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Attempts to Use Settlement Discussions as Evidence

September 13, 2010 in  News

New York Law Journal

Most practitioners believe it axiomatic that what they do, say or communicate to adversaries in connection with settlement negotiations will not be used as evidence against their clients’ interests in some proceeding. This assumption sometimes leads to a kind of smugness or comfort zone that loosens lips and finds lawyers, their experts, consultants and others generating communications, reports or other materials that are given to the adversary in order to further the compromise negotiations. Smugness invites peril, however, since the evidentiary rule offering protection against admissibility of settlement communications is sprinkled with exceptions and caveats. Moreover, case law sometimes confirms gaps in the assumed mantle of protection. These factors should induce caution about what one says, writes, or does during settlement talks.

In New York state courts, CPLR §4547, titled “Compromise and offers to compromise,” prohibits admission of any evidence of settlements, compromises or offers to compromise to prove either liability or invalidity of a claim or amount of damages, and any statements made during settlement negotiations. CPLR 4547 also says: “Evidence of any conduct or statement made during compromise negotiations shall also be inadmissible.” But evidence which is “otherwise discoverable” is not required to be excluded “solely because” it was presented during the course of compromise negotiations. Furthermore, admissibility of such evidence is not limited “when it is offered for another purpose” such as proving bias or prejudice of a witness, among others.

New York Appellate Division Justice Helen E. Freedman’s treatise, “New York Objections,”1 observes at §3:150 (dealing with Opening Statements) that, since parties and counsel undertake settlement negotiations for many reasons other than an admission of liability, “such negotiations have no evidentiary value.” Allowing references to settlements or settlement negotiations during any portion of a trial would have a “chilling effect” on such negotiations. Therefore, “offers to settle or compromise are not generally  admissible.”2  At §19:150, dealing with summations, Justice Freedman offers other observations including that references to settlements are also prohibited when made either in other cases or with other parties in the same case.3

Three reasons are given: (1) no predicate or basis in the record could have been made since evidence of settlements or offers to settle is inadmissible. Thus, counsel becomes an unsworn witness; (2) circumstances surrounding settlement decisions are often “totally unrelated” to the factors a jury must consider in assessing value or determining liability. For example, a defendant may settle to avoid punitive damages or to settle a group of cases. Or a plaintiff may take less from a particular defendant because of underlying insurance coverage issues or a fear of defendant’s potential insolvency. “In none of these situations does the settlement amount reflect the time value of the case”; (3) factors that went into a jury determination in one case are unknown and immaterial to the jury in another case.4 In both sections of the treatise some representative cases are squibbed.

Federal Rule

In federal court litigation, the applicable rule is Federal Rule of Evidence 408. Although similar to CPLR 4547, there are differences. The basic exclusionary approach is reflected in Rule 408(a), entitled “Prohibited Uses,” which sets forth what is not admissible “when offered to prove” specified things. However, subdivision (b) entitled, “Permitted Uses,” says that the rule “does not require exclusion if the evidence is offered for purposes not prohibited by subdivision (a).” Examples similar to those in CPLR 4547 are given. Federal case law has fleshed out what is meant by “offered for another purpose.” A sampler of such case law may be viewed in the book, “O’Connor’s Federal Rules—Civil Trials,” for example.5

Thus, exceptions allowing the evidence have been used to (1) admit only the occurrence of settlement talks or the settlement agreement itself for another purpose; (2) to prove facts unrelated to the subject matter of the negotiations or where the claim was based on some wrong committed in the course of the settlement discussions;(3) to prove the amount in controversy or “merely to indicate [plaintiff’s] assessment of the value of the trademark”;7 (4) to prove, via evidence from negotiations in a separate action that a party acted in bad faith;8 (5) to prove, via evidence from negotiations in a separate action, that defendant was on notice that the conduct was wrongful;9  and (6) to prove, via evidence from negotiations from a previous suit, the party’s intent regarding a release,10 among others.

The evidentiary rule offers limited protection and practitioners should recognize the exceptions that could prove to be pitfalls. Armed with such knowledge, lawyers can better assess what statements, communications and materials should be conveyed during negotiations and what conduct during compromise negotiations may generate concerns or risks regarding proceedings that may involve separate parties or that may be used in separate cases.

A June 8 U.S. Court of Appeals for the Fifth Circuit decision, Lyondell Chemical Co. v. Occidental Petroleum Corp.,11 offers a nice legal discussion, surveys the various approaches circuit courts have adopted and well illustrates the tensions in this area. Keep in mind that Federal Evidence Rule 408 precludes certain evidence regarding settlement negotiations in order to effectuate certain goals. But, not only does Rule 408 explicitly carve out exceptions where the evidence is offered “for purposes not prohibited by subdivision (a),” but the exclusionary portion of the rule also runs “counter to the overarching policy favoring the admission of all relevant evidence.”12 Courts might tip the scales towards the latter policy when “gray area” conflicts are presented.

Lyondell involved litigation over liability for an environmental cleanup at a hazardous waste dump near the Houston Ship Channel. Both sides conceded liability but left to a bench trial the allocation of the cleanup costs. Both sides were unhappy with the district court’s allocation of liability and appealed raising issues concerning the reliability of expert testimony, the district court’s choice of methodologies in allocating costs, some of the court’s factual findings and, of interest to us, “the admission of alleged settlement communications into evidence.”

The Fifth Circuit panel found error only in the admission of the settlement communications. In the course of its opinion the Fifth Circuit shows how Rule 408 can involve complexities that pose risks to compromise-negotiating litigants and how, in turn, negotiating counsel may need to weigh carefully beforehand what they say, write or communicate during settlement negotiations.

Decades ago hazardous waste from petrochemical facilities was dumped to a site along U.S. Route 90. When that site was busy or unavailable, the waste was taken to a second location known as Turtle Bayou. The EPA eventually ordered certain parties to remediate contamination at Turtle Bayou. Some of the parties met to try to comply but the group could not finalize a plan to divide responsibility.

The U.S. sued Lyondell to compel a cleanup of Turtle Bayou and to recover costs under CERCLA (Comprehensive Environmental Response, Compensation, and Liability Act), the popular name of the federal act governing cleanups at hazardous waste sites. Lyondell entered into a consent decree to remediate certain areas. Further CERCLA actions followed against others who also settled with the United States. Lyondell (and others) sued still other parties they believed should share cleanup responsibility. These were called CERCLA actions for “apportionment” and “contribution.”

Reports Generated

During the early, pre-suit meetings among various parties to attempt to allocate and settle their potential liability and avoid litigation, Occidental assigned an employee named Gary Smythe to be its representative to the group. By the time Mr. Smythe joined the proceedings, the group had decided on a higher allocation for Occidental. In an effort to convince the other parties that Occidental’s allocation should be lower, Mr. Smythe (along with other employees and an outside consulting firm) created two reports purporting to account for all of Occidental’s waste dumped at the Highway 90 site. Those “Smythe Reports” attempted to narrow the gap between the group’s allocation and Occidental’s.

Despite concluding that the Smythe Reports were “made during settlement negotiations,” the district court admitted them into evidence when offered by another party. The trial court accepted the argument that Rule 408 bars the use of the compromise evidence (the Smythe Reports) to prove the validity or invalidity of “the claim that was the subject of the compromise, [but] not some other claim.” Since the pending proceeding concerned liability allocation for the Turtle Bayou dump site and the Smythe Reports involved negotiations regarding the “Highway 90” site, the district court deemed exclusion under Rule 408 inapplicable.

The Fifth Circuit said that the dispute focuses on what the word “claim” means in Rule 408. “Courts vary widely in their understanding of the term.” Most agree that the “claim” does not mean “legal claim” and that, as a result, the dispute being settled need not be the one being tried in the case where the settlement evidence is being offered in order for Rule 408 to bar its admission.13 The treatise, “Weinstein’s Evidence,” would nonetheless require that these different disputes arise out of the “same transaction” in order to trigger Rule 408.14

Case law also can be organized around a loose “transactional” test. Four circuits (including the Fifth) have applied Rule 408 to distinct claims arising out of a common event.15 Other circuits have gone further applying the rule to distinct legal claims arising, for example, out of the same failed business relationship; or to legal claims by seven different plaintiffs during the same 15-month uranium exploration project; and others.

On the other hand, settlement evidence is not inadmissible merely because it relates to circumstances that are “similar” to those being litigated. The U.S. Court of Appeals for the Seventh Circuit eschews any strict “transaction” test but looks to the “spirit and purpose of the rule and decide[s] whether the need for the settlement evidence outweighs the potentially chilling effect on future settlement negotiations.” That balance will more likely “tip in favor of admitting evidence when the settlement communications at issue arise out of a dispute distinct from the one for which the evidence is being  offered.”16 The Wright & Graham treatise would take a similar approach.17

The Fifth Circuit decided to “decline to adopt any rigid definition of ‘claim’.” The application of Rule 408 “remains fact-specific and tethered to the rationales underlying the rule.” Thus, here, the Smythe Reports were created for use in negotiations regarding the “claim” now being litigated. But didn’t the Smythe Reports issue only in connection with the “Highway 90” allocation negotiations whereas this litigation involves the Turtle Bayou site? That may be true but, “[t]hough separated by time and location,” the disputes nevertheless “arise out of the same events: the repeated dumping of hazardous waste intended for Highway 90.” The disputes involve the same relevant parties, the same waste-generating facilities, the same basic time frame, the same waste hauler and the same intended disposal site. “More to the point, it involves the same primary liability question: What chemicals did each facility ship offsite and in what quantity?”18 The settlement evidence thus arose out of a shared factual nexus and bore directly on present issues of liability between the same parties.

Effective dispute resolution requires frank and full discussion of relevant evidence. “Making the content of such a discussion available for use in related litigation would invite the very situation that Rule 408 is designed to avoid….” In CERCLA litigation particularly, settlement is desirable. The district court’s admission of the Smythe Reports was an abuse of discretion and harmful error. In its footnote 57, the court clarifies that its holding does not prevent the admission of the raw data and information used to generate the Smythe Reports—if that data and information is otherwise admissible. The Rule 408 exclusion is limited to documents or statements that “would not have existed but for the negotiations” and to situations where “the negotiations are not being used as a device to thwart discovery by making existing documents unreachable.”


The foregoing discussion, distilled from the recent Lyondell opinion, shows that what seems like a comfortable rule of protection that many take for granted can actually become a strategic, tactical and contentious swamp. Lawyers eager to convince their adversaries to settle may issue statements, reports and materials that might otherwise not be disclosed as, for example, work product or consultants’ expert reports. If, however, attorneys have to worry that such communications may be offered against them in separate and distinct, but somewhat related, cases or even in the same litigation but when dealing with other parties, then compromise negotiations may be chilled. Particularly in products liability cases involving repeated but distinct claims or in mass tort scenarios or in consumer class actions, the risks of some party’s use of settlement communications have to be weighed. Thus, what seems to be a simple rule is not quite so simple.

Perhaps one approach to try to minimize future risks and, yet, permit earnest and full settlement negotiations to go forward is for the opposing attorneys to additionally agree in writing that all communications to be exchanged during compromise negotiations will be held confidential and will not be used or offered by them in related or distinct proceedings or with regard to other parties. This mechanism, though not perfect or risk-free, may fortify the exclusionary benefits of Rule 408. Interested counsel should take another (long) look at Rule 408 and CPLR 4547 before engaging in settlement negotiations in complex cases.

Michael Hoenig is a member of Herzfeld & Rubin.


  1.  James Publishing Inc. (November 2009 Supp.).
  2.  N.Y. Objections, §3:150, at p. 3—20.
  3.  Id. at §19:150, at p. 19—31.
  4.  Id. at §19:150, at pp. 19—31 to 19—32.
  5.  Author Michael C. Smith (Jones McClure Publishing, 2008 updated ed.)
  6.  Id. at p. 864, citing Stockman v. Oakcrest Dental Center, P.C., 480 F.3d 791, 797 (6th Cir. 2007).
  7.  Id., citing Cohn v. Petsmart Inc., 281 F.3d 837, 840 n. 3 (9th Cir. 2002).
  8.  Id., citing Towerridge Inc. v. T.A.O. Inc., 111 F.3d 758, 770 (10th Cir. 1997).
  9.  Id., citing United States v. Austin, 54 F.3d 394, 400 (7th Cir. 1995).
  10.  Id., citing Coakley & Williams Constr. Inc. v. Structural Concrete Equip. Inc., 973 F.2d 349, 353—54 (4th Cir. 1992).
  11.  608 F.3d 284 (5th Cir. 2010).
  12.  Lyondell, Id. at 299.
  13.  Id. at 297.
  14.  Id. at 297 n. 43 (citing and quoting treatise).
  15.  Id. at n. 44.
  16.  Id. at 298 nn. 49, 50.
  17.  Id. at n. 51.
  18.  Id. at 298.