Privileged and Confidential Settlement Communication? – Not So Much

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evidence smoking gun

While experiencing all the joys of electronic discovery, you actually find the brass ring – that elusive “smoking gun” email. It is the key to a discovery treasure trove, and proof positive of a critical fact that tips the weight of the evidence in your client’s favor.

Eureka!

But your elation is short lived, because those pesky words “privileged and confidential settlement communication” are written at the top.  You know as a result the referenced events and circumstances are not discoverable, and certainly could never be admitted into evidence at trial.

Wrong.

SETTLEMENT DISCUSSIONS ARE NOT PER SE PRIVILEGED

Never say never when it comes to the cosmic mysteries of the rules of evidence.

Wait, what? Has our buddy Silver gone off the deep end from all the social distancing and fumes from the cleaning products? This cannot possibly be right.

The magic words are right there on the top of the email – it says PRIVILEGED AND CONFIDENTIAL SETTLEMENT COMMUNICATION (all caps and boldfaced too). It must be so.

Surely the mere mention of anything in that email will get you sanctioned and maybe disbarred (I’ve been threatened with both by opposing counsel under similar circumstances – neither happened).

First of all, don’t call me surely.

Next, let’s look at California law, where communications made in the course of settlement discussions are not per se “privileged.” Covell v. Superior Court, 159 Cal. App. 3d 39, 42 (1984). Seems in California at least, writing the words “privileged and confidential settlement communication” does not make it so.

California Evidence Code §1152 provides confidentiality protection in settlement discussions:

(a) Evidence that a person has, in compromise or from humanitarian motives, furnished or offered or promised to furnish money or any other thing, act, or service to another who has sustained or will sustain or claims that he or she has sustained or will sustain loss or damage, as well as any conduct or statements made in negotiation thereof, is inadmissible to prove his or her liability for the loss or damage or any part of it. [Emphasis Added]

That boldfaced part, does it mean what it says?

ASK WHY THE DOCUMENT IS OFFERED IN EVIDENCE

What if your “privileged and confidential settlement communication” is offered for something other than to prove liability?  Courts considering the issue frame the question not as one of privilege, but one of relevancy.  Here is where it gets interesting. (I promised more on relevancy in an earlier post). 

For discovery purposes in California, information is “relevant” to the subject matter if it might reasonably assist a party in evaluating the case, preparing for trial, or facilitating settlement. Stewart v. Colonial Western Agency, Inc., 87 CA 4th 1006, 1013 (2001) Admissibility at trial is not required.

Rather, the test is whether the information sought might reasonably lead to other evidence that would be admissible. CCP § 2017.010 ; Volkswagen of America, Inc. v. Sup.Ct., 139 CA 4th 1481, 1490-1491 (2006) Could a “privileged and confidential settlement discussion” be relevant for something other than to prove liability? Could it reasonably be calculated to lead to discovery of admissible evidence? You bet.

YEAH, but so what – it could never be admitted at trial. Wrong again.

SETTLEMENT DOCUMENTS ADMITTED TO PROVE DEFENSES

Time for some rocket science. In 2015, the National Aeronautics and Space Administration (“NASA”) suspended a company called KST Data, Inc. (“KST”) from contracting with the United States Government (the “Suspension”) due to allegations of serious misconduct. The Department of Justice also launched a criminal investigation into KST.

During this Suspension, KST had a contract with Northrop Grumman (“Northrop”) to provide certain technology products and services. To make a long and complicated story short, Northrop decided to terminate that contract with KST because of the Suspension. This led to a lawsuit by KST against Northrop in a California federal district court for breach of contract and breach of implied covenant of good faith and fair dealing. KST Data, Inc. v. Northrop Grumman Sys. Corp., No. CV 17-5125-MWF (PJWx) (C.D. Cal. Aug. 30, 2019).

Prior to trial, KST filed a motion in limine seeking an order to prevent Northrop from referencing, commenting on, or attempting to introduce testimony or other evidence regarding settlement communications related to the federal criminal investigation surrounding the Suspension.

KST claimed its communications with the federal government about the Suspension were protected under California’s settlement communications privilege, and Northrop should be precluded from referencing, commenting on, or attempting to introduce testimony or other evidence regarding the substance of NASA or the DOJ investigations of KST at trial.

The federal district court denied KST’s motion in limine and found no such blanket settlement communication privilege existed under California law, and the NASA/DOJ evidence was relevant to Northrop’s affirmative defenses.

The court also found in light of Northrop’s contention that it intended to use the evidence not to prove liability, but rather to assert its defenses, the evidence was not barred by California Evidence Code 1152 or Federal Rule of Evidence 408.

Furthermore, assuming that the evidence was not going to be offered to prove the truth of the matters asserted therein, the evidence would not be inadmissible hearsay.

SETTLEMENT COMMUNICATIONS AND FEDERAL COURT

Yeah, so what. We are all bankruptcy lawyers, and that California state court stuff won’t cut it under federal law.

Wrong again.

Federal Rule of Evidence 408 covers settlement offers and communications:

(a) Prohibited uses — Evidence of the following is not admissible on behalf of any party, when offered to prove liability for, invalidity of, of amount of a claim that was disputed as to validity or amount, or to impeach through a prior inconsistent statement or contradiction:

(1) furnishing or offering or promising to furnish — or accepting or offering or promising to accept — a valuable consideration in compromising or attempting to compromise the claim; and

(2) conduct or statements made in compromise negotiations regarding the claim, except when offered in a criminal case and the negotiations related to a claim by a public office or agency in the exercise of regulatory, investigative, or enforcement authority.

(b) Permitted uses — This rule does not require exclusion if the evidence is offered for purposes not prohibited by subdivision (a). Examples of permissible purposes include proving a witness’s bias or prejudice; negating a contention of undue delay; and proving an effort to obstruct a criminal investigation or prosecution.

Rule 408 is designed to ensure that parties may make offers during settlement negotiations without fear that those same offers will be used to establish liability should settlement efforts fail. When statements made during settlement are introduced for a purpose unrelated to liability, the policy underlying the Rule is not injured.

Still don’t believe me? Read Rhoades v. Avon Prods., 504 F.3d 1151, 1161-62 (9th Cir. 2007) (rejecting the argument that “allegations based on settlement discussions . . . are inadmissible for any purpose” as “not an accurate statement of the law.”

Or take a look at Granger v. Lowe’s Home Ctrs., LLC, No. 1:14-cv-01212-KJM-SKO, (E.D. Cal. Apr. 28, 2015) (“While any confidential settlement communications are undoubtedly inadmissible at trial to prove liability or the amount of Plaintiffs’ claim, such communications may be admissible for other purposes, such as disputing a claim of undue delay.”).

For an example of an entire case turning on this issue, check out Barth v. All Hearts Homecare, LLC, No. 3:18-cv-01207-CAB-(JMA), 2018 U.S. Dist. LEXIS 153125, at *10 n.2 (S.D. Cal. Sep. 7, 2018) where the Defendant’s position was the lawsuit was filed based solely on a clearly marked Offer of Settlement in violation of FRE 408. Citing Rhoades, the district court found that even if the email was part of a confidential settlement negotiation, notwithstanding an attempt to claim absolute privilege, it does not become inadmissible for any purpose.

The Takeaway

First and foremost, ignore everything you just read if the evidence relates to a mediation. Different rules apply, and those rules include a mediation privilege. (Something else for a future post – I see a disturbing trend here).

Next, check the law in your State and Federal Circuit. For example, in the Sixth Circuit, unlike the Ninth, “any communications made in furtherance of settlement are privileged.” Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 332 F.3d 976, 983 (6th Cir. 2003). And even in the Ninth Circuit, the issue is often described as unsettled. Stark v. Stall, No. 19-CV-00366-AJB-NLS (S.D. Cal. Aug. 7, 2019); Vondersaar v. Starbucks Corp., No. C 13-80061 SI (N.D. Cal. May 8, 2013)

For us California/Ninth Circuit lawyers, writing the magic words PRIVILEGED AND CONFIDENTIAL SETTLEMENT COMMUNICATION on an email or letter does not mean it will never see the light of day. If you are the author, it is not a license to say whatever you want, make threats, or engage in an ad hominem attack on opposing counsel.

To be safe when you are the source, always assume that all of your emails, letters and communications are potentially discoverable and possibly admissible. And if you are the recipient, don’t assume you can’t explore those emails, letters and communications in discovery, and maybe even use them at trial.