“Confidentiality is an important feature” of mediation, because it “promotes the free flow of information that may result in the settlement of a dispute.”
“We vigorously enforce the confidentiality provisions” of our own mediation system “because we believe that confidentiality is essential” to its “vitality and effectiveness.”
U.S. Second Circuit Court of Appeals, In re Teligent, Inc.
Mediation confidentiality requirements in bankruptcy courts can come from a variety of sources: local court rules, protective orders from the court, and agreements between the parties. The legal standard identified and applied in the In re Teligent case appears to apply with equal effect to all such sources.
The facts of the In re Teligent, Inc., case are convoluted. Here’s a simplified version of what happened:
–Teligent, Inc., fires its Chairman/CEO, Alex Mandl, and forgives the $12 million he owes.
–Then, Teligent, Inc., files bankruptcy in the Southern District of New York.
–The bankruptcy estate then sues Mandl, to set aside the $12 million debt forgiveness.
–A mediation session occurs in the lawsuit but does not result in a settlement.
–After trial, the Bankruptcy Court enters a $12 million judgment against Mandl.
–Then, Mandl fires his attorney, moves for a new trial in Bankruptcy Court, and asserts a malpractice claim against his former attorney.
–A second mediation occurs between Mandl and the judgment creditor. The former attorney is invited to participate to address the malpractice claim—he declines. This mediation does not produce a settlement.
–A settlement is later achieved with the judgment creditor, which requires Mandl to pursue the malpractice claim and share any recovery with the bankruptcy estate.
–Both mediation sessions occurred under the protection of confidentiality orders.
–A malpractice action is then filed by Mandl.
–During discovery Mandl seeks information from the mediation sessions.
–A request is made in the Bankruptcy Court for relief from the confidentiality protective orders.
–The Bankruptcy Court denies the request, the District Court affirms on appeal, and an appeal is taken to the Second Circuit.
The Legal Standard
The Second Circuit identifies a three-factor test to evaluate the request for relief from confidentiality requirements.
“A party seeking disclosure of confidential mediation communications must 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.”
“All three factors are necessary to warrant disclosure of otherwise non-discoverable documents.”
The Second Circuit, in the In re Teligent, Inc. case, decides to enforce confidentiality. And it provides this analysis under the three-factor test:
(1) a special need for the confidential material.
The requesting party is seeking “a blanket lift” of confidentiality but has “failed to submit any evidence” to support a “special need” for “any specific communication.”
(2) resulting unfairness from a lack of discovery
There is no “unfairness from a lack of discovery” because the evidence sought “was available through other means, including through responses to interrogatories or depositions.”
(3) the need for the evidence outweighs the interest in maintaining confidentiality.
The failure to “demonstrate a special need” is also fatal under this third element. .
The Court emphasizes, under the third factor, that mediation confidentiality requirements have a “presumptive entitlement to remain in force.”
Otherwise, if courts were to “cavalierly set aside” such confidentiality restrictions, parties might be “less frank and forthcoming” in mediation or might “limit their use of mediation altogether.”
This three-factor test, and its application by the Second Circuit, seems to be a wise and well-reasoned and sensible approach.