Even Thicker

Plaintiffs sued D Manufacturing Company, its accountants, and seven of its officers and employees for various security violations in connection with a public offering of D's stock. Two of the individual defendants, Jones and Smith--corporate officers--cross-claimed against the corporation, seeking indemnification for expenses incurred in defending the action. Under applicable state law a corporate officer is entitled to indemnification for reasonable attorneys' fees and expenses, "to the extent he has been successful on the merits in a proceeding where his action as an officer allegedly violated the law." During the pretrial phase of the case, cross-claimants obtained voluntary dismissals, with prejudice, of the actions against them. As part of the arrangement, Jones made a payment to the plaintiffs of $35,000. Smith made no payment.

At the trial of the indemnification claims the issue is whether Jones and Smith were "successful on the merits" in the main case. On this point the officers offer the dismissals. The corporation offers proof of Jones's $35,000 payment and an affidavit of an attorney for the plaintiffs in the main case regarding the settlement of the plaintiffs' claims against Smith and Jones. Is any of this admissible?

Rule 408's exceptions to the exclusion of evidence of compromises are exemplary rather than exclusive. Where evidence is offered for "another purpose," other than proving liability or validity of the claim or its amount, it may be admissible.

In this case, evidence of the settlement between Smith and Jones and the plaintiffs in the primary case is offered on the issue of whether they have been "successful on the merits" within the meaning of the applicable state law. Interpretations of the state law is a matter for the state court. However the statute is defined, the evidence of the settlements between Jones and Smith and the plaintiffs in the primary case may be relevant to that determination.

In this case, the state policy in applying the provisions of its corporate indemnification law may conflict with the policy underlying Rule 408 in promoting the settlement of disputes. Is there a way to avoid this conflict?

The rule excludes evidence of a compromise only on the issues of the amount or validity of the claim that is the subject of the compromise. Since the "claims" in the primary case and in the indemnification case are distinct, could one contend that the compromise negotiations were being used for "another purpose" and were not inadmissible under Rule 408?