Caution: Mediator’s Proposal May Not Be Confidential Where Both Federal and State Claims are at Issue

On September 1, 2016, the Ninth Circuit held that, where both federal and state law claims are at issue, the federal law of privilege applies to mediation negotiations. In re: TFT-LCD (Flat Panel) Antitrust Litigation, Sony Electronics, Inc. et al. v. Hannstar Display Corporation, No. 14-15916.

Sony and Hannstar Display Corporation were involved in a price-fixing dispute and engaged a mediator to resolve the dispute prior to Sony filing suit. Sony proceeded with antitrust claims against other defendants. In an email exchange, both parties accepted the Mediator’s Proposal for settlement. Hannstar subsequently refused to comply with the terms of the settlement agreement and informed counsel for Sony that it did not intend to pay the settlement amount contained in the Mediator’s Proposal. Sony then filed suit in federal court alleging federal and state antitrust claims and breach of contract for Hannstar’s alleged reneging on the settlement agreement.

After concluding its antitrust cases against other defendants, Sony dismissed its antitrust claims against Hannstar, but continued to litigate its state-law breach of contract claim. Sony moved for summary judgment on its breach of contract claim to enforce the settlement agreement. The district court denied the motion, holding that the mediation privilege in the California Evidence Code §1123(b) bars introduction of the settlement email exchange and resulting contract without an express statement that the settlement was intended to be enforceable or binding.

On appeal, the Ninth Circuit reiterated its prior holding in Agster v. Maricopa County, 422 F.3d 836, 839 (9th Cir. 2005) that “where there are federal question claims and pendent state law claims present, the federal law of privilege applies.” In Wilcox v. Arpaio, 753 F.3d 872 (9th Cir. 2014), the Court of Appeals clarified that although state contract law governs whether the parties had reached a settlement, if the underlying action that was allegedly settled contained both federal and state law claims, federal law on privilege applies. Accordingly, notwithstanding the fact that Sony had dismissed the federal antitrust claim, federal privilege law applied because the settlement negotiations related to both state and federal claims.

Federal Rule of Evidence Rule 408 prohibits evidence of statements made during settlement negotiations 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, … [however] the court may admit this evidence for another purpose.” Examples of admitting evidence of settlement negotiations for “another purpose” include: use to prove the amount in controversy or use to prove a party’s knowledge of facts. Rule 408 does not protect against public disclosure of settlement terms which may then become available to third parties in subsequent lawsuits.

In re: TFT-LCD (Flat Panel) Antitrust Litigation is a cautionary reminder that where a case involves both federal and state law claims – even if the federal claim is later dismissed – the federal privilege law applies to settlement communications. Due to the fact that federal privilege law is far more lenient on the use of settlement communications in litigation and the broader impact that has on potential subsequent lawsuits brought by third parties, discretion should be exercised in settlement communications.

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September 8, 2016