SC Lawyer, May 2004, #6. Secret settlements: reports of their demise are premature.

• Author: By Eli A. Poliakoff, Kris Hines and Matthew T. Richardson

South Carolina Lawyer

2004.

SC Lawyer, May 2004, #6.

Secret settlements: reports of their demise are premature

South Carolina LawyerMay 2004Secret settlements: reports of their demise are prematureBy Eli A. Poliakoff, Kris Hines and Matthew T. RichardsonSouth Carolina's state and federal courts have restricted - but not prohibited - so-called "secret settlements." As widely reported in state and national media, the U.S. District Court for the District of South Carolina and the Supreme Court of South Carolina have adopted rules addressing court-enforced secret settlements. In November 2002, South Carolina's federal district court adopted Local Civil Rule 5.03(c) and in May 2003, the state supreme court enacted South Carolina Rule of Civil Procedure Rule 41.1. National headlines - "Judges Seek to Ban Secret Settlements in South Carolina" read The New York Times - heralded the demise of sealed settlements in the Palmetto State. The reports of their demise are premature. The new rules establish a rebuttable presumption against court-enforced secret settlements but do not constitute an outright ban.

Before considering how to apply the new rules, the practitioner should consider whether they even apply to the proposed settlement. Both the state and federal rules address settlement agreements sealed by an order of the court, i.e., "court-enforced secret settlements." The rules do not affect secret settlements enforced by private contract. Litigants remain free to enter into contractually enforced secret settlements. State Rule 41.1 expressly states that it does not apply to private settlement agreements. Parties cannot rely on the contempt power of the court to enforce a private agreement but must bring a separate breach of contract action to remedy a breach of the private agreement. However, when a party seeks a court order to keep settlement terms private, the new rules apply.

Local Civil Rule 5.03 (c)

Local Civil Rule 5.03 (c) of the U.S. District Court for the District of South Carolina prohibits court-enforced secret settlements: "No settlement agreement filed with the Court shall be sealed pursuant to the terms of this Rule [Filing Documents under Seal]." However, Local Civil Rule 1.02 provides an escape valve by allowing the court to suspend or modify any local rule for good cause. In a forthcoming article in the South Carolina Law Review, Chief Judge Joseph Anderson notes that, together, "Local Rules 1.02 and 5.03(c) establish a preference for openness at settlement, while still preserving the ability of the presiding judge to seal a settlement when, for example, proprietary information or trade secrets need to be protected, or a particularly vulnerable party needs to be shielded from the glare of an otherwise newsworthy settlement." Joseph F. Anderson, Hidden from the Public by Order of the Court: The Case Against Government-Enforced Secrecy, 55 S.C. L. Rev. (forthcoming June 2004). [hereinafter "Anderson"] The federal rule is not a complete ban but a strong "preference."

No reported federal cases in South Carolina discuss what constitutes "good cause" under Rule 1.02 to suspend Rule 5.03(c). Generally, the determination of whether there is "good cause" to modify or suspend an existing rule is a fact-specific inquiry, the results of which will vary from case to case. The federal rule as originally proposed would have prohibited sealed settlements if keeping the settlement under seal would have a "probable adverse effect upon the general public health or safety, or the administration of public office, or the operation of government." Id. South Carolina's federal district court judges rejected that proposal in favor of the current rule.

South Carolina

Rule of Civil Procedure 41.1

South Carolina Rule of Civil Procedure 41.1 addresses the procedure for sealing documents and settlement agreements and provides factors that parties must address when requesting the court to seal a settlement. The rule categorically prohibits sealed settlements in only one category - settlements that involve a public body or institution. S.C. R. Civ. P. 41.1(c).

Any party to the litigation may file a motion to seal all or part of the settlement agreement either simultaneous with or after approval of the agreement. The same procedural requirements for filing a document under seal (Rule 41.1(b)) must be followed when requesting a sealed settlement, including a motion to seal specifically identifying the sections of the settlement to be sealed. The trial court then reviews the actual settlement in camera. In a forthcoming article in the South Carolina Law Review, Chief Justice Jean Hoefer Toal notes that the procedure is designed to give "both parties and the public an opportunity to be heard before a judge grants or denies a motion to seal a settlement." Jean Hoefer Toal and Bratton Riley, The New Role of Secret Settlements in the South Carolina Justice System, 55 S.C. L. Rev. (forthcoming June 2004). [hereinafter "Toal & Riley"]

As in a motion to seal documents, a motion to seal a settlement must state the reasons why sealing is necessary. A motion to seal a settlement must also address: "(1) the public or professional significance of the lawsuit; (2) the perceived harm to the parties from the disclosure; (3) why alternatives other than sealing the documents are not available to protect legitimate private interests as identified by this Rule; and (4) why the public interest, including, but not limited to, the public health and safety, is best served by sealing the documents." S.C. R. Civ. P. 41.1(c)(1)-(4). The court must weigh these four factors in considering whether to seal a settlement, and orders to seal settlements must specify the reasons for doing so. S.C. R. Civ. P. 41.1(c), (d). In family court matters, the court must also consider whether the case involves sensitive custody matters and whether public release of the settlement terms could expose private financial matters that could adversely affect the parties. Rule 41.1(c) specifically directs the court to "balance the special interests of the child or children involved in the family court matter."

The first two factors listed in Rule 41.1(c) - public or professional significance of the lawsuit and perceived harm to the parties - stem from Davis v. Jennings, 304 S.C. 502, 405 S.E.2d 601 (1991). Toal & Riley, 55 S.C. L. Rev. In Davis, the Supreme Court of South Carolina established factors for the trial court to consider when a protective order is sought. Those factors should include (but are not limited to) the ensuring of a fair trial; the need for witness cooperation; the parties' reliance on confidentiality; the public or professional significance of the lawsuit; and the harm to the parties from disclosure. Davis, 304 S.C. at 506, 405 S.E.2d at 604. The Davis factors are based in part on Mokhiber v. Davis, 537 A.2d 1100 (D.C. 1988), in which the Court of Appeals for the District of Columbia listed factors "counseling against" removal of protective orders after a settlement. These factors include ensuring a fair trial, encouraging witness cooperation and other sources of information and parties' reliance on continuing confidentiality. Mokhiber, 537 A.2d at 1116.

The third 41.1(c) factor - why alternatives are not available - is derived from In re Knight Publishing Co., 743 F.2d 231 (4th Cir. 1984). Toal & Riley, 55 S.C. L. Rev. In Knight Publishing, the Fourth Circuit required district courts to state the reasons for rejecting alternatives when issuing orders to seal court documents. Knight Publishing Co., 743 F.2d at 235.

The state supreme court included the fourth 41.1(c) factor - why the public interest is best served by sealing the settlement - so that "the trial judge [w]ould not be limited by public health and safety concerns as the exclusive justification for refusing to grant a motion to seal a settlement." Toal & Riley, 55 S.C. L. Rev.

Despite the media references to the "ban" on secret settlements, both the federal and state rules continue to permit sealed settlement agreements. However, litigants face a hurdle in convincing a court to agree to seal. The presumption against sealed settlements is strongest when the sealed information involves a public safety issue. Both Chief Judge Anderson and Chief Justice Toal invoke medical malpractice cases and the Bridgestone/Firestone tire issue as especially inappropriate instances for court-enforced sealed settlements. Anderson, 55 S.C. L. Rev. and Toal & Riley, 55 S.C. L. Rev. Rather than categorically prohibiting such court-sanctioned agreements, the new rules establish guidelines for the parties and the court to consider. As Chief Justice Toal remarked at an October 2003 symposium on the new rules, "the default position is that the public institutions . . . are open. . . . [I]f you want to shield something from public view, there [are] some showings that you have to make."

Eli A. Poliakoff is editor in chief of the South Carolina Law Review; Kris Hines is senior articles editor of the South Carolina Law Review; and Matthew T. Richardson was editor in chief of South Carolina Law Review Volume 49 and now practices in Columbia with Wyche Burgess Freeman & Parham, P.A. The Summer 2004 issue of the South Carolina Law Review. Volume 55, will contain articles by symposium participants, including Chief Judge Joseph F. Anderson, South Carolina Supreme Court Chief Justice Jean Hoefer Toal, USC Law Professor John Freeman and others. To order a copy, go to www. sclawreview.org.

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