The U.S. Court of Appeals for the Federal Circuit rejected the creation of a new settlement negotiation privilege and denied the plaintiffs’ petition for a writ of mandamus that sought to vacate a district court order compelling discovery of documents related to settlement negotiations. In re MSTG, Inc., Case No. 11-M996 (Fed. Cir., April 9, 2012) (Dyk, J.).

Plaintiff MSTG sued AT&T Mobility over patents covering third-generation mobile technology. During discovery, MSTG produced settlement agreements from another litigation granting third parties licenses to the patents asserted against AT&T, since the license agreements could be relevant to the calculation of a reasonable royalty for patent damages. However, MSTG refused to produce the underlying negotiation documents. AT&T moved to compel the production of communications between MSTG or its attorneys on the one hand and licensees on the other hand. Initially, the magistrate denied AT&T’s motion. AT&T then sought reconsideration of its motion based on MSTG’s damages expert relying on the settlement agreements as well as deposition testimony of an MSTG executive, who testified that there were business reasons for entering into the settlement agreements.

On reconsideration, the magistrate compelled MSTG to produce documents related to the settlement negotiations. The magistrate reasoned that the documents could contain information showing the expert’s grounds for reaching his opinions were erroneous, could shed light on why the parties reached their royalty agreements and could provide guidance on whether the licenses were relevant to calculating a reasonably royalty between AT&T and MSTG. The district court agreed and further found that it would be unfair for MSTG to shield the reasons for entering into the license agreements from AT&T when MSTG’s expert relied on this information. MSTG petitioned the Court for a writ of mandamus asking for the creation of a new settlement negotiation privilege and a finding that the district court abused its discretion.

The Federal Circuit denied MSTG’s petition for mandamus relief. At the outset, the Court dispensed with two threshold inquiries. First, the Court applied its own law related to discovery matters because the discovery sought related to an issue of substantive patent law—reasonable royalty and damages calculations for patent infringement. The Court then found that a writ of mandamus would be an appropriate remedy because even though it “is generally inappropriate to review discovery orders by mandamus,” the issue of settlement negotiations being privileged was a matter of first impression for the Court, an issue in which the district courts are split and the confidentiality of the settlement negotiation documents would be lost if review were denied until final judgment.

Nevertheless, the Court declined to create a new settlement negotiation privilege. The Court analyzed several factors identified by the Supreme Court in determining whether to adopt a new privilege under Fed. R. Evid. 501: state policy and recognition of the new privilege; congressional consideration of the new privilege or related issues; the list of evidentiary privileges recommended by the Advisory Committee of the Judicial Conference in its proposed Federal Rules of Evidence; and whether the new privilege effectively advances the public good.

First, the Court found that no state has adopted or recognized a settlement negotiation privilege outside the context of a third party mediator.

Second, the Court analyzed the text and legislative history of Fed. R. Evid. 408, which allows the admissibility of settlement negotiation documents for any purpose other than proving liability or the amount of a claim or to impeach by a prior inconsistent statement or a contradiction. The legislative history made clear that the rule not only includes settlements and negotiations between the parties to a lawsuit but also third parties. Further, when enacting Rule 408, Congress did not take the step of creating a new settlement negotiation privilege.

Third, the settlement negotiation privilege was not on the list of evidentiary privileges created by the Advisory Committee in its proposed Federal Rules of Evidence.

Fourth, the Court found that while there is an important public interest favoring settlement of disputes, disputes are routinely settled without the benefit of a settlement privilege, and therefore a settlement negotiation privilege is not necessary to achieve settlement. In short, none of the factors identified by the Supreme Court supported creation of a new settlement negotiation privilege.

The Court also found that any settlement privilege would necessarily have numerous exceptions, effectively weakening the privilege and creating uncertainty and a lack of clarity surrounding the privilege. In the end, the Court concluded that Rule 26 provides an effective method to limit the scope of discovery with respect to settlement negotiations. The district courts have broad discretion to exercise control over the discovery process, can limit the discovery of settlement negotiations and provide appropriate protections or heightened standards for discovery of settlement negotiations. Even though the Court did not decide or identify limits to the discovery of settlement negotiations, the existence of such authority cut against the need for a new settlement negotiation privilege.

The Court then found that in this case the district court did not abuse its discretion in granting AT&T’s motion to compel discovery of the settlement negotiation documents. The Court reasoned that as a “matter of fairness MSTG cannot at one and the same time have its expert rely on information about the settlement negotiations and deny discovery as to those same negotiations.”

Practice Note: All parties should proceed with settlement negotiations knowing that such communications between the parties may be discoverable. The parties may want to minimize the amount of documents (e.g., emails, letters) exchanged during settlement negotiations and limit, when possible, substantive comments to oral discussions. Parties should also carefully consider whether to rely on the underlying settlement negotiations, rather than the four corners of the settlement agreements, when formulating their damages theories.