Dumb Settlement Comments Can Help Establish Bad Faith in Trade Secrets Case

There's a perception that anything written in a settlement letter is privileged.

This perception is decidedly wrong.

Offers of settlement are not admissible to prove liability because we want to encourage parties to resolve their disputes out of court. If those offers were admissible, then parties would be hesitant to mediate disputes. This is a simple, common-sense rule. But that rule doesn't give a party carte blanche to say whatever it wants in a settlement letter and then hide under the cloak of privilege.

As readers of this blog know, trade secrets disputes can go horribly wrong for plaintiffs, my case of Tradesmen International v. Black from the Seventh Circuit being a recent example. But because of the overly emotional nature of competition cases, plaintiffs frequently double down when litigation goes south. It is quite common, in fact, for trade secrets plaintiffs to make outrageous settlement demands, or ridiculous statements in a settlement letter, even in the face of a significant defeat.

Those plaintiffs better be careful what they say in settlement letters, however.

If those letters contain over-the-top missives, improper threats, or even pie-in-the-sky demands, the statements aren't privileged and can help establish bad faith. Remember: a defendant gets his attorneys' fees if he can prove a plaintiff brought or maintained a trade secrets misappropriation claim in bad faith.

So what kind of statements in a settlement letter are not privileged? Generally, I find there are two categories that get plaintiffs in trouble.

First, the plaintiff often makes comments about how much continued litigation is going to cost, or indirect references to the fact that an appeal is going to be expensive for a prevailing party to defend. These sort of threats aren't privileged because even an idiot lawyer knows that further litigation costs money, and it's completely disconnected from an offer of settlement. Threatening a defendant into spending further legal fees indicates the plaintiff simply is pursuing litigation to force its adversary to bear the burdens of litigation - not to achieve a specific result at judgment.

Second, the plaintiff may make irrational demands as part of a settlement term sheet - often times totally disconnected to the actual dispute. In past cases (both in Iowa and California), courts have looked to outrageous settlement demands that have nothing to do with trade secrets claims as evidence of subjective bad faith. For instance, demanding a broad non-compete in California (where non-competes are unenforceable) as part of a settlement would demonstrate bad faith intent. So, too, would damages demands far in excess of a trial disclosure and demands to avoid certain customers or product lines, even though this is not part of the relief sought in the complaint. Even though these are terms of the offer, they aren't privileged as settlement communications because they don't tend to establish the plaintiff's case is worth less than what it claims.

Settlement letters are potential land-mines in litigation. If a trade secrets plaintiff says anything beyond conveying the offer, those statements could help show bad faith. As with most letters, it's best to keep it short and to the point.