It’s a common occurrence: counsel sends a demand letter to an employer explaining the basis for his/her client’s claim of discrimination or wrongful discharge, and threatening to sue, but offering to discuss settlement in advance of filing a complaint. In-house counsel responds by explaining why the claim has no merit, but expressing a willingness to discuss settlement, with the understanding that in the event of litigation the correspondence would be inadmissible under Evidence Rule 408 as a communication concerning settlement. It says so right in the Rule: “a statement made during compromise negotiations about the claim” is inadmissible “to prove or disprove the validity or amount of a disputed claim.” But the U.S. District Court for the District of New Jersey has reminded us that is not always the case.

In its recent decision in Bourhill v. Sprint Nextel Corp., the District Court affirmed the decision of the magistrate judge allowing the plaintiff in his cross-motion for summary judgment to rely on a portion of in-house counsel’s response to a demand letter. In that case, the demand letter first described the factual basis for the contention that the employee’s discharge was unlawful under the New Jersey Law Against Discrimination, and then set forth counsel’s position that while he believed the case had merit, his client was willing to avoid litigation if the matter could be resolved by means of an “adequate compensatory settlement.” In-house counsel wrote a two paragraph response under the subject line caption “Confidential/For Settlement Purposes Only.” In the first paragraph in-house counsel denied that the discharge was unlawful and explained in factual detail that it had been made for legitimate non-discriminatory reasons. The second paragraph expressed an interest in discussing an amicable resolution and requested a specific demand. In the ensuing litigation, plaintiff’s counsel relied on the letter as an exhibit in his cross-motion for summary judgment, and defense counsel moved to strike.

Before moving on to discuss the decision of the magistrate judge it is important to recognize that in-house counsel responded in the normal, customary fashion when responding to a demand letter of this type. It is the magistrate judge’s decision, and the subsequent decision of the District Court discussed in the next part, that should give every in-house counsel pause when responding to any demand letter.

The magistrate judge granted the defendant's motion to strike with respect to the second paragraph inasmuch as it clearly invited plaintiff’s counsel to make an offer to settle, but denied it as to the first. In this regard, the magistrate judge determined that the two parts of the letter were not “logically connected” and could therefore be evaluated separately because the first was addressed to the merits of the claim articulated in the demand letter while the second concerned the offer to compromise. The magistrate judge then found that the first paragraph did not implicate Rule 408 because it did not “contain an actual compromise or a suggestion of a genuine willingness to resolve the dispute.”

On appeal, defense counsel argued that the letter should be read in its entirety as a response to the settlement inquiry, that the first paragraph was designed to make clear that the company did not place a high monetary value on the claim, and that public policy requires that the parties be free to express their positions in settlement communications without fear they will be used to prove liability. The District Court did not disagree, but affirmed the decision of the magistrate judge based on the conclusion that he had simply made a finding of fact – that the paragraphs were not “logically connected” – which could not be overturned on appeal.

This is not the first time a court has determined that a portion of a communication otherwise covered by Rule 408 may be admitted into evidence because it did not directly address the subject of settlement. But the decision should serve as a reminder to in-house counsel to be extremely careful when responding to demand letters, to avoid including any facts, statements or admissions that could be difficult to explain in litigation and to make clear in each paragraph that it has been written in response to the demand letter for the limited purpose of exploring the possibility of settlement.