Mediation Communications Admissible

The Ninth Circuit, and California courts in particular, have been very strict in maintaining the confidentiality and inadmissibility of statements made during mediation.  Two recent cases have allowed such statements to be admitted, on interesting grounds.  An Arizona District Court decision allowing mediation statements was affirmed by the Ninth Circuit on grounds of both federal law of evidence and theory of waiver.  And a California District Court permitted evidence of mediation statements to be presented to a jury on notions not only of waiver, but of due process.

(Tip of the hat to Clinton Burke, Jacob Glasser and J.D. Hoyle, whose summaries of these and other cases appear in the Summer 2014 issue of Dispute Resolution Magazine.)

In Wilcox v. Arpaio (9th Cir. June 2, 2014), the District Court issued an order enforcing a settlement agreement of a Section 1985=3 case that had been reached during mediation.  The parties relied on the memorialization of the agreement that was found in several emails between the mediator and counsel for the settling parties.  One of the issues raised was whether, in examining the enforceability of a contract extinguishing both state and federal claims, state or federal privilege law should be applied by a federal court.  That question was answered by the court’s finding that, where claims sound both in state and federal law, the court is not limited only to state rules of privilege.

More intriguingly, the court found that the protesting defendant had waived any challenge to the admissibility of the mediation communications by failing to contemporaneously object to their introduction at trial.  Assuming that state law prevailed, it failed to argue that the evidence was inadmissible under federal law, and thus failed to preserve the issue.

In Milhouse v. Travelers Commercial Insurance Company (C.D. Cal. Nov. 5, 2013), the claimant sought payment pursuant to a policy of insurance when his residence burned for a total loss.  Efforts to settle were unavailing and the insured brought suit not only for the loss but also for damages resulting from alleged bad faith, as well as attorney fees and punitive damages.  The compensatory claim succeeded but the bad faith claim and punitive award failed.  Both parties filed post-trial motions.

The insurer’s motion for JNOV was denied on the ground that substantial evidence supported the conclusion that it breached its contract of insurance.  It granted the insurer’s motion for remittitur of damages or, in the alternative, a new trial on that question.

The claimants argued that they were prejudiced in their efforts to prove bad faith by the introduction of statements and positions taken during a mediation.  The court found that, while the evidence supported Travelers’ breach of contract, it did not support Travelers’ having acted with undue delay or in bad faith.  In particular, it was the claimant who delayed in responding to the insurer’s persistent efforts to settle the claim.  And, most interesting to our concern, it was the claimant who demanded, in mediation, that it receive $7,000,000 on a policy limited to $519,400, and that their attorney — who had the file for about six weeks — be paid an additional $800,000 – $1,000,000.  Again, two grounds were cited in denying the post-trial relief.

The first was waiver — that the claimants had failed to object to the introduction of the testimony both prior to the trial or during the trial itself.  An objection first heard post-trial is untimely and ineffective.

But the court went a step further, saying that if objection had been made in a timely manner, it nevertheless would have been overruled.  Throughout the trial, claimants’ counsel repeated the basis for the bad faith claim  – that Travelers refused to enter into negotiations, refused to send someone with authority to discussions, refused to cooperate in good faith.  In fact, the claimants’ demands during mediation were several millions over the policy limits; and at trial claimants’ counsel continued to seek such sums, saying  not only that bad faith damages of $8,325,860 should be awarded, but that, in addition, “Travelers’ conduct was so reprehensible, punitive damages were required: ‘The very least you can award thus company for punitive damages… is $9,079,182.'”

Travelers’ efforts to settle the claim were thus the very issue in contest, and the court permitted evidence to be introduced to the jury supporting the conclusion that settlement was not reached, not due to Travelers’ acting fraudulently or in bad faith, but rather due to the claimants’ excessive demands.  “To exclude this crucial evidence would have been to deny Travelers of its due process right to present a defense.”

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