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Are Settlement Talks Confidential?

Lawyers routinely send and receive settlement communications marked "Privileged and Confidential Pursuant to California Evidence Code Sections 1152 and 1154." They take solace in the quoted language, certain that what lawyers say in settlement discussions cannot be discovered later on in the litigation or in another case.

But in fact the two sections cited do not make anything privileged or confidential. They simply make settlement communications inadmissible to prove or dispute liability for the claim being negotiated. Settlement communications are often discoverable and admitted into evidence for purposes other than to buttress or attack liability for a given claim.

Is There a Privilege?
California Evidence Code section 1152(a) provides in general that evidence of settlement discussions cannot be admitted to prove liability. Its lesser-known counterpart, Evidence Code section 1154, focuses on offers by plaintiffs, and it states that an offer to discount a claim is inadmissible to prove the invalidity of the claim or any part of it. Each of these sections covers more than the actual settlement offer, protecting "any conduct or statements made in negotiation" of a settlement. (C&K Engineering Contractors v. Amber Steel Co., 23 Cal. 3d 1, 13 (1978)). Both sections are designed to encourage open and forthright settlement discussions free of the fear that something said during negotiations might later be used to show the weakness of a party's case, or worse—be construed as an admission of liability. In addition, a statement made in a settlement discussion cannot be admitted into evidence on the ground that it is contrary to testimony the witness will offer at trial (C&K Engineering Contractors, 23 Cal. 3d at 13).

These code sections have limits, however. Section 1152 "has no application where the evidence is not tendered as an admission of weakness by the party who settled or offered to settle, but for some other purpose." (Lemer v. Boise Cascade, 107 Cal. App. 3d 1, 9 (1980).) And as another court flatly proclaimed, "[c]ommunications made in the course of settlement discussions are not 'privileged.' " (Covell v. Superior Ct. (Drasin), 159 Cal. App. 3d 39, 42 (1984).)

Settlement Dialogue
A statement about liability does not fall under sections 1152 or 1154 unless it is part of a settlement discussion. Courts have held that preliminary statements of an initial demand are not settlement discussions, but rather an "itemization of all that the party is entitled to." (Volkswagen of America v. Superior Court, 139 Cal. App. 4th 1481, 1491 (2006).) Courts have allowed evidence of a statement acknowledging a debt as an "account stated," and observed that it could be used as an "admission against interest." (Truestone, Inc. v. Simi West Industrial Park II, 163 Cal. App. 3d 715, 725 (1984).)

Labeling correspondence as a settlement discussion under sections 1152 and 1154 is not an entirely idle act, because it helps ensure that the communication will at least be recognized as a settlement communication. But keep in mind that the nature of the discussion, and not the label, will determine whether the statutory protection applies.

Other Claims
A series of decisions makes clear that Evidence Code sections 1152 and 1154 do not apply when the statement is offered to show the invalidity of a claim other than the one being negotiated in the communication. In one case, a plaintiff involved in a car accident had negotiated with the other driver's insurance company concerning the extent of his injuries. A few months later he was in another car accident, which resulted in litigation. In the second case, the court allowed the defendant to introduce settlement negotiations from the first case in order to show that the plaintiff had attributed some of his injuries to the first accident (Zhou v. Unisource Worldwide, 157 Cal. App. 4th 1471 (2007)). Another court held that statements made during negotiation of an asbestos claim against one company were discoverable in an action against a different company (Volkswagen of America, 139 Cal. App. 4th at 1491). And in yet another ruling, a settlement communication acknowledging the falsity of a published sexual-assault accusation was deemed admissible in a subsequent defamation action to prove the falsity of the publication, which was an element of the claim (Carney v. Santa Cruz Women Against Rape, 221 Cal. App. 3d 1009, 1023–1024 (1990)).

Settlement communications may also become admissible when a person's conduct during the negotiations is relevant in a subsequent proceeding. In bad faith litigation, judges routinely rule that the language of Evidence Code section 1152 "does not preclude the introduction of settlement negotiations if offered not to prove liability for the original loss but to prove failure to process the claim fairly and in good faith." (White v. Western Title Ins. Co., 40 Cal. 3d 870, 887 (1985); Shade Foods, Inc. v. Innovation Products Sales & Materials, Inc., 78 Cal. App. 4th 847, 915 (2000).) Indeed, the White decision led to a statutory amendment specifying that if a portion of the settlement communications is admitted into evidence, the rest of the communication may also be admitted (Cal. Evid. Code § 1152, subd. (b)).

Malicious prosecution actions raise other concerns regarding the admissibility of settlement conversations in the underlying (allegedly malicious) action. In one case a court found that in the underlying action the plaintiff's "counsel insisted on a payment of $25,000 to dismiss the case, irrespective of the facts," and concluded that the statement was admissible (HMS Capital, Inc. v. Lawyers Title Co., 118 Cal. App. 4th 204, 219 (2004)). However, in another case the court found that a settlement offer by the defendant in the underlying action was not admissible, because only the plaintiff's state of mind in the underlying action was relevant (Covell, 159 Cal. App. 3d 39).

Fee Disputes
Prior settlement communications may be admissible in disputes over attorneys fees. Courts have observed that a previous settlement offer can be relevant to the question of whether an application for attorneys fees is reasonable. Appellate courts have ruled that when a plaintiff refuses a settlement offer, vigorously litigates, and then obtains less relief than was originally offered in settlement by the defendant, post-offer attorneys fees are not "reasonable" and the trial court does not err in refusing to award them (Meister v. Regents of University of California, 67 Cal. App. 4th 437, 449–453 (1998)). Stated another way, a party seeking to recover attorneys fees under certain fee-shifting statutes, such as Code of Civil Procedure section 1021.5, must demonstrate that the litigation—or its continuation—was necessary. If a party litigates and obtains less in settlement than was offered at the outset of the case, proving the litigation's necessity will be an uphill battle, to say the least. The California Supreme Court has noted that "a court properly takes into consideration whether the party seeking fees attempted to resolve the matter without litigation" and that "failed attempts to settle can help to demonstrate that litigation was necessary." (Vasquez v. California, 45 Cal. 4th 243, 251252 (2008).)

In a "catalyst" case—one in which the plaintiff contends its lawsuit was the motivating force that caused a defendant to change its conduct—counsel must make a pre-suit effort to resolve the matter if they are to claim attorneys fees (Graham v. DaimlerChrysler Corp., 34 Cal.4th 553, 561 (2004)). A plaintiff seeking fees under such circumstances may find it essential to introduce some evidence of prior settlement discussions.

Another situation in which settlement discussions are highly relevant is in a dispute over the meaning of an ambiguous settlement agreement. In such a case, the parties often must resort to extrinsic evidence—which may include testimony about settlement discussions—to explain the meaning of the agreement (Butler v. The Vons Cos., 140 Cal. App. 4th 943, 949 (2006)).

Discovery Issues
Evidence Code sections 1152 and 1154 do not directly limit discovery. However, attorneys need to determine whether the information they are seeking is reasonably likely to lead to the production of admissible evidence. If so, a court may well allow discovery of settlement communications. In the Volkswagen case, the court found a sufficient likelihood that the communications would be admissible and permitted discovery (139 Cal. App. 4th at 1491). In the Covell case, the court found that the requested information so clearly would not lead to admissible evidence that it precluded discovery (159 Cal. App. 3d at 42).

Prior Settlements
The existence of a prior settlement, as distinct from a settlement offer, poses a slightly different factual scenario, and this may affect the admissibility of evidence. Some courts have found that the existence of a previous settlement is relevant to particular issues. In Moreno v. Sayre (162 Cal. App. 3d 116, 126 (1984)), the court of appeal held that a trial judge must inform the jury of a "sliding-scale settlement" because it may give witnesses a financial interest in having the plaintiff prevail against the remaining defendants who did not participate in the settlement. This makes the settlement relevant to the jury's assessment of witness credibility. Indeed, Code of Civil Procedure section 877.5(a)(2) may require such disclosure. It provides that if "a defendant party to the agreement is called as a witness at trial," upon motion of another party the court must "disclose to the jury the existence and content of the agreement" unless the court finds that doing so would cause undue prejudice or confuse or mislead the jury.

What About Prejudice?
The aforementioned cases illustrate that Evidence Code sections 1152 and 1154 do not really involve confidentiality per se, but rather the admissibility of evidence. And when it comes to admissibility, another code section will come into play: Evidence Code section 352, which prohibits the admission of evidence that, while relevant and probative, would nevertheless "create substantial danger of undue prejudice, of confusing the issues, or of misleading the jury." (Cal. Evid. Code § 352(b).) Though the parties may well disagree on the issue of prejudice, the trial judge will have wide discretion. (See Bishop v. Hyundai Motor America, 44 Cal. App. 4th 750, 760 (1996).)

Special Rules for Mediation
The treatment of ordinary settlement discussions contrasts greatly with the special provisions governing statements made during a formal mediation, which are governed by Evidence Code sections 1115 through 1128. Those sections specifically protect mediation communications from being admitted, discovered, or subject to compelled disclosure. Lawyers should review these sections carefully, for although they preserve "mediation confidentiality," some exceptions allow for admitting into evidence certain written or oral agreements reached during a mediation (Evidence Code §§ 1123, 1124; Fair v. Bakhtiari, 40 Cal. 4th 189 (2006)).

Confidentiality Agreements
So what's a lawyer to do? First and foremost, understand and follow the case law. In many cases, no action will be necessary. However, in some situations it may be important to ensure that a party can use settlement discussions to the extent the law allows. For example, if an opponent makes improper threats during settlement negotiations; refuses reasonable settlement offers; or seeks to recover attorneys fees for time spent that did not improve the settlement, it makes sense to use the settlement discussions. Indeed, in that situation such discussions would appear to be highly relevant and therefore admissible under the authority cited above.

In cases involving insurance companies and other entities bound by a legally enforceable duty to negotiate in good faith, plaintiffs counsel may want to use evidence from settlement discussions to demonstrate either bad faith or a breach of the covenant of good faith and fair dealing (White, 40 Cal. 3d at 887).

In light of the foregoing authority, lawyers cannot assume that communications exchanged under sections 1152 and 1154 are automatically confidential. The best course of action is to raise confidentiality issues with the opposing party and reach a common understanding that protects everyone equally. Prudent lawyers should execute a written confidentiality agreement at the outset of a dialogue on settlement. If such an agreement is in place, then any subsequent disclosure in violation of stipulated terms provides a basis to argue for damages and specific performance—not to mention for a claim that the other party has waived any right to rely on the evidence in question. Moreover, a breach of the confidentiality agreement may move the court to award sanctions under Code of Civil Procedure section 128.7, as well as to award reasonable expenses under section 128.6.

A confidentiality agreement can be as simple as a letter stating, "We agree that all communications made as part of attempting to reach a settlement are confidential and may not be introduced in this or any other proceeding for any purpose," with signature lines at the bottom for all counsel.

If the settlement discussions are likely to be lengthy and involve exchanges of evidence, counsel may wish to draft a separate agreement that addresses a number of related issues. One concern is to ensure that any confidentiality agreement cannot be used as a "cloaking device" (that is, a method that transforms otherwise discoverable information into something that is confidential). The agreement should provide that such discoverable information does not become confidential simply because of its inclusion in a settlement exchange. In addition, the agreement should provide that having experts or other witnesses present during settlement communications does not disqualify them from testifying at trial.

Of course, no agreement will bind a third party in a separate case in which such discussions become relevant. That's why some lawyers insert a clause providing that if one party receives a discovery request in another case for the confidential information, it will provide notice to the other party so it can take protective steps to contest disclosure.

The lesson of this discussion is quite simple: Attorneys should not assume that settlement discussions are confidential; they aren't. To ensure true confidentiality, don't rely on the Evidence Code. Instead, draft a specific agreement that provides for it.

Edward G. Weil is a superior court judge in Contra Costa County. Previously, he served as a deputy attorney general for the state of California.

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