Without Prejudice? Canadian Settlements Are Not Entitled to the Same Privilege in the United States

Torys Quarterly: Adapting to Change

Canada and the United States share a common public policy of encouraging the compromise and settlement of legal disputes.

The two countries diverge, however, in their approach to promoting that policy. The distinctions are significant and can lead to different litigation outcomes on either side of the border.

Public Policy Favors Settlement in Canada and the U.S.

Canadian and U.S. courts alike have long recognized a strong public interest in the settlement of disputes and litigation.1 In Canada,

there is an overriding public interest in favour of settlement. This policy promotes the interests of litigants generally by saving them the expense of trial of disputed issues, and it reduces the strain upon an already overburdened provincial court system.3

Likewise in the United States, “[s]ettlements before reaching a trial foster a more efficient, cost-effective, and significantly less burdened judicial system.”3

Despite similar public policies favoring settlement, the countries do not share common rules to encourage settlements. While Canadian courts have established a “settlement privilege” akin to the solicitor-client privilege, United States courts, in all but a handful of jurisdictions, employ a narrower evidentiary rule that limits only the admission of certain settlement communications at trial. For parties doing business – and litigating disputes – on both sides of the border, the disparity can result in unanticipated and potentially harmful consequences.

Canada’s Settlement Privilege

To promote the public policy favoring settlements, Canadian courts, including in Quebec, have established a “settlement privilege,” which prohibits the disclosure or admission into evidence of settlement communications and completed agreements, including the amount of settlement.4

The Canadian settlement privilege began as the “without prejudice” rule adopted from English common law. According to the rule, communications made “without prejudice” in the course of settlement negotiations were inadmissible in evidence. The rule “was based on the understanding that parties will be more likely to settle if they have confidence from the outset that their negotiations will not be disclosed.”5 Initially, Canada’s “without prejudice” rule protected only communications expressly stated as such and only when those communications did not result in a completed settlement.6

Canadian settlement privilege can be overcome if a competing public interest outweighs the interest in encouraging settlements.

Over time, Canadian courts determined that the “without prejudice” rule should be a “class” or “blanket” privilege.7 This broader “settlement privilege” has been extended to all settlement communications and documents, including those not expressly stated to be “without prejudice,”8 and also protects completed settlement agreements.9

The Canadian settlement privilege can be overcome if a competing public interest outweighs the interest in encouraging settlements.10 Employing this standard, Canadian courts have overridden the settlement privilege when its proponent has engaged in misrepresentation or fraud – or made threats to do so.11 In Berry v. Cypost, for example, the defendant’s witness admitted during a settlement negotiation that he had lied in an affidavit previously submitted to the court. The BC Supreme Court ruled that the plaintiff could testify at trial and cross-examine the defendant’s witness about the admission despite its having been made as a settlement communication. The Court reasoned, “[i]t cannot be the case that an admission that a false affidavit had been sworn would be protected by the privilege associated with any honest attempt at settlement.”12

Exceptions are also made to prevent a plaintiff from being overcompensated or when necessary to prove the existence or scope of a settlement.13

U.S. Evidentiary Rules on Settlements

Unlike Canada, the United States has not widely adopted a broad settlement privilege in its federal or state courts. Although U.S. courts routinely affirm the importance of encouraging settlements, they have concluded that “an across-the-board recognition of a broad settlement negotiation privilege is not necessary to achieve settlement.”14 The U.S. balances the policy favoring settlements against discovery rules that, by and large, reach farther than those in Canada.15

Only one U.S. jurisdiction, the federal Court of Appeals for the Sixth Circuit, which covers the federal trial courts in Kentucky, Michigan, Ohio and Tennessee, has adopted a settlement privilege.16 “The public policy favoring secret negotiations, combined with the inherent questionability of the truthfulness of any statements made therein, leads us to conclude that a settlement privilege should exist . . . .”17 Even the Sixth Circuit, however, has not extended the privilege as far as Canadian courts, having held only that “communications made in furtherance of settlement are privileged;” completed agreements and settlement amounts are fair game for discovery and admission in evidence.18

With the exception of the Sixth Circuit, U.S. courts have declined to recognize a broad settlement privilege because Congress and many state legislatures have already addressed the issue – and did not create a privilege. The principal authorities concerning settlement communications are Federal Rule of Evidence 408 and parallel evidentiary rules enacted by many states.19 Rule 408, and its state-law counterparts, do not establish a privilege and do not address pretrial discovery. Rather, they provide that evidence of an offer or acceptance of valuable consideration in settlement of a disputed claim is not admissible to prove or disprove the validity or amount of the claim.20 Rule 408 therefore only precludes the use of settlement communications for certain purposes at trial. In addition, Rule 408(b) identifies numerous exceptions that permit the admission of settlement communications “for another purpose, such as proving a witness’s bias or prejudice, negating a contention of undue delay, or proving an effort to obstruct a criminal investigation or prosecution.”21

U.S. courts have rarely addressed, at least in published decisions, whether documents protected by the Canadian settlement privilege are discoverable in a U.S. proceeding.

Because Rule 408 concerns only the admissibility of settlement evidence, the substantial majority of U.S. courts to address the issue have concluded that there is no prohibition over the pretrial discovery of settlement communications, agreements, or amounts.22 One court concisely explained the distinction:

Congress clearly enacted [Rule 408] to promote the settlement of disputes outside the judicial process. However, it is equally plain that Congress chose to promote this goal through limits on the admissibility of settlement material rather than limits on discoverability. . . . In fact, the Rule on its face contemplates that settlement documents may be used for several purposes at trial, making it unlikely that Congress anticipated that discovery into such documents would be impermissible.23

Therein lies the fundamental difference between Canada and the United States: Canada limits all access to settlement evidence in service of the public policy, while the United States only limits the admissibility of such evidence and, even then, for certain limited purposes.

Settlement communications in the context of a mediation may receive greater protection in the U.S., but a hodge-podge of statutes, court rules, and private agreements govern the scope and applicability of such measures. The Uniform Mediation Act (“UMA”) provides that a “mediation communication is privileged” and “is not subject to discovery or admissible in evidence,” however only ten states have enacted the UMA.24 The UMA’s privilege also does not reach completed settlement agreements.

A Clash of Competing Interests

U.S. courts have rarely addressed, at least in published decisions, whether documents protected by the Canadian settlement privilege are discoverable in a U.S. proceeding. In the leading case to do so, a Washington D.C. federal court determined that the bulk of settlement-related documents generated in connection with a Canadian government investigation should remain protected.25 While the decision in In re Vitamins Antitrust Litigation demonstrates that U.S. courts can invoke principles of international comity to respect the Canadian settlement privilege, because of the role that the substantial interests of the Canadian government played in the case, its influential value in a strictly private or commercial context is uncertain. due to the role the substantial interests of the Canadian government played in that case.

The Vitamins decision resolved a motion to compel the production of documents that defendant Bioproducts had provided to law enforcement agencies in Canada and Europe as well as Bioproducts’ written communications with those agencies. Notably, the court ordered production of Bioproducts’ submissions to the European Commission (“EC”), but denied the motion with respect to all but a few documents provided to the Canadian government.26

Due to an earlier ruling by the court with respect to other defendants’ EC documents, the court relied on “law of the case” to conclude that Bioproducts was required to produce such documents to the plaintiffs. In the prior decision, which the court reaffirmed, an argument that an “investigative privilege” protected the EC documents from disclosure was rejected. No party suggested that the EC recognized a settlement privilege akin to the Canadian doctrine.27

With respect to the Canadian documents, the court adopted the following five-prong comity analysis initially employed by the court-appointed Special Master:

  1. the importance to the investigation or litigation of the documents or other information requested;
  2. the degree of specificity of the request;
  3. whether the information originated in the United States;
  4. the availability of alternative means of securing the information; and
  5. the extent to which noncompliance with the request would undermine important interests of the United States, or compliance with the request would undermine important interests of the state where the information is located.28

The Special Master found, and the court agreed, that the first four factors weighed in favor of disclosing the Canadian documents.29

The fifth factor proved decisive, however, in the court’s determination to deny disclosure of most of the documents:

The Special Master acknowledged that the documents would be protected from disclosure under Canadian law as they were exchanged during settlement negotiations, and conducted his analysis under each category [of documents] to ascertain whether, as Canada asserted, disclosure would substantially reveal Canada’s negotiating positions and potentially affect Canada’s ability to negotiate settlements with other potentially cooperating parties.30

The Special Master, with the court’s concurrence, concluded that an executed plea agreement and drafts of the plea agreement, an agreed statement of facts, indictment, prohibition order, immunity letter, and cover letter, as well as letters of Bioproducts’ counsel commenting on these drafts and related matters, should be protected from disclosure. “Noting that the issue is close,” the Special Master and the court resolved that “such documents would reveal Canada’s negotiating positions and potentially interfere with Canada’s power to settle antitrust cases within its borders.”31 The court further observed that the Canadian government had agreed to treat the documents as confidential. These circumstances, the court noted, distinguished the Canadian documents from the EC documents it had ordered Bioproducts to disclose.32

The Canadian settlement privilege, therefore, was an important basis to deny disclosure of documents falling within its scope in a U.S. proceeding. But, its precedential value is far from certain for several reasons. The decision was not affirmed by an appeals court and has not been cited in subsequent cases. In fact, the Vitamins case appears to be the only reported U.S. decision addressing the impact of the Canadian settlement privilege on the disclosure of information in a U.S. proceeding. The Canadian government’s direct public interest in the Vitamins case further complicates the matter. The court undoubtedly credited the risk to Canada’s ability to settle antitrust cases and heavily weighed “the Canadian government’s interest in protecting the viability of its practices and procedures.”33 On the other hand, the court distinguished the Canadian government’s interest in settling cases from the EC’s interest in investigating them, suggesting that its analysis turned on the nature of the privilege asserted, and not the involvement of a governmental agency.

Impact and Recommendations

The Vitamins case shows that the Canadian settlement privilege may protect settlement-related materials in a U.S. proceeding. That said, the court observed that the “issue is close,” and the decision has not been followed in any reported decision.

Therefore, the discoverability vs. admissibility dichotomy between the Canadian and U.S. doctrines can have practical impacts, particularly in litigation that arises out of an earlier settlement or relates to previously settled litigation with a common set of facts. Consistent with Rule 408 and similar state law provisions, litigants in the U.S. typically are entitled to obtain settlement communications and agreements from their adversaries. That is a very different result than in Canada where litigants are rarely entitled to obtain such materials due to the settlement privilege.

A party who receives discovery of its adversary’s settlement communications and agreements can obtain a substantial advantage. Even if factual concessions in those communications are not admissible at trial, the materials can provide insight into a party’s strategies; its real or perceived weaknesses; and the party’s appetite to settle by paying monetary compensation. The settlement materials can also be used to obtain testimony and admissions that are admissible at trial.

A Canadian party, particularly one with cross-border activities, therefore could be required to disclose information in U.S. litigation that it would not have contemplated having to disclose under Canadian law. While such disclosure may be unavoidable, a Canadian party can take the following precautionary steps during the course of settlement negotiations to mitigate the impact in related U.S. litigation:

  • Keep written settlement communications to a minimum and avoid making factual concessions in writing.
  • Conduct settlement negotiations within the context of a confidential mediation.
  • Include lawyers in internal communications concerning the settlement of disputes to enhance protection under the solicitor-client and litigation (or work product) privileges.
  • Require that settlement agreements, including the fact of the settlement, are confidential and disclosure can be made only with the consent of the counterparty.

Because most U.S. jurisdictions simply do not treat settlement communications as privileged – and generally treat settlement agreements as ordinary contracts – these measures are by no means foolproof. Perhaps the most important advice to Canadian parties is to be aware of the dissimilar rules on either side of the border and plan accordingly to avoid surprise.

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1 See Sable Offshore Energy Inc. v. Ameron Int’l Corp., [2013] 2 S.C.R. 623; United States v. Contra Costa County Water Dist., 678 F.2d 90, 92 (9th Cir. 1982).

2 Sable Offshore, supra note 1 at para. 11, quoting Sparling v. Southam Inc. (1988), 66 O.R. (2d) 225 at 230 (H.C.J.); Sidney N. Lederman, Alan W. Bryant and Michelle K. Fuerst, Sopinka, Lederman & Bryant: The Law of Evidence in Canada, (Markham, ON: LexisNexis Canada, 2014) § 14.316 (“It has long been recognized as a policy interest worth fostering that parties be encouraged to resolve their private disputes without recourse to litigation or, if an action has been commenced, encouraged to effect a compromise without resort to trial.”)

3 Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 332 F.3d 976, 980 (6th Cir. 2003). See also Fed. R. Evid. 408, Advisory Committee Notes (evidence of settlement offers are inadmissible due to the “promotion of the public policy favoring the compromise and settlement of disputes”).

4 See Sable Offshore, supra note 1 at paras. 17-18. See also I Waxman & Sons Ltd. v. Texaco Canada Ltd., (1968), 2 O.R. 452, (H.C.), aff’d (1968) 69 D.L.R. 543 (Ont. C.A.); Middlekamp v. Fraser Valley Real Estate Bd. (1992), 71 B.C.L.R. (2d) 276 (C.A.); Brown v. Cape Breton (Regional Municipality) 302 N.S.R. (2d) 84 (C.A.); , Globe and Mail v. Canada (Attorney General), 2010 SCC 41, [2010] 2 S.C.R. 592 (common law settlement privilege applies in Quebec).

5 Sable Offshore, supra note 1 at para. 13, citing David Vaver,“‘Without Prejudice’ Communications – Their Admissibility and Effect” (1974), 9 U.B.C. L. Rev. 85, 88.

6 Sable Offshore, ibid. at paras. 13, 15; Vaver, ibid. at 143-44.

7 Sable Offshore, supra note 1 at para. 12.

8 See Middlekamp, supra note 4 at paras. 19-20.

9 Sable Offshore, supra note 1 at para. 18 (“[T]he negotiated amount is a key component of the ‘content of successful negotiations,’ reflecting the admissions, offers, and compromises made in the course of negotiations.”)

10 Ibid at para. 19 quoting Dos Santos Estate v. Sun Life Assurance Co. of Canada (2005), 207 B.C.A.C. 54, at para. 20.

11 Ibid.; See also Berry v. Cypost (2003), 21 B.C.L.R. (4th) 186 (S.C.) (categorizing the recognized exceptions to the settlement privilege.)

12 Berry, ibid. at para. 25.

13 Ibid. at para. 19(C); Sable Offshore, supra note 1 at para. 19.

14 In re MSTG Inc., 675 F.3d 1337, 1345 (Fed. Cir. 2012); Matsushita Elec. Indus. Co. v. Mediatek, Inc., 2007 WL 963974, at *5 (N.D. Cal. Mar. 30, 2007) (“[W]hile there is a public policy of promoting settlement [of] disputes outside the judicial process, it [is] far from clear that a federal settlement privilege would result in increased likelihood of settlements so substantial that it would justify an exception to the production of evidence in support of the truth-finding process.”)

15 In re Subpoena Issued to Commodity Futures Trading Comm’n, 370 F. Supp. 2d 201, 211 (D.D.C. 2005), quoting 2 Weinstein’s Federal Evidence § 408.07, at 408-26 (2005).

16 See Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 322 F.3d 976 (6th Cir. 2003).

17 Ibid. at 981. The Sixth Circuit also observed that the public interest favoring secrecy of settlement communications applies “whether settlement negotiations are done under the auspices of the court or informally between the parties.” Ibid. at 980. At least one lower court, however, has concluded that the privilege does not extend to the settlement of a dispute without a pending lawsuit. Compare Michigan v. Little River Band of Ottawa Indians, 2007 WL 851282, at *2 (W.D. Mich. Mar. 16, 2007) (“[T]he settlement privilege recognized by the Sixth Circuit in Goodyear has not been shown to apply in the absence of the existence of an actual case between the parties”) with Snap-On Bus. Sols., Inc. v. Hyundai Motor Am., 2011 WL 6957594, at *1 n.2 (N.D. Ohio Feb. 3, 2011) (“While the Little River court’s analysis and criticism of the Settlement Privilege is provocative, the undersigned believes it may not jibe with explicit language in Goodyear, where the privilege was first recognized.”) The Canadian settlement privilege requires only that a litigious dispute be within contemplation, not that proceedings have commenced. See Lederman, Bryant and Fuerst, supra note 2 at § 14.325.

18 Goodyear, 322 F.3d at 983.

19 See, e.g., Fed. R. Evid. 408; Cal. Evid. Code § 1152; Ill. R. Evid. 408; N.Y. C.P.L.R. § 4547.

20 Fed. R. Evid. 408(a).

21 Ibid. Rule 408(b).

22 See In re General Motors Corp. Engine Interchange Litig., 594 F.2d 1106, 1124 n.20 (7th Cir. 1979) (“Inquiry into the conduct of the [settlement] negotiations is also consistent with the letter and the spirit of Rule 408 . . . [which] only governs admissibility”); In re MSTG, 675 F.3d at 1343 (“In adopting Rule 408 . . . Congress directly addressed the admissibility of settlements but in doing so did not adopt a settlement privilege”).

23 In re Subpoena, 370 F. Supp. 2d at 211(emphasis in original).

24 The ten states are: District of Columbia, Hawaii, Idaho, Illinois, Iowa, Nebraska, New Jersey, Ohio, Vermont, and Washington.

25 In re Vitamins Antitrust Litig., 2002 WL 3449952 (D.D.C. Dec. 18, 2002).

26 Ibid. at *15.

27 Ibid. at *5-*10.

28 Ibid. at *11, quoting Restatement (Third) of Foreign Relations Law of the United States § 442(1)(c) (1987), at 348.

29 Ibid. at *12.

30 Ibid.

31 Ibid. at *13.

32 Ibid.

33 Ibid. at *14.

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