Paige Cap. Mgmt., LLC v. Lerner Master Fund, LLC, C.A. No. 5502-VCS (Del. Ch. May 5, 2011), read opinion here.  In this decision the Court of Chancery discussed the application of the absolute litigation privilege (e.g., for defamatory statements made in connection with a lawsuit), and Delaware Rule of Evidence 408, to a pre-litigation threat made during settlement discussions. We previously provided a link here to a video/audio clip of prior proceedings in this case.

The underlying cause of action in Paige is a contract dispute, but the issue in this decision concerns the admissibility of evidence at trial.  The plaintiffs, an amalgam of individuals, companies and investment funds that operates a hedge fund, and the defendants, the primary investors in the hedge fund, disagree as to the admissibility of an email wherein one of the plaintiffs threatened “to breach its fiduciary duties” (as candy-coated by the Court) if the defendants did not surrender to the plaintiffs’ settlement demands. 

The Absolute Litigation Privilege

The Court provided the following summary of the absolute litigation privilege:

A traditional privilege has attached to testimony in judicial proceedings that immunizes a lawyer or witness from a collateral claim alleging that the testimony amounted to defamation or a related tort based on the alleged reputational harm suffered by a third party because of what the lawyer or witness said.  That privilege has been deemed absolute and is thought to serve several important purposes, including encouraging the peaceable resolution of disputes in the courts, fostering the willingness of witnesses to testify freely and counsel to argue zealously, and limited the proliferation of follow-on lawsuits.

 This privilege has long been recognized in Delaware.  In practice, it protects lawyers and witnesses from potential defamation liability where a defamatory statement (1) was made as part of a judicial proceeding and (2) was relevant to the matter at issue.

The first question was whether the email threat in this case was made as part of a judicial proceedings.  Prior to Paige, the Delaware Superior Court accepted (in dicta) that the absolute litigation privilege applied to pre-litigation communications. In this decision, the Chancery Court assumed (without holding) that the Superior Court’s dicta expanded the privilege to statements made outside of judicial proceedings.  The plaintiffs, however, sought to further expand the coverage of the privilege from defamation and related torts arising from derogatory statements alleged to be harmful to the suing party’s reputation or psychic well-being,” to all tort actions.  Believing that part of the utility of and the public policy rationale behind the privilege would be lost by such an expansion, the Court did not adopt the plaintiffs’ position. 

Additionally, the Court found that other jurisdictions that expanded the privilege did so to “allow[] parties to peaceably resolve disputes in advance of litigation by previewing claims that will be made in good faith litigation,” rather than “immunize statements about future wrongful actions a speaker will take if the recipient does not meet the speaker’s settlement demand,” as the plaintiffs seek here.  The Court stated that “embracing the idea that the law immunizes threats of future wrongful action simply because they were connected to an offer to settle a lawsuit” would vitiate the purpose of the privilege.

Further, expanding the absolute litigation privilege would render Delaware Rule of Evidence 408 (and its Federal Rule counterpart), which bars the admissibility of certain settlement discussions from evidence,  largely “superfluous.”  The threatening email was definitely an offer of settlement as defined by the Rules of Evidence; however, Rule 408 cannot be used to prevent a plaintiff from proving his case, or shield wrongful acts because they took place during settlement negotiations.  Federal courts have applied this principle to threats made by parties during settlement negotiations and found that “such threats fall outside the scope of Rule 408.” 

Additionally, the Court clarified that Rule 408 does not bar the admissibility of evidence of a new wrongdoing or a future wrongful state of mind, as compared to the wrongdoing that led to the initial litigation and the need for settlement discussions.

The Court concluded that the threatening email was not protected by the absolute litigation privilege and its admission as evidence at trial was not barred by Rule 408.