Federal Rule of Evidence 408 and Its Rationale
In federal court, the admissibility of offers to compromise, or other settlement-related evidence, is governed by Rule 408, which provides as follows:
(a) Prohibited Uses. Evidence of the following is not admissible—on behalf of any party—either to prove or disprove the validity or amount of a disputed claim or to impeach by a prior inconsistent statement or a contradiction:
(1) furnishing, promising, or offering—or accepting, promising to accept, or offering to accept—a valuable consideration in compromising or attempting to compromise the claim; and
(2) conduct or a statement made during compromise negotiations about the claim—except when offered in a criminal case and when the negotiations related to a claim by a public office in the exercise of its regulatory, investigative, or enforcement authority.
(b) Exceptions. The court may admit this evidence for another purpose, such as proving a witness’s bias or prejudice, negating a contention of undue delay, or proving an effort to obstruct a criminal investigation or prosecution.
Rule 408’s exclusion of settlement-related evidence is based on two principles. First, settlement-related evidence is considered to be irrelevant because settlement offers may be motivated by a desire for peace, a desire to avoid costly legal battles, or for any number of reasons that have nothing to do with the merits of the claim. McCormick on Evidence § 76.251.
The second, and more important, reason for excluding settlement-related evidence under Rule 408 is to promote the amicable resolution of lawsuits. See Affiliated Mfrs., Inc. v. Aluminum Co. of Am., Inc., 56 F.3d 521, 526 (3d Cir. 1995) (“[T]he policy behind Rule 408 is to encourage freedom of discussion with regard to compromise.”). The Sixth Circuit Court of Appeals explained this rationale in more detail in Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 332 F.3d 976, 980 (6th Cir. 2003):
There exists a strong public interest in favor of secrecy of matters discussed by parties during settlement negotiations. This is true whether settlement negotiations are done under the auspices of the court or informally between the parties. The ability to negotiate and settle a case without trial fosters a more efficient, more cost-effective, and significantly less burdened judicial system. In order for settlement talks to be effective, parties must feel uninhibited in their communications. Parties are unlikely to propose the types of compromises that most effectively lead to settlement unless they are confident that their proposed solutions cannot be used on cross examination, under the ruse of “impeachment evidence,” by some future third party. . . . Without a privilege, parties would more often forego negotiations for the relative formality of trial. Then, the entire negotiation process collapses upon itself, and the judicial efficiency it fosters is lost.
The Basic Contours of Rule 408
To understand how settlement-related evidence may be used at trial, it is important, first, to understand the parameters of Rule 408. Remember, Rule 408 bars the admission of evidence relating to a “disputed claim.” Thus, a prerequisite for application of Rule 408 is that a “dispute” existed between the parties when the evidence was created. Weems v. Tyson Foods, Inc., 665 F.3d 958, 965 (8th Cir. 2011). As one might expect, determining when a claim is in dispute often proves elusive.
There is general agreement among the courts that the parties’ disagreement “need not have crystallized to the point of threatened litigation” in order for a “dispute” to exist under Rule 408. See, e.g., Affiliated Mfrs., 56 F.3d at 527. Many courts have held that a dispute exists for Rule 408 purposes as long as there is an “actual dispute or difference of opinion” about a party’s liability or for the amount of the claim. Weems, 665 F.3d at 965. By way of example, in Weems the Eighth Circuit held that a dispute existed under Rule 408 when the plaintiff had been removed from her position and placed on administrative leave, and had made the defendant aware of her gender discrimination concerns.
Conversely, where a party does not dispute a claim, such as where the validity of a monetary claim and the amount due are admitted, Rule 408 does not bar evidence relating to the concessions or any offer to pay. See Molinos Valle del Cibao v. Lama, 633 F.3d 1330, 1353–55 (11th Cir. 2011) (upholding district court’s decision to admit evidence that defendant acknowledged his responsibility to pay debt owed to plaintiff). There is a wide gulf between these two extremes in determining when a claim is disputed under Rule 408, and most of the decisions on this issue are very fact-specific.
In addition to determining when Rule 408 may apply, we must also consider what kinds of evidence are governed by the rule. Certainly, evidence of any settlement demand or offer is within Rule 408. In addition, the notes of the Advisory Committee on Rule 408 make clear that evidence of any statements of fact or conduct that are made during settlement negotiations are also covered by Rule 408.
Documents or records that were not created for settlement purposes are not covered by Rule 408, even if they happen to be exchanged during settlement negotiations. For instance, in Chenevert v. Springer, 431 F. App’x 284, 2011 WL 2534192 (5th Cir. June 27, 2011), the circuit court held that Rule 408 did not bar admission of deposition transcripts that were exchanged in settlement negotiations, because the transcripts preexisted the negotiations and the depositions were not taken for the purpose of furthering the negotiations. Rule 408, however, does protect internal documents that are created for the purpose of settlement discussions, even if such documents are never exchanged with the other side. See, e.g., Lyondell Chem. Co. v. Occidental Chem. Corp., 608 F.3d 284, 295 (5th Cir. 2010) (Rule 408’s “protection extends to legal conclusions, factual statements, internal memoranda and the work of lawyers and non-lawyers alike so long as the communications were ‘intended to be part of . . . negotiations toward compromise.’”).
Permissible Uses of Settlement-Related Evidence
Even if the evidence fits within the parameters of Rule 408 as described above, the evidence is not automatically inadmissible for any purpose. Rule 408 prohibits the use of settlement evidence only when it is offered either (1) to prove or disprove the validity or amount of a disputed claim or (2) to impeach by a prior inconsistent statement. But Rule 408 expressly allows the court to admit settlement-related evidence “for another purpose.” Creative lawyers have found many “other purposes” for which to admit settlement evidence.
Rule 408 provides specific examples of instances in which settlement-related evidence may be admissible. The rule expressly sanctions use of such evidence to prove a witness’s bias or prejudice, or to negate a contention of undue delay. For example, evidence of the Commissioner of Internal Revenue’s settlement with a similarly situated taxpayer was deemed admissible evidence of the commissioner’s potential bias in Hudspeth v. Comm’r, 914 F.2d 1207, 1213–14 (9th Cir. 1990).
Case law provides numerous examples of other scenarios in which settlement-related evidence may be admissible. For instance, several courts have held that a plaintiff’s settlement demand may be considered as one piece of evidence in determining whether the amount-in-controversy threshold for federal diversity jurisdiction has been met. See, e.g., Grinnell Mut. Reinsurance Co. v. Haight, 697 F.3d 582, 585 (7th Cir. 2012).
Settlement-related evidence has also been deemed relevant and admissible in determining when a statute of limitations began to run. In Kraft v. St. John Lutheran Church of Seward, Neb., 414 F.3d 943 (8th Cir. 2005), the plaintiff argued that a statute of limitations should be tolled because he was unable to make a causal connection between his alleged injuries and the defendants’ alleged conduct until 2002. The district court, however, noted that the plaintiff had made a settlement demand on the defendants in 2001, which undermined his equitable tolling argument. The Eighth Circuit affirmed the decision to admit “Kraft’s settlement negotiations with the church for the purpose of proving Kraft’s knowledge of a causal connection between his injuries and the alleged abuse.” Id. at 947. See also B & B Hardware, Inc. v. Fastenal Co., 688 F.3d 917, 920 (8th Cir. 2012) (draft complaint that was sent with settlement demand was admissible in determining when statute of limitations began to run).
A plaintiff’s conduct and demands in settlement negotiations may also be admitted to determine the reasonableness of an award of attorney fees. In Lohman v. Duryea Borough, 574 F.3d 163 (3d Cir. 2009), the district court significantly reduced the plaintiff’s attorney fees from the lodestar amount, based in part on the fact that the plaintiff had rejected a $75,000 settlement demand and then won only $12,500 at trial. The Third Circuit affirmed, holding that “Rule 408 does not bar a court’s consideration of settlement negotiations in its analysis of what constitutes a reasonable fee award in a particular case.” Id. at 167.
As one would expect, settlement-related evidence is also admissible when a dispute arises over a completed settlement agreement. For example, where a party repudiates or breaches a settlement agreement, the agreement itself and any relevant settlement negotiations may be admitted to prove the contract claim. See Starter Corp. v. Converse, Inc., 170 F.3d 286, 293–94 (2d Cir. 1999).
One of the trickier issues arises in connection with the admissibility of settlements with third parties. The prevailing view is that evidence of settlement agreements between a party to the case and a third party are inadmissible under Rule 408, even when the settlement is related to the same matter as the case in which it is offered. Thus, in Portugues-Santana v. Rekmodiv International, 657 F.3d 56 (1st Cir. 2011), the First Circuit upheld a ruling that barred evidence of the plaintiff’s settlement with a third party of a claim arising from the same occurrence as the instant case. The First Circuit held that settlements with third parties were inadmissible under Rule 408 to prove the validity or invalidity of a claim or amount, and that to rule otherwise would “discourage settlements in either case.” Id. at 63. The First Circuit held, however, that the district court should have considered the third-party settlement in determining whether to remit damages after trial.
Similar results have been reached in numerous other cases. See, e.g., Banker v. Nighswander, Martin & Mitchell, 37 F.3d 866, 872 (2d Cir. 1994) [Login required] (noting that the plaintiff could not rely on his settlements with third parties when calculating malpractice damages against his former attorney because the settlements were inadmissible under Rule 408 [Login required]). The vast majority of these cases require that the third-party claim arise from the same transaction as the subject claim, or at least that the claims share a factual nexus. Lyondell Chem. Co. v. Occidental Chem. Corp., 608 F.3d 284, 297–98 (5th Cir. 2010). The courts that bar evidence of third-party settlements stress that the policy to promote out-of-court settlements by sheltering settlement evidence applies with equal force to third-party settlements.
Other courts have held that Rule 408 does not bar the introduction of settlement agreements with third parties. See, e.g., Uforma/Shelby Bus. Forms, Inc. v. NLRB, 111 F.3d 1284, 1293–94 (6th Cir. 1997) (“. . . Rule 408 only bars the use of compromise evidence to prove the validity or invalidity of the claim that was the subject of the compromise, not some other claim.”). These courts have based their rulings on a strict linguistic construction of Rule 408, finding that the rule only bars the use of compromise evidence to prove the validity or invalidity of the claim that was the subject of the compromise, not some other claim. See, e.g., Armstrong v. HRB Royalty, Inc., 392 F. Supp. 2d 1302, 1304 (S.D. Ala. 2005).
Is There a “Settlement Privilege” for Discovery Purposes?
A separate, but related, question is whether federal courts will apply a “settlement privilege” to preclude even discovery of settlement-related evidence. Although discoverability is not the topic of this article, a few points on this issue are worth mentioning.
As we have seen, Rule 408 does not provide a blanket ban on the admissibility of settlement-related evidence. Moreover, Federal Rule of Civil Procedure 26(b) authorizes discovery of “any matter, not privileged, that is relevant to the claim or defense of any party.” It is not surprising, then, that most courts reject a discovery privilege for settlement-related materials. See In re MSTG, Inc., 675 F.3d 1337, 1348 (Fed. Cir. 2012) (after examining factors that are relevant to creation of a new privilege, court rejected call to recognize privilege that “would prevent discovery of litigation-related settlement negotiations”).
A minority of cases, however, have recognized such a privilege. See, e.g., Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 332 F.3d 976, 980, 983 (6th Cir. 2003) (“[V]iewed ‘in the light of reason and experience,’ we believe a settlement privilege serves a sufficiently important public interest, and therefore should be recognized.”) Other courts have tried to find a middle ground, applying a heightened standard to requests for settlement-related discovery. See, e.g., Bottaro v. Hatton Assocs., 96 F.R.D. 158, 160 (E.D.N.Y. 1982) (allowing discovery of terms of a settlement agreement only after a “particularized showing of a likelihood that admissible evidence will be generated” by such discovery).
As of now, it must be considered an open issue as to whether a settlement privilege will be recognized under Federal Rule of Evidence 501. See Gov’t of Ghana v. ProEnergy Servs., LLC, 677 F.3d 340, 344 n.3 (8th Cir. 2012). Given the broad scope of discovery under the Federal Rules and the limited scope of the evidentiary exclusion under Rule 408, it is wise to assume that settlement-related evidence will be discoverable.
Conclusion
Settlement-related evidence can be admissible for a myriad of purposes other than to prove or disprove a disputed claim or to impeach a witness. To protect such evidence from being admitted, a practitioner should
- Place a “Settlement Communication” legend on each document, which will at least indicate that a “dispute” existed when the document was created;
- Secure an agreement from opposing counsel that settlement offers and related communications will not be offered for any purpose; and
- Be aware of the many exceptions to Rule 408’s bar on use of settlement-related evidence.
