The Impact of Confidentiality on Reasonable Royalty Determinations in Patent Disputes

Under 35 U.S. Code § 284, a patentee involved in patent infringement litigation is entitled to recover damages “adequate to compensate for the infringement.” The minimum level of damages the patentee may receive is a “reasonable royalty” on the invention.  To compute a reasonable royalty, courts analyze what royalty would have resulted if the two parties had entered into a hypothetical negotiation on the eve of infringement.

The best evidence for a reasonable royalty includes the established royalty rates for the patent-in-suit. If the patentee has existing or prior licenses for the patent-in-suit, a court can apply the same rate as the reasonable royalty. While this solution seems simple, the Federal Circuit has recognized the factual context surrounding each licensing agreement may impact the royalty rate.  Because of this, the Federal Circuit requires a higher level of proof that established royalties may be used as the reasonable royalty. For instance, a single documented royalty is insufficient to establish there is general acceptance that the royalty is reasonable. Thus, it can be very difficult to use established royalties, standing alone, as sufficient proof of the reasonable royalty rate. Nevertheless, established royalties are still an important consideration when determining what constitutes a reasonable royalty.

Since information regarding established royalties is obviously important to have during a patent infringement lawsuit, what happens when that information is subject to a confidentiality provision?  The Federal Circuit has addressed this question in the context of settlement negotiations.

In In re MSTG, Inc., MSTG filed a lawsuit against AT&T for infringement of its 3G technology patents. One of the issues in the AT&T dispute was the reasonable royalty rate for the patents-in-suit.  Previously, MSTG sued other telecommunications companies for patent infringement and eventually settled those cases. As part of the various settlement agreements, MSTG granted the alleged infringers a license to the patents-in-suit. During discovery in the case against AT&T, MSTG produced six licensing agreements that resulted from its previous settlements as evidence of a reasonable royalty rate. AT&T, however, also sought to discover the negotiations concerning the settlement agreements by arguing the negotiations would assist the court in making a reasonable royalty determination.

In response, MSTG petitioned the Federal Circuit to recognize a privilege for confidential settlement negotiations. The court refused.  Instead, the Federal Circuit held “[S]ettlement negotiations related to reasonable royalties and damage calculations are not protected by a settlement negotiation privilege.”

In re MSTG raises the legal question of when confidential information relating to reasonable royalties may be privileged. One potential area is mediation. As described in an earlier Disputing blog post, it is still unsettled whether a federal mediation privilege exists and the Federal Circuit has never directly addressed the issue.

The In re MSTG opinion sends mixed signals regarding whether the Federal Circuit may recognize a mediation privilege in the future. On one hand, the Federal Circuit partially supported its opinion by noting the second circuit has allowed for discovery of mediation materials and protected confidentiality through heightened discovery standards without using privilege. In addition, the Court of Federal Claims followed the reasoning of In re MSTG to hold in Kansas City Power & Light Co. v. United States that mediation communications are discoverable.

In contrast, the Federal Circuit noted that every state has enacted a statutory mediation privilege. This is important because one of the primary factors used to determine whether to recognize a new federal privilege includes the policy decisions of the various states. The court also compared the widespread adoption of a mediation privilege with a lack of state consensus regarding a settlement negotiation privilege. This suggests the Federal Circuit may be willing to recognize a mediation privilege in the future.

Given the current uncertainty in this area of the law, practitioners need to be aware that mediation communications concerning patent licenses may be discoverable in order to determine reasonable royalties during future litigation. Still, parties arguing for or against using a federal mediation privilege to protect information related to a reasonable royalty may be able to develop arguments from the Federal Circuit’s opinion in In re MSTG.

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