Judge: Rodney Gilstrap
Holding: Defendant's Motion to Compel GRANTED
In the past couple of weeks we've had a lot of guidance from the courts on the discovery of license negotiations. Layered onto the preexisting ED caselaw interpreting ResQNet.com, Inc. v. Lansa, Inc., 594 F. 3d 860 (Fed. Cir. 2010), we received Judge Gilstrap's opinion in Hill v. Abt, followed by the Federal Circuit's recent opinion in In re MTSG, Inc.. But since the opinions dealt with slightly different issues - although arising out of common subject matter - the need to be dealt with separately.
First, the starting point. As Judge Gilstrap noted in Hill, before the Federal Circuit’s ResQNet decision in 2010, courts in the Eastern District of Texas generally applied the rule set forth in Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 332 F. 3d 976 (6th Cir. 2003) providing that settlement negotiations are privileged while the resulting license agreement itself is discoverable. But "[t]he ResQNet decision has caused some shift away from Goodyear’s bright-line rule and toward the discoverability of settlement negotiations," Judge Gilstrap noted. "This court now considers these decisions and seeks to clarify its approach to reconciling ResQNet with Goodyear in relation to the discovery of preexecution license negotiations and settlement discussions." (Citations to Eastern District opinions discussing ResQNet omitted).
Judge Gilstrap noted that while some argue that ResQNet wholly replaces Goodyear, and requires that settlement negotiations relating to licenses are proper for production in all cases, "this Court takes a case-by-case approach to the issue and holds that while ResQNet may create an exception to the Goodyear rule in certain circumstances, it has not wholly replaced Goodyear. Whether the license negotiations and settlement discussions are properly discoverable will likely depend on whether, within the context of each case, they are an accurate reflection of the patents’ underlying value and whether their probative value exceeds their prejudicial effect." (Emphasis added). Like Goldilocks trying out the different bowls of soup (here it comes), or yea, even The Bachelor going out on dates with different girls trying to find true love, Judge Gilstrap reviewed three prior Eastern District opinions on the subjects and decided that Clear with Computers LLC v. Bergdorf Goodman, Inc., 753 F. Supp. 2d 662 (E.D. Tex. 2010) (Davis, C.J.) gets the rose. "This Court finds itself much closer to the rationale developed in the Clear with Computers decision. While signed licenses relating to the same patents-in-suit are accepted as a valuable source for calculating a reasonable royalty, the negotiations behind those licenses must be viewed, as a general rule, as less probative and more prejudicial than the licenses themselves." Judge Gilstrap then goes on to discuss the negotiation process, armed with a day's supply of abt, excuse me, apt metaphors of his own.
The negotiation process is, by its nature, a place in which strategy predominates and often obscurity is generated at the cost of clarity. Parties are inclined to say or act in whatever way moves the process in their direction, regardless of the merit or truth of what is said or done at the negotiating table. Parties often employ an “end justifies the means” approach to negotiations. They do so for two primary reasons: (1) the end result, not the process of getting there, is the sole objective; and (2) the parties feel free to employ a wide variety of negotiating tactics because they consider that such negotiations are privileged and protected from future discovery. . . . the Federal Circuit said in ResQNet that “[d]etermining a fair and reasonably royalty is often … a difficult judicial chore, seeming to involve more the talents of conjurer than those of a judge.” ResQNet, 594 F. 2d at 869. The blanket admissibility of all manner of negotiations permitting parties to go behind the executed licenses appears to this Court to primarily add heat and not light to an already difficult judicial chore. This being said, however, the Court finds itself supportive of the approach to this quandary laid out in Clear with Computers. 753 F. Supp. 2d 662.
(Emphasis added). Finding that the Hill case presented a situation analogous to that in CWC in which Judge Davis found the draft license agreements and settlement negotiations discoverable, Judge Gilstrap ordered the corresponding documents produced. (No word on whether a rose ceremony is planned).
BUT the opinion continues
... the Court cautions future litigants that such production will be viewed as the exception and not the rule. Settlement negotiations are always suspect to some degree and are often littered with unreal assertions and unfounded expectations. The Court is aware that assertions made during settlement negotiations are generally made to “close the deal” and are not always grounded in facts or reason. Accordingly, while the Court allows discovery of the negotiations and settlement discussions at issue, the Court intends, as provided in Datatreasury, to thereafter direct its attention and scrutiny to the weight and degree that should properly be afforded to such negotiation materials.
("Not always" grounded in facts or reason? That's charitable.) So while production of these documents was ordered, such production is the exception and not the rule, and even when produced, the court will continue to analyze the materials to determine "the weight and degree" that they should receive.
Five days after Judge Gilstrap's opinion in Hill, the Federal Circuit in In re MTSG, No. 11-m996, denied a petition for writ of mandamus directed at a Illinois judge's order requiring (as did Judge Gilstrap) production of documents related to the plaintiff's license negotiation discussions with six other companies, including prior defendants in the case, holding that license negotiations related to reasonable royalties and damages were not privileged. It specifically did not address the admissibility of such materials, or the issue of what limits can appropriately be placed on the discovery of settlement negotiations.
In an interesting fact, however, it did note that the plaintiff's expert had relied on the negotiations and not just the final settlement agreements in declining to set aside the district judge's order permitting discovery into the negotiations. In that case, the magistrate judge had actually denied discovery into the underlying negotiations, finding that the defendant had not shown a need for the discovery, but changed his ruling after the plaintiff's expert's report, in which the expert relied on testimony which the court found was not limited to the agreements themselves, or at least argued in favor of the defendant's having access to the negotiations to test the accuracy of the expert's opinions and assumptions.