Before entering into a so-called “high-low agreement” in a multi-defendant action, prepare to tell the court and any non-agreeing defendants all about it. A high-low agreement fixes a defendant’s total liability within a predetermined range, guaranteeing the plaintiff a minimum recovery and capping the agreeing defendant’s potential exposure. The New York Court of Appeals recently held that, when a plaintiff and defendant in a multidefendant action enter into a high-low agreement, and the agreeing defendant remains a party to the litigation, the parties must disclose the existence and terms of the agreement to the court and to any non-agreeing defendants.

The case, In the Matter of Eighth Judicial District Asbestos Litigation (Reynolds v. Amchem Products Inc.), 8 N.Y.3d 717, 872 N.E.2d 232, 840 N.Y.S.2d 546 (2007), involved products liability and negligence claims against various manufacturers and distributors of alleged asbestos-containing products used at the Ashland Oil Refinery in Tonawanda, New York, where plaintiff Donald Reynolds worked. Reynolds and his wife, Nancy Reynolds, alleged that he had contracted mesothelioma from his exposure to asbestos at the refinery. Before trial, Reynolds settled with all but two defendants: Garlock Sealing Technologies LLC, a manufacturer of gaskets and packaging, and Niagara Insulations, Inc., a distributor and installer of pipe covering insulation.

Two weeks before trial, the plaintiffs and Niagara entered into a high-low agreement, ensuring that, even if Niagara was found to be without fault and regardless of the amount of the jury’s verdict, its total liability to the plaintiffs would fall within a range of $155,000 to $185,000. That is, the plaintiffs and Niagara agreed that: if the jury returned a damage award against Niagara of $155,000 or less, Niagara would pay the plaintiffs $155,000; if the jury returned a damage award against Niagara of $185,000 or more, Niagara would pay the plaintiffs $185,000; and if the jury returned a damage award against Niagara between $155,000 and $185,000, Niagara would pay the plaintiffs the amount of the award. Thus, under the high-low agreement, Niagara’s exposure – beyond the minimum that it had already agreed to pay – was limited to $30,000, a range that the Court of Appeals deemed “quite narrow,” suggesting that the plaintiffs’ and Niagara’s true motive for entering into the agreement was to gain a tactical advantage at Garlock’s expense.

The trial court was aware that the plaintiffs and Niagara had entered into a high-low agreement (though it did not know the terms of the agreement), but Garlock and the jury were not. The jury ultimately awarded the plaintiffs $3,750,000 in damages and found Garlock 60% liable and Niagara 40%. When Garlock learned of the high-low agreement several days after the jury’s verdict, it moved to set aside the verdict and for a new trial. The Supreme Court denied Garlock’s motions and entered judgment on the verdict, and the Appellate Division affirmed.

The Court of Appeals reversed and ordered a new trial, concluding that the trial court’s failure to disclose the existence of the high-low agreement prevented Garlock from obtaining a fair determination of its rights and liabilities. The court explained that, in a multi-defendant action, “a high-low agreement between a plaintiff and fewer than all defendants has the potential of prejudicing the rights of the non-agreeing defendant if all parties are not apprised of the agreement’s existence.” In addition to causing prejudice to the non-agreeing defendant, the court warned, secretive agreements “may . . . distort the true adversarial nature of the litigation process[] and cast a cloud over the judicial system.”

The Court of Appeals concluded that the undisclosed high-low agreement had deprived Garlock of its right to a fair trial because the $185,000 cap on Niagara’s liability had given the plaintiffs an incentive to minimize Niagara’s liability and maximize Garlock’s, and had concealed from Garlock “the true posture of the case.” Had Garlock known of the high-low agreement, it could have evaluated the risks of going to trial, conducted jury selection differently, sought evidentiary rulings from the court regarding the admissibility and permitted uses of the agreement, and argued the significance of the agreement to the jury.

Requiring a high-low agreement to be disclosed to the court and any non-agreeing defendants, the court explained, “strikes a proper balance between this State’s public policy of encouraging the expeditious settlement of claims, and the need to ensure that all parties to a litigation are apprised of the true posture of the litigation so they may tailor their strategy accordingly.” The court noted that the determinations of what effect, if any, the existence of the high-low agreement would have at trial lay within the discretion of the trial court.