The good news: The case has settled and the settlement agreement is confidential.

The bad news: Another lawsuit arises and the confidential settlement agreement is requested in discovery.

The dilemma: Honor the contractual obligation of confidentiality or comply with the discovery demand?

California Disfavors Discovery of Confidential Settlement Agreements As Contrary To The Strong Public Policy Favoring Settlements

California Extends Privacy Protection To Confidential Settlement Agreements

In Hinshaw, et al. v. Super. Ct., 51 Cal. App. 4th 233 (1996) ("Hinshaw"), the court held, as a matter of first impression in California, that confidential settlement agreements are entitled to privacy protection given the strong public policy favoring settlements. See Hinshaw, 51 Cal. App. 4th at 241 (noting the privacy of a settlement "is generally understood and accepted in our legal system, which favors settlement and therefore supports attendant needs for confidentiality"); see also Doe 1 v. Super. Ct., 132 Cal. App. 4th 1160, 1171 (2005) (affirming that there is no legitimate public interest in disclosing confidential settlement agreements because such agreements serve the interests of the public and the parties). Therefore, the burden rests on the requesting party to show a "compelling" interest. Hinshaw, 51 Cal. App. 4th at 241; see also Volkswagen of America, Inc. v. Super. Ct., 139 Cal. App. 4th 1481, 1492 (2006).

Hinshaw involved a legal malpractice case. Plaintiffs were part of a group of physicians represented by the Hinshaw Law Firm ("Firm") against Kaiser. For disputed reasons, the Hinshaw plaintiffs dismissed their claims and the remaining plaintiffs settled pursuant to a confidential settlement agreement. Later, another group of physicians sued Kaiser for similar claims; the Hinshaw plaintiffs tried to join the second action, but were barred due to their participation in the first case. As a result, the Hinshaw plaintiffs sued the Firm for legal malpractice. In the suit against the Firm, the Hinshaw plaintiffs requested copies of the confidential settlement agreements reached in the first and second actions against Kaiser to calculate their damages. The court rejected this demand because of the "public policy favoring settlements, the parties' expressed desire for confidentiality, and the speculative nature of measuring plaintiffs' damages by these settlements." Hinshaw, 51 Cal. App. 4th at 242.

Possible Limitation Under Hinshaw

Hinshaw was primarily concerned with the privacy interests of third parties, i.e., the other settling plaintiffs. No California cases have specifically addressed the privacy interests of a party in the context of a confidential settlement agreement. However, Hinshaw indicates that even if no third-party interests are at stake, a court must still balance "the need for the information against the magnitude of the invasion of privacy." Hinshaw, 51 Cal. App. 4th at 238. Thus, regardless if the interests of a party or third party are implicated, it appears that confidential settlement agreements are afforded privacy protection under California law. 

Federal Courts Require Good Cause To Protect Confidential Settlement Agreements From Disclosure

In federal court, confidential settlement agreements are protected from disclosure by the issuance of a protective order upon a showing of good cause. Phillips ex rel. Estates of Byrd v. General Motors Corp., 307 F. 3d 1206, 1212 (9th Cir. 2002) ("Phillips"). Good cause is not defined-rather, it is left to the broad discretion of the trial court. Id. at 1211. In contrast to the Hinshaw standard, however, the burden is on the party seeking protection to demonstrate that a "specific prejudice or harm will result if no protective order is granted." Id. at 1210-11.

That said, some federal district courts in California have recognized that California's strong public policy favoring settlements supports "heightened scrutiny" regarding the production of confidential settlement agreements. See, e.g., Big Baboon Corp. v. Dell, Inc., 2010 WL 3955831 *4 (C.D. Cal. 2010); MedImmune, L.L.C. v. PDL BioPharma, Inc., 2010 WL 3636211 *2 (N.D. Cal. 2010). Accordingly, California federal courts will likely still balance one party's "interest in the discovery of potentially relevant information against [the other party's] interest in protecting a settlement negotiated with the expectation of confidentiality." MedImmune, L.L.C., 2010 WL 3636211 at *2. Ultimately, disputes regarding disclosure are often resolved by requiring the party seeking protection to file the settlement agreement under seal for an in camera review. See e.g., Big Baboon Corp., 2010 WL 3955831 at *4.

Summary

Given the strong public policy favoring confidential settlements, California courts will generally rule in favor of nondisclosure. As a result, in most cases, it is reasonable to resist the production of confidential settlement agreements in discovery. However, it is important to note that in state court, the burden is on the party seeking disclosure to make a "compelling" showing; while in federal court, the burden is on the party seeking protection to demonstrate good cause.

Client Alert 2011-062