Tuesday, November 22, 2011
Federal Rule of Evidence 408 provides that
(a) Prohibited uses. Evidence of the following is not admissible on behalf of any party, 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:
(1) furnishing or offering or promising to furnish or accepting or offering or promising to accept a valuable consideration in compromising or attempting to compromise the claim ; and
(2) conduct or statements made in compromise negotiations regarding the claim, except when offered in a criminal case and the negotiations related to a claim by a public office or agency in the exercise of regulatory, investigative, or enforcement authority.
Permitted uses. This rule does not require exclusion if the evidence is offered for purposes not prohibited by subdivision (a). Examples of permissible purposes include proving a witness's bias or prejudice; negating a contention of undue delay; and proving an effort to obstruct a criminal investigation or prosecution.
So, Rule 408 precludes the admission of evidence of, inter alia, settlements negotiations connected to "a claim that was disputed as to validity or amount" when offered for certain purposes. But at what point is there a "claim for Rule 408 purposes. If Dan allegedly breached a contract with Paul and Paul brings a lawsuit against Dan, obviously there is a claim. But what if Paul merely threatens to bring a lawsuit? Or what if Paul intimates that he might sue but doesn't actually threaten litigation? What's the standard for determining whether there is a claim? Well, let's take a look at the recent opinion of the Third Circuit in ECEM European Chemical Marketing B.V. v. Purolite Co., 2011 WL 5517319 (3rd Cir. 2011).
Purolite Co. arose "out of a contractual dispute between ECEM European Chemical Marketing, B.V. ("ECEM") and The Purolite Company ("Purolite") for the sale of an organic compound called styrene monomer." After the district court entered judgment in favor of Purolite, ECEM appealed, claiming, inter alia,
that the District Court abused its discretion by excluding statements the parties made during their email communications between January and June 2005. Specifically, ECEM contend[ed] that because there was no "dispute" between ECEM and Purolite as to the validity or amount of payment due under the 2004 Contract, the District Court erred by excluding the parties' emails. Purolite respond[d] that the Court did not abuse its discretion because, during the early 2005 time frame in question, Purolite put ECEM on notice of a potential "compensation claim" based on ECEM's failure to deliver two styrene shipments in November 2004, and because the parties were negotiating to avoid a breakdown in their business relationship.
In addressing this issue, the Third Circuit found that
Rule 408 applies where there is a "dispute" between parties, or "at least an apparent difference of view...concerning the validity or amount of a claim."...A dispute need not "crystallize to the point of threatened litigation"; a mere difference of opinion will suffice to warrant the exclusion....In determining whether a dispute exists, the facts of each case are critical to a district court's exercise of discretion....Ultimately, when in doubt, the district court should err on the side of excluding compromise negotiations.
Applying these principles, the Third Circuit found that
The District Court here did not abuse its discretion by excluding statements made by the parties during their compromise negotiations between January and June 2005. The record reveals that the threat of litigation loomed over the parties as early as December 10, 2004. On that date, Purolite put ECEM on notice by email that if Purolite exhausted its supply of styrene as a result of ECEM's untimely shipment, "a considerable compensation claim [would] be lodged with whoever [was] responsible for the delay."...At a minimum, Purolite's email demonstrates that ECEM was aware that Purolite considered filing a lawsuit to recoup losses it sustained as a result of the late shipments, and that Purolite was serious enough to make its intentions known. In addition, ECEM confirmed the existence of a dispute between the parties when it terminated its deliveries to Purolite, thus showing the failure of negotiations.