Racing to settlement: the applicability of Federal Rule of Evidence 408 to nonparty settlement communications.

Author:Albert, Chad

INTRODUCTION I. PROTECTING THE DRIVERS: THE FEDERAL RULES CONCERNING THE SECRECY OF SETTLEMENT COMMUNICATIONS A. Rule 408 B. Rule 501 and the Settlement Privilege II. NAVIGATING THE TRACK: NONPARTY SETTLEMENT COMMUNICATIONS IN THE COURTS OF APPEALS A. Textual Analysis B. Foundational Policy 1. Avoiding Reliance on Statements of Suspect Evidentiary Value 2. Promoting Judicial Efficiency Through Settlement C. Similar Cases 1. Internal Work Product 2. Third-Party Settlements 3. Purposes Other than Settlement 4. Mediation in the Sixth Circuit III. THE FINAL LAP: RECOMMENDATIONS TO PRACTITIONERS CONCLUSION INTRODUCTION

The racing world breathed a long sigh of relief on May 22, 2008--the date on which Bruton Smith, Chairman of Speedway Motorsports Inc. (SMI), announced his intention to purchase Kentucky Speedway. (1) For the previous two years, Kentucky Speedway had been engaged in a bitter antitrust battle against NASCAR involving the latter's refusal to award it a lucrative NEXTEL Cup race, (2) and it appeared that all of the necessary pieces were finally in place for a settlement agreement to be reached. Kentucky Speedway had lost at the trial level, (3) it was hemorrhaging money, and its investors were desperately trying to sell the speedway. (4) Thus, when Bruton Smith effectively conditioned the acquisition of the speedway on the lawsuit between Kentucky and NASCAR ending, (5) it seemed as though the three entities would naturally work together on a settlement that would be in all of their best interests. NASCAR could avoid the costs of an appeal, Bruton Smith could acquire the speedway for a fraction of its value, and Kentucky Speedway's shareholders could be bailed out of their failing investment.

Given the prevalence of settlement in federal lawsuits, (6) the parties' lawyers were likely quite familiar with an immediate concern of their clients--ensuring that their statements to the opposing party over the course of settlement negotiations would not expose them to future liability. (7) The lawyers likely turned to Federal Rule of Evidence 4088 to explore the specific protection that their clients could enjoy during the course of the settlement proceedings. There is a wealth of case law and academic literature to which these practitioners may have turned for answers concerning the application of this Rule to settlement communications between the parties, (9) and it is clear that it would have afforded protection to such communications directly between NASCAR and Kentucky Speedway. (10)

An interesting issue must have surfaced, however, when the practitioners considered the consequences of Bruton Smith--a nonparty to the litigation--being involved in the settlement proceedings. Neither the most thorough inspection of the Rule nor the most detailed analysis of its accompanying advisory note would have yielded a sufficient answer to the question whether communications between Bruton Smith and one of the parties to the litigation, in furtherance of settlement with the other party, would have been protected. (11) Such a settlement scenario would arguably further the policy goals underlying the Rule (12) and be enormously advantageous to everyone involved. There is no case law, though, to guide practitioners encountering such a situation, and the academic literature is similarly silent.

When confronted with this issue, practitioners are thus forced either to forgo potentially beneficial interactions with third parties (people like Bruton Smith) or to proceed with an imperfect understanding of their clients' potential exposure to liability resulting from admissions or concessions made in such communications. This void in both the literature and the case law is particularly troubling given the increasing complexity of settlement negotiations and the underlying disputes. In addition, given the growth of mergers and acquisitions and the involvement of third-party "specialists" (13) to whom parties convey a wide variety of sensitive information, the Bruton Smith example might even begin to seem relatively simple. Practitioners are responsible for protecting their clients from harm during the course of settlement proceedings, and it is essential that the issue of nonparty communications be clarified in order to provide practitioners with necessary direction.

This Comment presents an initial analysis of the applicability of Rule 408 to communications made by a party to a nonparty in furtherance of a settlement with another party to the dispute. (14) Given the lack of direct authority regarding this issue, I rely on a textual analysis of the Rule itself, an examination of the public policy considerations motivating the Rule's enactment, and an analysis of the applicability of this Rule to other, similar situations within the jurisdiction of the federal courts of appeals, in order to provide recommendations to practitioners facing this issue.

In Part I, I present an overview of the origins and foundations of the Rules concerning the secrecy of settlement communications and offer a brief description of some of the issues resulting from the Rules' ambiguity. I then argue that the applicability of these Rules to nonparties involved with settlement negotiations has yet to be adequately addressed, note the probable reasons for this being the case, and reflect on the necessity of a swift resolution to this failure.

In Part II, I engage in a textual, policy-based, and common law analysis of the applicability of Rule 408 to nonparty settlement communications under the jurisdiction of the federal courts of appeals. In so doing, I find that the terms of the Rule, its underlying policy, and its current application to analogous cases suggest that the federal circuits would look favorably upon protecting nonparty communications in furtherance of settlement.

In Part III, I present circuit-specific, recommendations to practitioners based on the results of my analysis in Part II. I argue that practitioners should feel most comfortable engaging in nonparty settlement communications in the Third, Fifth, Sixth, Eighth, and Eleventh Circuits; that practitioners should feel less, but still reasonably, comfortable engaging in such communications in the First and Ninth Circuits; and that there is insufficient case law upon which to base a conclusion in the Second, Fourth, Seventh, Tenth, and D.C. Circuits. Finally, I argue that because the federal courts of appeals have acknowledged a broad policy of encouraging the settlement of lawsuits under Rule 408, it would not be inherently unreasonable for parties to engage in such communications--even in the more ambiguous circuits when the communications would be particularly advantageous.


    Before I analyze the applicability of the Rules concerning the secrecy of settlement negotiations to nonparties to a litigation, it is important to understand both the context in which these Rules arose and the current issues resulting from their ambiguity. I explain the absence of an adequate discussion of the issue and emphasize the importance of reaching a resolution.

    1. Rule 408

      Federal Rule of Evidence 408, entitled "Compromise and Offers to Compromise," concerns the admissibility of settlement offers and other communications made during the course of settlement negotiations. (15) It provides, in its current amended form, that "offering ... or accepting ... valuable consideration in compromising or attempting to compromise [a] claim" and "conduct or statements made in compromise negotiations regarding [a] claim" are "not admissible on behalf of any party, when offered to prove liability for, invalidity of, or amount of a claim that was disputed as to validity or amount, or to impeach through a prior inconsistent statement or contradiction." (16)

      The Advisory Committee on Evidence Rules has noted two principal motivations behind the enactment of Rule 408: First, the Rule seeks to guard against the admission of statements made in compromise negotiations because of the statements' questionable evidentiary value; as settlement is often "motivated by a desire for peace rather than from any concession of weakness of position," the use of these statements in another context may be highly misleading. (17) Second, the Rule seeks to further the general public policy of encouraging settlement of lawsuits. (18) Successful settlement negotiations are vital to ensuring that the federal courts remain productive and efficient, and Rule 408 attempts to encourage settlement discourse by freeing individuals from the worry that their statements may expose them to future liability.

      As is the case with many of the Rules of Evidence, the federal courts have yet to implement a consistent judicial philosophy regarding the proper scope and application of Rule 408, (19) and the Supreme Court has yet to produce an opinion addressing the Rule. Given that settlement negotiations are involved in most federal lawsuits, (20) the academic community has understandably developed a keen interest in attending to the various ambiguities inherent in Rule 408. There has been a wealth of scholarship concerning the types of settlement communications covered by the Rule and the safeguards that parties must employ in order to ensure the Rule's applicability to the precise circumstances of their litigation. (21)

      Such scholarship, however, has generally been limited to the context of negotiations taking place directly between two adverse parties to a litigation. Even when the issue of nonparties has been broached in the literature and case law, it has only been with regard to ancillary third parties entering into a preexisting dispute and bringing their own claims against the defendant. The situation is generally as follows: Party A is involved in a lawsuit with Party B. Nonparty C considers engaging in its own litigation against B arising out of...

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