Many of the ADR articles that have appeared in The Legal over the past few years have highlighted the often-blurred understanding in statutes and court decisions of the concept of confidentiality as it relates to mediation.

Often, “confidentiality” has been characterized simply as an evidentiary privilege, created by statute, rule or court decision, with respect to any mediation communication. The Pennsylvania mediation statute is typical of many that have been adopted in other states. Although bearing the caption “confidential mediation communications and documents,” it is limited to creating a privilege against the admissibility of such evidence “in any action or proceeding, including, but not limited to, a judicial, administrative or arbitration action or proceeding.” Moreover, “disclosure of mediation communication or documents may not be required or compelled through discovery or other process.” Beyond prohibiting the discoverability of such mediation communications or their use as evidence in a proceeding, the statute imposes no restrictions.

A broader concept of “confidentiality” relates to barring a party or neutral from disclosing any of the mediation communications not only in the context of litigation or other formal proceeding but to anyone, including the press or business competitors. Such a provision may be found, for example, in the federal Administrative Dispute Resolution Act of 1996 (ADRA).

The Uniform Mediation Act, which has been adopted in several states, provides for a mediation privilege (with some notable exceptions). With respect to confidentiality beyond privilege, however, it simply recognizes that mediation communications are only confidential “to the extent agreed by the parties or provided by other law or rule of this state.”

What is often overlooked in all of these formulations, however, is that direct negotiation, without the assistance of a mediator, represents overwhelmingly the most common method of alternative dispute resolution. In entering into such direct negotiations, however, parties often appear to be accepting of the protections afforded by Rule 408 of the Federal Rules of Evidence (or its analogue in state statutes, including Pennsylvania), as if that rule somehow provides confidentiality/privilege protection equivalent to that provided by state mediation statutes.

In point of fact, Rule 408 provides neither the privilege afforded under the typical mediation statute nor protection from disclosure of the settlement negotiation communications to the outside world.

For example, Rule 408 does not apply to discovery depositions. It may be applicable only to court proceedings but not to administrative proceedings, arbitrations or comparable hearings. It may not cover statements made during the negotiations that do not relate to the claim (unlike the mediation privilege statute in Pennsylvania, which appears to cover any communication made during the mediation process). Moreover, it will apply only where the discussions relate to a disputed legal claim (not, for example, an admitted claim where one party acknowledges an obligation but is seeking to pay a lesser amount). In addition, there are potential exceptions under Rule 408, such as the introduction of statements from the negotiation to prove a witness’s bias or prejudice or to negate a contention of undue delay.

Recognition of these gaps in the protection provided by Rule 408 have impelled federal courts since the adoption of the FRE to consider whether they should establish a settlement negotiation privilege.

The issue of privileges in the FRE has always been problematic. An initial attempt to provide for a whole host of specific privileges (e.g., lawyer-client, psychotherapist-patient, husband-wife, trade secrets, clergy, etc.) was rejected. Rather, Rule 501 of the federal rules simply provides: “The common law — as interpreted by United States courts in the light of reason and experience — governs a claim of privilege.”

A settlement negotiation privilege was eventually recognized by the U.S. Court of Appeals for the Sixth Circuit in 2003, in Goodyear Tire and Rubber v. Chiles Power Supply, 332 F. 3rd 976. In that products liability case, a third party had requested details underlying a settlement agreement. The court blocked access to the negotiations by reason of a settlement negotiation privilege under Rule 501, stating (although its statements in this regard might have been regarded as dictum):

“In Jaffee v. Redmond, 518 US 1 (1996), the Supreme Court discussed at length the parameters of any recognizable privilege. … The rule ‘did not freeze the law governing the privileges of witnesses at a particular point in our history but rather directed federal courts to “continue the evolutionary development of testimonial privileges.”‘ … Thus, the recognition of a privilege should be judged on a case-by-case basis and weighed against the public interest. … Viewed ‘in the light of reason and experience,’ we believe a settlement privilege serves a sufficiently important public interest, and therefore should be recognized.”

The Sixth Circuit emphasized that public policy favored secret negotiations, that the privilege contributed to the effectiveness of the negotiation and that there is an inherent questionability of the truthfulness of any statements made during negotiations due to the likelihood of puffing and posturing.

Thereafter, several federal district courts considered the issue, with differing results. (These cases are cited in In re MSTG, discussed below.)

Whether a claim for a settlement negotiation privilege should be allowed was again addressed most recently by the Federal Circuit in In re MSTG, 675 F. 3rd. 1337 (2012), involving patent-royalty settlement negotiations.

The MSTG case was a mandamus action in which a patent owner hoped to keep secret negotiations with third parties resulting in several patent–royalty settlements. The court found that this information was relevant and potentially of assistance to the party seeking its disclosure. The court was confronted, however, with the claim that the information should be protected by a settlement negotiation privilege.

The court reviewed the factors noted by the Supreme Court in Jaffee and found that they did not support the creation of a privilege. These factors and the related findings of the court were:

1. Was there a widespread policy recognizing the privilege in the states? The court found that “although all states have apparently enacted a statutory mediation privilege,” it was “not aware of any state that recognizes a settlement privilege outside of the context of mediation.”

2. Has Congress considered this issue? The court noted that while Rule 408 covers not only settlements between the parties but also settlements involving a third party, “Congress did not take the additional step of protecting settlement negotiations from discovery.”

3. There was no indication of interest in the creation of this privilege in the original list of evidentiary privileges proposed by the advisory committee of the Judicial Conference.

4. Would the privilege “effectively advance the public good”? Although recognizing that there is an important interest in settlement, the court rejected this contention based upon the belief that disputes are routinely settled without the benefit of a settlement privilege.

5. A new settlement negotiation privilege would necessarily have numerous exceptions that would detract from its effectiveness, clarity and certainty.

6. The courts, particularly through Fed. R. Civ. P 26, are already provided with effective methods to limit the scope of discovery to achieve the necessary ends.

In light of the disagreement among the various federal courts, the imminent creation of a federal settlement negotiation privilege appears problematic. However, the language in MSTG, in which the absence of a settlement negotiation privilege in the states is contrasted to the adoption of a mediation privilege statute in virtually every state, would appear to suggest a readiness of the federal courts to adopt a general federal mediation privilege. This is particularly true in light of Congress’ adoption of such a privilege in the ADRA and the requirement in the ADR Act of 1998 that federal district courts adopt local rules to provide for the confidentiality of ADR procedures in their court programs.

In sum, as noted above, FRE Rule 408 does not provide protection equivalent to the privilege afforded by the typical state statutes relating to mediation. Moreover, with respect to broad confidentiality, parties will have to rely on the effectiveness of their written negotiation or mediation agreements while recognizing that these may not be enforceable against third parties or susceptible to practical enforcement.

As to securing an effective settlement negotiation privilege, however, the best hope would appear to be to designate and convene every negotiation as a mediation, with a mediator specifically selected for this purpose (even if the parties resort to the services of the mediator only minimally). In short, the “potted plant” mediator may, potentially, provide the best protection against objectionable discovery or compelled evidence in any judicial, administrative or arbitration action or proceeding. •

Abraham J. Gafni is a mediator/arbitrator with ADR Options and a professor at Villanova University School of Law.