Thursday, March 24, 2011

The Continuing Saga of ResQNet -- How Discoverable are Patent Settlement Negotiations?

Since the Federal Circuit's decision in, Inc. v. Lansa, Inc., 594 F.3d 860 (Fed. Cir. 2010), holding that "litigation based" settlement agreements were at least potentially relevant to the determination of a reasonable royalty, there has been a substantial amount of controversy in the district courts as to how to apply it, or whether the issue could even be ignored altogether.

Since ResQNet represented a stark reversal of decades of authority holding that licenses entered into as settlement of actual or threatened litigation were somehow so "tainted" that they could not be used in any way in determining a reasonable royalty, there has been an understandable resistance to suddenly allowing parties to use these agreements at trial -- especially where sensitive settlement negotiations may be revealed. Indeed, defendants have started asking for -- any in some cases receiving -- discovery of settlement negotiations between plaintiffs in their own cases involving the very patents they were sued on.

This issue arose recently in two decisions by Magistrate Ashman of the Northern District of Illinois in MSTG, INC. v. AT&T Mobility LLC.

MSTG is what could broadly be described as a "patent troll" in the sense that it makes no products and its income is derived solely from licensing its patents (which are products of the research arm of the South Korean government). In discovery, it produced licenses for three of the patents-in-suit. AT&T, however, requested that it also produce documents relating to the settlement negotiations for those licenses. Judge Ashman held, however, that although ReQNet made the license agreements themselves relevant, AT&T had failed to show that ResQNet required the disclosure.

Now here's where it gets interesting.

Not to be dissuaded, AT&T moved for reconsideration -- and won.

AT&T's argument was that, because MSTG's expert stated that the prior license agreements should not be used as part of the hypothetical negotiation analysis because the rate was too heavily discounted, the actual settlement negotiations which led up to that agreement were relevant because they might show why the parties agreed on that rate. The court agreed.

This decision makes it clear that any settlement negotiations may be subject to discovery and that and plaintiffs in multi-defendant cases need to be extremely careful that their negotiations do not come back to bite them later, since they may not be able to hide behind carefully crafted agreements.

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