Vol. 76, No. 10, October 2003

Secret Settlements:
Do We Need a Sunshine in Litigation Act?

by Andrew J. Schwaba

"To close a court to public scrutiny of the proceedings is to shut off the light of law."¹

A woman with an artificial heart valve was unable to learn of the danger that the device's mechanism may fracture. After the woman died because the valve failed, her husband learned that the manufacturer had secretly settled litigation brought by other victims years before.² From cases involving exploding gas tanks, defective tires, and child sexual abuse, these stories are becoming more and more common.³ Sealed court settlements are now widely used to prevent the public from learning the nature of harmful conduct.

In November of 2002, South Carolina's federal court system banned confidential legal settlements in everything from product liability cases to child sexual abuse lawsuits.⁴ This was not the first court system to ban sealed court settlements, nor will it be the last. For the last eight years, Wisconsin Sen. Herb Kohl has worked toward enactment of a federal sunshine law that would provide standards for federal judges to decide whether to seal files and records.⁵ Many state legislatures as well have already enacted or are considering a ban on sealed court settlements.⁶

Although Wisconsin has a long history of providing open access to court records and documents, the state has not taken any measures to specifically prohibit confidential settlements. The open records law mandates a general policy of open access to court records. However, the open records law has numerous statutory and common law exceptions. Thus, the question remains: Is a general policy enough? Does it afford the public adequate protection? Does Wisconsin need a state "Sunshine in Litigation" Act?

The Harm of Secrecy Agreements

Most often seen in the products liability arena, secret settlements are used both before and after suit is brought. The party requesting secrecy - usually the defendant - seeks to prevent exposure of the alleged conduct that caused the harm. Upon settlement, the parties form a contractual release agreeing not to disclose either the settlement amount or any alleged conduct. If disclosure occurs, the settlement can be declared null and void and any settlement proceeds returned. If a lawsuit has been started, a motion can be brought requesting a protective order that the court file be sealed as well. The defendant conditions settlement on the other party's agreement not to oppose the protective order.

Plaintiffs agree to confidentiality because they are guaranteed a recovery through settlement. They often can use confidentiality as a bargaining chip to increase the settlement amount. Although all the parties may be satisfied with the outcome, the public is put in danger by this practice. Sealed settlements allow the continuation of wrongful conduct that can result in harm to unknowing third parties.

The court is in the unique position to prevent further harm to third parties by preventing sealed settlements. Unfortunately, for many reasons, courts often agree to seal the file. For instance, the motion for a protective order may be unopposed. Or the court may want to relieve itself and the parties of the pressures of a trial. A judge may feel compelled to seal the court file to encourage settlement rather than risk seeing an injured person go uncompensated should the person lose at trial. By avoiding a trial, the court complies with pressure to reduce its docket. Of course, if a settlement is reached before suit is brought, a court has no opportunity to prevent a confidentiality agreement.

Issues Surrounding "Sunshine in Litigation" Acts

Courts have grappled with the complex questions that revolve around secrecy agreements. In general, everyone acknowledges that courts are public institutions that should maintain a presumption of openness. A sealed court file undermines the presumption of openness and, as a result, the public's respect for courts.

Opponents and proponents of secrecy agreements differ on whether secrecy encourages more litigation. Secrecy advocates believe secrecy encourages settlements and offer a two-pronged justification in this regard.⁷ Plaintiffs are discouraged from initially filing lawsuits because of privacy concerns.⁸ Once suits have been filed, sealed settlements reduce the length of litigation because defendants are more likely to settle claims with the additional incentive of privacy.⁹

Opponents of secrecy balk at the idea that secrecy reduces litigation. They point to California and Florida, where the per capita litigation rates fell after the states passed "Sunshine in Litigation" laws.¹⁰ The reasons for the drop in litigation are unclear, but most agree that the alternative to a settlement made public is a far more public trial.¹¹ Therefore, a manufacturer of a defective product is more likely to continue chipping away at a dispute if it believes a secret settlement can be requested on the eve of trial. Parties desiring secrecy often are more concerned with shielding a defective product or harmful conduct, the exposure of which would create future litigation in the long term. If secrecy were prohibited, parties would be better off admitting a product was defective or conduct was harmful, thereby avoiding future injuries. Furthermore, what good is a reduction in litigation if the reduction causes justice to go undone?

Another argument made in favor of secrecy is that secrecy prevents plaintiffs' lawyers from obtaining a "litigation kit." However, defense attorneys already have access to their own litigation kit. Many product liability cases are handled by national counsel dealing with hundreds of cases involving the same product. Defense lawyers already have access to the manufacturers' research, engineers, and designs. Prohibiting secrecy only allows plaintiffs' attorneys a more level playing field. Also, a litigation kit often refers to a series of "smoking gun" documents displaying the worst of the defendants' tortious conduct. When those documents are made public, settling those cases is much faster because each party gains a better understanding of the other's case.

Secrecy advocates also claim that allowing court records to remain open could result in exposure of proprietary and trade secret information of key products.¹² Secrecy opponents counter that defective products should not have trade protection. With the budget cuts of state and federal regulatory agencies, an open court record could be the public's last and only place to obtain information about defective products.¹³ In addition, many corporations are public entities. Sealing a court file means keeping information with respect to defective products from the public. Secrecy results in information relative to stock value being kept from shareholders and vital health and safety information being kept from consumers.

The 7th Circuit Approach

In federal court, Federal Rules of Civil Procedure 1 and 5(d), as well as Rule 26(c), create a presumption of openness in civil proceedings and discovery.¹⁴ The Seventh Circuit has taken this presumption a step further with Operating Procedures Rule 10.¹⁵ Rule 10 states that a document filed in or by the court is "in the public record unless a judge of this court orders it to be sealed."¹⁶ Documents originally sealed in the district court remain sealed for 14 days in the appellate court to allow a request to continue the seal.¹⁷ However, Rule 10 is silent as to what standard is used to determine when a seal will be continued.¹⁸

Seventh Circuit case law provides the standard. In civil litigation, only trade secrets, information covered by a recognized privilege (such as the attorney/client privilege), and information required by statute to be maintained in confidence is entitled to be kept secret on appeal.¹⁹ Motions to seal documents must analyze the applicable legal criteria, contend that a document contains a protectable trade secret, or state other legitimate and specific reasons.²⁰ Even claims of trade secrets are viewed with skepticism. As the Seventh Circuit has explained, litigation about trade secrets is regularly conducted in public; the court should seal only the secrets, not the entire matter.²¹ Specifically, a settlement involving a public hazard would not be included in the definition of trade secret.²²

The Wisconsin State Court Approach

Wisconsin does not take any measures to prohibit confidential settlements if they are reached before suit is filed. Currently, no statute, case law, or supreme court rule prevents parties from entering a confidential settlement pertaining to a public hazard before suit is brought.

The Wisconsin state court approach to the dangers of sealed court files in situations in which a case has been filed lacks the clarity of the Seventh Circuit's approach. Once the dispute enters the courts, a divergence of authority exists as to what standard applies to a request for sealed court records, with one side favoring the "balancing test" of the open records law and the other side favoring the "absolute right" of Wis. Stat. section 59.20.

Wisconsin's open records law mandates a presumption that a governmental body, including any court of law, is to allow open inspection of records.²³ However, numerous exceptions undermine that presumption. Among the open records law's many exceptions is one for "[s]ubstantive common law principles" that construe the right to inspect, copy, or receive copies of records.²⁴ Common law provides a balancing test to determine when a file is appropriately sealed,²⁵ including use of the vaguely defined "public policy" interest.²⁶ Adding to the confusion, in Linzmeyer v. Forcey, the court found a "public" interest in protecting an individual's privacy and reputation.²⁷

Wis. Stat. section 59.20 provides much stronger protection to the public, an "absolute right" to inspect court records.²⁸ However, section 59.20 has been undermined in conflicts with the open records law, in State ex rel. Bilder v. Township of Delavan and C.L. v. Edson. In Bilder, the police chief sued a township over a wrongful suspension.²⁹ The supreme court determined that the open records law codified the common law "balancing test" for inspection of government records.³⁰ Once the government records had been filed with the court, they were subject to an "absolute right" to inspection, pursuant to Wis. Stat. section 59.14 (now section 59.20).³¹ Even this "absolute right" was subject to statutory exceptions, constitutional rights, and a vague exception described as "when the administration of justice requires."³²

Before Bilder, the open records law had applied only in cases involving government records. The court in C.L. v. Edson further undermined section 59.20 when the court applied the open records law balancing test to a case in which governmental records were not involved. The Edson dispute involved allegations of a therapist sexually abusing his minor patients. The court considered whether the open records law or Wis. Stat. section 59.20 applied. The court held the open records law's "balancing test" applied because it had been more recently amended than Wis. Stat. section 59.20. The court reasoned that the amendment to the open records law included "any court of law" as an "authority" falling under the law's purview.³³ Ultimately, the Edson court allowed disclosure of the minor's settlement.³⁴ The court rejected an argument that there was no compelling public interest in disclosing documents pertaining to private individuals.³⁵ The Edson court disregarded the Bilder court's resolution of the conflict between the "balancing test" of the open records law and the "absolute right" found in section 59.20.³⁶

The Edson court also addressed the "administration of justice" exception considered in Bilder.³⁷ The proponents for the exception argued that making settlements public would have a chilling effect on future litigants.³⁸ The court rejected this argument, reasoning that the trial court could create an edited version of any settlement in order to protect any legitimate privacy concern.³⁹

Other Sunshine in Litigation Acts

The scope of sunshine in litigation acts throughout the country varies widely. Many states prohibit the sealing of court records.⁴⁰ Some states, like Louisiana and Washington, recognize that trade secrets and commercial information are factors to consider.⁴¹ Many states allow third parties to challenge confidentiality provisions in orders or agreements.⁴² The state of Washington even gives the court the right to award costs and attorney fees in a suit to roll back a protective order.⁴³

Arguably the sunshine act providing the most protection to the public is found in Florida. Florida law bars protective orders that conceal public hazards, but the judge can enter orders for good cause shown.⁴⁴ Trade secrets are protected in Florida, but only if they are not pertinent to a public hazard.⁴⁵ Florida law also allows third parties the right to contest a protective order and renders any confidential settlement agreement by a government agency void.⁴⁶

Many question the usefulness of a ban that does not apply to unfiled cases, because only 3 percent of cases actually make it into the courts.⁴⁷ Consequently, some states ban confidentiality agreements whether or not the case is filed in court. In Lousiana, agreements with a confidentiality provision relating to a public hazard are unenforceable.⁴⁸ California already has a court rule providing access to materials filed in court,⁴⁹ but is also considering a bill that would prevent confidentiality with respect to civil discovery as well.⁵⁰ Arkansas has a similar law that prevents confidential settlement agreements, whether filed in court or not, from containing any language that restricts a person's right to disclose the harmfulness of a hazard, and declares such agreements void.⁵¹

Conclusion

Wisconsin has a long history of integrity in its public institutions. Allowing parties to seal a court record with no specific justification undermines that integrity. Unfortunately, the law remains unclear as to what test applies to a request to seal court records. Wisconsin's failure to ban sealed court records and private confidentiality agreements jeopardizes the public's health and well-being. Whether by statute or supreme court rule, Wisconsin needs a clarification of when, if ever, records relating to public hazards are sealed from the public's view.

Endnotes

¹State v. Cottman Transmission Systems Inc., 75 Md. App. 647, 659, 542 A.2d 859, 864 (Md. App. 1988).

²Bob Gibbins, Secrecy Versus Safety: Restoring the Balance, 77 A.B.A. J. 74 (Dec. 1991).

³Nichole Schultheis, Court Secrecy: A Continuing National Disgrace, 28 Litig. 29 (Winter 2002).

⁴Nation in Brief: Judges In S.C. Ban Secret Settlements, Wash. Post (Nov. 8, 2002) <http://www.washingtonpost.com/wp-dyn/articles/A25832-2002Nov7.html>.

⁵Vincent J. Schodolski, Lawyers, Judges Push to Open Civil Court Records, Chi. Trib. (Sept. 30, 2002) <http://www.bayarea.com/mld/bayarea/news/nation/4181369.htm>.

⁶See, e.g., Eric Frazier, S.C. Judges Limit Sealed Deals, Charlotte Observer (Aug. 12, 2002) <http://www.charlotte.com/mld/charlotte/3845677.htm>; Larry Lebowitz, Judges Study Limiting Secret Settlements In Civil Cases, Miami Herald (Oct. 8, 2002) <http://www.miami.com/mld/miami/news/local/4234775.htm>; Diane Digges, Confidential Settlements Under Fire in 13 States, Law. Wkly. USA, April 30, 2001, at 353; Sarah Hoffman Jurand, South Carolina Federal Judges Ban Secret Settlements; Other Jurisdictions May Follow, Trial, Nov. 2002, at 17; Schodolski, supra note 5.

⁷Adam Liptak, In South Carolina, Judges Seek to Ban Secret Settlements, N.Y. Times, Sept. 2, 2002, at 1.

⁸Lebowitz, supra note 6.

⁹Id.

¹⁰Digges, supra note 6.

¹¹Liptak, supra note 7.

¹²Paul Marcotte, Keeping Secrets: Plaintiffs' Lawyers Claim Sealed Records Harm The Public, 75 A.B.A. J. 32 (Nov. 1989).

¹³Why Sealing of Court Records Must Be Stopped and Why Government Regulatory Agencies Are Not Sufficient to Guarantee Safety, Pub. Citizen (May 1, 2001) <http://www.citizen.org/congress/civjus/secrecy/articles.cfm?ID+794>; Marcotte, supra note 12.

¹⁴Fed. R. Civ. P. 1, 5(d), 26(c).

¹⁵7th Cir. Op. P. R. 10(a).

¹⁶Id.

¹⁷7th Cir. Op. P. R. 10(b).

¹⁸7th Cir. Op. P. R. 10.

¹⁹Baxter Int'l Inc. v. Abbott Labs., 297 F.3d 544 (7th Cir. 2002); Union Oil Co. v. Leavell, 220 F.3d 562 (7th Cir. 2000).

²⁰Baxter, 297 F.3d at 546.

²¹Id. (emphasis added).

²²Union Oil Co., 220 F.3d at 567.

²³Wis. Stat. §§ 19.32, .35.

²⁴Wis. Stat. § 19.35.

²⁵Linzmeyer v. Forcey, 2002 WI 84, 254 Wis. 2d 306, 646 N.W.2d 811.

²⁶Wis. Stat. § 19.35; Linzmeyer, 2002 WI 84, ¶ 12, 254 Wis. 2d 306.

²⁷Linzmeyer, 2002 WI 84, ¶ 31, 254 Wis. 2d 306.

²⁸Wis. Stat. § 59.20.

²⁹State ex rel. Bilder v. Township of Delavan, 112 Wis. 2d 539, 334 N.W.2d 252 (1983).

³⁰Id. at 553.

³¹Id. at 553-54.

³²Id. at 556.

³³C.L. v. Edson, 140 Wis. 2d 168, 181, 409 N.W.2d 417 (Ct. App. 1987).

³⁴Id. at 181.

³⁵Id. at 183.

³⁶Id. at 183-84.

³⁷Id. at 185.

³⁸Id.

³⁹Id. at 185.

⁴⁰See, e.g., 22 N.Y. A.D.C. 216.1 (New York); Ga. R. Unif. Super. Ct. 21 (Georgia); Del. R. Super. Ct. R.C.P. 5(g) (Delaware); Tex. R. R.C.P. 76(a) (Texas).

⁴¹Wash. St. 4.24.601 (Washington).

⁴²See, e.g., Wash. St. 4.24.601 (Washington); Del. R. Super. Ct. R.C.P. 5(g) (Delaware); Tex. R. R.C.P. 76a (Texas); La. C.C.P. art. 1426 (Louisiana).

⁴³Wash. St. 4.24.601.

⁴⁴Fla. Stat. § 69.081.

⁴⁵Fla. Stat. § 69.081(5).

⁴⁶Fla. Stat. § 69.081.

⁴⁷Schodolski, supra note 5.

⁴⁸La. C.C.P. art. 1426.

⁴⁹Cal. R. Ct. 243.1(a)(2).

⁵⁰Cal. AB 36/SB 11 (2002).

⁵¹Ark. Stat. § 16-55-122.

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