Letter agreements are usually confidential. As a result, there is a dearth of practical guidance on when, and how, to use them. Porter Wright Morris & Arthur LLP helps fill that gap.
Your settlement negotiation checklist should include this entry: “whether, and how, to use a letter agreement.” A letter agreement—if well-drafted—can expand the confidentiality of settlement negotiations.
Rule 408 and Confidentiality
You’re aware of the protections extended by Federal Rule of Evidence 408 (“Compromise Offers and Negotiations”).[1] You understand that the rule prohibits a party from offering settlement communications as evidence “either to prove or disprove the validity or amount” of a disputed claim. But how familiar are you with the limitations of that rule’s evidentiary bar? And when did you last consider its language permitting a court to admit evidence of prior settlement communications “for another purpose”?
The idea of letter agreements is simple: prior to settlement negotiations, the parties enter into an agreement promising to treat their communications with even greater privacy than that conferred by Rule 408. But, in practice, drafting a letter agreement can be tricky. And because letter agreements are usually confidential, there is a dearth of practical guidance on when, and how, to use them. Let’s fill that gap.
Evaluating Whether To Use A Letter Agreement
When evaluating whether to use a letter agreement, consider these factors:
- The value of the case. How much is at issue? A party will need to pay its attorneys for the time necessary to draft the agreement and to negotiate its terms with the other side. A letter agreement may be more appropriate in a case involving a claim for $5 million than in a case involving a claim for $30,000.
- The likelihood of future conflict between the parties. How likely is future litigation between the parties? Any other dispute between the parties would present a risk that settlement discussion evidence is admitted by a court. You should ask whether the parties conduct regular business with each other or have other ongoing, or threatened, litigation between them.
- The complexity of settlement discussions. Are the parties engaging in a prolonged and document-intensive negotiation? If so, a letter agreement is advisable. On the other hand, if the parties anticipate only a single settlement discussion on the courthouse steps, there may be less incentive to use a letter agreement.
- Enforceability concerns. Does your jurisdiction enforce letter agreements? Letter agreements are contracts, subject to all standard arguments of interpretation and defenses to enforcement. See Osteotech, Inc. v. Regeneration Techs., Inc., 2008 U.S. LEXIS 86254, at *8 (D.N.J. Sept. 25, 2008). Additionally, letter agreements may not protect against court-ordered or third-party discovery of information exchanged during settlement negotiations. See, e.g., Chi v. Univ. of S. Cal., 2019 U.S. Dist. LEXIS 125355, at *19-20 (C.D. Cal. May 21, 2019) (“The Court is not governed by the Rule 408 Agreement, and neither are members of the public.”). Before moving ahead with drafting a letter agreement, a party should familiarize itself with the likelihood that its jurisdiction would enforce the document.
Drafting A Letter Agreement
If you’ve decided to move forward with a letter agreement, consider the terms and definitions that should appear in the final product. Based on a sampling of publicly available letter agreements, here are aspects to consider and differing approaches taken by drafters:
- Applicable Time Period. Consider the time period of settlement communications to which the letter agreement applies. The agreement may, for example, define an “effective date” and state that it applies, prospectively, to all settlement communications made on or after that date. E.g., Draper, Inc. v. Mechoshade Syst., Inc., et al., Case No. 10cv01443, ECF No. 22-4 (S.D. Ind. Dec. 30, 2010). Another practice is for the parties to agree that the letter agreement applies to all settlement communications, whether made before or after the agreement’s execution date. E.g. Osteotech, Inc., 2008 U.S. LEXIS 86254, at *4; OGD Equipment Co. v. Overhead Door Corp., et al., Case No. 4:17cv898, ECF No. 18-4 (E.D. Tex. Mar. 23, 2018). Alternatively, parties may draft their letter agreement to apply to those communications that occurred only during a specific settlement meeting. E.g., Reiling, et al. v. Fisher Price Inc., Case No. 3:03cv222, ECF No. 41 at Ex. A (D. Conn. Feb. 20, 2004); Seren Motus, LLC v. Releve One Fitness Studios, LLC, et al., Case No. 3:15cv706, ECF No. 43-1 (M.D. Tenn. Oct. 27, 2015). A drafter should also bear in mind that, as a contract, the letter agreement can be extended or modified by the parties. E.g., Apple, Inc. v. Motorola Mobility, 2012 U.S. Dist. LEXIS 181854, *17 (W.D. Wisc. Oct. 29, 2012)(parties extending their “Mutual Non-Disclosure and Rule 408 Agreement” for two years).
- Types of Communications. Define the types of communications that are subject to enhanced confidentiality protections. Some parties define communications broadly, stating that all settlement “meetings, discussions, correspondence, or other communications” are subject to the letter agreement. E.g., OGD Equipment Co., Case No. 4:17cv898, ECF No. 18-4. Others opt to enumerate specific types of documents and communications that qualify as a confidential settlement communication. E.g., Chi, Case No. 2:18cv4258, ECF No. 120-2 (C.D. Cal. Apr. 8, 2019) (“‘Rule 408 Information’ means any statement, conversation, communication, information, material, document, email, electronic file, or other disclosure made by [certain defendants], [the defendants’] counsel, plaintiffs, or plaintiffs’ counsel participating in settlement discussions…”).
- Confidentiality Language. State, precisely, what enhanced confidentiality measures should attach to negotiations. Some parties merely state that their communications are to be governed by Rule 408. E.g., City of Minneapolis v. Time Warner Cable, Inc., 2005 U.S. Dist. LEXIS 55091, *2 (D. Minn. June 29, 2005) (settlement communications “would be governed by Federal Rule of Evidence 408” under parties’ letter agreement); Northern Nat’l Gas Co. v. L.D. Drilling, Inc., et al., Case No. 6:08cv1405, ECF No. 573-1 (D. Kan. Sept. 8, 2016) (“The Parties agree that any discussion(s), submission(s), exchange(s), and/or communication(s) related to resolution or potential resolution of any disputes and/or claims between them shall be subject to Federal Rule of Evidence 408.”). Although this practice may help parties clarify that they are engaging in settlement communications, its protection only goes so far as Rule 408. A better approach is to specify that, beyond the protections of Rule 408, settlement communications may not be used by either party for “any other purpose.” E.g., Chi, Case No. 2:18cv4258, ECF No. 120-2 (“Recipient will not use, disclose, copy, disseminate or distribute any Rule 408 Information for any other purpose.”); Apple, Inc., 2012 U.S. Dist. LEXIS 181854, at *17 (“The parties further agree that the existence of the settlement meetings, and documents and information prepared for or exchanged at any such meetings will not be admissible as evidence or used for any other purpose including, without limitation, filings with any court.”); Draper, Inc., Case No. 10cv01443, ECF No. 22-4 (“Moreover, the Parties agree that Settlement Discussions shall not be used for any purpose in litigation between the Parties.”).
- Description of Dispute. Insert a reference to the dispute that the parties are seeking to resolve. Think carefully about how to do so because the letter agreement itself could be filed in briefing on a future motion in limine. The letter agreement could simply cite to an already-filed action. E.g., Reiling, 3:03cv222, ECF No. 41 at Ex. A (letter agreement stating that the parties are meeting “to discuss the disputes in the action referred to above”). Alternatively, the letter agreement could refer to the cause of action in dispute. E.g., OGD Equipment Co., 4:1cv898, ECF No. 18-4 (letter agreement stating that the parties are going to discuss “allegations…of trademark infringement, unfair competition, and other related acts”). Another option, if the parties are not yet in litigation or have not yet sharpened the issues between them, is to refer to “issues” between the parties. E.g., Draper, Inc., 10cv01443, ECF No. 22-4 (“[Party A] and [Party B] have raised several issues they want to discuss with [Party C].”).
Remember to consider using a letter agreement the next time you approach a settlement meeting or dispute negotiation. The above examples and suggestions should provide you with a helpful framework for thinking through some of the mechanics of doing so. Although it may seem burdensome, a letter agreement can offer you added comfort at the time when stressful settlement discussions get underway.
Samuel J. Gamer is an Associate in the Chicago office of Porter Wright Morris & Arthur LLP. He focuses his practice on complex commercial litigation. The views expressed herein are personal to the author. This article is intended to provide general information for clients or interested individuals, and should not be relied upon as legal advice. Please consult an attorney for advice specific to your organization.
[1] This article addresses the use of letter agreements only within the context of the Federal Rules of Evidence. Many state rules of evidence have provisions that govern the admissibility of settlement communications and must be part of your assessment.
