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Although Rule 408 does preclude some settlement evidence from being admitted in litigation, it is a mistake, and potentially a dangerous one, to believe that any documents or communications bearing the label of “For Settlement Purposes Only” will necessarily fall within the scope of Rule 408. Lawyers must have a clear understanding of the limitations to Rule 408’s protection of settlement evidence.
In the August 31, 2023 Edition of The Legal Intelligencer, Edward Kang wrote “Not a Blanket Protection: Understanding Limits of Protections for Settlement Evidence“.
Dispute resolutions and business negotiations frequently involve documents labeled “For Settlement Purposes Only” or some similar designation. Lawyers sometimes apply these designations to communications or documents (that are not only discoverable but also admissible) to prevent the receiving party from using the materials in any ongoing or potential litigation against the party who sends them.
The idea that such a designation will prohibit the receiving party from using settlement negotiations or the fact of settlement for any purpose in any litigation stems from a misunderstanding of the Rule of Evidence 408. Under Rule 408, any evidence related to settlement cannot be used in a trial to prove or disprove the validity or amount of a disputed claim if such evidence pertains to the “furnishing, promising, or offering—or accepting, promising to accept or offering to accept—a valuable considering in compromising or attempting to compromise the claim and conduct or a statement made during compromise negotiations about the claim.”
Although Rule 408 does preclude some settlement evidence from being admitted in litigation, it is a mistake, and potentially a dangerous one, to believe that any documents or communications bearing the label of “For Settlement Purposes Only” will necessarily fall within the scope of Rule 408. Lawyers must have a clear understanding of the limitations to Rule 408’s protection of settlement evidence.
Rule 408 Precludes Some Settlement Evidence From Being Admitted
The Federal Rule of Evidence 408 is the model for many state court rules. Pennsylvania has its version of Rule 408, which is similar but not identical to the federal rule. Both the Pennsylvania rule and the federal rule make a statement inadmissible if: there is a “disputed claim,” the statement is “made during compromise negotiations about the claim,” and the statement is offered for the purpose of proving or disproving “the validity or amount of a disputed claim, or to “impeach by a prior inconsistent statement or a contradiction.”
Federal Rule of Evidence 408 can bar the introduction of evidence of settlement agreements and statements made during settlement negotiations. This is driven by a strong public policy that favors the settlement of disputes by enabling the parties to make full and frank disclosures without fear that their statements will later be used against them as an admission of liability or the amount of liability. Hence, Rule 408 precludes the admission of settlement agreements when they are used to “prove or disprove the validity or amount of a disputed claim.”
Following this policy, although there is no bright line rule as to when a claim is “disputed,” the majority of the federal circuit courts recognize that a dispute does not need to “crystallize to the point of threatened litigation” to implicate Rule 408. See, e.g., Macsherry v. Sparrows Point, 973 F.3d 212, 222 (4th Cir. 2020). Rather, a dispute exists for purposes of Rule 408 as long as there is “an actual dispute or difference of opinion” regarding a party’s liability for or the amount of the claim.
Furthering the policy goal, in addition to the parties’ communications, Rule 408 protection also extends to materials prepared by or for the parties in their effort to settle the dispute, including internal memoranda, expert opinions, and other materials. See, e.g., Affiliated Manufacturers v. Aluminum Co. of America, 56 F.3d 521, 529 (3d Cir. 1995).
On the other hand, courts have recognized that Rule 408 should not exclude “more than required” to effectuate its goals, which would contradict the fundamental policy favoring the admission of all relevant evidence. See, e.g., Ball v. LeBlanc, 881 F.3d 346, 354 (5th Cir. 2018).
Labeling Documents ‘For Settlement Purposes Only’ Does Not Make it So
The text of both the Pennsylvania rule and the federal rule makes clear that a “For Settlement Purposes Only” designation at the beginning of a document or communication does not automatically make such communications inadmissible. For a lawyer to object to the statement being admitted in court, the statement has to meet the three requirements above.
While the absence of a Rule 408 designation does not necessarily imply that Rule 408 does not apply to a document or communication, it may still remain in the interests of some lawyers to designate communications “For Settlement Purposes Only.” Doing so does, to some extent, indicate that one party intended the communication as a “statement made during compromise negotiations about the claim,” which may work to their benefit.
Settlement Evidence Can be Admitted ‘For Another Purpose’
Rule 408 does not preclude the admission of settlement evidence in all circumstances. Rather, when not used to “prove or disprove the validity or amount of a disputed claim,” settlement evidence is admissible when offered for “another purpose, such as proving a witness’s bias or prejudice, negating a contention of undue delay, or proving an effort to obstruct a criminal investigation or prosecution.” Whether settlement evidence should be allowed for “another purpose” is entirely within the discretion of the trial courts. Generally, courts consider the language that defines the rule’s scope as well as the rule’s underlying policy. See, e.g., Hudspeth v. C.I.R., 914 F.2d 1207, 1213–14 (9th Cir.1990) (recognizing that the trial court properly factored in the rule’s policy when excluding evidence, but finding that the evidence should have been admitted to show a witness’s bias as per Rule 408(b)).
The examples listed in Rule 408(b) serve as illustrations and are not all-encompassing. For example, courts have admitted evidence of settlement negotiations to establish when the statute of limitations began to run. See e.g., B & B Hardware v. Fastenal, 688 F.3d 917, 920 (8th Cir. 2012). Courts have also allowed settlement communications to prove a party’s knowledge of certain facts, see e.g., Kraft v. St. John Lutheran Church, 414 F.3d 943, 947 (8th Cir. 2005), or to establish jurisdiction for a declaratory judgment, see e.g., Rhoades v. Avon Products, 504 F.3d 1151, 1161 (9th Cir. 2007).
Notably, the advisory committee notes to Rule 408 emphasize that the rule does not bar the introduction of settlement evidence when “the claim is based upon a wrong that is committed during the course of settlement negotiations.” Fed. R. Evid. 408 advisory committee’s note to 2006 amendment (citing Uforma/Shelby Business Forms v. NLRB, 111 F.3d 1284 (6th Cir. 1997). For example, in Martin v. Finley, 349 F. Supp. 3d 391, 422 n. 3 (M.D. Pa. 2018), the plaintiff sued the defendants for abuse of process, alleging that all defendants brought a criminal complaint and used it to coerce him to settle. The court allowed evidence of settlement negotiations, reasoning that the settlement negotiation was “the crux” of the plaintiff’s claim and that the settlement evidence could also be used to show the defendants’ intent or purpose.
An especially compelling reason to permit the introduction of settlement communications is to reveal a party’s purpose or intent. In Rubin v. Stewart, 293 A.3d 617 (Pa. Super. Ct. 2023), an unreported case from the Pennsylvania Superior Court, the plaintiff sued the defendant for wrongful use of civil proceedings. At issue was an email containing the defendant’s counteroffer to the plaintiff’s settlement offer in an earlier matter. The counteroffer exceeded the initial proposal by over thirtyfold, and the email contained a threat to report the plaintiff’s alleged criminal wrongdoings to a tribunal unless a settlement agreement was reached. The court found that the email containing the counteroffer was admissible “for another purpose” under Pennsylvania Rule of Evidence 408(b), reasoning that the plaintiff sought to admit the “unreasonable demands and outrageous allegations of criminal conduct detailed in the email” to show the defendant’s purpose and intent. Specifically, the plaintiff sought to admit the email to support his claim that the defendant acted with gross negligence and for an improper purpose.
Rule 804 Does Not Establish a Privilege
Rule 408, as a rule of evidence, addresses the admissibility of evidence rather than its privilege. Privileged material means that its disclosure cannot be compelled in a legal proceeding or used as evidence by the opposing party in litigation.
Rule 408 does not extend to making the settlement evidence privileged from disclosure. Typically, if a settlement communication bears relevance to an issue within a case, Rule 408 does not prevent a party from requesting the communication’s disclosure in discovery.
Similarly, Rule 408 has very limited application when third parties in subsequent lawsuits seek to discover settlement evidence of a prior lawsuit. See e.g., Folb v. Motion Picture Industry Pension & Health Plans, 16 F. Supp. 2d 1164, 1171 (C.D. Cal. 1998). Moreover, public disclosure of settlement evidence is not protected by Rule 408. See e.g., Alpex Computer v. Nintendo, 770 F. Supp. 161, 166 (S.D.N.Y. 1991).
The Takeaways
The key consideration regarding Rule 408 is that it is unwise to assume that all settlement evidence will be shielded from admissibility, as settlement agreements and negotiation statements are not automatically protected under Rule 408. Practitioners should not use a “For Settlement Purposes Only” designation to protect material that is discoverable. Practitioners need to understand that settlement evidence is admissible when the claim is based upon a wrong that is committed during settlement negotiations. That is, affixing a “For Settlement Purposes Only” designation on communications will likely not, in and of itself, be dispositive when determining the communications’ admissibility. The court might disregard such a label if it is evident that the communications in question can be admitted for purposes other than proving liability or the amount of liability.
Edward T. Kang is the managing member of Kang Haggerty. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@kanghaggerty.com.