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The Settlement Privilege and the Threat of Legal Action

BY Stanley S. Arkin
October 02, 2014

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:

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