A Confidentiality Conundrum: How Confidential Are Your Confidential Settlements?

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April 3, 2014
Lew Bricker
SmithAmundsen Transportation Alert

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Judge Posner and the Seventh Circuit have weighed in on the concealment of terms in settlement agreements. On December 26, 2013, Judge Posner consolidated motions pertaining to concealing settlement terms arising from two appeals out of the Northern District of Illinois, Eastern Division: Andrew Goesel, et al., v. Holey International (H.K.) Ltd., et al. (Judge Milton L. Shadur) and Fortunee Massuda v. Panda Express, Inc. (Judge Ronald Guzman). In the former case, the parties settled the matter but the settlement was subject to court approval as the suit involved a minor. Senior District Court Judge Shadur, in reviewing the settlement, reduced the Plaintiffs' law firm's fee so as to increase the Plaintiffs' proceeds from the settlement. With the law firm's appeal pending, the parties requested that their settlement terms be sealed. In the latter case, which involved a breach of fiduciary duty complaint, District Court Judge Guzman dismissed most of the claims due to a prior suit's claims that had settled. The Massuda Defendants wanted the settlement terms sealed with their pending appeal as well.

In providing the Court's ruling on the consolidated motions, Judge Posner began his analysis by referencing the importance of public access to documents affecting the "disposition of federal litigation." He then went on to explain that settlement terms invoke a different question concerning concealment because many times, settlements never show up on judicial record either because they settle pre-suit or the parties enter a dismissal order pursuant to settlement. Judge Posner reasoned that absent the need for Court approval, there would "rarely be a good reason to require that [settlement] terms be made public, because making them public would not reveal anything about judicial activity." Judge Posner did reference some exceptions to this generality, but noted that settlement terms would usually only be of potential public interest when they required judicial approval, became an issue in a later suit, or the terms of the settlement required enforcement. The Seventh Circuit Court analyzed that those exceptions warranted the presumption of a right to public access.

Expanding further, Judge Posner discussed that the size of the settlement is the most commonly desired confidential settlement term. Judge Posner went through the negatives to both sides of disclosing settlement amounts to the public. For example, defendants may fear a high settlement amount invites more litigation or a plaintiff's lawyer may fear that a low settlement portrays him or her as a weak negotiator. The Court also addressed it may be moot to argue those negatives at all where research shows that negotiating parties are typically experienced negotiators making disclosed terms of other settlements irrelevant to their negotiations. With that research, Judge Posner expressed there may be little at stake when analyzing the concealment issue absent something like trade secrets, institutional privacy, or national security at issue in the settlement.

At the conclusion of his decision, Judge Posner noted that the parties before him had not provided any type of reason to conceal their settlement terms that could rebut "the presumption of public access to judicial records." The Seventh Circuit panel went on to write that a party seeking concealment must give a judge a reason for the request. The facts of Goesel required outsiders seeking to evaluate the district judge's decision to know the amount of the settlement terms and no reason was given by the parties to keep it confidential. Judge Posner subsequently denied the parties' motion to seal the terms. As for the second case, Judge Posner was perplexed why the Defendants would want it sealed given the redacted agreement did not reveal any terms and they had no good reason to support their request. Where the Defendants included the redacted document in their brief on appeal, thus making it public, Judge Posner felt their request moot and dismissed it.

So what are negotiators left to do in the future whose client desires confidentiality? If the case is settled pre-suit or will not be subject to judicial record once suit is filed, the confidential clauses appear safe. If the Court needs to approve a settlement, or the settlement becomes part of the judicial record in some manner, particularly pending in the Seventh Circuit, Judge Posner's ruling left some practical implications to consider during settlement negotiations. Parties need to come up with a reason - a good reason - for the request to conceal settlement terms. These consolidated motion rulings revealed that a general statement to the Court that "my client wishes the terms to be confidential" or "it is company policy to keep the terms confidential" will not pass the test laid out in Judge Posner's ruling. Parties need to be prepared to present a good explanation to the Court, especially in those cases where settlements require Court approval, to protect the confidentiality clauses or confidential terms of their negotiations.