By Michael Hoenig - New York Law Journal -
September 13, 2010
believe it axiomatic that what they do, say or communicate to
adversaries in connection with settlement negotiations will not be used
as evidence against their clients' interests in some proceeding. This
assumption sometimes leads to a kind of smugness or comfort zone that
loosens lips and finds lawyers, their experts, consultants and others
generating communications, reports or other materials that are given to
the adversary in order to further the compromise negotiations. Smugness
invites peril, however, since the evidentiary rule offering protection
against admissibility of settlement communications is sprinkled with
exceptions and caveats. Moreover, case law sometimes confirms gaps in
the assumed mantle of protection. These factors should induce caution
about what one says, writes, or does during settlement talks.
In New York state courts,
CPLR §4547, titled "Compromise and offers to compromise," prohibits
admission of any evidence of settlements, compromises or offers to
compromise to prove either liability or invalidity of a claim or amount of
damages, and any statements made during settlement negotiations. CPLR 4547
also says: "Evidence of any conduct or statement made during compromise
negotiations shall also be inadmissible." But evidence which is "otherwise
discoverable" is not required to be excluded "solely because" it was
presented during the course of compromise negotiations. Furthermore,
admissibility of such evidence is not limited "when it is offered for
another purpose" such as proving bias or prejudice of a witness, among
New York Appellate Division
Justice Helen E. Freedman's treatise, "New York Objections,"1
observes at §3:150 (dealing with Opening Statements) that, since parties and
counsel undertake settlement negotiations for many reasons other than an
admission of liability, "such negotiations have no evidentiary value."
Allowing references to settlements or settlement negotiations during any
portion of a trial would have a "chilling effect" on such negotiations.
Therefore, "offers to settle or compromise are not generally admissible."2
At §19:150, dealing with summations, Justice Freedman offers other
observations including that references to settlements are also prohibited
when made either in other cases or with other parties in the same case.3
Three reasons are given:
(1) no predicate or basis in the record could have been made since evidence
of settlements or offers to settle is inadmissible. Thus, counsel becomes an
unsworn witness; (2) circumstances surrounding settlement decisions are
often "totally unrelated" to the factors a jury must consider in assessing
value or determining liability. For example, a defendant may settle to avoid
punitive damages or to settle a group of cases. Or a plaintiff may take less
from a particular defendant because of underlying insurance coverage issues
or a fear of defendant's potential insolvency. "In none of these situations
does the settlement amount reflect the time value of the case"; (3) factors
that went into a jury determination in one case are unknown and immaterial
to the jury in another case.4 In both sections of the treatise
some representative cases are squibbed.
In federal court
litigation, the applicable rule is Federal Rule of Evidence 408. Although
similar to CPLR 4547, there are differences. The basic exclusionary approach
is reflected in Rule 408(a), entitled "Prohibited Uses," which sets forth
what is not admissible "when offered to prove" specified things. However,
subdivision (b) entitled, "Permitted Uses," says that the rule "does not
require exclusion if the evidence is offered for purposes not prohibited by
subdivision (a)." Examples similar to those in CPLR 4547 are given. Federal
case law has fleshed out what is meant by "offered for another purpose." A
sampler of such case law may be viewed in the book, "O'Connor's Federal
Rules—Civil Trials," for example.5
Thus, exceptions allowing
the evidence have been used to (1) admit only the occurrence of settlement
talks or the settlement agreement itself for another purpose; (2) to prove
facts unrelated to the subject matter of the negotiations or where the claim
was based on some wrong committed in the course of the settlement
discussions;6 (3) to prove the amount in controversy or "merely
to indicate [plaintiff's] assessment of the value of the trademark";7
(4) to prove, via evidence from negotiations in a separate action that a
party acted in bad faith;8 (5) to prove, via evidence from
negotiations in a separate action, that defendant was on notice that the
conduct was wrongful;9 and (6) to prove, via evidence from
negotiations from a previous suit, the party's intent regarding a release,10
The evidentiary rule offers
limited protection and practitioners should recognize the exceptions that
could prove to be pitfalls. Armed with such knowledge, lawyers can better
assess what statements, communications and materials should be conveyed
during negotiations and what conduct during compromise negotiations may
generate concerns or risks regarding proceedings that may involve separate
parties or that may be used in separate cases.
A June 8 U.S. Court of
Appeals for the Fifth Circuit decision,
Lyondell Chemical Co. v. Occidental Petroleum Corp.,11
offers a nice legal discussion, surveys the various approaches circuit
courts have adopted and well illustrates the tensions in this area. Keep in
mind that Federal Evidence Rule 408 precludes certain evidence regarding
settlement negotiations in order to effectuate certain goals. But, not only
does Rule 408 explicitly carve out exceptions where the evidence is offered
"for purposes not prohibited by subdivision (a)," but the exclusionary
portion of the rule also runs "counter to the overarching policy favoring
the admission of all relevant evidence."12 Courts might tip the
scales towards the latter policy when "gray area" conflicts are presented.
involved litigation over liability for an environmental cleanup at a
hazardous waste dump near the Houston Ship Channel. Both sides conceded
liability but left to a bench trial the allocation of the cleanup costs.
Both sides were unhappy with the district court's allocation of liability
and appealed raising issues concerning the reliability of expert testimony,
the district court's choice of methodologies in allocating costs, some of
the court's factual findings and, of interest to us, "the admission of
alleged settlement communications into evidence."
The Fifth Circuit panel
found error only in the admission of the settlement communications. In the
course of its opinion the Fifth Circuit shows how Rule 408 can involve
complexities that pose risks to compromise-negotiating litigants and how, in
turn, negotiating counsel may need to weigh carefully beforehand what they
say, write or communicate during settlement negotiations.
Decades ago hazardous waste
from petrochemical facilities was dumped to a site along U.S. Route 90. When
that site was busy or unavailable, the waste was taken to a second location
known as Turtle Bayou. The EPA eventually ordered certain parties to
remediate contamination at Turtle Bayou. Some of the parties met to try to
comply but the group could not finalize a plan to divide responsibility.
The U.S. sued Lyondell to
compel a cleanup of Turtle Bayou and to recover costs under CERCLA
(Comprehensive Environmental Response, Compensation, and Liability Act), the
popular name of the federal act governing cleanups at hazardous waste sites.
Lyondell entered into a consent decree to remediate certain areas. Further
CERCLA actions followed against others who also settled with the United
States. Lyondell (and others) sued still other parties they believed should
share cleanup responsibility. These were called CERCLA actions for
"apportionment" and "contribution."
During the early, pre-suit
meetings among various parties to attempt to allocate and settle their
potential liability and avoid litigation, Occidental assigned an employee
named Gary Smythe to be its representative to the group. By the time Mr.
Smythe joined the proceedings, the group had decided on a higher allocation
for Occidental. In an effort to convince the other parties that Occidental's
allocation should be lower, Mr. Smythe (along with other employees and an
outside consulting firm) created two reports purporting to account for all
of Occidental's waste dumped at the Highway 90 site. Those "Smythe Reports"
attempted to narrow the gap between the group's allocation and Occidental's.
Despite concluding that the
Smythe Reports were "made during settlement negotiations," the district
court admitted them into evidence when offered by another party. The trial
court accepted the argument that Rule 408 bars the use of the compromise
evidence (the Smythe Reports) to prove the validity or invalidity of "the
claim that was the subject of the compromise, [but] not some other claim."
Since the pending proceeding concerned liability allocation for the Turtle
Bayou dump site and the Smythe Reports involved negotiations regarding the
"Highway 90" site, the district court deemed exclusion under Rule 408
The Fifth Circuit said that
the dispute focuses on what the word "claim" means in Rule 408. "Courts vary
widely in their understanding of the term." Most agree that the "claim" does
not mean "legal claim" and that, as a result, the dispute being settled need
not be the one being tried in the case where the settlement evidence is
being offered in order for Rule 408 to bar its admission.13 The
treatise, "Weinstein's Evidence," would nonetheless require that these
different disputes arise out of the "same transaction" in order to trigger
Case law also can be
organized around a loose "transactional" test. Four circuits (including the
Fifth) have applied Rule 408 to distinct claims arising out of a common
event.15 Other circuits have gone further applying the rule to
distinct legal claims arising, for example, out of the same failed business
relationship; or to legal claims by seven different plaintiffs during the
same 15-month uranium exploration project; and others.
On the other hand,
settlement evidence is not inadmissible merely because it relates to
circumstances that are "similar" to those being litigated. The U.S. Court of
Appeals for the Seventh Circuit eschews any strict "transaction" test but
looks to the "spirit and purpose of the rule and decide[s] whether the need
for the settlement evidence outweighs the potentially chilling effect on
future settlement negotiations." That balance will more likely "tip in favor
of admitting evidence when the settlement communications at issue arise out
of a dispute distinct from the one for which the evidence is being offered."16
The Wright & Graham treatise would take a similar approach.17
The Fifth Circuit decided
to "decline to adopt any rigid definition of 'claim'." The application of
Rule 408 "remains fact-specific and tethered to the rationales underlying
the rule." Thus, here, the Smythe Reports were created for use in
negotiations regarding the "claim" now being litigated. But didn't the
Smythe Reports issue only in connection with the "Highway 90" allocation
negotiations whereas this litigation involves the Turtle Bayou site? That
may be true but, "[t]hough separated by time and location," the disputes
nevertheless "arise out of the same events: the repeated dumping of
hazardous waste intended for Highway 90." The disputes involve the same
relevant parties, the same waste-generating facilities, the same basic time
frame, the same waste hauler and the same intended disposal site. "More to
the point, it involves the same primary liability question: What chemicals
did each facility ship offsite and in what quantity?"18 The
settlement evidence thus arose out of a shared factual nexus and bore
directly on present issues of liability between the same parties.
resolution requires frank and full discussion of relevant evidence. "Making
the content of such a discussion available for use in related litigation
would invite the very situation that Rule 408 is designed to avoid…." In
CERCLA litigation particularly, settlement is desirable. The district
court's admission of the Smythe Reports was an abuse of discretion and
harmful error. In its footnote 57, the court clarifies that its holding does
not prevent the admission of the raw data and information used to generate
the Smythe Reports—if that data and information is otherwise admissible. The
Rule 408 exclusion is limited to documents or statements that "would not
have existed but for the negotiations" and to situations where "the
negotiations are not being used as a device to thwart discovery by making
existing documents unreachable."
The foregoing discussion,
distilled from the recent Lyondell
opinion, shows that what seems like a comfortable rule of protection that
many take for granted can actually become a strategic, tactical and
contentious swamp. Lawyers eager to convince their adversaries to settle may
issue statements, reports and materials that might otherwise not be
disclosed as, for example, work product or consultants' expert reports. If,
however, attorneys have to worry that such communications may be offered
against them in separate and distinct, but somewhat related, cases or even
in the same litigation but when dealing with other parties, then compromise
negotiations may be chilled. Particularly in products liability cases
involving repeated but distinct claims or in mass tort scenarios or in
consumer class actions, the risks of some party's use of settlement
communications have to be weighed. Thus, what seems to be a simple rule is
not quite so simple.
Perhaps one approach to try
to minimize future risks and, yet, permit earnest and full settlement
negotiations to go forward is for the opposing attorneys to additionally
agree in writing that all communications to be exchanged during compromise
negotiations will be held confidential and will not be used or offered by
them in related or distinct proceedings or with regard to other parties.
This mechanism, though not perfect or risk-free, may fortify the
exclusionary benefits of Rule 408. Interested counsel should take another
(long) look at Rule 408 and CPLR 4547 before engaging in settlement
negotiations in complex cases.
Michael Hoenig is a
member of Herzfeld & Rubin.
1. James Publishing Inc.
(November 2009 Supp.).
2. N.Y. Objections, §3:150,
at p. 3-20.
3. Id. at §19:150, at p.
4. Id. at §19:150, at pp.
19-31 to 19-32.
5. Author Michael C. Smith
(Jones McClure Publishing, 2008 updated ed.)
6. Id. at p. 864, citing
Stockman v. Oakcrest Dental Center, P.C., 480 F.3d 791,
797 (6th Cir. 2007).
7. Id., citing
Cohn v. Petsmart Inc., 281 F.3d 837, 840 n. 3 (9th Cir.
8. Id., citing
Towerridge Inc. v. T.A.O. Inc., 111 F.3d 758, 770 (10th
9. Id., citing
United States v. Austin, 54 F.3d 394, 400 (7th Cir. 1995).
10. Id., citing
& Williams Constr. Inc. v. Structural Concrete Equip. Inc.,
973 F.2d 349, 353-54 (4th Cir. 1992).
11. 608 F.3d 284 (5th Cir.
Lyondell, Id. at 299.
13. Id. at 297.
14. Id. at 297 n. 43
(citing and quoting treatise).
15. Id. at n. 44.
16. Id. at 298 nn. 49, 50.
17. Id. at n. 51.
18. Id. at 298.
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