John Macsherry, Jr. v. Sparrows Point, LLC
PUBLISHED (2020)
Rule of Law:
Federal Rule of Evidence 408 prohibits the admission of statements made during compromise negotiations to prove or disprove the validity or amount of a disputed claim, including for the purpose of establishing bad-faith liability for enhanced damages, where such purpose is inseparable from the claim's underlying validity, and a dispute exists even without formal litigation threats if there is an actual difference of opinion.
Facts:
- In September 2012, Michael Roberts and his brother Thomas formed Sparrows Point, LLC, to acquire and redevelop a highly contaminated 3,100-acre industrial property on the Sparrows Point peninsula in Baltimore.
- Robert Schoelch, Vice President of Asset Management for Commercial Development Company, Inc. (CDC), discussed with Michael Roberts the need for a local representative for the Sparrows Point site, contemplating a commission component for the position's compensation.
- John Macsherry, Jr., a Baltimore real estate professional, inquired about working for the owners of Sparrows Point and subsequently received a "Red-Lined Term Sheet" from Schoelch on December 4, 2012, for a Vice President position, listing a $77,000 annual salary and a 0.75% commission on sales/leases, which Macsherry accepted after negotiation attempts.
- Macsherry began working on December 10, 2012, performing various duties as the defendants' local representative for the Sparrows Point site, including dealing with state and local officials, supervising environmental remediation, and managing existing tenants.
- In May 2013, Macsherry requested a 0.75% commission on a lease renewal with the Nelson Company, an existing tenant, which the defendants ignored, leading Macsherry to drop his pursuit.
- On September 18, 2014, Hilco Global, a company that already owned part of the Sparrows Point site, purchased the remaining portion from Sparrows Point, LLC for $110 million.
- Leading up to the Hilco sale, Macsherry requested his 0.75% commission (amounting to $825,000) on the sale, but his employment was terminated, and he was not paid the commission.
- After his termination, Michael Roberts (co-owner of CDC and Sparrows Point) allegedly told Macsherry during a phone call, "I know I owe you a commission. I don’t believe you deserve a commission as big. What will you take?" (the "Compromise Statements").
Procedural Posture:
- John Macsherry, Jr. filed suit against Sparrows Point, LLC, Commercial Development Company, Inc. (CDC), and Michael Roberts in the Circuit Court for Baltimore County (state trial court).
- Macsherry’s state-court complaint indicated "No" for a jury demand on its accompanying Case Information Report, and only referenced a jury in general ad damnum paragraphs.
- Defendants removed the case to the United States District Court for the District of Maryland based on diversity jurisdiction, likewise checking "No" for a jury demand on the Civil Cover Sheet.
- The district court partially granted motions to dismiss against Michael Roberts on both Macsherry's initial and amended complaints.
- Macsherry subsequently moved for a jury trial under Fed. Rs. Civ. P. 38(b) and 39(b), which the district court granted.
- Prior to trial, the district court denied defendants' motion in limine to exclude evidence of Michael Roberts’s Compromise Statements under Fed. R. Evid. 408, ruling them admissible without limitation and as relevant to enhanced damages.
- During a seven-day jury trial, the defendants renewed their Rule 408 objection, which the district court overruled, admitting the statements.
- The jury returned a verdict in Macsherry’s favor on all claims, awarding $1 million in damages, including $825,000 in compensatory damages and $175,000 in enhanced damages.
- The district court denied defendants' post-trial motion for judgment notwithstanding the verdict or for a new trial, but granted their alternative motion to amend the judgment.
- Defendants (Sparrows Point, LLC, CDC, and Michael Roberts) appealed, and Macsherry cross-appealed, to the United States Court of Appeals for the Fourth Circuit.
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Issue:
Does Federal Rule of Evidence 408(a) prohibit the admission of statements made during compromise negotiations to prove or disprove the validity or amount of a disputed claim, including for the purpose of establishing bad faith for enhanced damages, even when the dispute has not yet escalated to threatened litigation?
Opinions:
Majority - Diaz
Yes, Federal Rule of Evidence 408(a) prohibits the admission of statements made during compromise negotiations to prove or disprove the validity or amount of a disputed claim, including for the purpose of establishing bad faith for enhanced damages, even when the dispute has not yet escalated to threatened litigation. The Fourth Circuit holds that a "dispute" for purposes of Rule 408(a) exists "so long as there is 'an actual dispute or difference of opinion' regarding a party’s liability for or the amount of the claim," which "need not 'crystallize to the point of threatened litigation.'" The court found that the defendants had clearly, if impliedly, communicated a difference of opinion regarding Macsherry's commission claim through their actions, such as ignoring previous requests and terminating him without payment. Michael Roberts's alleged Compromise Statements explicitly disputed the amount of the claim and sought negotiation, squarely falling within "statements made during compromise negotiations." The court further held that while proving a defendant's bad faith for enhanced damages is technically a distinct purpose, it is "inseparable" from proving the validity of the underlying claim itself. Admitting such evidence for bad faith would "eviscerate Rule 408[a]’s protection and undermine its clear purpose" by directly establishing liability. Therefore, the district court erred in admitting the Compromise Statements without limitation and for the purpose of proving entitlement to enhanced damages. The court also clarified that a district court's discretion to grant an untimely jury trial request under Rule 39(b) is "very broad," rejecting narrower interpretations from other circuits and affirming that the new trial may proceed before a jury.
Analysis:
This case clarifies the broad scope of Federal Rule of Evidence 408, emphasizing that a "dispute" triggering the rule's protections can arise without explicit litigation threats and through implied communications. It also underscores that the "other purpose" exception under Rule 408(b) cannot be used for purposes "inseparable" from proving or disproving the validity or amount of the claim, particularly to establish bad faith liability, which directly bears on the claim's validity. The decision also provides important guidance on the expansive discretion afforded to district courts under Federal Rule of Civil Procedure 39(b) to grant untimely jury trial requests, rejecting more restrictive views from other circuits. This ruling serves to strengthen the policy favoring settlement by ensuring that compromise discussions are generally inadmissible, and it offers clarity on trial management, particularly regarding jury demands.
