Rescue Me! The Attack on Settlement Negotiations after ResQNet v. Lansa

Abstract

Patent litigation often results in settlement with the parties agreeing to a license involving the patent-in-suit. Licenses arising out of litigation are commonly referred to as settlement licenses or litigation licenses. The terms of a license resulting from settlement negotiations may depend on many factors such as the technology involved, the competitive position of the parties, the anticipated cost of further litigation, and the relative strengths of each party’s claims. Prior licenses involving the patent-in-suit play a central role in establishing damages for patent infringement. Although parties emphasize prior licenses, courts have traditionally deemed settlement licenses inadmissible as evidence due to the concern that these licenses lack adequate probative value. Courts have found that two considerations weigh against admission: the complexities of litigation and the multitude of factors unrelated to the value or validity of a patent that nonetheless affect the parties’ decision to settle. Despite the traditional bias against admitting settlement licenses, the Federal Circuit’s opinion in ResQNet.com Inc. v. Lansa Inc. brought the issue of admissibility of settlement licenses back into question. In ResQNet, the Federal Circuit vacated and remanded a damage award for patent infringement because the district court improperly determined the reasonable royalty rate. After evaluating the various licenses considered by the district court, the Federal Circuit stated that “the most reliable license in this record arose out of litigation.” Based on this statement, some district courts have expanded admissibility of settlement licenses in patent cases and have also opened up discovery of the underlying settlement negotiations, leaving litigators and other courts questioning how licenses arising out of settlement negotiations may be used in future litigation. Of particular interest is the inconsistent treatment of settlement licenses within the Eastern District of Texas. This uncertainty is causing parties to fear that negotiations in one case will be used against them down the road, which could have a significant chilling effect on settlement generally.This Note attempts to address several issues arising from the ResQNet decision. Part I reviews the discovery and admissibility of litigation-induced licenses as well as their underlying negotiations. Part II discusses the ResQNet case and how district courts have interpreted the opinion. Part III addresses three key questions arising from ResQNet: (1) To what extent settlement licenses and negotiations should be admissible or discoverable in the wake of the ResQNet decision; (2) If admitted, how settlement licenses should factor into a reasonable royalty analysis; and (3) How increased admissibility might affect patent litigation and settlement negotiations. This Note argues that courts should decide the admissibility of settlement licenses on a case-by-case basis so that judges can balance the relevant rules of evidence and civil procedure in making these determinations. It also argues that increased discovery of settlement negotiations based on ResQNet conflicts with the recent judicial policy trend to promote settlement, and that the justification being used to support discovery relies on a flawed assumption regarding the reliability of settlement communications.