Wednesday, October 24, 2007
The Great Compromise: Hawaii Court Resolves Circuit Split Over Whether Rule 408 Applies In Third Party Situations
The recent decision of the District Court for the District of Hawaii in McDevitt v. Guenther, 2007 WL 2121241 (D. Hawaii 2007) discusses and I think resolves an interesting circuit split under Federal Rule of Evidence 408. Rule 408 generally precludes the admission of evidence of compromises, offers to compromise, and related statements in federal cases to prove the validity, invalidity, or amount of a claim.
The first classic case under this Rule would involve a plaintiff being prevented from introducing the defendant's offer to pay the plaintiff a certain amount of money during failed settlement negotiations as evidence that the defendant knew that he was at fault and that the amount of money offered equaled the amount of the defendant's liability. The second classic case would involve the defendant being prevented from introducing evidence that he rejected the plaintiff's offer to settle a case for a small amount of money to show that that the plaintiff knew that he had a losing case (and that the defendant knew that he had a winning case).
The theories behind the Rule are (1) that parties might be making certain statements/offers in settlement negotiations to make a costly lawsuit go away, not because they believe the statements, and (2) that courts want to encourage settlements to avoid clogging courts with cases, and excluding statements made during these negotiations alows parties to speak openly during these negotiations without the fear that their words will later be disclosed in future cases.
Guenther, however, presented an atypical case in that the plaintiff, Timoth McDevitt, brought a lawsuit against the defendant, Lianne M. Guenther, claiming that she committed legal malpractice by failing to draft a proper prenuptual agreement, which meant that he had to pay more money to his wife upon their divorce than if they entered into a proper prenuptual agreement. The amount of damages he claimed was the difference between what he would have paid to his wife under the proposed prenuptual agreement and the amount he agreed to pay his wife after settlement negotiations (Guenther was not involved in the settlement negotiations).
The problem was that McDevitt was using evidence of a compromise with his wife to prove the amount of a claim, so under a literal reading of Rule 408, the evidence should have been excluded. According to the court in Guenther, however, "[c]ourts are split as to whether Rule 408 bars admission of evidence from a settlement between plaintiff and a third party to calculate a claim for damages against a defendant who is not a party to the original suit in which the settlement occurred." The Hawaii court sided with those courts finding such evidence inadmissible; I agree.
The Advisory Committee Notes to Rule 408 when it was first proposed in 1972, combined with the Advistory Committee Notes to Rule 408 when it was amended in 2006, clearly support the court's position. In 1972, after discussing the 2 theories behind the Rule, the Advisory Committee noted: "While the rule is ordinarily phrased in terms of offers of compromise, it is apparent that a similar attitude must be taken with respect to completed compromises when offered against a party thereto. This latter situation will not, of course, ordinarily occur except when a party to the present litigation has compromised with a third person."
In 2006, the Advisory Committee noted that the amendment it made to Rule 408 "makes clear that Rule 408 excludes compromise evidence even when a party seeks to admit its own settlement offer or statements made in settlement negotiations." This is beacuse Rule 408 protects both parties to the negotiation, so one party to the negotiations cannoy unilaterally waive the protections of Rule 408.
Thus, the 1972 Notes tell us that Rule 408 covers "third party" situations like the fact pattern in Guenther, and the 2006 Notes tell us that Rule 408 is applicable in this "third party" situation, regardless of whether the party to the settement negotiations is offering the evidence or having the evidence offered against him. The way I see it, the circuit split has been resolved, and all federal courts in the future should act in conformity with the Guenther opinion.