The Impacts of Non-Disclosure Agreements in Product Liability Settlements

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The New York Times and major media outlets have covered General Motor’s defective ignition switch problem in extensive detail. One of the more explosive charges leveled against GM in the press and Congress has been GM’s handling of the defect and failure to report it to the National Highway Transportation Safety Administration (NHTSA). As already discussed on this blog, the inquiry by Senator Claire McCaskill initially targeted GM CEO Mary Barra, but soon expanded to inquire regarding the performance of GM’s general counsel, Michael Milikin.

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One of the issues that triggered this expanded inquiry was that despite a number of legal settlements that pertained to the ignition switch defect, regulators were not informed for more than a decade. GM has presented a picture where a handful of mid-level employees, the alleged bad apples, failed to pass details on to senior management or to the General Counsel. In an effort to prevent a situation where important safety information is not communicated through an organization or reported to regulators, the Sunshine in Litigation Act of 2014 has been re-introduced in Congress.

What Spurred this Legislative Action?

While this legislation passed committee in 2011, it failed to reach the Senate floor. However, cracks in GM’s original story and the fallout from the failure to recall defective ignition switches sooner has given this bill renewed life.

Problems with GM’s official story started to become apparent when top GM engineer, Jim Federico, was about to be deposed in a lawsuit filed by the family of Brooke Melton. However on the day prior to Mr. Federico’s testimony, the company reversed course and accepted a settlement offer that it had previously rejected. At the time, this was apparently the 5th confidential settlement by GM related to the ignition switch defect issue.

Some of the revelations drawn from and following the Melton case, as reported by the New York Times, include:

  • GM conducted, at a minimum, 8 internal reviews regarding ignition switch problems from 2004 to 2013.
  • A GM engineer, Mr. DeGiorgio, testified that he did not approve a change to the ignition switch in 2006. Internal documents from Delphi would later reveal that he did authorize major changes.
  • Despite 5 confidential settlements, news of the defective parts allegedly did not reach CEO Mary Barra until the day of the recall.

Generally speaking, the more pro-active an individual or organization can be in addressing a potential situation, the better the potential outcome. While people can debate whether earlier action would have prevented injuries and death in this particular case, Senators have taken action to force disclosures in a number of circumstances.

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Bipartisan Congressional Action Proposed

U.S. Senators Richard Blumenthal and Lindsey Graham have taken action to address this type of scenario with proposed legislation titled the Sunshine in Litigation Act of 2014.  Blumenthal described the bill as such, “Too often in product liability cases, victims are pressured to pay for a settlement with their silence, even when public interest outweighs corporate confidentiality. The Sunshine in Litigation Act will ensure that courts permit sunshine when product liability cases involve information vital to public health and safety. Concealment can kill, and so can secret settlements. The courts must be stopped from complicity in hiding lifesaving information.”

The proposed act would impose restrictions on parties’ ability to require non-disclosure clauses or seal court records if the pleadings “state facts that are relevant to the protection of public health or safety”. The proposed act would create a presumption against confidentiality clauses in such matters where a health or safety interest is relevant. That is, at the moving party’s request the court must make certain findings of fact prior to restricting public access or disclosure. These findings are:

  • The proposed Order would not restrict the disclosure of information relevant to the safeguarding of safety or public health;
  • The public interest served by disclosure is outweighed by “specific and substantial interest in maintaining the confidentiality of the information or records in question;
  • The proposed Order narrowly constructed and is no broader than the alleged confidentiality interest.

The burden of proof showing that the Order is necessary is imposed upon the party requesting the non-disclosure or restriction on access to court records.

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What Types of Consequences Could Result?

The intended goal of legislation of this type is to improve transparency and disclosure of potentially dangerous conditions. Such disclosures and increased access to court records may allow regulatory agencies like the National Highway Transportation Safety Agency or Consumer Product Safety Commission (CPSC) to identify safety issues more quickly. Earlier detection of problems may prevent injuries and save lives.

However, there is the potential that this legislation could have unintended consequences. In circumstances that are not altogether dissimilar, regulatory agencies, like the Securities and Exchange Commission (SEC), have long weighed the consequences of requiring an admission of guilt when settling a case. That is, requiring an admission of guilt or liability may eliminate the incentives for a defendant to settle a mater as they may find themselves the target of civil lawsuits due to the admission or admissions.

Similar circumstances could occur here. Although this bill involves a presumption against non-disclosure, the purpose of a settlement is often to avoid the costs of litigation while avoiding any admissions or finding of wrongdoing. An inability to seal records could be tantamount to an admission depending on the facts of the mater. In short, the impetus for the settlement of a single legal matter may be swallowed whole by fears of additional suits or a class-action as the as the disclosure itself may expose the company to further liability.

However, the alternative to this potential scenario is the status quo as is being revealed in the GM matter. The true question, however, is can lawmakers navigate a middle ground that encourages the early disclosure of potential defects without destroying the company’s incentive to do so?

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