The existence and scope of a federal mediation privilege remains unclear. Among the Circuit Courts, the strongest and clearest endorsement of a federal mediation privilege is the Second Circuit’s decision in In re Teligent, Inc., 640 F.3d 53 (2d Cir. 2011). Yet, in a somewhat surprising about-face, a federal magistrate judge in the Southern District of New York recently held that the mediation confidentiality standard announced in Teligent does not apply to private mediations not subject to a court order. Rocky Aspen Management 204 LLC v. Hanford Holdings, LLC, 2019 WL 3852234 (S.D.N.Y. Aug. 16, 2019).
The Teligent 3-Part Test Governing Mediation Confidentiality
In Teligent, a debtor filed an action against its former CEO to recover the $12 million balance on an unpaid loan. The parties voluntarily agreed to mediate the dispute under confidentiality provisions sourced from protective orders previously entered by the bankruptcy court in the context of court-ordered mediations.
The mediation resulted in a settlement agreement that obligated the CEO to, inter alia, assert a malpractice claim against the law firm that had negotiated his severance agreement with the debtor. In defending against that claim, the law firm sought all documents relating to “the negotiations leading up to the Settlement Agreement, including all mediation and settlement communications.” To that end, the law firm moved to lift the confidentiality provisions governing the mediation. The bankruptcy court denied the motion, and the law firm appealed.
The Second Circuit observed that confidentiality is an important feature of mediation that “promotes the free flow of information” necessary to help settle disputes. Citing mediation confidentiality standards applicable under the Uniform Mediation Act, and federal alternative dispute resolution statutes, the Second Circuit adopted a 3-part test requiring a party seeking disclosure of confidential mediation communications to demonstrate:
(1) a special need for the confidential material,
(2) resulting unfairness from a lack of discovery, and
(3) that the need for the evidence outweighs the interest in maintaining confidentiality.
Based on that standard, the Second Circuit affirmed the denial of the law firm’s request for disclosure of all mediation-related communications.
Dandong: Application of Teligent to Private Mediations
In Dandong v. Pinnacle Performance Ltd., 2012 WL 4793870 (S.D.N.Y. Oct. 9, 2012), unlike in Teligent, the parties had engaged in a private mediation in Singapore before the plaintiffs (Singaporean investors) filed their action for fraud against the defendants in New York.
After the action commenced, the plaintiffs moved for a protective order to preclude discovery of all mediation-related communications and documents. Magistrate Judge Gabriel W. Gorenstein granted the motion in part based on Teligent, but directed disclosure of materials related to plaintiffs’ reliance under the “special need” prong of the 3-part test.
The District Court agreed with Judge Gorenstein’s application of Teligent to the pre-suit mediation in Singapore, holding that the 3-part Teligent test applies “to all situations in which a party seeks disclosure of confidential mediation communications.” In doing so, it noted that the Second Circuit’s policy basis for the test — to promote the candor necessary to foster settlement — “applies with as much force to private mediations as it does to court-sponsored mediations.” The District Court further observed that the Second Circuit formulated its 3-part test in part based on the Uniform Mediation Act, which applies to private mediations.
The District Court concluded, however, that Judge Gorenstein had misapplied the 3-part test in finding a “special need” for disclosure of mediation communications related to reliance, and reversed.
In Rocky Aspen, the plaintiffs sued the defendant over a failed restaurant venture. The defendant claimed it was entitled to obtain communications concerning the settlement of a prior litigation involving the plaintiffs. The settlement agreement from that case was a private agreement between the parties that included a confidentiality provision. However, the settlement agreement was never made part of a court order, and the settlement discussions between the parties were not governed by any court order.
The plaintiffs argued that communications related to the earlier settlement were protected from disclosure under the 3-part Teligent test. Since it appears that the settlement at issue did not arise out of a mediation, that fact alone would seemingly have been enough to reject application of Teligent.
However, in an about-face from his previous application of Teligent to the discovery dispute in Dandong, Judge Gorenstein concluded that Dandong was wrongly decided “insofar as it ruled that In re Teligent applied to a private mediation not subject to any court order.” Instead, Judge Gorenstein held that Teligent’s 3-part test only “applies to situations in which there has been a prior court promise of confidentiality — not to discussions between parties without court involvement and not to a settlement agreement with a private promise to maintain its confidentiality.”
As noted, it appears that Judge Gorenstein went further than needed to resolve the discovery dispute at hand since the earlier settlement at issue in Rocky Aspen did not arise out of a mediation.
Moreover, while the mediation in Teligent was conducted during a litigation pursuant to confidentiality provisions contained in a protective order, it was not court-ordered. To the contrary, the Second Circuit stated that the mediation between the debtor and its former CEO was “voluntary.”
Ultimately, it does not appear there is a persuasive basis to distinguish between private mediations and court-ordered mediations in terms of mediation confidentiality given that confidentiality is equally vital in private mediations to encourage candor.
But for now, there is a decision out there drawing a distinction, which creates a bit of unwelcome uncertainty.