Federal Circuit Examines Evolution Of The Privilege To Promote Settlement

In patent infringement action, the last alleged infringer (AT&T) sought mandamus review of the trial court's refusal to compel plaintiff MSTG to disclose the contents of its settlement negotiations with the other infringers who had settled; federal circuit rejects creation under FRE 501 of "a new privilege in patent cases that would prevent discovery of litigation settlement negotiations related to reasonable royalties and damages” of a party in In re MSTG, Inc., 675 F.3d 1337 (Fed. Cir. April 9, 2012) (No. Misc. 996)

Under FRE 501, the application of privileges in the federal courts are to be guided by “[t]he common law ... in the light of reason and experience.” The Supreme Court suggested a number of factors to use in making this determination. See, e.g., Jaffee v. Redmond, 518 U.S. 1, 8–9 (1996) (citations omitted). In a recent patent infringement suit, one party urged the Federal Circuit to use FRE 501 to recognize a new privilege that would permit parties in a patent dispute to discover any settlement negotiations that the opposing party had engaged in with other parties regarding reasonable royalties and damages in the case. The case presents a clear example a basic approach that can be used by a court when assessing whether a new evidentiary privilege should be recognized.

In the case, patentee MSTG sought from several cell phone providers, including AT&T, recovery for alleged infringement of patents regarding 3G mobile technology. As the case proceeded, MSTG reached settlements with all the defendants except AT&T. As discovery proceeded, MSTG disclosed as requested by AT&T all licenses and settlement agreements it had made with the other defendants in the case. However, MSTG declined to disclose to AT&T information on the course of the negotiations that led to their settlement with the other defendants. AT&T sought an order from the trial court to compel MSTG to produce the settlement discussions information.

After it failed to achieve initial success on its motion to compel production of the negotiation documents, AT&T renewed its application for an order and the trial court granted it. MSTG then sought mandamus review from the Federal Circuit, urging it to reverse the disclosure order by invoking FRE 501 "to fashion a new privilege in patent cases that would prevent discovery of litigation settlement negotiations related to reasonable royalties and damages.” The circuit rejected this invitation, leaving MSTG subject to the trial court order to provide AT&T the disputed MSTG patent license negotiation materials for the parties that had settled. MSTG, Inc., 675 F.3d at 1348.

One central argument made by MSTG in support of a new privilege in patent cases was that such a privilege could prevent the discovery of litigation-settlement negotiations concerning reasonable royalties and damages" for the alleged infringement. The circuit noted that the "only one of our sister circuits to adopt such a privilege" was the Sixth Circuit. On the other hand, the Seventh Circuit had "declined to adopt" such a patent settlement privilege.

The Federal Circuit then examined factors the Supreme Court had identified as warranting the recognition of a new privilege through the process of "evolutionary development." This consisted of applying a six-factor analysis to the development of a privilege. A summary of the circuit's discussion is presented in the table below. The table provides a description of how the factors were applied by the Federal Circuit to conclude that they "do not support recognition of a settlement privilege here."

Application Of Six-Factor Analysis

Evolutionary FactorApplication To MSTG Litigation
Factor 1: Policy Direction of the States:
Is there a consensus among the states as to the existence of the privilege, that may demonstrate that “reason and experience” supported recognition of the proposed privilege? Specifically, would “[d]enial of the federal privilege ... frustrate the purposes of ... state legislation that was enacted to foster these confidential communications” to be protected by the proposed privilege. See Jaffee, 518 U.S. at 13.
Federal Circuit noted: "[w]e are not aware of any state that recognizes a settlement privilege outside the context of mediation." The failure to recognize a federal settlement privilege would not “frustrate the purposes” of any state legislation. But even if it did, it would not apply in the MSTG case because "the negotiations in this case did not result from mediation but from settlement negotiations between two sides without the assistance of a third-party mediator."
Factor 2: Congressional Considerations:
Has Congress considered whether the proposed new privilege should be adopted?
Circuit notes that Congress considered the issue in its adoption of FRE 408, in which it "directly addressed the admissibility of settlements and settlement negotiations but in doing so did not adopt a settlement privilege." After recounting the history of the development of FRE 408, the circuit concluded that by "enacting Rule 408, Congress did not take the additional step of protecting settlement negotiations from discovery. Adopting a settlement privilege would require us to go further than Congress thought necessary to promote the public good of settlement, or in other words, to strike the balance differently from the one Congress has already adopted."
Factor 3: Original FRE Proposal:
Was a privilege similar to the proposed privilege "recommended by the Advisory Committee of the Judicial Conference in its proposed" Federal Rules of Evidence in 1973-75?
Federal Circuit notes that in applying this factor, the Supreme Court has examined whether the proposed privilege "was among the nine specific privileges recommended by the Advisory Committee in its proposed privilege rules.” (citing Jaffee, 518 U.S. at 13–14). Accordingly, it was notable in MSTG's case that "a settlement negotiation privilege was not included among the nine specific privileges recommended by the Advisory Committee, thus cutting against MSTG's argument."
Factor 4: Advancing The Public Good:
This factor examines whether the party seeking judicial recognition of a new evidentiary privilege can demonstrate "...that the proposed privilege will effectively advance a public good.”
Circuit recognized that the need for confidence and trust in the relationship of litigating parties is not a sufficient reason alone to create a new privilege. The circuit noted that "[i]n other circumstances, the Supreme Court has rejected new privileges under Rule 501 even though recognition of a privilege would foster a relationship based on trust and confidence.... Also, while there is clearly an important public interest in favoring the compromise and settlement of disputes, disputes are routinely settled without the benefit of a settlement privilege." As a result, "[i]t is ... clear that an across-the-board recognition of a broad settlement negotiation privilege is not necessary" to achieve or promote settlement.
Factor 5: Number Of Exceptions Necessary:
The issue to be considered by a court is whether creation of a privilege would necessitate the development of "numerous exceptions"? The circuit noted that in the example of FRE 408, the exceptions are unified and "contemplate[ ] a host of scenarios under which documents related to settlement negotiations would be admissible for purposes other than “prov[ing] or disprov[ing] the validity or amount of a disputed claim."
The circuit concluded that establishing "a privilege for settlement negotiations would necessarily be subject to numerous exceptions. The existence of such exceptions would distract from the effectiveness, clarity, and certainty of the privilege." The court cited as an example that "settlement negotiation evidence would be admissible where the settlement itself or its interpretation is at issue or where evidence of the ingredients of the settlement might be relevant to an issue of double recovery. See, e.g., Portugues–Santana v. Rekomdiv Int'l, 657 F.3d 56, 63–64 (1st Cir. 2011) (concluding the district court erred in not considering a settlement agreement in connection with a motion to offset damages); Catullo v. Metzner, 834 F.2d 1075, 1079 (1st Cir. 1987) (holding that testimony of settlement negotiations was admissible to “prove the terms of the agreement itself”))
Factor 6: Other Effective Methods Available To Accomplish Goal:
Is creation of a new privilege the only effective way to accomplish the goal of the privilege? The circuit considered Fed. R. Civ. P. 26 to be quite robust for this purpose as "[d]iscovery is not unlimited, though, under Rule 26"
Courts are required to “limit the frequency or extent of discovery otherwise allowed ... if it determines that ... the burden or expense of the proposed discovery outweighs its likely benefit, considering the needs of the case, the amount in controversy, the parties' resources, the importance of the issues at stake in the action, and the importance of the discovery in resolving the issues.” (quoting Fed. R. Civ. P. 26(b)(2)(C)) Indeed, Fed R. Civ. P. 26 already allows the courts to "grant motions for protective orders to restrict the use of information solely for purposes of the litigation. See Mohawk Indus., Inc. v. Carpenter, 558 U.S. 100, 130 S.Ct. 599, 608, 175 L.Ed.2d 458 (2009) (“Moreover, protective orders are available to limit the spillover effects of disclosing sensitive information.”). Rule 26 was sufficient since "the district court issued a protective order to help preserve confidentiality" in the litigation. MSTG, Inc., 675 F.3d at 1346.

The MSTG opinion cited other federal trial and circuit court decisions both supporting and opposing creation of a new privilege for settlement information. In the end, the circuit concluded that it needed to "reserve for another day the issue of what limits can appropriately be placed on discovery of settlement negotiations." But the existence of such authority, whatever its scope, strongly demonstrated there was no need for recognition of the proposed. In other words, the public policy goals supposedly advanced by recognition of the privilege, could more easily and appropriately achieved by limiting the scope of discovery" under the Rules of Civil Procedure instead of employing the Federal Rules of Evidence.

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