California Settlement Privilege: Excluding Evidence of Discussions

California Settlement Privilege

If you need clarification on how California Settlement Privilege really works, this article is going to answer a lot of your questions.

Let’s suppose that you have a longtime friend and client named Alice. You have made a lot of money with Alice over the years, and her business is important. One day, she accuses you of a breach of contract. Now not only have you lost Alice’s business and friendship, but your reputation in the industry is also being damaged because she is telling her friends about your supposed breach of contract. You also face hundreds of thousands of dollars in legal fees and possible damages if the case goes to trial.

In light of all of this, you decide to invite Alice to your office to talk things over. You miss both her business And her friendship, and you are worried about what your other customers may do if she keeps telling them her story. So you admit that things could have been handled better, though you believe the fault lies mostly with her.

You apologize and say that you wish the two of you could be friends again and do business together as you used to. Finally, you offer Alice $50,000 to put the whole matter behind her. This is a fraction of what you could be making if the two of you were working together again.

Unfortunately, things don’t go well Alice refuses your settlement offers, and her breach of contract suit goes to trial. At trial, Alice offers evidence of your settlement discussion and a $50,000 offer to prove liability. Well, the court admits the evidence?

Under both California and federal law, the answer appears to be no. But the exclusion is a limited one, and Disputants would do well to understand its parameters.

I. The basis for the evidentiary exclusion of settlement discussions.

California evidence code section 1152 (modeled on Federal Rule of Evidences 408) provides:

“(a) Evidence that a person has, in compromise …furnished or offered or promised to furnish money… to another who has sustained …or claims that .., he has sustained or will sustain.. loss or damage, as well as any conduct or statements made in negotiation thereof, is inadmissible to prove …liability for the loss or damage…”

The general rule is that the court is entitled to hear every person’s evidence. Exclusionary rules and privileges must serve some public good to justify their negative impact on the courts’ search for truth. The justification for excluding evidence of settlement offers is twofold.

First, there is a public benefit in promoting settlement discussions. Only about 1%of federal cases go to trial. Many more disputes never reach the courthouse, because parties settle them early. If parties had to be afraid that the settlement negotiations would be offered to prove liability, they might never engage in them. The courts could be flooded with unresolved disputes as a result.

Second, the settlement statements made in negotiation aren’t necessarily relevant to liability. As demonstrated by the hypothetical dispute with Alice, people settle cases for reasons other than their liability: to preserve or restore social relationships, to maintain profitable business arrangements, to protect their reputation, to limit possible damage awards, or to avoid legal fees and costs.

II. The scope of Section 1152’s evidentiary exclusion.

The plain language of Evidence Code Section 408 (a) establishes that neither evidence of the settlement negotiations nor the proffered $50,000 payment is admissible and offered to prove liability. But there are several exceptions. Subdivision (b) allows such evidence in actions for bad faith breach of the insurance contract, whereas subdivision (c) Permits evidence Regarding partial payment of a debt to show its validity, or to show its revival.

In addition to the statutory exceptions, case law holds that evidence of settlement negotiations may be presented as evidence of things other than liability, such as notice that conduct was unlawful, the intended scope of a release, establishing the bias of a witness, or defeating a claim of undue delay.

It has been suggested in the academic literature that evidence from a negotiation could be presented for impeachment purposes. That is, having made a protected admission of liability during settlement negotiations, if the defendant denied liability at trial he or she could be confronted with the contrary statements made in negotiations.

This position seems to run directly counter to the language and intent of the rules. However, there is no California case on point. Federal Rule of Evidence 408 was amended specifically to prohibit the admission of negotiation evidence for impeachment evidence.

III. Neither Federal Rule of Evidence 408 Nor Evidence Code Section 1152 creates a settlement privilege.

Though Evidence Code Section 1152 and Federal Rule of Evidence 408 is sometimes referred to as privileged, they neither prohibit disclosure of protected information nor bar the testimony of any person., which are the hallmarks of a privilege.

Under both the California Code of Civil Procedure section 2017.010 and Federal Rule of Evidence 402, evidence need not be admissible to be discoverable. It only needs to be reasonably likely to lead to the discovery of admissible evidence. Practically, this means that under both Federal Rule of Evidence 408 and Evidence Code Section 1152, all that is required to discover evidence of settlement is a reasonable argument a) that it is needed to prove something other than liability or impeachment or b) that the discovery is otherwise likely to lead to admissible evidence.

There has been some discussion of a “federal settlement privilege.“ To date, however only the Sixth Circuit has expressly created such a privilege, while the Seventh and Federal Circuits have rejected it. The other Circuit courts have yet to rule, and district courts are split, though the Eastern and Southern Districts of California have ruled that a settlement privilege exists. However, those decisions are not binding.

IV. The absence of confidentiality in settlement negotiations “protected” by Evidence Code Section 1152 and Federal Rule of Evidence 408.

Neither Evidence Code Section 1152 nor Federal Rule of Evidence 408 prohibits dissemination by a participant of the details of settlement negotiations nor provides for any penalties if disclosure occurs.

The term “confidential” generally refers to information as to which there are efforts to keep it secret from others.
Protection is often given to banking and other sensitive financial information, and to trade secrets.
In contrast to privileged information, confidential information is sometimes subject to discovery, although the California courts may impose a higher standard, and deny discovery of information that is only marginally
relevant to the subject matter. But while the participants in settlement discussions could contractually agree to confidentiality and breach of contract penalties, absent such an agreement, the information is neither privileged nor confidential.

V. The apology trap

Research has demonstrated that making an apology, especially early in the dispute, will almost certainly reduce the demand for damages, improve the relationship between the disputants, and make a defendant look better to plaintiffs and jurors alike. It may even end the dispute altogether. We are often taught to equate an apology with the end of the conflict.

Yet, apologies are extremely hard to come by. Lawyers routinely argue they should never be risked, because they can be interpreted as accepting liability and taken into subject matter evidence as admissions against interest.

Of course, they may be protected by section 1152 or Rule 408 if they are given during settlement negotiations, but in non- Federal cases, there is a risk that an apology could be offered for impeachment purposes rather than to establish liability. And as every trial lawyer knows, juries have trouble considering the evidence for one purpose but not another. Also, because some of the negotiations often take place later in the litigation, apologies offer then less effective than they could be. But to some extent, the calls for an early apology are a trap. An apology made before a negotiation arises is not covered by Rule 408 or section 1152 and Is admissible as an admission against interest to the extent it admits liability. So, to return to the opening hypothetical, apologizing to Alice for incorrectly filling her order before she complained, or after negotiations ended, would be admissible to prove liability.

Some effort has been made to promote the use of apologies by making them inadmissible to prove. But generally, the protection is limited to personal injury and expressions of sympathy. (See California Evidence Code section 1160). Contract actions are not covered, nor are admissions of fault. The wording is critical. “I’m sorry you are hurting” is a protected expression of sympathy. “I’m sorry I hurt you” is a disastrous admission. The statute, and apologies generally, are traps for the unwary.

VI. The mediation solution

Both California law (Evidence Code section 1119) and Federal authorities recognize a mediation privilege, all mediation participants can maintain the confidentiality of negotiations during mediation efforts and the communications concerning them. ‘ For example, California’s statute provides no statement or document “made for, in the course of, or under, a mediation or a mediation consultation” is admissible or discoverable. The California Supreme Court has been fiercely protective of the privilege. A mediator does not require special training to come within the scope of the privilege, though training would Make them more effective. All that is required is that a) a neutral person b) facilitate communication c) to reach a settlement ( California Evidence Code 1115 ) The mediator also has a limited privilege not to testify about his or her acts as a mediator. (id.)The privilege does not apply to related contempt, criminal, disqualification, or disciplinary proceedings. The mediation process appears to be the only certain way to ensure settlement negotiations, admissions of fault, and apologies are privileged and confidential. Evidence Code sections 1152 and 1160 and Rule 408 are far too limited.

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