Discoverability of Settlement Negotiations That Are or May Be Inadmissible under Rule 408 — Burden of Persuasion — Relevance, Admissibility and Protective Order Considerations

In re MI Windows & Doors, Inc., Prod. Liab. Litig., MDL No. 2333, Case No. 2:12-mn-00001 (D.S.C. June 18, 2013) (Capra, Special Master):

The Defendant MI Windows and Doors, Inc. (“MIWD”) moves for a protective order under Fed. R. Civ. P. 26, “limiting the production of communications and documents prepared in connection with settlement negotiations.” This motion is styled broadly but of necessity (as discussed below) it will be treated narrowly, to the two documents actually before the Special Master. Both are letters to component part suppliers concerning problems with windows: 1) A letter from Mike Ohlin to Peter Reardon dated September 28, 2006; and 2) a letter from Tamie Scherbik to John Sands dated July 24, 2009.

Both of these letters were logged on MIWD’s amended privilege log — the ground of privilege being protection of settlement communications under Fed.R. Evid. 408. In a previous opinion the Special Master ruled that Rule 408 is not an evidentiary privilege and that the Rule governs the admissibility, rather than the discoverability, of settlement evidence. Opinion dated April 2, 2013. [Note: See our blog entry of April 21, 2012, discussing the Circuit split on the question whether settlement negotiations are privileged.] The Special Master noted in that Opinion, however, that the proper procedure for seeking to protect such information was a motion for a protective order under Fed.R.Civ.P. 26(c). The Defendant has so moved. The parties have submitted helpful papers and have waived oral argument.

It must be emphasized that the ruling herein is limited to the two documents described above. The Special Master cannot rule in advance on other settlement-related evidence. As the parties on both sides acknowledge, discoverability of this evidence is in the end dependent on whether it is admissible as relevant evidence or “reasonably could lead” to admissible evidence. Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351 (1978). That determination cannot be made in a vacuum. None of the cases cited by MIWD provide a blanket ruling that all settlement documents are shielded from discovery in all circumstances. See, e.g., Hear-Ware Technologies, LLC v. Oticon, Inc., 2008 WL 3388455, at *3 (N.D. Okla.) (cited by MIWD) (noting that “the court conducted in camera review of the settlement agreement following hearing”). Moreover, whether any particular document even qualifies as settlement evidence potentially protected by Rule 408 requires a look at the particular document and the circumstances of its creation. Proper analysis therefore calls for a case-by-case approach.

As to the two documents before the Special Master, the parties cite conflicting law on whether there is special protection for settlement evidence in the discovery process. Some courts have held that because of the policy of promoting settlement, the burden is shifted to the requesting party “to make a particularized showing of likelihood that admissible evidence will be generated.” Reist v. Source Interlink Companies, Inc., 2010 WL 4940096, at *3 (M.D.Fla.) (citing cases). Other courts disagree and hold that Rule 408 imposes no special requirements in the discovery process. See, e.g., Folb v. Motion Picture Industry Pension and Health Plans, 16 F.Supp.2d 1164, 1171 (C.D. Cal. 1998).

The Fourth Circuit has not ruled on the subject, and while there appears to be some disagreement among the district courts in the Circuit, the case law in the District of South Carolina is clear. In Polston v. Eli Lilly and Co., 2010 WL 2926159, *1 (D.S.C. 2010), Judge Anderson cited the law on both sides of the question, and declared categorically:

The Fourth Circuit has never recognized a settlement privilege or required a particularized showing in the context of a subpoena for confidential settlement documents. Nor can the court find any statute or rule excepting a confidential settlement agreement from Rule 26(b)(1). Accordingly, the only question before the court is whether any information in the [settlement] agreement is relevant, and not unduly burdensome to produce.

See also National Union Fire Ins. Co. of Pittsburgh, PA v. Porter Hayden Co., 2012 WL 628493, *3 (D. Md.) (“The court finds that the material sought by the subpoenas should not be automatically barred from discovery by virtue of being related to settlement. As noted, the Fourth Circuit has not imposed a settlement privilege with respect to discovery. To the contrary, courts in this circuit have found that ‘relevance, not admissibility, is the appropriate inquiry with regard to whether or not the information sought ... is discoverable.’ Herchenroeder v. Johns Hopkins Univ. Applied Physics Lab., 171 F.R.D. 179, 181 (D. Md.1997)); Volumetrics Medical Imaging, LLC v. Toshiba America Medical Systems, Inc., *4, n.5, 2011 WL 2470460 (M.D.N.C.2011) (“Accordingly, this Court, like the Polston Court, declines to impose any special form of burden on a party seeking disclosure of settlement agreements.”); Oakridge Associates, LLC v. Auto-Owners Ins. Co., 2010 WL 3788058 (W.D.N.C.).

There are a couple of district court cases in the Fourth Circuit — not in the District of South Carolina — that appear to impose extra requirements before production of settlement information. But those cases, carefully reviewed, do not assist MIWD in its argument that the documents at issue here should be shielded. Thus, in Young v. State Farm Mut. Auto. Ins. Co., 169 F.R.D. 72 (D. W.Va. 1996), the court appears to approve of the case law requiring a “particularized showing” of relevance. But the court ended up ordering disclosure because the settlement information was relevant to the plaintiff’s claim — the plaintiff was an attorney who was discharged from a tort matter and sought part of the settlement that was reached. There was no actual “particularized showing” as far as can be gleaned from the opinion. And in Duncan v. Phoenix Supported Living, Inc., 2006 U.S. Dist. Lexis 66742, *7 (W.D. N.C.), cited by MIWD, the court denied the production of settlement information, but central to its decision was its concern over the disclosure of “the thoughts and legal theories of the defendants and their counsel.” Having reviewed the two documents at issue here in camera, the Special Master can say with confidence that there is nothing in them that reveals anything about legal theories.

In the end, then, the question remains whether the two documents before the Special Master are relevant or “reasonably calculated to lead to the discovery of admissible evidence.”Polston, supra, at *1.

Footnote 2. The Special Master has already ruled that Rule 408 can protect evidence of compromise in one action against disclosure in a different — but related — action. Opinion dated April 2, 2013. Here the actions are clearly related.

On this question, the Plaintiffs claim among other things that the settlement information could be used to “impeach or contradict” MIWD’s assertions at trial. But Rule 408 — despite the Plaintiffs’ contention to the contrary — does not permit compromise evidence to be admitted for purposes of impeachment by prior inconsistent statement or contradiction. The 2006 amendment to Rule 408 — written, as it happens, by the Special Master — specifically forecloses those uses of compromise evidence. See Committee Note to 2006 amendment to Rule 408.

That said — and without predetermining the question of admissibility — it is at the very least possible that the documents before the Special Master will fall outside the protections of Rule 408 and will be relevant and admissible at trial. To take just two possibilities:

1. There might not have been a “dispute” between MIWD and the component supplier at the time the document was prepared. As the court put it in Johnson v. Land O’Lakes,Inc., 181 F.R.D. 388, 392 (N.D. Iowa 1998):

[T]he “trigger” for application of Rule 408, the existence of an actual dispute as to existing claims, appears to be whether the parties have rejected each other’s claims for performance, or, to put it another way, whether the parties have reached a clear difference of opinion as to what performance is required. When this point is reached depends upon the circumstances, and thus a determination of whether Rule 408 bars admission of discussions cannot be made without hearing evidence as to the context of the challenged discussions. (Emphasis added).

2. The documents may be admissible to prove notice. See, e.g., United States v. Austin, 54 F.3d 394 (7th Cir. 1995) (no error to admit evidence of the defendant’s settlement with the FTC, because it was offered to prove that the defendant was on notice that subsequent similar conduct was wrongful); Spell v. McDaniel, 824 F.2d 1380 (4th Cir. 1987) (in a civil rights action alleging that an officer used excessive force, a prior settlement by the City of another brutality claim was properly admitted to prove that the City was on notice of aggressive behavior by police officers).

All that said, the point of the case law in the Fourth Circuit is that 1) the party seeking the information need not make a special case on relevance (which is difficult, by the way, without knowing what the document is); 2) admissibility may be different from discoverability; and 3) in any event decisions on admissibility cannot be made until they are ripe. At this point it can at least be said that the two documents before the Special Master — even if inadmissible at trial — could reasonably lead to the discovery of admissible evidence. They might inform the Plaintiffs of other sources of problems in windows that may warrant investigation. Or they might inform on how widespread the problems were and how they might be remedied. Or they might provide sources of information on the operations of the component suppliers. Given the liberal standards of discoverability in Rule 26; the legitimate questions about admissibility of the two documents before the Special Master; and the fact that there is nothing especially sensitive in those two documents, it must be concluded that a protective order is not warranted.

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