Important Lessons about the Settlement Privilege

Did you know there is a settlement privilege?  Not many do, primarily because few courts have adopted the privilege.  The Sixth Circuit adopted a federal common-law settlement privilege in Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 332 F.3d 976 (CTA6 2003), but other courts reject the Goodyear decision.  See, e.g., In re MSTG, Inc., 675 F.3d 1337 (Fed. Cir. 2012); Matsushita Elect. Indust. Co. v. Mediatek, Inc., 2007 WL 963975 (N.D. Cal. 2007).

MediationA recent federal-court decision highlights some of the misconceptions and misassumptions about the so-called settlement privilege, and provides lessons for in-house and outside counsel participating in settlement negotiations.  Babcock & Wilcox Power Generation Group, Inc. v. Cormetech, Inc., 2015 WL 350392 (N.D. Ohio Jan. 23, 2015).  You may access the decision here.

Brief Background

Babcock presents a classic example of how the settlement privilege arises.  Kansas City Power & Light Co. sued Babcock over its installation of a nitrogen-oxide reducing system that contained a catalyst module built by Cormetech.  KCPL and Babcock settled their dispute, and Babcock sued Cormetech for indemnification.

In discovery, Cormetech sought settlement communications between KCPL and Babcock and documents created for settlement purposes.  Babcock asserted the federal common-law settlement privilege adopted in Goodyear or, alternatively, the Ohio state-law mediation privilege.

Conflicts-of-Law Issues

The court quickly raised the issue whether federal or state privilege law applied. Because this case was a diversity action involving a state-law contract claim, federal common-law did not apply, rendering the federal settlement privilege inapplicable.  Babcock argued that privilege law is procedural, rather than substantive, thereby requiring application of federal privilege law, but the court summarily and properly discarded that legal theory.

Babcock correctly noted that Goodyear adopted the federal common-law settlement privilege in a diversity case involving state-law claims.  Indeed, one can criticize Goodyear for applying the wrong law—it clearly should have applied state law.  But, the Babcock court ignored that aspect, stating simply that “be that as it may, the Court in Goodyear did not discuss why it applied federal common law to the privilege asserted.”

State Mediation Privilege & Choice-of-Law Contract Provisions

Fortunately for Babcock, it added the alternative argument that Ohio’s mediation privilege applied.  Ohio’s mediation statute provides that “mediation communications will be privileged against disclosure,” Ohio Rev. Code Ann. § 2710.02, and the court found that this state-law privilege protected the KCPL/Babcock communications from discovery.

Interestingly, the KCPL/Babcock settlement agreement contained a choice-of-law provision stating that Missouri law governed the agreement.  The Babcock–Cormetech dispute was in Ohio, and the parties argued and applied the Ohio mediation privilege even though the underlying mediation occurred in Missouri and the resulting settlement agreement designated Missouri law as governing.

Because Cormetech failed to advance Missouri law, the court simply did not “consider whether Missouri law applies to the privilege asserted here.”  This is disappointing from an academic standpoint as it deprives us from obtaining guidance on choice-of-law contractual provisions concerning privilege law.

PoP Analysis

The Babcock decision presents several practice tips for lawyers involved in settlement negotiations.

  • Always assume a third-party may later seek your settlement-related communications;
  • Know whether your state jurisdiction has a statutory mediation privilege or common-law settlement privilege;
  • Do not rely solely on FRE 408 (or state-law equivalent) disclaimers as privilege-protectors—these rules pertain to admissibility only;
  • Label settlement communications with opposing counsel and settlement neutrals as “privileged and confidential”;
  • If your state has a mediation privilege, then identify that authority (statute or common law) in your communications;
  • Ensure that all settlement-related communications and documents are confidential when delivered and kept confidential thereafter;
  • In the resulting settlement agreement, insert the appropriate choice-of-law provision and expressly state that this provision includes the chosen law’s mediation or settlement privilege.