As the popularity and frequency of mediated settlements grow, clients and their counsel often ask practitioners compelling questions about the confidentiality of mediated agreements.
Most practitioner know that Evidence Code Section 1119 provides that communications made during mediations are neither admissible in evidence nor subject to discovery. Problems arise, however, because information gained in the settlement process can be developed or used against a party in other contexts.
Three leading cases explore the parameters of the circumstance under which "confidential" agreements may be ordered disclosed to nonsettling third parties.
In Norton v. Superior Court, 24 Cal.App.4th 1750 (1994), a legal malpractice case, the petitioner was the attorney who represented the plaintiffs in an inverse-condemnation lawsuit, The homeowners had sustained substantial damage form landslides. While that suit was pending. and represented by a different attorney, they brought an action against State Farm Insurance Co. for failing to indemnify them for the property damage at issue in the first lawsuit.
They settled their suits for undisclosed sums and initiated the attorney malpractice action. They alleged that the attorney was negligent in negotiation the settlement terms with the defendant, resulting in adverse tax consequences, and that he had pressured them into accepting the settlement.
Pursuant to Code of Civil Procedure Section 2031, the attorney demanded a complete copy of the State Farm lawsuit settlement agreement. The homeowners refused on grounds of irrelevancy, privacy of financial information and attorney-client privilege.
The trial judge refers to order disclosure, but the Norton court vacated the ruling and directed the trial judge to consider whether the material could be admissible or reasonably lead to the discovery of admissible evidence, If so, the court must order the plaintiffs to produce the information. The trial judge was to inspect the materials in camera to determine whether the settlement should be disclosed and under what circumstances.
The court noted the liberal policies underlying discovery. "Bearing these principles in mind..., "the Court wrote, "the State Farm settlement agreement could be...admissible evidence...of the extent of the [owners'] injury from the alleged malpractice, their motive in bringing the malpractice action, or their bias and credibility as witnesses.
...[T]he settlement agreement might provide that State Farm would make a future payment to the [owners] up to a certain amount depending on the amount they recover from [the attorney]...
"[T]he [owners] might acknowledge the two settlements together constitute a complete satisfaction for all their injuries. Or, the settlement agreement might provide that in return for State Farm's payment of their property damage claim, the [owners] agree to sue [the attorney] for malpractice in obtaining an inadequate settlement with the [defendant] and to surrogate State Farm to that claim or turn over the proceeds of any recovery to State Farm."
Disclosure was also ordered in Home Ins. v. Superior Court, 46Cal.App.4th 1286 (1996), in which the plaintiff's interest as an excess insurer was sufficient to require the primary insurers' immediate disclosure of the line of coverage addressed in their "confidential" settlements.
In Home, oil giant ARCO sued its primary and excess-liability carriers to determine coverage for contamination claims. All but three insurers settled. Home, a nonsettling excess carrier, sought disclosure of the settlements before commencing trial to determine its coverage obligation. Disclosure was postponed, although the court recognized that Home would be entitled to the settlement dollar amounts for contribution purposes if Home was found responsible for coverage.
The appellate court concluded that Home need not await the outcome of the trial about whether it had coverage obligations, because "settlement dollars should be properly allocated, and a determination made as to which, if any, underlying claims have been fully satisfied without Home's participation and which, if any, of Home's policies are no longer at issue."
The Home court rejected ARCO's arguments that pretrial disclosure would distort the settlement dynamic and should be postponed on its assertion that no underlying claim had been fully satisfied.
In contrast, Hinshaw, Winkler, Draa Marsh & Still v. Superior Court, 51 Cal.App.4th 233 (1996), upheld the confidentiality of the settlement in a subsequent discovery dispute.
In Hinshaw, two doctors sued their former attorney for malpractice in dropping them from a large case prior to settlement. The trial judge granted the plaintiffs' request for discovery of the confidential settlement with the larger group of doctors, but the appellate court directed the trial court to vacate its order, noting the third-party privacy interests involved.
Hinshaw stressed balancing the need for information against the magnitude of the invasion of privacy, stating that plaintiffs must show more than a possibility that the information may lead to something relevant. Rather, "they must show a compelling and opposing state interest." The court emphasized that "a private settlement agreement is entitled to as least as much provacy as a bank account or tax information."
Proof of lost settlement opportunity as damages in a malpractice action was not a sufficient showing to invade the privacy protections and public policy favoring settlements.
Article originally appeared in November 5, 1999 issue of VERDICTS AND SETTLEMENTS.