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…

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.

Federal Privilege Law Governs Mediation Evidence for Federal & State Claims against “America’s Toughest Sheriff” 1

Do federal courts apply federal or state privilege law in cases involving federal and supplemental state-law claims? The 9th Circuit ruled that federal privilege law governs even where the privileged matter relates to both federal and state claims. Wilcox v. Arpaio, 2014 WL 2442531 (CTA9 June 2, 2014). You may read the opinion here.

But thearpaio Court sidestepped two important issues. Does the 9th Circuit recognize a federal common law mediation privilege? And does federal privilege law apply in federal-question cases where the privileged evidence relates solely to the state-law claim?

America’s Toughest Sheriff Settles

The plaintiffs, Maricopa County (Arizona) supervisors, brought federal (42 U.S.C. § 1983) and state-law claims against “America’s Toughest Sheriff,” Joe Arpaio, and the County. As the plaintiffs were two of several plaintiffs with similar claims, the County established an alternative dispute resolution program and appointed retired judge Christopher Skelly to help resolve the claims.

Following mediation, Judge Skelly sent an email to plaintiffs’ counsel confirming a $975,000 settlement “subject to any further approvals deemed necessary by the parties.” You may read the confirming email here. When the County argued there was no settlement, the plaintiffs moved to enforce and the district court, following an evidentiary hearing, granted the motion.

9th Circuit Rules

On appeal, the County argued that the district court erred by admitting Judge Skelly’s email, claiming that Arizona’s mediation privilege precluded the email’s admissibility. The 9th Circuit noted that state contract law governs the issue whether the parties reached a settlement, but that, where the privilege question relates both to federal and state claims, federal rather than state privilege law applies.

This decision comports with the almost universal treatment of this conflict-of-privilege-law issue. Federal privilege law applies where a court entertains a case under federal-question jurisdiction, even with the presence of supplemental state-law claims.

Unanswered Questions

The Court expressly refused to answer “whether, in federal question cases, state or federal privilege law governs the admissibility of evidence that relates exclusively to state law claims.” The answer is likely that federal common law applies, and you can read more about this conflict-of-privilege-law issue in my article The Application of Conflict of Laws to Evidentiary Privileges.

The Court also ruled that the County waived the mediation privilege by not asserting it at the lower-court level, and therefore declined to “determine whether a mediation privilege should be recognized under federal common law and, if so, the scope of such a privilege.”  See my posts Court Takes Broad View of Mediation Privilege and Is Mediation Privilege Absolute or Qualified? for a discussion of some of these issues.  The Court’s ruling is unfortunate, as the federal common law mediation privilege, prevalent in some but not nearly all federal district courts, needs circuit-court attention and refinement.

Alas, we must await another day for these answers.

My thanks to Phoenix lawyer Patrick Gorman of the Jones, Skelton & Hochuli firm for alerting me to this opinion.