Travelers Property Casualty Company of America v. Bobrick Washroom Equipment, Inc.

Filing 168

MEMORANDUM (Order to follow as separate docket entry) re 143 MOTION on Appeal of Magistrate Judge Decision filed by Bobrick Washroom Equipment, Inc., 135 Order on Motion,,,, Signed by Honorable Malachy E Mannion on 9/23/2024. (gg)

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF PENNSYLVANIA
TRAVELERS PROPERTY
CASUALTY COMPANY
OF AMERICA,
Plaintiff

CIVIL ACTION NO. 3:18-94
(JUDGE MANNION)

V.

BOBRICK WASHROOM
EQUIPMENT, INC.,
Defendants

MEMORANDUM

Pending before the court is the defendant's appeal of a discovery order
entered by former United States Magistrate Judge Karoline Mehalchick.1
(Doc. 143). Upon review, the defendant's appeal will be DENIED and the
decision of Judge Mehalchick will be AFFIRMED.
By way of relevant background, in an underlying action 2 , Scranton
Products, Inc. ("Scranton"), brought suit against the defendant in this case,
Bobrick Washroom Equipment, Inc. ("Bobrick"), alleging violations of the

Judge Mehalchick began active service as a United States District
Judge on February 5, 2024.
2 Scranton Products, Inc. v. Bobrick Washroom Equipment, Inc., United
States District Court, Middle District of Pennsylvania, Civil Action No. 3:1 4853-RDM.
1

Lanham Act, 15 U.S.C. §1117, as well as various state laws. In turn, Bobrick
brought counterclaims against Scranton also claiming violations of the
Lanham Act and various state laws. After Bobrick asserted its counterclaims,
Scranton moved to voluntarily dismiss its claims against Bobrick with
prejudice. As a result of the voluntarily dismissal by Scranton, the court
allowed Bobrick to pursue claims for attorneys' fees under the Lanham Act
as a prevailing party. Bo brick ultimately settled its counterclaims with
Scranton for $7.5 million along with non-economic terms.
Travelers Property Casualty Company of America ("Travelers"), the
plaintiff here, was Bobrick's insurer. In the course of the underlying action,
Travelers paid Bobrick approximately $7.3 million in counsel fees and costs
to defend against the lawsuit filed by Scranton. The insurance policy issued
by Travelers to Bobrick provides that any rights held by Bobrick to recover
payments made by Travelers under the policy were transferred to Travelers,
and that Bobrick was obligated to refrain from any action that could impair
Travelers' recovery rights. The settlement of the underlying action between
Bobrick and Scranton was negotiated without Travelers' knowledge or
consent. After Bobrick settled its counterclaims with Scranton, Travelers
demanded under the terms of the policy that Bobrick reimburse it for the
defense costs Bobrick received from Scranton as a result of the settlement.
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Bobrick refused contending that the amount Travelers paid was less than
half of the defense costs incurred.
In this action, which was originally filed in the Central District of
California and later transferred here to the Middle District of Pennsylvania,
Travelers is now seeking reimbursement of the monies it paid Bobrick for
counsel fees and costs in the course of the underlying action. In doing so,
among other things, Travelers sought to obtain discovery related to the
settlement of the underlying action and the nature, type and amount of
damages

Bobrick

obtained.

The

requested

discovery

included

communications exchanged between Bobrick and Scranton leading up to the
settlement. Specifically, Travelers requested Bobrick:
Provide a copy of all documents which describe, comment on, or
document communications between Bobrick or its representatives, on
the one hand, and Scranton Products or its representatives, on the
other hand, regarding settlement of the Underlying Action, including all
communications which led to the ultimate settlement.
(Doc. 146, Ex. C at Document Request 11 ). Bobrick opposed Traveler's
requests for discovery related to the settlement discussions.
The matter was referred to Judge Mehalchick for purposes of resolving
the parties' discovery disputes. After oral argument, Judge Mehalchick
entered a memorandum and order which after thorough consideration found,
in relevant part:
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... the settlement negotiations between Bobrick and [Scranton]
are not precluded under Rule 408 of the Federal Rules of
Evidence as long as they are used for the purpose of determining
whether and how funds were apportioned.
(Doc. 134, p. 20). Having so found, Judge Mehalchick ordered that Traveler's
motion to compel be granted as to Document Request 11 , except to the
extent that Travelers sought protected attorney work product or documents
protected by the attorney-client privilege. (Doc. 135).
Bobrick has filed the instant appeal challenging only that portion of
Judge Mehalchick's memorandum and order compelling it to produce to
Travelers its settlement negotiations with Scranton in the underlying action,
i.e., the information in Document Request 11 . Bobrick argues that Judge
Mehalchick erred as a matter of law in compelling it to produce the settlement
negotiation materials because requiring such production goes against the
policy behind Rule 408 of the Federal Rules of Evidence.
When a United States Magistrate Judge decides a non-dispositive
motion, the district court sitting on appeal may only reverse the judge's
decision if the ruling is "clearly erroneous or contrary to law. " 28 U.S.C.
§636(b )(1 )(A); see Fed. R. Civ. P. 72(a) (reiterating the statutory standard);
M.D. Pa. L. R. 72.2 (same). A ruling is clearly erroneous when "the reviewing
court on the entire evidence is left with the definite and firm conviction that a
mistake has been committed ." PA Prison Soc. v. Cortes, 622 F.3d 215, 231
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(3d Cir. 2010) (quoting Anderson v. Bessemer City, 470 U.S. 564, 573
(1985)). This means the court must accept the judge's factual determination
unless that determination "either (1) is completely devoid of minimum
evidentiary support displaying some hue of credibility, or (2) bears no rational
relationship to the supportive evidentiary data[.]" Haines v. Liggett Group,
Inc. , 975 F.2d 81 , 92 (3d Cir. 1992) (citing Krasnov v. Dinan, 465 F.2d 1298,
1302 (3d Cir. 1972)). A finding is contrary to law if the magistrate judge
misinterpreted or misapplied applicable law. Alarmax Distributors, Inc. v.
Honeywell lnt'I Inc., 2015 WL 12756857, at *1 (W.D. Pa. Nov. 24, 2015).
Findings supported by the record are not clearly erroneous, even if the
record could support a different conclusion. Anderson, 470 U.S. at 573-74
("Where there are two permissible views of the evidence, the factfinder's
choice between them cannot be clearly erroneous."). Along the same lines,
the court is not entitled to reverse Judge Mehalchick's order simply because
it would have decided the case differently. PA Prison Soc. , 622 F.3d at 231
(citing Anderson, 470 U.S. at 573). Judge Mehalchick's ruling, then, is
accorded significant deference. Since the defendant filed this appeal, "[it]
must clear a high hurdle to compel this court to overturn a magistrate judge's
decision of a non-dispositive pretrial matter." Nothstein v. USA Cycling, 337
F.R.D. 375, 384 (E.D. Pa. 2020).
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Acknowledging that the Third Circuit has not addressed Rule 408's
application to matters of discovery, Bobrick argues that, in order to promote
Rule 408's policy of encouraging settlements, settlement communications
are generally immune from discovery. Bobrick argues that Judge Mehalchick
erred as a matter of law in allowing Travelers to obtain discovery related to
the settlement negotiations between it and Scranton leading up to the
settlement agreement in the underlaying case. (Doc. 143-1 , pp. 8-15).
The issue here is whether Travelers is entitled to discovery of the
settlement communications between Bobrick and Scranton in order to
determine whether there was any discussion of allocation of the settlement
funds to attorney's fees. By its terms, Rule 408 limits the admissibility of
evidence, not its discoverability. Rule 408 of the Federal Rules of Evidence,
Compromise Offers and Negotiations, provides:

(a) Prohibited Uses. Evidence of the following is not
admissible--on behalf of any party--either to prove or
disprove the validity or amount of a disputed claim or
to impeach by a prior inconsistent statement or a
contradiction:
(1) furnishing, promising, or offering--or accepting,
promising to accept, or offering to accept--a valuable
consideration in compromising or attempting to
compromise the claim; and
(2) conduct or a statement made during compromise
negotiations about the claim--except when offered in
a criminal case and when the negotiations related to
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a claim by a public office in the exercise of its
regulatory, investigative, or enforcement authority.
(b) Exceptions. The court may admit this evidence for
another purpose, such as proving a witness's bias or prejudice,
negating a contention of undue delay, or proving an effort to
obstruct a criminal investigation or prosecution.
Fed. R. Evid. 408 (emphasis added).
It is Federal Rule of Civil Procedure 26(b )(1) which would determine
whether settlement negotiations are discoverable. This rule provides, in
relevant part:
(b) Discovery Scope and Limits.
(1) Scope in General. Unless otherwise limited by court
order, the scope of discovery is as follows: Parties may obtain
discovery regarding any nonprivileged matter that is relevant to
any party's claim or defense and proportional to the needs of the
case, considering the importance of the issues at stake in the
action, the amount in controversy, the parties' relative access to
relevant information, the parties' resources, the importance of
the discovery in resolving the issues, and whether the burden or
expense of the proposed discovery outweighs its likely benefit.
Information within this scope of discovery need not be admissible
in evidence to be discoverable.
Fed.R.Civ.P. 26(b)(1 ). Thus, "[d]iscovery of nonprivileged information not
admissible in evidence remains available so long as it is otherwise within the
scope of discovery." Fed.R.Civ.P. 26(b)(1) advisory committee note to 2015
amendment. In the Third Circuit, "it is well recognized that the federal rules
allow broad and liberal discovery." Schiavone v. Luzerne Cnty. , 343 F.R.D.

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34, 37 (M.D. Pa. 2023) (quoting Pacitti v. Macy's, 193 F.3d 766, 777-78 (3d
Cir. 1999)).
Here, the settlement negotiations at issue are discoverable under
Fed.R.Civ.P. 26(b)(1 ). To this extent, they are not privileged because there
is no federal privilege with respect to settlement negotiations. Jacoby
Donner, P.C. v. Aristone Realty Cap., LLC, 2018 WL 4328253, at *2 (E.D.

Pa. May 30, 2018) (citing, inter a/ia, Bd. of Trustees of Leland Stanford Junior
Univ. v. Tyco Int'/ Ltd., 253 F.R.D. 521 , 523 (C .D. Cal. 2008) (there is no

federal privilege preventing the discovery of settlement agreements and
related documents)). See also In re MSTG, Inc. , 675 F.3d 1337, 1344
(Fed.Cir. 2012) (declining to adopt a settlement privilege).
Moreover, the materials sought by Travelers are relevant. As
discussed by Judge Mehalchick, "[t]he information sought is relevant
because it has a tendency to make a consequential fact more or less
probable. See In re Schaefer, 331 F.R.D. 603, 607 (W.D. Pa. 2019). To this
extent, there is no dispute that Travelers paid Bobrick $7.3 million to defend
Bobrick in the underlying action pursuant to an insurance policy Travelers
issued to Bobrick. It is further undisputed that the policy provides that any
rights held by Bobrick to recover payments made by Travelers under the
policy were transferred to Travelers, and that Bobrick was obligated to refrain
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from any action that could impair Travelers' recovery rights. In the underlying
action, Bobrick asserted counterclaims against Scranton which sought
reimbursement of its counsel fees. Bobrick then settled its claims with
Scranton for $7.5 million. The information which Travelers seeks relates to
discussions of how that settlement amount was to be apportioned and is
relevant to whether Travelers is entitled to obtain any portion of the
settlement amount recovered by Bobrick.
The court must then consider whether the information sought by
Travelers is proportional to the needs of the case. When considering
proportionality under Fed.R.Civ.P. 26(b)(1) of a request to discover materials
covered by Fed.R.Evid. 408, it has been found that "the closer the
discovery's purpose is to offering the evidence in a manner that would be
barred by Rule 408, the more likely courts are to find that materials
nondiscoverable." Washtenaw County Employees ' Retirement System v.
Walgreen Co., 2019 WL 6108220, *7 (N.D. Ill. Nov. 15, 2019) (collecting
cases). Further, where a party seeks to obtain discovery relating to
settlement negotiations there has been found the need for a "heightened" or
"particularized" showing of relevance which must be made. See Kang v.
Haggerty & Fetbroyt, LLC, 2018 WL 4328251 (E.D.Pa. July 31, 2018) (citing
Doe v. Methacton Sch. Dist., 164 F.R.D. 175 (E.D.Pa. 1995); Fid. Fed. Sav.
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& Loan Ass'n v. Felicetti, 148 F.R.D. 532 (E.D.Pa. 1993). There is, however,
no bright line rule as to what that showing entails. Id. (citing Spear v. Fenke/1,
2015 WL 3947559 (E.D.Pa. June 26, 2015)).
As set forth above, Rule 408 bars evidence used to ( 1) "either to prove
or disprove the validity or amount of a disputed claim" or (2) "impeach by a
prior inconsistent statement or a contradiction." Fed.R.Evid. 408. Bobrick
argues that Travelers' discovery request falls under the first category in that
Travelers is seeking the discovery to establish the validity of its claims here.
However, as discussed by Judge Mehalchick, the relevant focus is on the
claims which were the subject of the settlement negotiations. See Spence v.
Foxx, 159 F.Supp.3d 483, 501 n.9 (D.N.J. 2014) ("However, statements
made during settlement negotiations are admissible 'when offered for
another purpose,' Fed.R.Evid. 408(b), such as to establish 'an independent
violation .. . unrelated to the underlying claim which was the subject of the
correspondence."') (citation omitted). See also B&B Investment Club v.
Kleinert's Inc. , 472 F.Supp. 787 (E.D.Pa. 1979) (finding Rule 408 excludes

evidence of a compromise only on the issue of the amount or validity of the
claim which is the subject of the compromise).
Here, the discovery sought by Travelers is not for the purpose of
establishing the validity or invalidity of the underlying conduct which was the
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basis of the settlement negotiations, i.e., that Bo brick or Scranton
deceptively advertised or committed other conduct that could have been
disclosed in the underlying settlement negotiations. Instead, Travelers is
seeking discovery related to whether the settlement discussions apportioned
any proceeds to attorneys' fees. Thus, as found by Judge Mehalchick, the
discovery is not being used to determine the underlying conduct of the
parties, but simply to determine the terms of the parties' agreement. Because
Travelers does not seek the discovery for a purpose prohibited by Rule 408,
the court finds that the production of such information is not disproportionate
to the needs of the case. See Kang Haggarty & Fetbroyt, LLC v. Hayes,

supra, at *1 n.1 (E.D.Pa. July 31, 2018) (allowing, as proportional, discovery
of a settlement agreement disclosing contingency fees owed to plaintiffs by
defendants from defendants' settlement recovery in a separate case, in order
to determine what contingency fee was owed to plaintiffs, but applying a
"' heightened' or 'particularized' showing of relevance" because of the "strong
public policy encouraging settlements under Rule 408).
While Bobrick argues that Judge Mehalchick failed to require Travelers
to make a particularized showing that the settlement discussions are relevant
to a proper evidentiary purpose, Travelers argues that the settlement
communications between Bobrick and Scranton are necessary in order to
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determine the apportionment of attorneys' fees which it is entitled to collect
under its policy with Bobrick. On the record, the settlement between Bobrick
and Scranton was negotiated without the knowledge or consent of Travelers.
Travelers has no other means by which to obtain this information and without
this information it cannot determine what, if any, monies it is owed from the
settlement proceeds received by Bobrick. While the court makes no finding
as to the merit of Travelers' substantive claims in this matter, Travelers has
made a particularized need to discover, if possible, how the settlement
proceeds were to be apportioned.
In light of the above and upon review of Judge Mehalchick's decision,
there is no indication that Judge Mehalchick misinterpreted or misapplied
applicable law. In fact, her findings and conclusions are in line with the
dictates of Fed.R.Civ.P. 26(b)(1 ) and Fed.R.Evid. 408. As such, her findings
are not contrary to the law. The defendant's appeal (Doc. 143) will be denied
and Judge Mehalchick's order allowing the discovery of the settlement
negotiations between Bobrick and Scranton as not being precluded under

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Fed.R.Evid. 408 as long as they are used for the purpose of determining
whether and how funds were apportioned (Doc. 135) will be affirmed. An
appropriate order follows.

tates District Judge

DATE: September 23, 2024
18-94-05

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