Patent Damages

Prior settlement agreements not discoverable, rules California court; Kansas court takes different view

The Central District of California, in Mobile Hi-Tech Wheels v. MKW Alloy, Inc., Case No. CV 09-5696-VBF (RCx) (Sept. 20, 2010), refused to compel production of settlement agreements from previous litigation involving the plaintiff, Mobile Hi-Tech.  The patents at issue were design patents directed to alloy wheels for automobiles.

MKW sought production of settlement agreements from prior patent lawsuits filed by Mobile Hi-Tech, which conceded that it had filed 37 prior lawsuits for alleged infringement of its wheels.  However, Mobile Hi-Tech informed MKW that none of those prior lawsuits related to infringement of the patents at issue in this case, that none of the lawsuits involved the grant of a license or the payment of a royalty, and that it “had no established royalty rates.”  Mobile Hi-Tech had settled at least some of those lawsuits, but refused to produce the settlement agreements because they did not involve the patents-in-suit, even though those lawsuits did allege infringement of Mobile Hi-Tech’s wheel designs—the same subject matter as the current lawsuit.

Surprisingly, in refusing to grant MKW’s motion to compel production, the court discussed none of the Federal Circuit’s recent case law concerning license or settlement agreements, including Lucent and ResQNet.  Those cases have reined-in the types of licenses that can be relied on in proving a reasonable royalty.  The court could have cited them to shore-up the opinion.  Instead, the court provided the following authority for its refusal to compel production:

General Elec. Co. v. DR Sys., Inc., 2007 WL 1791677, *2 (E.D.N.Y.) (refusing to compel production of settlement agreements when such settlement agreements involved different patent than patent-at-issue); cf. Conerly v. Marckwald, 131 U.S. 159, 161, 9 S. Ct. 744, 745, 33 L. Ed. 117 (1889) (“[T]he payment of a sum in settlement of a claim for an alleged infringement of a patent ‘cannot be taken as a standard to measure the value of the improvements patented, in determining the damages sustained by the owner of the patent in other cases of infringement.’” (citation omitted); Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1164 (6th Cir. 1978) (“A royalty, if any, resulting from settlement of an infringement suit between [plaintiff] and a third party, should not be considered evidence of an ‘established’ royalty and thus a measure of adequate damages” since “[l]icense fees negotiated in the face of a threat of high litigation costs ‘may be strongly influenced by a desire to avoid full litigation.’” (citation omitted)).

On the other hand, if the district court had considered ResQNet, it might have at least allowed the defendant to see the settlement agreements, even though the plaintiff represented that they involved different patents.  ResQNet found that an agreement reached to settle litigation was the most reliable agreement in that case.  The EDTX has extended this finding to compel production of settlement agreements and even the underlying negotiation documents.  See Tyco Healthcare Group LP v. E-Z-EM, Inc., Civil Action No. 2:07-CV-262 (TJW) (E.D. Tex. (March 2, 2010).  There the court stated:

The Federal Circuit has explained that prior license agreements that result from litigation can be the “most reliable” to the hypothetical negotiation damages analysis and, when performing a reasonable royalty calculation, the Court should consider “the panoply of ‘events and facts that occurred thereafter and that could not have been known to or predicted by the hypothesized negotiators.’” ResQNet, 2010 WL 396157 at *11 (quoting Fromson v. Western Litho Plate & Supply Co., 853 F.2d 1568, 1575 (Fed. Cir. 1988)). A prior, related settlement agreement, where it exists, may be central to the fact-finder’s determination of damages using a hypothetical negotiations analysis. Given that the “hypothetical reasonable royalty calculation occurs before litigation and that litigation itself can skew the results of the hypothetical negotiation,” the parties are entitled to show whether and to what extent the rate from a prior license agreement is the result of a compromise or reflects a desire to avoid litigation. Id. Moreover, the district court should make “factual findings that account[] for the technological and economic differences between [previous] licenses and the [patent-in-suit].” Id. It necessarily follows that, in light of the admissibility and importance of prior related settlement agreements, ResQNet suggests that the underlying negotiations are relevant to the calculation of a reasonable royalty using the hypothetical negotiation damages model. The prior license agreements, as before ResQNet, must relate to the same patents or comparable technology to be of any value to the hypothetical negotiation process. Id. (“[T]he trial court should not rely on unrelated licenses to increase the reasonable royalty rate above rates more clearly linked to the economic demand for the claimed technology.”) See also Lucent Techs., Inc. v. Gateway, 580 F.3d 1301, 1327–28 (Fed. Cir. 2009).

Mobile Hi-Tech’s prior settlement agreements admittedly involved the same type of products, alloy wheels.  And, even though they involved different patents, under ResQNet and cases such as Tyco one could argue that the court should at least allow the defendant to see the agreements.  The court could later exercise its gatekeeper function and refuse to admit the agreements into evidence in support of a damages theory, assuming they have no relevance at all.

The takeaway from Mobile Hi-Tech is that courts are cutting back on what constitutes a relevant agreement for damages purposes—so much so, that one can avoid having to produce agreements that do not involve the same patents that are at issue.  For a case going the other way, see HR Tech., Inc. v. Imura Int’l U.S.A., Inc., Case No. 08-2220-JWL (D. Kan. December 1, 2010) (at pages 13-14):

Defendants also argue that plaintiff improperly withheld documents from [plaintiff’s counsel’s] enforcement files relating to its relationship with Cooktek [a third party]. Plaintiff insists that such documents are not responsive because its dispute with Cooktek relates to the scope of a license for the technology at issue here, and does not relate to the patents at issue in the case. The Court agrees with defendants, however, that under the applicable liberal discovery standard, such documents relating to the licensing of the technology could lead to the discovery of admissible evidence relating to the subjects of Mr. Clothier’s expert opinions.