JAMES L. COTT, United States Magistrate Judge.
Currently before the Court are the requests of Defendants Implant Direct, MFG., LLC, Southern Implants, Inc., Southern Implants (Pty) Ltd., MegaGen USA, Inc., and MegaGen Co., Ltd. (together "Implant Direct") and Defendants Nobel Biocare USA, LLC and Nobel Biocare AB (together "Nobel") for a pre-motion conference regarding a proposed motion to compel the production of a settlement agreement that Plaintiff Dr. Paula Small ("Small") consummated with two former Defendants in this action, Neoss, Inc. and Neoss, Ltd. (together "Neoss") and that Implant Direct and Nobel contend is relevant under Rule 26(b)(1) of the Federal
This is a patent infringement case concerning dental implants. Dr. Small, a prosthodontist and one of the three named inventors of Patent Number RE38,945 (the "'945 Patent"), has asserted claims of the '945 Patent against Implant Direct, Nobel, Camlog USA Inc., and Henry Schein Inc. Neoss was also originally among the named Defendants; however, Small and Neoss resolved their dispute in a confidential settlement agreement (the "Neoss Agreement") and filed a stipulation of dismissal on April 28, 2011, which Judge Holwell endorsed on May 2, 2011 (Dkt. No. 187).
By letter to the Court dated May 27, 2011, Implant Direct seeks to compel the production of the Neoss Agreement, asserting that it is relevant pursuant to Fed. R. Civ. 26(b)(1). Implant Direct's May 27, 2011 Letter. On June 1, 2011, Small responded by letter. Pl.'s June 1, 2011 Letter. On June 20, 2011, Nobel joined Implant Direct in its request for permission to make a motion to compel. Nobel's June 20, 2011 Letter. Small responded one day later. Pl.'s June 21, 2011 Letter. By letter dated June 28, 2011, Implant Direct provided the Court with additional authority that it believes supports its position. Implant Direct's June 28, 2011 Letter. Small responded on July 6, 2011. Pl.'s July 6, 2011 Letter. On July 8, 2011, Nobel sent the Court another letter, contending that since Small seeks testimony from Nobel's 30(b)(6) witnesses concerning, among other things, settlement agreements to which Nobel has been a party, it is disingenuous for Small to argue that the Neoss Agreement is not relevant in this action. Nobel's July 8, 2011 Letter at 1. Finally, Camlog USA, Inc. and Henry Schein, Inc. (together "Camlog") submitted a letter to the Court dated July 15, 2011 joining in Implant Direct and Nobel's application. Camlog's July 15, 2011 Letter.
Although Rule 408 of the Federal Rules of Evidence limits the introduction at trial of evidence regarding settlement negotiations in light of the strong "public policy favoring the compromise and settlement of disputes," Fed.R.Evid. 408 advisory committee's note (citations omitted), Rule 408 does not apply to discovery. See, e.g., Conopco, Inc. v. Wein, No. 05 Civ. 9899(RCC)(THK), 2007 WL 1040676, at *5 (S.D.N.Y. Apr. 4, 2007); In re Initial Public Offering Sec. Litig., No. 21 MC 92(SAS), 2004 WL 60290, at *4 (S.D.N.Y. Jan. 12, 2004); ABF Capital Mgmt. v. Askin Capital Mgmt., No. 96 Civ. 2978(RWS), 2000 WL 191698, at *1 (S.D.N.Y. Feb. 10, 2000). Instead, Rule 26(b)(1) of the Federal Rules of Civil Procedure provides the scope of discovery—that, unless otherwise limited by court order
Fed.R.Civ.P. 26(b)(1). Though district courts in this Circuit have in the past disagreed as to whether discovery of settlement agreements requires a heightened showing of relevance, the majority view is now that no such heightened showing is required. See Gen. Elec. Co. v. DR Sys., Inc., No. 06 Civ. 5581(LDW)(ARL), 2007 WL 1791677, at *1 (E.D.N.Y. June 20, 2007) (discussing split in authority and adopting the view that no heightened relevance showing is required); ABF Capital Mgmt., 2000 WL 191698, at *1 ("Prevailing authority within this Circuit holds that the discovery of settlement-related information is governed by [Rule 26], and that no heightened showing of relevance need be made in order to justify the disclosure of a settlement agreement." (citations omitted)). The parties do not dispute this point here. See Implant Direct's May 27, 2011 Letter at 2; Pl.'s June 1, 2011 Letter at 1.
The burden of demonstrating relevance is on the party seeking discovery. See, e.g., Callaway Golf Co. v. Corporate Trade Inc., No. 10 Civ. 1676(GBD)(JCF), 2011 WL 1642377, at *3 (S.D.N.Y. Apr. 25, 2011). Thus, Implant Direct and Nobel bear that burden here. They assert that the Neoss Agreement is relevant to (1) the issue of damages, i.e., the determination of a reasonable royalty; (2) the infringement or validity of the '945 Patent; (3) the credibility of Small and her experts; and (4) the credibility of Mr. Cooper and Dr. Marotta, the other named inventors of the '945 Patent. Implant Direct's May 27, 2011 Letter at 2-4; Nobel's June 20, 2011 Letter at 1-2. Further, Nobel asserts that since Small seeks deposition testimony regarding settlement agreements to which Nobel has been a party, it is disingenuous for Small to argue that the Neoss Agreement is not relevant in this action. Nobel's Letter dated July 8, 2011 at 1. The Court turns next to the relevancy of the Neoss Agreement as to the issue of a reasonable royalty.
Before deciding whether the Neoss Agreement is relevant as to a reasonable royalty—the issue most hotly contested by the parties here—it is first necessary to explain what a reasonable royalty is. 35 U.S.C. § 284 provides that a patentee who has demonstrated infringement is entitled to "damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer." A reasonable royalty "can be calculated from an established royalty, the infringer's profit projections for infringing sales, or a hypothetical negotiation between the patentee and infringer based on the factors in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F.Supp. 1116, 1120 (S.D.N.Y.1970)." Wordtech Sys., Inc. v. Integrated Networks Solutions, Inc., 609 F.3d 1308, 1319 (Fed.Cir.2010). But in litigation it "is often determined on the basis of a hypothetical negotiation, occurring between the parties at the time that infringement began." Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1312 (Fed.Cir.2011) (internal citations omitted). The hypothetical
Whether the Neoss Agreement is relevant to the issue of the determination of a reasonable royalty largely turns on the Court's interpretation of a recent decision of the Federal Circuit in ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 872 (Fed.Cir.2010), a case in which the Circuit overturned a royalty verdict based on seven licenses—five of which were unrelated to the claimed invention and two of which arose from the litigation.
Implant Direct points to the above-quoted language from ResQNet and contends, along with Nobel, that the Federal Circuit has approved of the use of litigation settlements as evidence of the amount of a plaintiff's damages. Implant Direct's May 27, 2011 Letter at 3; Implant Direct's June 28, 2011 Letter at 2; Nobel's June 20, 2011 Letter at 1. Defendants contend that since, as far as they are aware, the Neoss Agreement is the only agreement in which anyone has compensated Small for the '945 Patent, its terms could be relevant in determining the patent's value.
Small responds that ResQNet stands for the opposite proposition than that proposed by Defendants—that the decision merely reiterates the Federal Circuit's "long standing position that the most reliable hypothetical calculations arise out of situations that do not involve litigation since `litigation itself can skew the results of the hypothetical negotiation.'" Plaintiffs June 1, 2011 Letter at 3 (quoting ResQNet, 594 F.3d at 872). Thus, Small contends, the Neoss Agreement is not relevant under Fed. R. Civ. 26(b)(1) to determining a reasonable royalty. Id. The Court's interpretation of ResQNet falls somewhere in between those of the parties.
ResQNet involved, among other things, a challenge to a district court damages award that relied upon a reasonable royalty rate that had been determined by the patentee's expert. ResQNet, 594 F.3d at 868. The Federal Circuit concluded that evidence of royalty rates from five licenses which were unrelated to the invention at issue in the case could not form the basis of a reasonable royalty calculation by the patentee's expert or the damages award of the district court. Id. at 870-72. These licenses, the Circuit stated, had no discernible link to the claimed technology, and were used only "to drive the royalty rate up to unjustified double-digit levels." Id. at 870. The rates in the licenses, moreover, were
Id. The Circuit thus vacated the damages award and remanded the case to the district court for recalculation of a reasonable royalty, ordering it to "consider the panoply of events and facts that occurred thereafter and that could not have been known to or predicted by the hypothesized negotiators[,]" and admonishing it not to "rely on unrelated licenses to increase the reasonable royalty rate above rates more clearly linked to the economic demand for the claimed technology." Id. at 872-73 (citation and internal quotations omitted). Before doing so, however, the Circuit made the following observation:
Id. (internal citations, quotations, and alterations omitted). The meaning of this passage is at issue here.
The Court is not alone in its interpretation of ResQNet and the decision's impact on the discoverability of litigation-based settlement agreements and other documents related to settlement. See, e.g., Volumetrics, 2011 WL 2470460, at *14 (concluding that "ResQNet.com forecloses ... [the] contention that' [a]greements reached to resolve patent litigation are not relevant to the calculation of a reasonable royalty'" and granting motion to compel settlement agreement); MSTG, Inc. v. AT & T Mobility LLC, No. 08 Civ. 7411, 2011 WL 841437, at *3-4 (N.D.Ill. Mar. 8, 2011) (on reconsideration, motion to compel settlement communications granted in light of ResQNet where communications relevant to demonstrating comparability of litigation-based settlement licenses that could have resulted from communications to patents in suit); Tyco Healthcare Grp. LP v. E-Z-EM, Inc., No. 07 Civ. 262(TJW), 2010 WL 774878, at *2 (E.D.Tex. Mar. 2, 2010) (motion to compel documents related to settlement negotiations granted because "ResQNet suggests that the underlying negotiations are relevant to the calculation of a reasonable royalty using the hypothetical negotiation damages model"); Clear with Computers, 753 F.Supp.2d at 663-64 (motion to compel documents related to settlement agreements with previous defendants granted where, among other things, settlement agreements likely only licenses of patents at issue in case and patentee has not shown that there are other non-litigation licenses that reflect patent's value).
As for the few district court decisions that have interpreted ResQNet differently, they are both factually and legally distinguishable. For instance, Fenner Investments involved the admissibility of certain settlement agreements at trial, not the agreements' discoverability. 2010 WL 1727916, at *3. Further, the settlement agreements that the patentee there sought to exclude from introduction at trial involved patents at issue in prior litigations—not the patent at issue in the case. Id. The case thus involved a different scenario than that presented here; the Neoss Agreement directly relates to the '945 Patent.
Additionally, though Software Tree, LLC v. Red Hat, Inc., No. 09 Civ. 097, 2010 WL 2788202, at *4 (E.D.Tex. June 24, 2010), did involve a motion to compel documents relating to settlement negotiations, and the court there ultimately denied production of the documents, it based its decision on a
Small cites a number of cases in support of her assertion that "[c]ourts have long held that litigation-based settlement licenses are not relevant to determining a reasonable royalty in patent infringement cases." Pl.'s June 1, 2011 Letter, at 3. Yet each of these cases either does not stand for this proposition or is distinguishable.
In sum, though Small makes many arguments regarding the relevance of the Neoss Agreement that may well prove to be successful in excluding it from the evidence presented at any trial in this case, they are insufficient to overcome Defendants' arguments regarding discoverability at this stage of the litigation. Accordingly, the Court concludes that the Neoss Agreement is relevant to determining a reasonable royalty for purposes of Fed.R.Civ.P. 26(b)(1), and therefore must be produced. In light of this conclusion, the Court need not address Defendants' other arguments.
Defendants' motion to compel production of the Neoss Agreement is GRANTED. Within 14 days of the entry of this Order, Small shall produce the Neoss Agreement to Implant Direct, Nobel, and Camlog consistent with the terms of the Stipulated Protective Order (Dkt. No 148).