Statements During Settlement Negotiations As Evidence in a Criminal Trial

The Federal Rules of Evidence may soon be changed to make it easier for federal prosecutors to use statements made by cooperating companies in settlement negotiations as evidence in trials. On May 15, 2004, the Advisory Committee on Evidence Rules reported its approval of certain proposed amendments. See www.uscourts.gov/rules/Reports/EV5-2004.pdf) and www.uscourts.gov/rules/evdocket.pdf (noting that the Standing Committee approved the proposal in June 2005, followed by the Judicial Conference in September 2005). The amendments have now gone to the Supreme Court, which has until May 1, 2006 to submit them to Congress. Congress will have 7 months to amend, delay, or reject the amendments; otherwise they will take effect as a matter of law on Dec. 1, 2006. See 28 U.S.C. '' 2071-2077 (Rules Enabling Act).

The proposed amendments to Rule 408 (“Compromise and Offers to Compromise”) are intended to resolve conflicting interpretations about whether the limitation on evidentiary use of statements and offers made during compromise negotiations applies in criminal proceedings. The circuit courts have split on this issue. Rule 408 provides:

“Evidence of (1) furnishing or offering or promising to furnish, or (2) accepting or offering or promising to accept, a valuable consideration in compromising or attempting to compromise a claim which was disputed as to either validity or amount, is not admissible to prove liability for or invalidity of the claim or its amount. Evidence of conduct or statements made in compromise negotiations is likewise not admissible. This rule does not require the exclusion of any evidence otherwise discoverable merely because it is presented in the course of compromise negotiations … ” (Emphasis supplied).

The Fifth and Tenth Circuits have sided with the defense in rejecting the government's efforts to introduce such statements as authorized admissions. See United States v. Bailey, 327 F.3d 1131 (10th Cir. 2003) (Rule 408 applies to criminal and civil cases) and United States v. Hays, 872 F.2d 582 (5th Cir. 1989) (same). On the other hand, the Second, Sixth, and Seventh Circuits have sided with the government by interpreting Rule 408 as allowing such evidence to be introduced. See Manko v. United States, 87 F.3d 50, 54 (2d Cir. 1996) (Rule 408 doesn't apply in a criminal case to exclude statements made during civil settlement negotiations); United States v. Logan, 250 F.3d 350, 366-367 (6th Cir. 2001) (notwithstanding Rule 408, evidence about civil settlement negotiations was admissible in a subsequent prosecution); and, United States v. Prewitt, 34 F.3d 436, 439 (7th Cir. 1994) (despite Rule 408, admissions made during civil negotiations with the SEC were admissible in a subsequent prosecution — and noting that Fed. R. Crim. P. 11(e)(6) is facially limited to the inadmissibility of pleas, plea discussions, and related statements in criminal cases).

Assuming that the proposed amendments are approved, Rule 408 will read much differently:

(a) General rule — Evidence of the following is not admissible on behalf of any party, when offered as evidence of 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:

(1) furnishing or offering or promising to furnish, or accepting or offering or promising to accept, a valuable consideration in compromising or attempting to compromise the claim; and

(2) in a civil case, conduct or statements made in compromise negotiations regarding the claim.

(b) Other purposes. — This rule does not require exclusion if the evidence is offered for purposes not prohibited by subdivision (a). Examples of permissible purposes include proving a witness's bias or prejudice; negating a contention of undue delay; and proving an effort to obstruct a criminal investigation or prosecution.” (Emphasis added).

Other Protections Remain

Even without help from Rule 408, all is not necessarily lost if a prosecutor later seeks to introduce statements made during negotiations as admissions against a company or its em-ployees. For one thing, the accompanying Committee Note to amended Rule 408 reflects, “[s]tatements made in civil compromise negotiations [still] may be excluded in criminal cases where the circumstances so warrant under Rule 403.” Nevertheless, given the express reason for amending Rule 408, it will likely be harder to convince a trial judge to exclude such evidence under Rule 403 because its probative value is substantially outweighed by the danger of unfair prejudice.

For those counsel who represent individual employees in these circumstances, good arguments appear to remain for invoking the balancing standards envisioned in Rule 403. The strongest argument will likely focus on an individual's Sixth Amendment confrontation rights and the core protections outlined in Bruton v. United States, 391 U.S. 123 (1968). The scope to which Bruton applies was recently revisited by the Court in Crawford v. Washington, 541 U.S. 36 (2004). There the Court overruled Ohio v. Roberts, 448 U.S. 56 (1980), and held instead that the Sixth Amendment's Confrontation Clause bars testimonial out-of-court statements made by witnesses — regardless of whether such statements are deemed reliable by a court — unless such witnesses are unavailable and defendants had a prior opportunity to cross-examine them. “Where testimonial statements are involved,” the Court noted, “we do not think the Framers meant to leave the Sixth Amendment's protection to the vagaries of the rules of evidence, much less to amorphous notions of 'reliability.' Certainly none of the authorities discussed … acknowledges any general reliability exception to the common-law rule.” Crawford, 541 U.S. at 61.

Still, as a practical matter, even Crawford's expansive reading of the Confrontation Clause may not be enough to defeat a prosecutor's argument that confrontation issues can be avoided by redacting identifying information from a written statement or by instructing witnesses not to volunteer otherwise inappropriate detail. As one commentator has observed: “An issue that has arisen under Bruton is whether a criminal defendant's Confrontation Clause rights are violated by the admission of the confession of a codefendant when the confession does not refer in any way to the defendant, but the defendant is linked to the confession by other evidence properly admitted against the defendant.” Chase CA: The Five Faces of the Confrontation Clause 40. Hous. L. Rev. 1003, 1073 (2003). If, as an example, the government sought to admit as admissions statements made by a company's counsel to government attorneys or investigators during civil or administrative settlement negotiations — such statements being to the effect that what these employees (now defendants) had done violated company policy because their acts violated federal laws — then clearly individuals' counsel would respond that the statements are not admissible since their clients never had an opportunity to confront the witness against them. But to avoid this Bruton/Crawford objection, the government can agree to delete (redact) all references to the individuals by substituting in their place gender-neutral pronouns and argue that this procedure sufficiently protects the defendants from any unfair prejudice (notwithstanding that a jury will quickly decipher who the “he” or “she” in the statements refers to since the evidence has been offered by the government against the defendants). See generally Ritter JL: The X Files: Joint Trials, Redacted Confessions and Thirty Years of Sidestepping Bruton. 42 Vill. L. Rev. 855, 862-72 (1997) (describing the evolution of the Bruton doctrine).

Criminal procedure sets many traps for transactional attorneys and civil litigators who represent companies in heavily regulated industries. Since a criminal proceeding may loom in their client's future, they must stay informed about trends in interpretive cases as well as proposed amendments to these rules. The ambiguity of and proposed change to Rule 408 is one example.

Your client, a corporate executive, is being investigated in connection with whether the stock of her employer was artificially inflated. The company is in a “full cooperation mode” with the SEC and the DOJ, and is negotiating the terms of a consent decree. You learn that the company's attorneys have met with DOJ and SEC attorneys and have admitted (as they felt was necessary to maintain credibility) to certain wrongdoing by various corporate employees. Can the company's statements during negotiations be used against your client, or are they protected by Rule 408 Fed. R. Evid.?

In today's environment, since companies rarely will risk going to trial in federal criminal cases, even if factually innocent, these issues will be encountered most often during the prosecution of former employees. Business entities facing possible criminal prosecution have too many strong incentives not to cooperate with government officials when called upon to turn over evidence, waive privileges, and identify wrongdoers. They cooperate in the hope of avoiding criminal exposure, although doing so often means placing some individuals in harm's way. And, since businesses badly want to negotiate resolutions short of criminal charges, the circumstances for their counsel to make incriminating statements during negotiations have increased. See, eg, the Securities and Exchange Commission's “Seaboard 21(a) Report” (available at www.sec. gov/litigation/investreport/34-44969.htm.) (in which the Commission outlined its requirements about the quality and degree of cooperation necessary for publicly traded entities to obtain some latitude); Commodity Futures Trading Commission's Enforcement Advisory: “Cooperation Factors in Enforcement Division Sanction Recommendations” (available at www. cftc.gov/files/enf/enfcooperation-advisory.pdf) (identifying and discussing cooperation factors that the Enforcement Division may consider when recommending enforcement sanctions for violations of the Commodity Exchange Act); and, the Department of Justice's “Thompson Memorandum” (available at www.usdoj.gov/dag/cftl/corporate_ guidelines.htm) (addressing factors that federal prosecutors should consider in determining whether business entities deserve leniency for cooperating with prosecutors and investigators).

Proposed Amendments to Rule 408

The Federal Rules of Evidence may soon be changed to make it easier for federal prosecutors to use statements made by cooperating companies in settlement negotiations as evidence in trials. On May 15, 2004, the Advisory Committee on Evidence Rules reported its approval of certain proposed amendments. See www.uscourts.gov/rules/Reports/EV5-2004.pdf) and www.uscourts.gov/rules/evdocket.pdf (noting that the Standing Committee approved the proposal in June 2005, followed by the Judicial Conference in September 2005). The amendments have now gone to the Supreme Court, which has until May 1, 2006 to submit them to Congress. Congress will have 7 months to amend, delay, or reject the amendments; otherwise they will take effect as a matter of law on Dec. 1, 2006. See 28 U.S.C. '' 2071-2077 (Rules Enabling Act).

The proposed amendments to Rule 408 (“Compromise and Offers to Compromise”) are intended to resolve conflicting interpretations about whether the limitation on evidentiary use of statements and offers made during compromise negotiations applies in criminal proceedings. The circuit courts have split on this issue. Rule 408 provides:

“Evidence of (1) furnishing or offering or promising to furnish, or (2) accepting or offering or promising to accept, a valuable consideration in compromising or attempting to compromise a claim which was disputed as to either validity or amount, is not admissible to prove liability for or invalidity of the claim or its amount. Evidence of conduct or statements made in compromise negotiations is likewise not admissible. This rule does not require the exclusion of any evidence otherwise discoverable merely because it is presented in the course of compromise negotiations … ” (Emphasis supplied).

The Fifth and Tenth Circuits have sided with the defense in rejecting the government's efforts to introduce such statements as authorized admissions. See United States v. Bailey , 327 F.3d 1131 (10th Cir. 2003) (Rule 408 applies to criminal and civil cases) and United States v. Hays , 872 F.2d 582 (5th Cir. 1989) (same). On the other hand, the Second, Sixth, and Seventh Circuits have sided with the government by interpreting Rule 408 as allowing such evidence to be introduced. See Manko v. United States , 87 F.3d 50, 54 (2d Cir. 1996) (Rule 408 doesn't apply in a criminal case to exclude statements made during civil settlement negotiations); United States v. Logan , 250 F.3d 350, 366-367 (6th Cir. 2001) (notwithstanding Rule 408, evidence about civil settlement negotiations was admissible in a subsequent prosecution); and, United States v. Prewitt , 34 F.3d 436, 439 (7th Cir. 1994) (despite Rule 408, admissions made during civil negotiations with the SEC were admissible in a subsequent prosecution — and noting that Fed. R. Crim. P. 11(e)(6) is facially limited to the inadmissibility of pleas, plea discussions, and related statements in criminal cases).

Assuming that the proposed amendments are approved, Rule 408 will read much differently:

(a) General rule — Evidence of the following is not admissible on behalf of any party, when offered as evidence of 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:

(1) furnishing or offering or promising to furnish, or accepting or offering or promising to accept, a valuable consideration in compromising or attempting to compromise the claim; and

(2) in a civil case, conduct or statements made in compromise negotiations regarding the claim.

(b) Other purposes. — This rule does not require exclusion if the evidence is offered for purposes not prohibited by subdivision (a). Examples of permissible purposes include proving a witness's bias or prejudice; negating a contention of undue delay; and proving an effort to obstruct a criminal investigation or prosecution.” (Emphasis added).

Other Protections Remain

Even without help from Rule 408, all is not necessarily lost if a prosecutor later seeks to introduce statements made during negotiations as admissions against a company or its em-ployees. For one thing, the accompanying Committee Note to amended Rule 408 reflects, “[s]tatements made in civil compromise negotiations [still] may be excluded in criminal cases where the circumstances so warrant under Rule 403.” Nevertheless, given the express reason for amending Rule 408, it will likely be harder to convince a trial judge to exclude such evidence under Rule 403 because its probative value is substantially outweighed by the danger of unfair prejudice.

For those counsel who represent individual employees in these circumstances, good arguments appear to remain for invoking the balancing standards envisioned in Rule 403. The strongest argument will likely focus on an individual's Sixth Amendment confrontation rights and the core protections outlined in Bruton v. United States , 391 U.S. 123 (1968). The scope to which Bruton applies was recently revisited by the Court in Crawford v. Washington , 541 U.S. 36 (2004). There the Court overruled Ohio v. Roberts , 448 U.S. 56 (1980), and held instead that the Sixth Amendment's Confrontation Clause bars testimonial out-of-court statements made by witnesses — regardless of whether such statements are deemed reliable by a court — unless such witnesses are unavailable and defendants had a prior opportunity to cross-examine them. “Where testimonial statements are involved,” the Court noted, “we do not think the Framers meant to leave the Sixth Amendment's protection to the vagaries of the rules of evidence, much less to amorphous notions of 'reliability.' Certainly none of the authorities discussed … acknowledges any general reliability exception to the common-law rule.” Crawford, 541 U.S. at 61.

Still, as a practical matter, even Crawford's expansive reading of the Confrontation Clause may not be enough to defeat a prosecutor's argument that confrontation issues can be avoided by redacting identifying information from a written statement or by instructing witnesses not to volunteer otherwise inappropriate detail. As one commentator has observed: “An issue that has arisen under Bruton is whether a criminal defendant's Confrontation Clause rights are violated by the admission of the confession of a codefendant when the confession does not refer in any way to the defendant, but the defendant is linked to the confession by other evidence properly admitted against the defendant.” Chase CA: The Five Faces of the Confrontation Clause 40. Hous. L. Rev. 1003, 1073 (2003). If, as an example, the government sought to admit as admissions statements made by a company's counsel to government attorneys or investigators during civil or administrative settlement negotiations — such statements being to the effect that what these employees (now defendants) had done violated company policy because their acts violated federal laws — then clearly individuals' counsel would respond that the statements are not admissible since their clients never had an opportunity to confront the witness against them. But to avoid this Bruton/Crawford objection, the government can agree to delete (redact) all references to the individuals by substituting in their place gender-neutral pronouns and argue that this procedure sufficiently protects the defendants from any unfair prejudice (notwithstanding that a jury will quickly decipher who the “he” or “she” in the statements refers to since the evidence has been offered by the government against the defendants). See generally Ritter JL: The X Files: Joint Trials, Redacted Confessions and Thirty Years of Sidestepping Bruton. 42 Vill. L. Rev. 855, 862-72 (1997) (describing the evolution of the Bruton doctrine).

Criminal procedure sets many traps for transactional attorneys and civil litigators who represent companies in heavily regulated industries. Since a criminal proceeding may loom in their client's future, they must stay informed about trends in interpretive cases as well as proposed amendments to these rules. The ambiguity of and proposed change to Rule 408 is one example.