three of its patents covering third-generation (“3G”) mobile telecommunications technologies. In 2009, MSTG accused additional cell phone service providers and mobile device manufacturers of infringing the same three patents. MSTG ultimately settled with all defendants other than AT&T. Most defendants were granted licenses to the patents-in-suit in addition to other patents owned by MSTG. One defendant entered into an agreement with an option to license the patents at a predetermined rate. During this time period, MSTG also licensed the patents-in-suit to a technology consortium, giving the consortium the right to grant a sublicense to its over 50 members, some of which were defendants in the litigation.3

MSTG’s Dispute with AT&T

In response to an AT&T document request, MSTG produced six license agreements and an option agreement (as mentioned before and hereafter referred to as, the “settlement agreements”). AT&T then sought discovery relating to the negotiations surrounding the settlement agreements. Specifically, AT&T sought “documents reflecting communications between MSTG or its attorneys, on the one hand, and either licensees or parties threatened with infringements by MSTG, on the other.”4 MSTG objected on the grounds that the negotiations were irrelevant. In an order dated January 20, 2011, AT&T’s motion to compel was denied (the “initial ruling”) stating that it did not carry its burden of showing that the negotiations are relevant and discoverable under Rule 26.

Subsequent to the initial ruling, MSTG’s damages expert submitted his report and offered an opinion regarding a reasonable royalty. In arriving at his opinion, he “analyz[ed] royalty rates from potentially comparable licenses, industry survey results, licensing policies of the 3GPP, and other published licensing rates for similar technology.”5 As a part of his work, MSTG’s damages expert did review the settlement agreements but determined that the rates in those agreements were not comparable to a rate in a hypothetical negotiation between MSTG and AT&T. In arriving at this conclusion, there was nothing to show that the expert had access to the settlement negotiation documents, but relied on deposition testimony that stated the agreements reflected “litigation related compromises.”6

AT&T sought reconsideration of the initial ruling7 based on grounds that the expert’s discussion of the license agreements supported the discovery of the settlement negotiations. This motion was granted.8 The order stated that “[d]ocuments related to negotiations could shed light on why the parties reached their royalty agreements and could provide guidance on whether some or all of the licenses could be considered a basis for calculating a reasonable royalty between AT&T and MSTG.”9 The district court also found that because MSTG’s expert relied on testimony of MSTG’s executive regarding business reasons for entering into the license agreements, it would be unfair for MSTG to shield those reasons.10

MSTG’s Argument Before the Federal Circuit

MSTG appealed to the Federal Circuit, arguing that the negotiation documents should not be produced because: 1) The license negotiations are protected by settlement negotiation privilege, and 2) the fully integrated settlement agreements are already part of the record, and that the district court erred by ordering production of the underlying settlement negotiations.11

License Negotiations Not Protected by Settlement Negotiation Privilege

MSTG requested that the Federal Circuit fashion a new privilege in patent cases that would prevent discovery of settlement negotiations related to reasonable royalties and damages.12 District courts have been divided on whether settlement negotiation privilege exists.13 MSTG pointed to a case in which settlement privilege was adopted by the United States Court of Appeals for the Sixth Circuit in Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 332 F.3d 976, 979-83 (6th Cir. 2003). This appears to be the only example of a circuit adopting such a privilege. In the order, the Federal Circuit cites an example in which the Seventh Circuit denied settlement privilege in In re General Motors Corp. Engine Interchange Litigation, 594 F.2d 1106, 1124 n.20 (7th Cir. 1979). In light of the divided opinion and consideration of the facts and circumstances in this particular case, the Federal Circuit must interpret “the common law … in the light of reason and experience” when assessing the creation of new evidentiary privileges.14

In arriving at its decision, the Federal Circuit considered guidance from the Supreme Court. The Supreme Court has identified factors to be considered when assessing whether or not it is proper to define a new privilege, warning that evidentiary privileges “are not lightly created nor expansively construed, for they are in derogation of the search for the truth.” The Federal Circuit ultimately concluded that it does not support the recognition of a settlement privilege in this case.15

Supreme Court Factors Used to Define Evidentiary Privileges

1I The policy decision of the States bear on the question whether federal courts should recognize a new privilege or amend the coverage of an existing one.

2I Courts look to whether Congress had considered that or related questions.

3I The Supreme Court has been influenced by the list of evidentiary privileges recommended by the Advisory Committee of the Judicial Conference in its proposed Federal Rules of Evidence.

4I A party seeking judicial recognition of a new evidentiary privilege under Rule 501 demonstrate … that the proposed privilege will effectively advance a public good.

5I Settlement privilege would necessarily have numerous exceptions.

6I To the extent it is necessary to protect the sanctity of settlement discussions and promote the compromise and settlement of dispute, there are other effective methods to limit the scope of discovery to achieve that.

After reviewing and addressing these factors the Federal Circuit concluded that “in light of reason and experience, we hold that settlement negotiations related to reasonable royalties and damage calculations are not protected by a settlement negotiation privilege.”16

District Court Did Not Err by Ordering Production of the Underlying Settlement Negotiations

Another reason the negotiation documents were ordered to be produced was “because they might contain information showing that the grounds [MSTG’s expert] relied on to reach his conclusion are erroneous.”17 MSTG argued that its expert simply relied on information within the settlement agreements, and only the agreements. AT&T was able to point to areas in which the expert went beyond the agreements themselves, such as citing an MSTG executive on reasons for entering into the agreements and discounting the agreements by at least 75% because they were entered before significant litigation rulings such as claim construction or summary judgment.18 The Federal Circuit concluded that “[a]s a matter of fairness MSTG cannot … have its expert rely on information about the settlement negotiations and deny discovery as to those same negotiations.”19

The Federal Circuit ultimately concluded that the district court did not abuse its discretion in ordering production of the underlying settlement negotiation documents because MSTG’s expert relied on information relating to the negotiations and MSTG did not show that the district court permitted overly broad discovery into the settlement negotiations. The court did not specifically rule on whether settlement negotiations are admissible under Fed. R. Evid. 408.


In conclusion, MSTG provides further guidance on the degree to which settlement agreements and the negotiations surrounding those agreements may be instructive to a hypothetical negotiation. More important, MSTG also serves as a reminder of what may or may not be privileged during the settlement negotiation process. Furthermore, although this was an IP litigation ruling, it might have applications to cases outside of the IP context.


1, Inc. v. Lansa, Inc. 594 F.3d 860 at 872 C.A.Fed. (N.Y.), 2010.
2 According to the Federal Circuit, “[i]t is generally inappropriate to review discovery orders by mandamus” but it may be appropriate when a discovery order “raises a novel and important question of power to compel discover, or … reflects substantial uncertainty and confusion in the district courts.” “The issue of whether settlement negotiations are privileged is a matter of first impression before this court and one on which district courts are split.”
3 In re MSTG, Inc., Misc. Doc. No. 996 (Fed. Cir. Apr. 9, 2012) p. 2-3.
4 Id. at 3
5 Id. at 4
6 MSTG, Inc. v. AT&T Mobility LLC (Initial Order), No. 08-C-7411, slip op. at 21, 26-27 (N.D. Ill. Jan. 20, 2011).
7 In re MSTG, Inc., Miasc. Doc. No. 996 (Fed. Cir. Apr. 9, 2012) p. 4.
8 Id.
9 Id. at 5
10 Id. at 8
11 Id.
12 Id. at 4. The Federal Circuit lists the following examples: Compare Matsushita Electric Indus. Co. v. Mediatek, Inc., No. C-05-3148, 2007 WL 963975 (N.D. Cal. Mar. 30 2007), and In re S ubpoena Issued to Commodity Futures Trading Comm’n, 370 F. Supp. 2d 201 (D.D.C. 2005), with California v. Kinder Morgan Energy Partners, L.P., No. 07-1883, 2010 WL 3988448 (S.D. Cal. Oct. 12, 2010), and Software Tree, LLC v. Red Hat, Inc., No. 6:09-CV-097, 2010 WL 2788202 (E.D. Tex. June 24, 2010).
13 In re MSTG, Inc., Misc. Doc. No. 996 (Fed. Cir. Apr. 9, 2012) p. 9.
14 Id. at 9-10
15 Id. at 19
16 Id. at 20
17 Id.
18 Id.
19 Id.