Rule Change Significantly Alters Civil Settlement Negotiation Environment; Permits Government to Use Civil Settlement Statements in Criminal Prosecutions

February 5, 2007

Although there has been much attention focused on both recent changes to the Federal Rules of Civil Procedure governing discovery of electronic documents, and the proposed changes to Federal Rule of Evidence 502, governing the scope of the attorney-client privilege, clients should not overlook another recent Federal Rule change of great significance. On December 1, 2006, Federal Rule of Evidence 408 was amended, at the request of the U.S. Department of Justice, to permit the government to use any "conduct or statements" made during civil settlement negotiations with a government agency against a defendant in a criminal proceeding. The amended rule significantly alters how defense counsel and their clients should approach settlement negotiations with any government agency. 

Prior to the amendment, in most Federal Circuits, parties could rely on Rule 408 to exclude statements made during settlement negotiations from admission to prove a party’s liability. The rule provided that evidence stemming from settlement discussions, offers to compromise and "[e]vidence of conduct or statements made in compromise negotiations" offered to prove the validity or invalidity of a claim in both civil and criminal proceedings was "not admissible." The rule served to foster an open environment for settlement discussions, assuring that statements made during the negotiations could not be used against a party in later criminal or civil proceedings. 

The amended rule now subverts this historical purpose, and eliminates such protection in subsequent criminal proceedings for "conduct or statements made in compromise negotiations regarding the claim . . . related to a claim by a public office or agency in the exercise of regulatory, investigative, or enforcement authority." The Advisory Committee notes to Amended Rule 408 bluntly explain the expanded scope of the change: “Where an individual makes a statement in the presence of government agents, its subsequent admission in a criminal case should not be unexpected.” 

The amended rule’s vagueness also dictates that potential defendant’s and their counsel should approach any discussions with government regulators with extreme caution. The rule fails to define either “conduct” or “statements” or differentiate these terms in any way. The rule also fails to explain whether the term “statements” includes authorized or unauthorized statements of counsel, as well as client statements. Such ambiguities create complex challenges for successful settlement discussions — especially for the corporate defendant. 

The Advisory Committee notes do provide some guidance on limiting the potential impact of the amended rule, stating "individuals can seek to protect against subsequent disclosure through negotiation and agreement with the civil regulator or an attorney for the government." However, this somewhat naïve guidance presupposes that government regulators would be willing to enter into confidentiality agreements that would deny access to the criminal authorities — something that government agencies may be both reluctant and unauthorized to do.

Because amended Rule 408 dramatically increases the sensitivity of any regulatory or investigatory settlement interaction with the government, clients must be mindful of the potentially severe consequences from the outset of discussions with the government. As with any government inquiry, counsel should be consulted at the earliest possible moment in order to ensure that the client successfully resolves the regulatory investigation without exposing itself to criminal liability.  

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or Timothy J. Hatch (213-229-7368; [email protected]) in Los Angeles, Karen L. Manos (202-955-8536; [email protected]) in Washington, D.C. or James C. Dougherty (415-393-8347; [email protected]) in San Francisco. 

To learn more about the firm’s Government and Commercial Contracts Group, please contact any member of the group or the practice group Chair:
Joseph D. West (202-955-8658; [email protected]

To learn more about the firm’s Business Crimes and Investigations Group, please contact any member of the group or the practice group Co-Chairs:
Thomas E. Holliday (213-229-7370; [email protected])
Marcellus A. McRae (213-229-7675; [email protected])

© 2007 Gibson, Dunn & Crutcher LLP

The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.