Federal Texas Court Rules for Producing Negotiation Communications

By Brett Goodman

The United States District Court for the Eastern District in Tyler, Texas, has allowed a motion to compel and denied a motion to protect in a suit concerning negotiation communications of formerly created license agreements to patents-in-suit.

In Clear with Computers, LLC v. Bergdorf Goodman, Inc., 753 F. Supp. 2d 662, 663 (E.D. Tex. 2010) Clear With Computers (CWC), a provider of computer parts and repair, sued many defendants on the patents-in-suit, but only one went to trial whereas the rest were settled out of court. The issue was whether litigation induced settlement agreements are admissible in trial. The patent concerned an Electronic Preparation Proposal System claimed to be owned by CWC and alleged to be improperly used by the defendants. The defendants, various companies using the disputed system in their websites and sales methods, sought the production communications as a means of tracing how the suits were settled and thus determining if the settlement agreements were admissible at trial.

The court first noted that Rule 26b of the Federal Rules of Civil Procedure allows discovery of nonpriviliged materials relevant to a claim or defense. Although district courts vary on their interpretations of Rule 26, the present court had ruled earlier in ReedHycalog UK, Ltd. v. Diamond Innovations Inc., 727 F.Supp.2d 543, 546–47, 2010 WL 3021550 at *3 (E.D.Tex.2010) “that the admissibility of litigation licenses—like all evidence—must be assessed on a case-by-case basis, balancing the potential for unfair prejudice and jury confusion against the potential to be a ‘reliable license.’ ”

The court then found inconsistencies in CWC’s settlement amounts with the former defendants with what was to be expected. The court declared, “[T]he settlement communications are likely to be key in determining whether the settlement agreements accurately reflect the inventions’ value or were strongly influenced by a desire to avoid or end full litigation.” Still reaffirming that privileged communications would not be admissible at trial, the court decided that understanding the settlement agreements would be important as they would “likely be the only licenses of the patents-in-suit.”

To the chagrin of CWC, the court did not accept the argument that this production would be overly burdensome because of the sheer number of settlement agreements and related communications because defendants’ “need for the documents outweighs this concern given that there are no non-litigation licenses that can be used to value the patents-in-suit and the inconsistencies among the litigation settlement agreements.”

Thus, taking this case as an independent entity and weighing the particular facts in question, the court ruled for defendants and allowed the production of the negotiations leading to the settlement agreements. Though this ruling in an exception to the norm, it shows the possibility of confidentiality of mediation communications being overruled by weighing other interests.

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Brett Goodman is a summer intern at Karl Bayer, Dispute Resolution Expert. Brett is a J.D. candidate at The University of Texas School of Law. He holds degrees in Finance, Mathematics, and Spanish from Southern Methodist University.