Settling the Score: Are Settlement Agreements Private, Public, or Something In Between?
The hallmark of a good intellectual property litigation settlement is that neither party is totally happy with it. That is the nature of compromise – no one gets everything they ask for. For this reason, the settling parties prefer, and usually agree, that the settlement agreement will be held in confidence by them. But when a subsequent lawsuit involving the same IP rights is filed, the newly-sued defendant wants to inspect and review any previously negotiated settlement agreements. Are confidential settlement agreements shielded from compelled disclosure to other defendants?
The good news is that your patent litigation case has settled, saving all parties involved significant cost and effort in pursuing a lawsuit all the way through to trial. The settlement agreement between the parties is confidential as negotiated and mutually desired by both sides. The bad news is that another lawsuit relating to the same intellectual property arises thereafter, and the confidential settlement agreement from the previous lawsuit is requested in discovery. Must the confidential settlement agreement be produced to a complete stranger to the litigation for which the settlement agreement was negotiated and signed?
Recently, this issue was briefly commented upon by the Court of Appeals for the Federal Circuit (CAFC) in In re Modern Font Applications LLC.[1] In that case, the plaintiff MFA petitioned for a writ of mandamus challenging the United States District Court for the District of Utah’s order requiring MFA to turn over settlement agreements in discovery in the lawsuit brought by MFA. The defendant in the suit had filed a motion to compel production of previous settlement agreements as being relevant for purposes of determining a reasonable royalty. Defendants often assert that prior settlement agreements are relevant for this purpose even when the agreements contain a specific provision that says the amounts of money paid pursuant to settlement do not reflect or represent a reasonable royalty. Obviously, plaintiffs insert these provisions for their own self-serving purposes, and courts may find such transparent “disclaimers of relevance” to be ineffective.
The CAFC denied MFA’s petition. While MFA argued that the settlement agreements were protected against compelled disclosure by the attorney-client privilege, the court noted that MFA failed to explain how settlement agreements constitute “‘communications by a client to an attorney made in order to obtain legal assistance’ from the attorney in his capacity as a legal advisor.” This is the standard that must be met for correspondence or other documents to qualify as attorney-client privileged communications. Further, the court reasoned that even if the settlement agreement was privileged as a communication between MFA and its own attorneys, MFA identified no legal authority establishing a clear and indisputable right that would avoid ordinary waiver principles resulting from sharing allegedly privileged communications with an adverse party under the circumstances presented in that case.
Clearly, while settlement agreements may be drafted by attorneys on behalf of their clients, they are not communications by a client to the attorney or by the attorney to the client. Rather, such documents are directed to, and are meant to be shared, with an adversary. Under any other circumstances, sharing work product or any communications crafted by an attorney for a client with another party would result in waiver of the attorney-client privilege. Why then is there any expectation that settlement agreements should be protected by attorney-client privilege? There is none.
By way of background, in patent litigation, reasonable royalty is the predominant measure of patent damages awards in cases filed by Non-Practicing Entities, and serves as the minimum floor of an award granted to any plaintiff upon a finding of liability for infringement, assuming that all other criteria for awarding damages have been proven, as well. The reasonable royalty determination is based on an analysis of fifteen (15) factors used by parties and the finder of fact, known as the Georgia-Pacific factors. One of these 15 factors inquires as to the amount the licensor and licensee would have agreed on had they entered into a negotiation, and has developed into a method courts apply by replicating a negotiation between the parties. When previous license agreements involving the prevailing party exist, the amount agreed upon in those agreements provides an actual, established royalty. Knowing this information removes the guesswork of engaging in a hypothetical negotiation, which is what courts do in the absence of an established royalty. Thus, defendants involved in infringement suits always seek to discover license agreements and all related communications and negotiations related to the patents at issue between the plaintiff and third parties. Defendants typically contend that prior settlement agreements are simply a specific subset of the broader category of license agreements, generally.
However, parties in a litigation are barred from discovering privileged information. The Federal Rules of Evidence gives federal courts the ability to define new privileges by interpreting “the common law . . . in the light of reason and experience.” In 2003, the U.S. Court of Appeals for the Sixth Circuit used this clause to establish a “settlement privilege.” In finding this new privilege, the U.S. Court of Appeals for the Sixth Circuit reasoned that the confidentiality of settlement negotiations was in the public interest because there is an interest in “favor of secrecy of matters discussed by parties during settlement negotiations.” As a society, we want to encourage settlement so that parties can reach common ground without worrying about the settlement negotiations and agreements being used against them in subsequent disputes. Thus, the public policy argument for allowing settlement agreements to remain confidential is compelling, at least in courts of the Sixth Judicial Circuit (which includes the states of Kentucky, Michigan, Ohio and Tennessee).
Despite this ruling by one regional court of appeals, other circuit courts have declined to adopt the settlement privilege. For example, over the years, different courts have ruled that negotiations are discoverable in order to review the fairness of settlement, to show manipulation of market prices, and to use third-party settlements in the current suit. This trend reflects the courts’ concerns for disclosure when a negotiated settlement plays a large role in the course of a trial. Some courts have taken a middle ground requiring a “particularized showing” that the requested settlement negotiation or agreement evidence is likely to lead to admissible evidence. The U.S. District Court for the Eastern District of Texas, which was an incubator for patent procedure and litigation for many years, wavered back and forth between protecting settlement negotiations and allowing discovery of the same. Eventually, that court consistently found that no evidentiary privilege existed for settlement negotiations.
The CAFC has adapted and circumscribed the attorney-client privilege and work-product immunity separate from any regional circuit court of appeals. There, the trend has followed the same pattern, with the CAFC within the last decade articulating policy reasons for not establishing a settlement negotiation privilege. Specifically, the CAFC reasoned that there are pre-existing mechanisms to limit the scope of discovery in order to protect the confidentiality of settlement discussions and promote the compromise and settlement of disputes, including judicially imposed limits and protective orders. In addition, the CAFC has noted that if settlement negotiations were protected by attorney-client privilege, there would need to be an exception to the privilege when settlement or its interpretation is an issue, or possibly the central issue, in a case.
Overall, due to the rise in the amount of patent litigation and the burden placed on courts to determine reasonable royalties, the trend has been to allow discovery into settlement negotiations and agreements. In addition, because there are other ways to protect confidential information, such as by entry of a protective order or by conduction of an in-camera review (private inspection by the presiding judicial officer) of the documents provided under seal, most courts have concluded that settlement agreements are not protected by attorney-client privilege and should be produced in the course of discovery in other litigation matters.
Thus, even when your settlement agreement contains a confidentiality provision, you should expect that at least your competitors’ attorneys and their litigation damages experts will be entitled to inspect and review the agreement and the negotiation correspondence, as well. It is wise to be careful about what is said in any litigation settlement negotiations for this reason alone, in addition to any other good and sufficient reasons.
