In a case of first impression involving patent royalty settlement talks, the Federal Circuit in In re MSTG, Inc., 675 F.3d 1337 (Fed. Cir. 2012) has rejected a “settlement negotiation privilege,” at least for non-mediated communications. This holding conflicts with Sixth Circuit precedent that protects settlement negotiations in general and casts doubt upon several district court cases that have found such a privilege.

Brief History of the “Settlement Negotiation” Privilege

Evidentiary privileges in federal court are governed by Fed. R. Evid. 501, which authorizes federal courts to “define new privileges by interpreting the common law in the light of reason and experience.” MSTG, 675 F.3d at 1342–43. This is a dynamic provision, allowing for the “evolutionary development” of future privileges beyond well-known standards like the attorney-client privilege. In addition, in the context of settlement negotiations, Fed. R. Evid. 408 generally restricts the admissibility (if not the discoverability) of certain compromise-related communications and documents, though with an array of exceptions.

Several decades ago, the Seventh Circuit tackled the prospect of a “settlement negotiation” privilege in the federal class action case of In re General Motors Corp. Engine Interchange Litigation, 594 F.2d 1106, 1124 n.6 (7th Cir. 1979). Concerned that the class was not adequately represented in the negotiations leading up to the proposed settlement, and applying its class-settlement supervisory powers under Fed. R. Civ. P. 23, the Seventh Circuit held that no settlement negotiation privilege should be recognized in the circumstances.

Almost 25 years later, the Sixth Circuit had occasion to consider a settlement negotiation privilege in a product liability case, in the face of a third-party request for the details behind a (produced in discovery) settlement agreement. In Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 332 F.3d 976, 979–83 (6th Cir. 2003), the court blocked access to the background negotiations, recognizing a “settlement negotiation” privilege, for both mediated and unmediated negotiations. Notably, the Sixth Circuit also found that the materials were not relevant to the third party’s dispute, perhaps suggesting that the privilege holding may be dicta.

A number of lower courts have taken up this privilege question more recently, with mixed determinations. Compare Matsushita Electric Industrial Co. v. Mediatek, Inc., No. C-05-3148, 2007 U.S. Dist. LEXIS 27437 (N.D. Cal. Mar. 30, 2007), and In re Subpoena Issued to Commodity Futures Trading Comm’n, 370 F. Supp. 2d 201 (D.D.C. 2005) (no federal settlement privilege), with California v. Kinder Morgan Energy Partners, No. 07-1883, 2010 U.S. Dist. LEXIS 108391 (S.D. Cal. Oct. 12, 2010), and Software Tree, LLC v. Red Hat, Inc., No. 6:09-cv-097, 2010 U.S. Dist. LEXIS 70542 (E.D. Tex. June 1, 2010) (finding a federal settlement privilege).

This past April, the Federal Circuit—the mandatory reviewing court for any patent-related matter—weighed in on the issue. The MSTG case was a mandamus action by the patent owner’s counsel hoping to keep secret various negotiations with third parties that had led to a handful of patent-royalty settlements. The final settlement agreements themselves had already been produced in the case, presumably in keeping with ResQNet.com v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010), which commented favorably upon the use of litigation-resolving patent royalty settlement agreements in appropriate cases.

The plaintiff sought emergency relief to protect the pre-agreement communications. The defendant countered that an expert witness for the plaintiff had chosen to rely upon the plaintiff’s own deposition testimony suggesting that the settlement agreements were reached solely for compromise, and not for commercial, purposes, so those royalties should be discounted dramatically (a 75 percent discount according to the expert). The defendant sought the background information to test this logic.

After finding that patent royalty negotiations were a matter for Federal Circuit jurisdiction, the MSTG panel declined to find that a federal “settlement negotiation” privilege had been established to date. Undertaking a thoroughgoing review of previously allowed federal evidentiary privileges, the court determined that none of the multiple factors used by the Supreme Court in a new-privilege assessment had been met.

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