In the Matter of Eighth Judicial District Asbestos Litigation, 8 N.Y.3d 717, 872 N.E.2d 232 (2007)

Brief Summary
The court concluded failure to disclose to all parties the existence of a high-low settlement agreement between plaintiffs and one of the defendants prejudiced the determination of the rights and liabilities of the non-agreeing defendant at trial, requiring a new trial on both liability and damages.

Complete Summary
Plaintiff Donald Reynolds worked at the Ashland Oil Refinery for many years. After he contracted mesothelioma, his wife and he brought a products liability/negligence lawsuit against multiple manufacturers and distributors of asbestos-containing products used at the refinery. This opinion focuses on what occurred at a time when only two defendants remained in the case, Garlock Sealing Technologies, LLC (“Garlock”) and Niagara Insulations, Inc. (“Niagara”).

Unknown to Garlock, Mr. Reynolds and Niagara had entered into a high-low agreement two weeks before trial in which they agreed that if the jury’s award against Niagara was $155,000 or less, Niagara would pay a minimum of $155,000. If the award was more than $185,000, Niagara would not pay more than $185,000. If the amount fell between $155,000 and $185,000, Niagara would pay the designated amount. Consequently, Niagara was only risking $30,000 at the trial. Although the trial court was aware of the existence of an agreement, it was not aware of the specific terms. Garlock knew nothing of the agreement. The jury returned a verdict of $3.7 million apportioned 60 percent against Garlock and 40 percent against Niagara. Id. at 720. When Garlock learned of the high-low agreement after the verdict, it moved to set aside the verdict and for a new trial. The trial court denied the motion and the Appellate Division affirmed the judgment, holding that the failure to disclose the agreement to Garlock did not require reversal unless there was evidence of collusion between Mr. Reynolds and Niagara to the detriment of Garlock. This appeal followed.

On appeal, the court noted that the trial court “did an admirable job in brokering pre-trial settlements of many claims in this complex litigation…[N]onetheless, we are constrained to agree with Garlock that the court’s failure to disclose the existence of the high-low agreement rendered impossible a fair determination of Garlock’s rights and liabilities.” Id. at 721. The court emphasized the difference between such an agreement in a single defendant case and those in multi-defendant litigation. In single defendant cases, high-low agreements give the parties a way to manage the risks of trial, but in multi-defendant cases in which not all of the defendants are aware of the agreement, there is the potential to prejudice the rights of the party left ignorant of the agreement. “Indeed, courts and commentators alike have acknowledged that secretive agreements may result in prejudice to the non-agreeing defendant at trial, distort the true adversarial nature of the litigation process, and cast a cloud over the judicial system.” Id. at 721. In this instance, Garlock lost the right to a fair trial because the agreement gave Mr. Reynolds an incentive to maximize Garlock’s liability and minimize Niagara’s in light of the agreed cap on those damages.

The court recognized that although it is not uncommon for a plaintiff to have an incentive to maximize recovery against a particular defendant in a multi-defendant action, Garlock was entitled to know of the existence of the agreement and the “true posture” of the case. Id. at 722. The court concluded “[T]o ensure that all parties to a litigation are treated fairly, we hold that whenever a plaintiff and defendant enter into a high-low agreement in a multi-defendant action, which requires the agreeing defendant to remain a part to the litigation, the parties must disclose the existence of that agreement and its terms to the court and the non-agreeing defendant(s). This result strikes a proper balance between the State’s public policy of encouraging the expeditious settlement of claims and the need to ensure that all parties to a litigation are apprised of the true posture of the litigation so they may tailor their strategy accordingly.” Id. at 722. The case was reversed and remanded for a new trial on liability and damages.

Significance of Case
Secret side-deals between parties that are hidden from other litigants in a way that may foreseeably mislead those other litigants to their detriment are extremely hard to justify as a matter of fairness if not also as a matter of honesty.

This alert has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.