Settlement Confidentiality; Spoliation Sanctions
New York Law Journal
This article discusses two recent developments. The first is the Goesel ruling which decided motions addressed to the federal appellate court to seal the settlement agreements reached in two separate lawsuits. One request was by plaintiffs’ counsel and one on behalf of defendants. The court consolidated the motions, and its opinion informs readers about potential traps for the unwary who seek confidentiality of their settlements. The second ruling is by New York’s Appellate Division, First Department, in the Malouf case affirming harsh spoliation penalties against a defendant who failed to preserve a treadmill used by a plaintiff who was injured.
Assume that adverse litigants in a federal court personal injury case both decide to settle on a confidential basis. For example, they want the settlement amount not to be disclosed. And the plaintiff’s lawyer doesn’t want his fee publicized. These objectives should not be a problem. Right? Not so fast! A lot depends on whether and to what extent the settlement proceedings are to be reflected in the federal court’s records. A mutual desire for private treatment can be thwarted by a practical necessity to effectuate the settlement via court approval as, for example, in the case of an infant compromise. At that point, the settling litigants may have to move to seal the record. Do they have to give good reasons? Maybe.
It is worthwhile to check out Goesel v. Boley Int’l (H.K.) Ltd.,1 a Seventh Circuit Court of Appeals decision written by Judge Richard A. Posner, so that readers can be informed regarding hurdles in achieving settlement confidentiality. By recognizing the traps, interested counsel can try to work around them. Actually, the Goesel decision involves two separate appeals in which motions had been filed to seal settlement agreements in two separate cases. Posner was the motions judge for that week. He consolidated the motions and issued the rulings we discuss.
In Goesel, the parties agreed to settle a minor’s personal injury suit but had to obtain the district judge’s approval of the settlement. The judge first reduced the portion payable to the plaintiffs’ law firm, thereby increasing the amount of money to be received by the claimants, and then approved the settlement. The law firm challenged the fee modification on appeal. Both sides had successfully asked the district judge to seal the settlement. Posner now had to rule on the plaintiff law firm’s motion to maintain under seal documents that disclosed the settlement amount and the lawyers’ fees and costs.
In the second motion before Judge Posner (in a case called Massuda v. Panda Express), the plaintiff had sued for breach of fiduciary duty. The district judge there dismissed most of the claims on the ground that they were derivative from claims in a previous suit the parties had settled. The judge relied on a redacted copy of the settlement agreement in the earlier suit, filed under seal, that inked out almost all the settlement terms except the parties’ names and the nature of the suit. In Massuda, the defendants moved to keep under continued seal the redacted settlement agreement.
Here’s the problem. Documents that affect the disposition of federal litigation “are presumptively open to public view.” Why? In order to enable “interested members of the public,” including lawyers, journalists, and government officials, “to know who’s using the courts, to understand judicial decisions, and to monitor the judiciary’s performance of its duties.”2 This “presumption” can be rebutted, however. Thus, in the case of trade secrets, for example, information can be concealed or, when “compelling reasons of personal privacy” dictate, one could litigate under a pseudonym. Further, the presumption of public access applies “only to the materials that formed the basis of the parties’ dispute and the district court’s resolution.” Thus, other materials that may have crept into the record are not subject to the presumption.
How do the foregoing principles apply when settlement agreements are sought to be concealed by both sides? The pivotal crossing point is whether the settlement agreement shows up in the judicial record. Thus, a settlement before the suit is filed is not subject to a right of public access. Neither is a settlement in which the parties simply file a stipulation of dismissal, since they are not required to make the agreement part of the court’s record. In Goesel, however, the parties did not have that option because the local district court rule applicable to suits by minors required the court’s approval for the settlement to be valid.
Posner suggests that, even though made part of the judicial record, if the settlement is made without any court action (approval, disapproval or approved with revisions), then there will “rarely be a good reason” to require that its terms be made public “because making them public would not reveal anything about judicial activity.”3 Exceptions to this might be “imagine[d].”4 But, for the most part, settlement terms are of potential public interest only when “judicial approval of the terms is required, or they become an issue in a subsequent lawsuit, or the settlement is sought to be enforced.”
Posner described the “net effects” of compelled disclosure of settlement terms as “deeply uncertain.” Some argue in favor of disclosure because settlement agreements “may conceal safety hazards and other matters of acute public concern.” Usually, however, all that is sought to be concealed is the size of the settlement. Some will argue that making that information public will encourage pre-litigation settlements since they are not open to public scrutiny. This allegedly would economize on litigation costs.
A further argument is that the more that is known about the size and other terms of settlements, the easier it should be for prospective litigants to predict the likely outcome of their own litigation. In turn, it is argued, this “should both foster and simplify settlement.” Another purported advantage of disclosure is the supposed reduction of the probability of “lopsided settlements,” i.e., ones the parties would have recognized were too large or too small had they had settlement information from similar cases.5
But there also seem to be disadvantaged from taking a pro-disclosure stance. If parties know that the size of their settlements will become public, their negotiations are likely to become more complicated. A defendant will fear that, if the amount is large, making it public will invite more suits against him. The plaintiff’s lawyer will fear that, if the amount is small, he will find settlement negotiations in his next case more difficult. The defendant in the next case will have a greater incentive to resist, hoping to negotiate as good a bargain as observed in the public settlement agreement. A plaintiff’s lawyer who has agreed to a modest settlement, if made public, may fear that future clients, unimpressed by his past performance for the previous client, “will desert him for tougher-seeming negotiators.”6
In the end, says the jurist, this “to and fro of competing considerations” may be of “little importance.” It is argued that most attorneys who negotiate settlements are experienced and know from their own cases and by word-of-mouth from other lawyers what the attainable settlement terms are likely to be in the class of cases they handle. Thus, there may be “little at stake” in the decision whether to allow or forbid the parties to conceal the size of a settlement.
Against “such a background of uncertainty,” says Posner, it is “difficult to imagine” what arguments or evidence parties wishing to conceal settlement terms could present “to rebut the presumption of public access” to judicial records. In both the Goesel and Massuda matters the parties did not even try. In neither case did they offer any reason for secrecy except that they had a confidentiality agreement. “Obviously that’s insufficient.” Because there is potential public value to disclosing settlement terms, “parties have to give the judge a reason for not disclosing them—and the fact that they don’t want to disclose is not a reason.”
The court could have stopped there but elected to “trudge on” and comment further. Thus, in Goesel, an “outsider” could not evaluate the dispute over the district judge’s modification of the settlement without knowing the amount of the settlement (including fees and costs) before and after the judge’s revision. No reason has been given for thinking that concealment of the information “would serve some social purpose.”
In the Massuda case, there was no indication that the settlement amount figured in the district court’s decision. Indeed, there is no unredacted copy of the settlement agreement filed in either the district court or the Court of Appeals. The only issue, therefore, is whether the redacted agreement, which is in the judicial record, should be under seal as defendants request. Posner could not “understand why they want that, since almost everything of any possible interest has been redacted, including the size of the settlement.” In response to the judge’s request for an “explanation,” the attorneys’ “unhelpful response” was that they requested the seal “in an abundance of caution” but did not object to the circuit court unsealing the redacted document “if it decides to do so.” “Oddest of all,” said the court, they had included a copy of the redacted settlement agreement in the appendix to the brief on appeal “—a public document—thus mooting their request for concealment.” The foregoing circumstances led the court to deny the motion to seal in Goesel and to dismiss the request in Massuda.
In Malouf v. Equinox Holdings,7 plaintiff sued for personal injuries she received when she fell off a treadmill at defendant’s SoHo gym. Defendant was unable to provide the treadmill for inspection or to provide meaningful information as to how or when the treadmill was removed. Defendant submitted an affidavit from a manager at the SoHo location who believed the treadmill was replaced as part of an equipment upgrade that would have occurred some two years after the accident. All paperwork concerning the treadmill was also missing.
Plaintiff and the third-party defendant established that defendant’s failure to take affirmative steps to preserve the treadmill constituted spoliation of evidence by showing that defendant was on notice that the treadmill might be needed for future litigation. Although the lawsuit was filed some eight months after the accident, the evidence showed that plaintiff immediately reported the accident and a “claims defense form” was prepared by defendant’s employee and forwarded to its legal department.
The motion court granted plaintiff’s request for spoliation sanctions to the extent of “precluding defendant from arguing at trial that the treadmill plaintiff was using at the time of her accident was operating properly or was free from defects.” The motion court also struck defendant’s third-party complaint seeking contribution and indemnification based on products liability and maintenance theories because the treadmill was “a key piece of evidence that is not available for inspection.”
The Appellate Division, First Department, affirmed the preclusion of evidence and other sanctions citing its famous decision in Kirkland v. N.Y. City Housing Authority,8 a pivotal ruling fortifying the “spoliator beware” approach to the preservation of evidence. In this case, the defendant was saddled with the harsh penalties. But it should be remembered that preservation obligations and spoliation sanctions are a two-way street and that the “crown jewels” evidence, i.e., the product being used when an injury occurs, often is in the plaintiff’s possession or control and likewise must be preserved.
Michael Hoenig is a member of Herzfeld & Rubin.
- No. 13—2434 and No. 13—2818 (consolidated case motions) (7th Cir. Dec. 26, 2013) (Slip Opinion).
- Goesel, Slip Op., at 3 (citing cases).
- Id., Slip Op., at 4—-5 (citing cases).
- E.g., cases in which the size of the settlement can be shown to be the result of judicial doctrines that “excessively” favor one side in a class of disputes; rulings made earlier in the case that, by favoring one side or the other, influenced the terms of the settlement. Id., Slip Op., at 5.
- Id., Slip Op., at 5—6.
- Id., Slip Op., at 6—7.
- 2014 NY Slip Op. 00165 (1st Dept., Jan. 9, 2014).
- 236 A.D.2d 170 (1st Dept. 1997).