Main Menu

Federal Court Declines To Recognize A Privilege For Non-Disclosure Of Settlement Discussions In Subsequent, Collateral Litigation

July 28, 2006

In a result that was surprising to many lawyers, the U.S. Court of Appeals for the District of Columbia Circuit, which is often regarded as the second most important court in the land, ruled that there is no privilege from disclosure of settlement discussions and materials prepared for purposes of settlement negotiations in an earlier unrelated proceeding with the Government.  In re: Subpoena Duces Tecum issued to Commodity Futures Trading Commission, WD Energy Services, Inc., 439 F.3d 740, 755 (D.C. Cir. 2006).

The dispute related to disclosures made in a prior case, in which the Commodity Futures Trading Commission (the “CFTC”) of the federal government had settled a claim that a natural gas supplier violated federal energy regulations.  During those settlement negotiations, the gas company had disclosed significant financial records.  Later, a California winery that was a large consumer of natural gas sued the gas company, contending that it had unlawfully manipulated the state energy market and injured the winery’s business.  The winery subpoenaed the CFTC, seeking production of the financial records submitted by the gas company during negotiation of the settlement of the CFTC’s charges.  The gas company moved to quash the subpoena on the grounds that its financial documents were protected from disclosure by a privilege for materials prepared for purposes of settlement.  The CFTC, represented by the Department of Justice, took the position that no settlement privilege exists in litigation in federal courts, and that the financial records should be disclosed to the winery in connection with its suit against the gas company.

The Court of Appeals avoided reaching the sweeping result sought by the government by ruling that the gas company had failed to establish that the documents sought had actually been prepared only for purposes of settlement discussions.  Therefore, the gas company failed to satisfy the necessary preconditions for the claimed privilege; that is, the materials sought (a) had not existed before the settlement discussions, and (b) were created only for purposes of settlement.  The court ruled that even if it were to recognize a settlement privilege, which it declined to do, no settlement privilege could apply to the disputed documents, which had not been shown to be created only for purposes of settlement.

In reaching its conclusion that there was no relevant privilege, the Court of Appeals observed, substantially in agreement with the Department of Justice’s position, that the existence of a settlement privilege in federal court lawsuits, is an “open question.”  The court specifically rejected the view previously expressed by another federal appeals court that the policy of encouraging the voluntary resolution of disputes requires that the federal courts recognize a settlement privilege in later, unrelated proceedings.  Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 332 F.3d 976, 977 (6th Cir. 2003).

The court also concluded that the rules of evidence governing proceedings in federal courts did not require a different result.  Rule 408 of the Federal Rules of Evidence provides that parties who engage in an unsuccessful discussion for purposes of settlement of their lawsuit are each barred from using statements made and materials prepared for the settlement negotiations to prove the other party’s liability in the trial of the lawsuit. Rule 408, however, applies only to the same claim or lawsuit that is the subject of the settlement efforts.  The rule does not preclude parties from using settlement materials to advance a different claim or defense in a subsequent lawsuit.

Rule 501 of the Federal Rules of Evidence alone provides privileges of general applicability. Congress did not mandate that any particular privilege apply, but left the creation of such privileges to be “governed by the principles of the common law as they may be interpreted by the Courts of the United States in the light of reason and experience.”  So far, as the decision in the Commodity Futures case reveals, the federal courts’ collective wisdom and experience has not resulted in a consensus for a general settlement privilege.

In the employment law context, the absence of a settlement privilege for collateral litigation could be enormously costly to a company.  Imagine that any one of the many enforcement agencies in the alphabet soup of federal employment regulation, the EEOC, NLRB, OSHA, BICE or the OSC, initiates a lawsuit alleging that employee A was the subject of discrimination, retaliation or some other employment law violation by the defendant company.  As it happens, employees B, C and D were also subjected to similar discriminatory conduct by the company but the agency did not immediately sue with respect to those other claims.  Further imagine that the government agency and the company negotiate unsuccessfully about settlement of A’s claim.  Those settlement negotiations are made inadmissible by Rule 408 in the government’s case against the company regarding A.  Shortly thereafter, the government sues in a new action regarding  employee B, C or D.  In that later, collateral action, regarding B, C or D, the company may be confronted with damaging admissions it made regarding its employment practices in the settlement negotiations regarding A; government agents or any other available witness may testify about those prior settlement discussions, and settlement documents may be offered in evidence.

The District of Columbia Circuit’s decision in Commodity Futures permits precisely this sequence of events.  Although the contrary decision of the Sixth Circuit in Goodyear Tire prohibits the use of offers to settle one case as proof of liability in a second case, the U.S. Supreme Court has not yet spoken, and the lower federal courts are equally split on the subject.

In the final analysis, the Commodity Futures rule discourages frank discussion of settlement issues.  Parties will be disinclined to make even hypothetical concessions of facts, they will not offer creative suggestions for remedies to compromise claims, nor will they otherwise step down from their adversarial posturing.  This only makes settlement discussions less productive and less likely to be successful because the parties may be wary that any frankness in discussion of settlement of matter A may be used against them to create liability in later litigation B.  The significance for management is this:  extreme caution must be exercised in any settlement conversation to avoid making damaging admissions that can be used against the company in a later lawsuit on a different claim.