Compromise evidence used to establish the amount in controversy in diversity of jurisdiction case without violating FRE 408, in McPhail v. Deere & Co., 529 F. 3d 947 (10th Cir. June 25, 2008) (No. 07-6142)
In order to advance the policy of encouraging settlement, FRE 408 excludes evidence regarding offers to compromise a dispute if that evidence is used "to prove liability for or invalidity of the claim or its amount" and excludes "[e]vidence of conduct or statements made in compromise negotiations." As one court has explained: "The primary policy reason for excluding settlement communications is that the law favors out-of-court settlements, and allowing offers of compromise to be used as admissions of liability might chill voluntary efforts at dispute resolution." See, e.g., Zurich American Ins. Co. v. Watts Indus., Inc., 417 F.3d 682, 688 (7th Cir. 2005). A recent Tenth Circuit case highlighted the permissible and impermissible uses of settlement evidence under the rule.
In McPhail, a farmer died in a tractor accident. His widow filed a state court action against the manufacturer of the tractor. The case was removed to federal court. The widow moved to remand the case back to state court, claiming the diversity jurisdiction amount in controversy of $75,000 had not been shown. The court considered materials beyond the complaint to assess the amount in controversy, including a settlement offer from the plaintiff. After finding jurisdiction, the district court granted the manufacturer’s motion for partial summary judgment on claim whether a warning was adequate to cure any design defects.
On appeal, the circuit noted that FRE 408 did not bar consideration of settlement evidence to determine jurisdiction. The circuit distinguished the issue of jurisdiction from proof at trial: "The amount in controversy is not proof of the amount the plaintiff will recover. Rather, it is an estimate of the amount that will be put at issue in the course of the litigation. To this end, documents that demonstrate plaintiff’s own estimation of its claim are a proper means of supporting the allegations in the notice of removal, even though they cannot be used to support the ultimate amount of liability." McPhail, 529 F.3d at 596.
FRE 408 lists permitted and prohibited purposes for admitting compromise or offers to compromise evidence. Compromise evidence is prohibited "when offered 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." FRE 408. Settlement evidence may be permitted if offered for "proving a witness’s bias or prejudice; negating a contention of undue delay; and proving an effort to obstruct a criminal investigation or prosecution." FRE 408(b).
As demonstrated in McPhail, the list of permitted purposes is illustrative. Settlement evidence is permissible to show jurisdiction. It would be impermissible to establish liability. The rationale is that the permitted use does not interfere with the policy of the rule to encourage settlement.
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