Confidentiality of Settlement Negotiations

Most attorneys are familiar with the principle that Federal Rule 408 (Rule 408) that protects settlement discussions from subsequent disclosure in court. Rule 408, which governs proceedings in Federal courts (Maryland and most states have adopted state analogues to this rule), prohibits the use, as evidence in court, of an offer-to-compromise a claim as an admission of the validity or invalidity of the claim.

Federal Rule of Evidence 408 states:

(a) Prohibited uses.-- Evidence of the following is not admissible on behalf of any party, when offered to prove liability for, invalidity of, or 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.

The lazy way of thinking about this Rule is that the Rule protects information exchanged and discussed during settlement negotiations. Not so fast. This assumption is wrong.

The first exception to this rule are admissions of fact, “even though made during the course of compromise negotiations, unless hypothetical, stated to be ‘without prejudice,’ or so connected with the offer as to be inseparable from it.” (See, for example, McCormick on Evidence §251, pp. 540 -541).

This exception alone, even if observed by the thoughtful lawyer, inhibits settlement discussions and restricts free communication. It also has the potential of generating controversy over what was said by whom and whether a statement is hypothetical or a statement of fact. But wait: there are more limits to the protections apparently offered by Rule 408. The rule does not require exclusion if the evidence is offered for purposes such as proving a witness’s bias, negating a contention of undue delay or proving an effort to obstruct justice.

The 3rd Circuit recently found another exception to Rule 408 in Lohman v. Duryea Borough, et al. (No. 08-3524, 2009 WL 2183056 (3d Cir. July 23, 2009). In this case the Third Circuit affirmed the District Court’s reduction of an attorney’s fees based on unusually limited success where the plaintiff rejected a settlement offer of $75,000 and after trial was awarded only $12,205. While much of the case turns on the law of attorneys’ fees, the Court also considered whether, and to what extent, trial courts may consider settlement negotiations when awarding attorney fees. It is easy to see why the Court wanted to limit the amount awarded to the attorney, given the settlement offer of $75,000 and the “win” in trial of $12,205.

In a case of first impression the Court held that evidence of settlement negotiations under Rule 408, while inadmissible to prove the validity or amount of the claim, in respect to an attorney’s fee claim, “does not offend the clear terms of Rule 408. Such evidence can be relevant when comparing what a plaintiff ‘requested’ to what the plaintiff was ultimately ‘awarded.’” (Id. at p. 12)

So there you have it. While the information about how much was offered and accepted (or, as in this case, not accepted), may seem to be the core information intended to be protected by Rule 408, when offered to evaluate the “success” of an attorney when determining attorneys’ fees, is admissible -- at least in the 3rd Circuit.

The Court further considered the major policy reason asserted for excluding such evidence – to protect and support confidential settlement negotiations – and found the assumption that “settlement discussions will not now occur because an attorney could be penalized if he or she achieves less than was demanded makes little sense. In fact, permitting settlement negotiations to be considered would encourage reasonable and realistic settlement negotiations.”(Id. at 14)

The bottom line for attorneys and mediators entering into settlement negotiations? Do not rely simply on Rule 408. Cite to another statute protecting the confidentiality of settlement negotiations – such as the Uniform Mediation Act in those states that have adopted it (Maryland has not) or to a Court rule or by agreement of the parties and, if the last, confirm the agreement in advance in writing.