Important Choice-of-Privilege-Law Issue Unfolding in the Ninth Circuit 1

Resist the urge to stop reading when you see the phrase “choice of laws.”  There is an important choice-of-privilege-law issue brewing in the 9th Circuit that could have significant privilege repercussions in federal-court cases containing federal- and state-law claims.

Still reading?  Let’s discuss the situation in In re: TFT-LCD (Flat Panel) Antitrust Litig. (Sony Electronics, Inc. v. HannStar Display Corp.), No. 14–15916 (CTA9).

Background

Sony Electronics, Inc. possessed antitrust and related claims against HannStar Display Corporation (and others) arising from HannStar’s alleged conspiracy to fix prices and limit the output of LCD panels.  Sony and HannStar participated in a pre-suit mediation where it appeared, through confirming emails, that both parties agreed to a mediator’s proposal of $4.1M. More…

Settlement Agreement Not Privileged, Court Rules

The USDC for the Eastern District of Tennessee recently ruled that the Sixth Circuit’s settlement privilege does not prevent a non-settling defendant from obtaining the settlement agreement settlementbetween a plaintiff and a settling defendant.  Kelley v. Apria Healthcare, Inc., 2016 WL 737919 (E.D. Tenn. Feb. 23, 2016).  You may access the decision here.

Sixth Circuit’s Settlement Privilege

In Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 332 F.3d 976 (CTA6 2003), the Sixth Circuit adopted a federal common-law “settlement privilege” that prevents compelled disclosure of settlement communications and negotiations.  Critics of Goodyear correctly point out that the court was exercising diversity jurisdiction and should have applied state law—not federal law—in determining whether a settlement privilege exists under common law.

Courts outside the Sixth Circuit reject Goodyear’s analysis, but the decision remains good law.  For an explanation of Goodyear and practice tips for outside and in-house counsel, see my post Important Lessons about the Settlement Privilege.

Background

In Kelley, the plaintiff sued multiple defendants following a fire that erupted in a traveling camper and killed the camper’s occupant.  All defendants except Apria Healthcare settled, and Apria filed a motion to compel the settlement agreements.

The plaintiff and the settling defendants opposed the motion on grounds of relevancy, but also that the Sixth Circuit’s settlement privilege protected the settlement agreements from compelled disclosure.

Ruling

Noting that “a number of district courts have recognized that settlement agreements are not privileged,” the Kelley court ruled that, “[a]lthough the Sixth Circuit recognizes that the settlement privilege protects settlement negotiations from discovery, ‘this privilege does not extend to the terms of the final agreement.’” (emphasis added).

What about Confidentiality Provisions?

The plaintiff and settling defendants argued for non-disclosure because the settlement agreements contained confidentiality provisions, but the court ruled that was of no consequence, stating that the no-privilege rule “is true even where the agreement is designated as ‘confidential.’”

Protective Order

The plaintiff and settling defendants received a consolation prize as the court ruled that it would approve entry of a protective order limiting use and disclosure of the settlement agreement.  So, while the settlement privilege does not protect settlement agreements from discovery, counsel likely can limit disclosure through a court-approved protective order.

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.