The Settlement Privilege and the Threat of Legal Action

[A]ccording to defendants, [evidence of plaintiff's large settlement demand] shows that her underlying sexual harassment claim was made in bad faith, that is, that it was not merely invalid, but was known to be such by plaintiff when she made it. Thus, even if the offer is limited to its alleged relevance to the retaliation claim, it is offered precisely for the forbidden purpose of showing that the underlying claim that was the subject of the settlement discussions was frivolous.

Here, then, the court clearly determined that the value of preserving the confidentiality of settlement talks outweighed the principal point that the plaintiff was seeking to leverage a potentially meritless claim by threat of a lawsuit ' a different conclusion than that recently reached by the District of Massachusetts.

Ray v. Ropes & Gray LLP

The District of Massachusetts took a different approach to that of the Sanders court in Ray v. Ropes & Gray LLP, 961 F. Supp. 2d 344 (D. Mass. 2013). In Ray, the defendant law firm terminated the plaintiff's employment in December 2008 and offered him six months of severance pay. In May 2009, the plaintiff threatened to file a racial discrimination complaint with the United States Equal Employment Opportunity Commission (EEOC) unless the firm extended his severance period indefinitely or paid him $8.5 million. This settlement demand then increased to $40 million over the course of the parties' discussions. Indeed, the plaintiff further threatened the firm's partners with criminal prosecution, bar discipline and public embarrassment if his demands were not met.

The parties were unable to settle, and plaintiff commenced a lawsuit. He alleged, among other things, that the firm retaliated against him by refusing to provide letters of recommendation after he filed a complaint with the EEOC. To prove his retaliation claim, he had to establish, among other things, that he was acting in good faith when he filed his complaint with the EEOC.

At trial, the court allowed the firm to offer evidence of the plaintiff's exorbitant settlement demands and threats to the firm's partners to show that the plaintiff did not believe he had a good-faith claim, but rather sought to extort money from the firm. The court acknowledged that Rule 408 “bars the use of an offer of compromise as an admission of liability.” Nonetheless, the court sought to avoid this bar by explaining that the firm “characterize[d] the 'offer,' coupled as it was with the threat to file a discrimination complaint, as an attempt at extortion (relevant to the issue of bias).” In other words, after acknowledging that Rule 408 bars the use of settlement demands to prove liability, the court referenced the “bias” exception in an attempt to justify its decision to admit such evidence. After just two and a half hours of deliberations, the jury returned a verdict in favor of the defendants.

By our analysis, the conclusion to admit the evidence at issue is sound ' though it seems that the notion of “bias” is artifice. Every alleged settlement demand could be said to reveal a “bias.” Instead, it would appear that the District of Massachusetts sought to impose upon the plaintiff accountability for his unreasonable and, at a minimum, criminally suspect demand for $40 million in favor of his claim in order to avoid the threat of public humiliation or worse to the lawyers at Ropes & Gray LLP.

Conclusion

Aggressive advocacy can often cross the line from legitimate negotiation tactics to extortion. It is laudable to encourage good-faith efforts to settle legitimate claims; however, this policy cannot and should not be used to undermine a defendant's ability to present civilly evidence demonstrating a criminally extortionate demand. The Ray court's characterization of allegations of extortion as sounding in “bias” is less intellectually honest than simply conceding that this conflict of policy exists.

One potential solution is for the legislature to create a “crime-fraud” exception to the settlement privilege that is analogous to the “crime-fraud” exception to the attorney-client privilege. The latter is a relatively elaborate standard applied when one looks to pierce the otherwise sacrosanct attorney-client privilege. See United States v. Jacobs , 117 F.3d 82, 87 (2d Cir. 1997) (“A party wishing to invoke the crime-fraud exception must demonstrate that there is a factual basis for a showing of probable cause to believe that a fraud or crime has been committed and that the communications in question were in furtherance of the fraud or crime.”) Certainly, it is worth considering whether an analogous standard should exist to protect against the instance of settlement overtures tinged by extortion.

Arguably, a “crime-fraud” exception would not undermine the policies underlying the settlement privilege. To the contrary, it will promote ' rather than interfere with ' good-faith efforts to settle legitimate claims. It will also have a restraining influence on those who might otherwise be inclined to make extortionate-type demands while hiding behind the mask of faux negotiation.

Stanley S. Arkin and Lisa C. Solbakken are partners of Arkin Solbakken LLP. The authors thank Deana Davidian, an associate at Arkin Solbakken LLP, for her contributions to this article.

Editor's Note: The Federal Rules of Evidence (FED. R. EVID. 408) and similar state rules prohibit the introduction into evidence of statements or acts made during compromise negotiations if they are offered to prove the validity or value of a claim. This so-called “settlement privilege” is meant to encourage the parties to negotiate and settle, where possible. But, as the authors pointed out in Part One of this article, there may be a fine line between a settlement offer and an attempt at extortion ' “Pay what I ask or I will sue (and commercially disparage your company).” Here, they describe how two courts came to opposite conclusions about the settlement privilege, and discuss the advisability of enacting an exception to that privilege when an offer rises to the level of an extortionate threat.

Sanders v. Madison Square Garden

In Sanders v. Madison Square Garden, L.P. , 525 F. Supp. 2d 364 (S.D.N.Y. 2007), the Southern District of New York addressed the application of the settlement privilege in the context of potentially extortionate settlement discussions. There, the plaintiff commenced a lawsuit against her former employer, alleging that: 1) she was discriminated against on the basis of gender by virtue of sexual harassment by the defendant; and 2) she was fired in retaliation for her sexual harassment claim. To prove the retaliation claim, the plaintiff had to establish, among other things, that she was acting in good faith when she made her sexual harassment claim. The defendants sought to present evidence that the plaintiff offered a large sum of money to settle the sexual harassment claim, suggesting that she did not believe she had a good-faith claim, but rather sought to extort money from the defendants. The court granted the plaintiff's motion in limine to exclude this evidence, stating that this was simply an effort to use compromise discourse to disprove the validity of her claim. The court explained its ruling as follows:

[A]ccording to defendants, [evidence of plaintiff's large settlement demand] shows that her underlying sexual harassment claim was made in bad faith, that is, that it was not merely invalid, but was known to be such by plaintiff when she made it. Thus, even if the offer is limited to its alleged relevance to the retaliation claim, it is offered precisely for the forbidden purpose of showing that the underlying claim that was the subject of the settlement discussions was frivolous.

Here, then, the court clearly determined that the value of preserving the confidentiality of settlement talks outweighed the principal point that the plaintiff was seeking to leverage a potentially meritless claim by threat of a lawsuit ' a different conclusion than that recently reached by the District of Massachusetts.

Ray v. Ropes & Gray LLP

The District of Massachusetts took a different approach to that of the Sanders court in Ray v. Ropes & Gray LLP , 961 F. Supp. 2d 344 (D. Mass. 2013). In Ray, the defendant law firm terminated the plaintiff's employment in December 2008 and offered him six months of severance pay. In May 2009, the plaintiff threatened to file a racial discrimination complaint with the United States Equal Employment Opportunity Commission (EEOC) unless the firm extended his severance period indefinitely or paid him $8.5 million. This settlement demand then increased to $40 million over the course of the parties' discussions. Indeed, the plaintiff further threatened the firm's partners with criminal prosecution, bar discipline and public embarrassment if his demands were not met.

The parties were unable to settle, and plaintiff commenced a lawsuit. He alleged, among other things, that the firm retaliated against him by refusing to provide letters of recommendation after he filed a complaint with the EEOC. To prove his retaliation claim, he had to establish, among other things, that he was acting in good faith when he filed his complaint with the EEOC.

At trial, the court allowed the firm to offer evidence of the plaintiff's exorbitant settlement demands and threats to the firm's partners to show that the plaintiff did not believe he had a good-faith claim, but rather sought to extort money from the firm. The court acknowledged that Rule 408 “bars the use of an offer of compromise as an admission of liability.” Nonetheless, the court sought to avoid this bar by explaining that the firm “characterize[d] the 'offer,' coupled as it was with the threat to file a discrimination complaint, as an attempt at extortion (relevant to the issue of bias).” In other words, after acknowledging that Rule 408 bars the use of settlement demands to prove liability, the court referenced the “bias” exception in an attempt to justify its decision to admit such evidence. After just two and a half hours of deliberations, the jury returned a verdict in favor of the defendants.

By our analysis, the conclusion to admit the evidence at issue is sound ' though it seems that the notion of “bias” is artifice. Every alleged settlement demand could be said to reveal a “bias.” Instead, it would appear that the District of Massachusetts sought to impose upon the plaintiff accountability for his unreasonable and, at a minimum, criminally suspect demand for $40 million in favor of his claim in order to avoid the threat of public humiliation or worse to the lawyers at Ropes & Gray LLP.

Conclusion

Aggressive advocacy can often cross the line from legitimate negotiation tactics to extortion. It is laudable to encourage good-faith efforts to settle legitimate claims; however, this policy cannot and should not be used to undermine a defendant's ability to present civilly evidence demonstrating a criminally extortionate demand. The Ray court's characterization of allegations of extortion as sounding in “bias” is less intellectually honest than simply conceding that this conflict of policy exists.

One potential solution is for the legislature to create a “crime-fraud” exception to the settlement privilege that is analogous to the “crime-fraud” exception to the attorney-client privilege. The latter is a relatively elaborate standard applied when one looks to pierce the otherwise sacrosanct attorney-client privilege. See United States v. Jacobs , 117 F.3d 82, 87 (2d Cir. 1997) (“A party wishing to invoke the crime-fraud exception must demonstrate that there is a factual basis for a showing of probable cause to believe that a fraud or crime has been committed and that the communications in question were in furtherance of the fraud or crime.”) Certainly, it is worth considering whether an analogous standard should exist to protect against the instance of settlement overtures tinged by extortion.

Arguably, a “crime-fraud” exception would not undermine the policies underlying the settlement privilege. To the contrary, it will promote ' rather than interfere with ' good-faith efforts to settle legitimate claims. It will also have a restraining influence on those who might otherwise be inclined to make extortionate-type demands while hiding behind the mask of faux negotiation.

Stanley S. Arkin and Lisa C. Solbakken are partners of Arkin Solbakken LLP. The authors thank Deana Davidian, an associate at Arkin Solbakken LLP, for her contributions to this article.