Friday, May 11, 2012

No Settlement Negotiations Privilege

            Oftentimes, at the start of a settlement dialogue with opposing counsel, attorneys will trot out language that says something like the following:

“This letter and all subsequent communications are settlement negotiations, and are neither discoverable nor admissible in any legal proceeding, as they are governed by Federal Rule of Evidence 408 and its local counterpart(s).”
But, as In re MSTG, Inc., 2012 U.S. App. LEXIS 7092 (Fed. Cir. April 9, 2012) teaches, there simply is no certainty that a settlement negotiations privilege exists, or that language like the above will be respected.  The Federal Circuit, Judge Dyk writing on an issue that has somewhat divided the courts, noted that Congress, in enacting Civil Rule 408, did not take the additional step of protecting settlement negotiations from discovery.  The Court found Congress’ failure supported the Court’s conclusion that no privilege for settlement negotiations should be recognized.  In contrast, the Sixth Circuit, in Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 332 F.3d 976, 979-83 (6th Cir. 2003), appears to have adopted a settlement negotiations privilege; whereas the Seventh Circuit, in In re General Motors Corp. Engine Interchange Litig., 594 F.2d 1106, 1124 n.20 (7th Cir. 1979) declined to adopt a settlement negotiations privilege.  The district courts which have had occasion to address this issue are deeply divided.  Compare Matsushita Electric Indus. Co. v. Mediatek, Inc., No. C-05-3148, 2007 U.S. Dist. LEXIS 27437 (N.D. Cal. Mar. 30, 2007) and In re Subpoena Issued to Commodity Futures Trading Comm’n, 370 F. Supp. 2d 201 (D.D.C. 2005) (no federal settlement privilege) with California v. Kinder Morgan Energy Partners, L.P., No. 07-1883, 2010 U.S. Dist. LEXIS 108391 (S.D. Cal. Oct. 12, 2010) and Software Tree, LLC v. Red Hat, Inc., No. 6:09-cv-097, 2010 U.S. Dist. LEXIS 70542 (E.D. Tex. June 24, 2010) (finding a federal settlement privilege). 

            Judge Dyk, in the In re MSTG opinion, notes the proliferation of state statutes recognizing a mediation privilege.  Either by enactment of the Uniform Mediation Act or otherwise, every state has codified some form of mediation privilege by statute or judicial rule.  See Folb v. Motion Picture Indus. & Health Plans, 16 F. Supp. 2d 1164, 1179 (C.D. Cal. 1998), aff’d, 216 F.3d 1082 (9th Cir. 2000); Pamela A. Kentra, “Hear No Evil, See No Evil, Speak No Evil: The Intolerable Conflict for Attorney-Mediators Between the Duty to Maintain Mediation Confidentiality and the Duty to Report Fellow Attorney Misconduct,” 1997 B.Y.U.L. Rev. 715, Appendix A (collecting statutes).  Some federal courts have recognized a federal common law “mediation privilege.”  See Sheldon v. Pa. Turnpike Comm’n, 104 F. Supp. 2d 511, 515 (C.D. Pa. 2000); Folb, 16 F. Supp. 2d at 1179-80.  But, rather than seeing the mediation privilege as support for adoption of a settlement negotiations privilege, the Federal Circuit rather stated that it is “not aware of any state that recognizes a settlement privilege outside the context of mediation.  Thus, the Court concluded that failure to recognize a federal settlement privilege will not ‘frustrate the purposes’ of any state legislation…”

            The Court went on to further justify its holding, contending that the district courts have ample power, using protective orders, to confine and restrict access to settlement negotiations.  Interestingly, the Court went on to note that it has not yet decided the extent to which evidence of settlement negotiations would be admissible under Rule 408, citing a series of Federal Circuit decisions issued over the last three decades.  In re MSTG, 2012 U.S. App. LEXIS 7092 at *25 n.4 (citing cases). 

            Finally, the Court noted that other courts have imposed “heightened standards for discovery in order to protect confidential settlement negotiations,” and that “[m]any district courts also require heightened showings for discovery of settlement negotiations.”  Id., at *26 (citing cases). But see Bennett v. La Pere, 112 F.R.D. 136, 140 (D.R.I. 1986) (finding party opposing discovery of settlement terms has the burden of establishing some good cause or sound reason for blocking the disclosure).  After having set forth a string cite of holdings requiring a heightened standard for discovery, along with one contrary holding, the Court then stated: “Because the issue is not before us, we reserve for another day the issue of what limits can appropriately be placed on discovery of settlement negotiations.”  Id. at 27.
            So, at the end of the day, in two circuits (the Federal and Seventh), there is no settlement negotiations privilege; whereas in one circuit (the Sixth), there “appears to be” a settlement negotiations privilege; and in some district courts outside those circuits, a privilege is recognized; whereas in some others it is not recognized.

            Confidentiality has been recognized as consistent with the public interest in settlement, albeit in the mediation context.  For example, the California Supreme Court, in a malpractice case against an attorney for alleged malpractice during settlement negotiations at a mediation, held that the state mediation privilege absolutely barred discovery and admissibility of anything that occurred during the mediation, even malpractice by the lawyer.  See Cassel v. Superior Court, 244 P.3d 1080, 1083 (Cal. 2011).  Given the recognition of the public interest in cloaking mediation in privilege, there seems to be no sensible reason not to similarly cloak lawyer-to-lawyer settlement negotiations in privilege, albeit not an absolute privilege. 

While we await either an eventual resolution of this issue by the Supreme Court or a rule change to make it crystal clear that such a privilege exists, what can practitioners do to armor-plate their settlement negotiations from discovery by the other party and third parties?  On this topic, I welcome suggestions from readers.  Certainly, with respect to the two parties to settlement negotiations, a written agreement that anything said or written in settlement negotiations will not be sought or otherwise used in discovery and litigation, and that the parties are estopped from seeking to admit any such evidence at trial, ought to chill most efforts to use what is said during settlement negotiations.  The real problem is discovery by third parties.  See Republic of Philippines v. Westinghouse Elec. Corp., 132 F.R.D. 384, 390 (D.N.J. 1990) (holding that “once information is disclosed to an adversary, a future adversary in a related proceeding may have access to the information”).  Imagine a scenario where (a) an individual is subpoenaed to testify about settlement negotiations; (b) there was a written agreement not to disclose to anyone anything said or done during the negotiations; and (c) the agreement had a penalty clause for breach of the bar on disclosure.  It would seem that the party sought to be deposed could interpose that contract and the potential penalty clause as the basis for a motion for a protective order to preclude questioning regarding the settlement negotiations.  Certainly, the opinion of the Federal Circuit underscores the need to adopt stronger measures, over and above the standard line in the opening demand letter with its citation to Rule 408.

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