Federal Evidence Review

Under FRE 408, proof of the validity or invalidity of a “claim” cannot be made through use of evidence of the parties’ attempts to compromise the matter, however, the trial court erred in using a “rigid definition” of a “claim” when it admitted statements “in nature of” those “made during settlement negotiations” during the parties’ earlier discussions; the earlier discussions involved the same “claim” as that in the dispute currently at issue, so that materials produced in the earlier disputes’ settlement negotiations between the parties were not admissible; the error in admitting this settlement evidence was harmful, in Lyondell Chemical Co. v. Occidental Chemical Corp., 608 F.3d 284 (5th Cir. June 8, 2010) (No. 08-40060)

FRE 408 is premised on the idea that private resolution of disputes should be promoted. By excluding evidence of settlement activities (offers, agreements, or other conduct) of parties, the drafters of FRE 408 anticipated that litigants would feel free to seek a settlement outside of court and not fear that the failure to settle would result in the negotiations being used against them. The rule ensures the exclusion of settlement agreements and offers in compromising a claim when “liability” or “invalidity” of a claim or its “amount” is at issue. But the rule also excludes conduct and statements during settlement talks in any prior litigation between the parties that is related to their current dispute (if offered to prove the validity or invalidity of a pending claim). See, e.g., Fiberglass Insulators, Inc. v. Dupuy, 856 F.2d 652, 654–55 (4th Cir. 1988) (Settlement discussions from prior litigation excluded because FRE 408 bars the use of settlement talks related to separate and discrete claims; as suit concerned antitrust violation and earlier suit did not, the earlier claims can be used as they derived from the breakup of a business association, finding that the present and prior claims all related to same transaction) .

In a recent case, the Fifth Circuit considered the application of FRE 408 in the related claims environment. The litigation involved plaintiff (Lyondell Chemical) and others who were potentially responsible to pay for hazardous waste hauled to a disposal site by a disposal company. The disposal company settled with the government to remediate certain parts of the disposal site and it sought from its customers apportionment or contribution for the remediation. The trial court conducted a bench trial on the contribution claims and decided for the plaintiff as to the liability of the defendant companies. The court also made an allocation of the costs between the defendants. The defendants appealed as to this allocation ordered by the court. One basis the defendants raised in disputing the court’s allocation was that the trial court erred in admitting reports that one of the potentially responsible party produced about the volume of hazardous waste that the plaintiff had dumped on behalf of the defendants. The defendants argued that the reports were in the nature of statements made during settlement negotiations and so barred by FRE 408.

The circuit rejected this contention, finding that it was based on too narrow a reading of FRE 408. The circuit found that the earlier dispute on the volume provided by each of the defendants who were customers of the disposal company was essentially the same “claim” as involved in the current dispute. Both disputes concerned the amount of waste each defendant supplied and both controversies concerned the allocation of costs for disposal of the waste. Even though the cost for the earlier dispute and the later dispute involved different remediation efforts, the circuit found that the materials produced (Smythe Reports) in settling the earlier dispute were not admissible in the current dispute and that this material should not have been considered by an expert witness in testifying about the waste volumes supplied by each defendant.

As noted by the circuit:

“[Defendant] El Paso’s argument hinges in part on the scope of the word “claim.” Courts vary widely in their understanding of the term, and thus in their understanding of when evidence is introduced to prove liability for, invalidity of, or the amount of the claim subject to compromise. Most do agree that ‘claim’ does not mean ‘legal claim’ and that, as a result, ‘[t]he dispute being settled need not be the one being tried in the case where the settlement is being offered in order for Rule 408 to bar its admission.‘”

Lyondell Chemical Co., 608 F.3d at 297 (citation omitted).

The circuit noted the various positions taken on this by the circuits. This included:

• Transactional Test: “Caselaw … can be organized around a loose ‘transactional’ test [to determine the identity of the claims under FRE 408]. Four circuits-including this one-have applied Rule 408 to distinct legal claims arising out of a common event.” Lyondell Chemical Co., 608 F.3d at 297 (citing:

• First Circuit: McInnis v. A.M.F., Inc., 765 F.2d 240, 248 (1st Cir. 1985) (holding inadmissible evidence of the plaintiff’s previous settlement with one defendant in an action against a second defendant when the suit arose out of the same accident)

• Fifth Circuit: Branch v. Fid. & Cas. Co. of N.Y., 783 F.2d 1289, 1294 (5th Cir. 1986) (preventing the use of evidence from the plaintiff’s previous settlement with one defendant in subsequent litigation with a second defendant when both actions arose out of same accident)

• Ninth Circuit: United States v. Contra Costa County Water Dist., 678 F.2d 90, 92 (9th Cir. 1982) (barring evidence related to the government’s settlement with one defendant in its suit against a second defendant when both actions arose out of damage to the same canal system).

• Eleventh Circuit: Lampliter Dinner Theater, Inc. v. Liberty Mut. Ins. Co., 792 F.2d 1036, 1042 (11th Cir. 1986) (holding that plaintiff could not introduce evidence of third-party plaintiff’s settlement with insurance company defendant when both plaintiffs’ claims arose out of the same sale of alcohol to minors))

• Modification Of Transaction Test For Examination Of Distinct Legal Claims: “Other circuits have gone further, applying the rule to distinct legal claims arising.” Lyondell Chemical Co., 608 F.3d at 297 (citing:

• Fourth Circuit: Fiberglass Insulators, Inc. v. Dupuy, 856 F.2d 652, 655 (4th Cir. 1988) (barring evidence from the settlement of previous legal claims in subsequent litigation when each dispute arose out of the same failed business relationship)

• Eighth Circuit: Williams v. Fermenta Animal Health Co., 984 F.2d 261, 264 (8th Cir. 1993) (In case regarding legal claims brought by the government against two different taxpayers, even though the claims did not stem from the same factual nexus, under FRE 408, evidence regarding the settlement of a prior, unrelated discrimination lawsuit against the defendant’s predecessor corporation).

• Tenth Circuit: Bradbury v. Phillips Petroleum Co., 815 F.2d 1356, 1363 (10th Cir. 1987) (rejecting, in dicta, evidence of seven prior claims that arose during the same uranium exploration project over the course of fifteen months because the “claims are related inasmuch as they arose in the course of the same large scale uranium exploration project operated by [the contractor], and because they are similar enough to the claim sued upon in this case to be relevant”)

• “Spirit And Purpose” Test: “The Seventh Circuit eschews any strict ‘transaction’ test, but looks to ‘the spirit and purpose of the rule and decide[s] whether the need for the settlement evidence outweighs the potentially chilling effect on future settlement negotiations.‘” ( Citing Bankcard Am., Inc. v. Universal Bancard Sys., Inc., 203 F.3d 477, 484 (7th Cir. 2000 ) (“The need for Universal to explain it thought a settlement had been reached allowing it to roll over accounts-without allowing any details about the settlement talks or even use of the word ‘settlement’-outweighed any potential for discouraging future settlements and did nothing to undermine the purpose and spirit of Rule 408.”) Lyondell Chemical Co., 608 F.3d at 298.

The circuit in Lyondell declined to “adopt any rigid definition of ‘claim.‘” Rather, the Fifth Circuit noted its rationale for concluding that the claims were unified. The circuit had:

“no trouble concluding the Smythe Reports were created for use in negotiations regarding the ‘claim’ now being litigated. Though separated by time and location, the disputes associated with the Highway 90 [Previous disposal site] and Turtle Bay [subsequent dump] sites arise out of the same events: the repeated dumping of hazardous waste intended for Highway 90. The disputes involve the same relevant parties, the same waste-generating facilities, the same basic time frame, the same waste hauler, and the same intended disposal site. More to the point, it involves the same primary liability question: What chemicals did each facility ship offsite and in what quantity? And because waste disposal at both sites is inextricably linked, the scope of a party’s liability for the Highway 90 Site bears directly on the extent of its liability for Turtle Bayou. The Highway 90 negotiations did not involve circumstances that were merely ‘similar’ to the current dispute over Turtle Bayou…. [L]iability for one site is ‘germane’ to liability for the other.”

Lyondell Chemical Co., 608 F.3d at 298.

Because the “cause” was the same, FRE 408 would exclude the evidence from the previous settlement. Accordingly, the district court’s admission of the Smythe Reports was an error, which the circuit found was harmful. The case presents a lengthy review of FRE 408 and some of the positions taken by the circuits on its application. Notably, the opinion did not cite to any positions taken by the Second, Third, Sixth and D.C. Circuits regarding the application of FRE 408 to related claims.