No Settlement Negotiations Privilege

April 9, 2012


What This Means To You

  • Settlement negotiation discussions relating to reasonable royalties and damage calculations are not protected by a settlement negotiations privilege.
  • Letters, emails, and other communications may have to be produced in discovery.
  • Opposing party is entitled to discovery regarding the bases for your expert witness’ opinions.

Overview

The Federal Rules of Evidence leave open the possibility of recognition of new privileges by the courts; however, privileges are not lightly created. In In re MSTG, Inc., the US Court of Appeals for the Federal Circuit (Federal Circuit) held there is no settlement negotiations privilege, resolving a split among district courts.

Case Background

Some years ago, MSTG asserted a number of patents against AT&T and other cell phone service providers. MSTG settled with all defendants except AT&T. During discovery in the MSTG-AT&T suit, MSTG produced six of its settlement agreements with other service providers. AT&T sought discovery of the settlement negotiations that led to those agreements. When MSTG refused to produce that evidence, AT&T asked the court to compel its production.

Before the court ruled on AT&T’s motion to compel, MSTG served AT&T with an expert report on damages. In that report, MSTG’s expert relied on a MSTG executive’s deposition testimony that the royalty rates in MSTG’s settlements with the other cell phone service providers did not reflect true value because they were litigation-related compromises.

Ultimately, the district court ordered the production of the settlement negotiations evidence. MSTG challenged that decision on appeal.

Decision Analysis

Supreme Court case law sets out a number of factors to consider in deciding whether to define a new privilege. The Federal Circuit noted that there was no consensus among the states regarding a settlement negotiations privilege and it was not one of the privileges originally proposed by the drafters of the Federal Rules (e.g., attorney-client privilege, psychotherapist-patient privilege). The Court also recognized the Federal Rules provide other means of limiting discovery. For these and other reasons, the Federal Circuit held that settlement negotiations related to reasonable royalties and damages calculations are not privileged and are therefore discoverable (even if not admissible at trial).

The Federal Circuit then addressed whether it was proper for the district court to order MSTG to produce settlement negotiations evidence . The Federal Circuit agreed with the district court that AT&T was entitled to investigate the bases for MSTG’s expert’s opinions. MSTG could not at one and the same time have its expert rely on information about settlement negotiations (the MSTG executive’s testimony) and deny discovery as to those same negotiations.

Takeaways

Settlement negotiations evidence is not presumptively off-limits. Because it is not privileged, it is potentially discoverable. Thus, letters, emails, and other communications related to settlement negotiations may have to be produced in discovery. Note, though, that the Federal Circuit’s decision is not an attack on the attorney-client privilege. The settlement negotiations discussions at issue were those between MSTG and the other cell phone service providers, not between MSTG and its attorneys.

Further, be cognizant of your expert witness’s opinions and of the evidence upon which that expert bases those opinions. If your expert relies on settlement negotiations evidence, or other evidence arguably related to settlement negotiations evidence (like MSTG’s executive’s testimony), a court is likely to order production of that evidence.