Negotiations Over Post-Termination Commission Should Have Been Excluded Under Fed. R. Evid. 408, Holds Fourth Circuit

In Macsherry v. Sparrows Point, LLC, No. 19-1281 (4th Cir. Sept. 1, 2020), a $1 million judgment in favor of plaintiff is vacated when the panel holds that evidence of negotiations over a claimed commission payment constituted offers to compromise a claim under Fed. R. Evid. 408, and thus should not have been admitted into evidence.

Macsherry, a former Vice President of Development and Leasing for defendants, claimed (upon his termination) a 0.75% commission on a $110 million transaction (the “Hilco sale”), amounting to $875,000. At trial, the parties disputed the course of negotiations. Macsherry testified that co-owner and defendant Michael Roberts admitted “I know I owe you a commission. I don’t believe you deserve a commission as big. What will you take?” (the “Compromise Statements”).

The defendants denied the Compromise Statements, but also moved to exclude them under Fed. R. Evid. 408. The district court overruled defendants’ objection, finding that the Compromise Statements “were admissible without limitation because they didn’t fall under the exclusionary provision of Rule 408(a), and even assuming they did, they were admissible under Rule 408(b) for the limited purpose of proving Macsherry’s entitlement to enhanced damages under the MWPCL.”

The jury awarded $1 million to Macsherry for (among other things) violation of Maryland’s Wage Payment and Collection Law (the “MWPCL”), Md. Code Ann., Lab. & Empl. § 3-501 et seq., which creates a cause of action to recover wages left unpaid upon termination, id. § 3-507.2(a), as well as “enhanced damages” under the MWPCL, which allows for recovery of up to treble damages where the wages were withheld “not as a result of a bona fide dispute.”

The Fourth Circuit vacates and remands for a new trial. It first holds that the Compromise Statements fell within the exclusion of Fed. R. Evid. 408(a), barring admission of “furnishing, promising, or offering—or accepting, promising to accept, or offering to accept—a valuable consideration in compromising or attempting to compromise the claim” to “prove or disprove the validity or amount of a disputed claim.” The panel here joins the majority of circuits that have held that a dispute “need not ‘crystallize to the point of threatened litigation’” to fall within this prohibition. “[T]he value of promoting efforts to settle disputes that have entered the doors of a court applies all the more to disputes that haven’t yet done so.”

The panel also holds that there was ample record evidence that Macsherry’s right to the commission was in dispute, including a prior unresolved controversy about another, much-smaller commission that was never paid and also the ultimate termination of the plaintiff. “Surely, the only ‘reasonable inference’ to be drawn from such extensive efforts to avoid Macsherry’s requests and terminate him without a commission is that the defendants disputed their obligation to pay the commission in the first instance.”

The panel also holds that while the Compromise Statements were ostensibly offered “for another purpose” other than to prove liability (Fed. R. Evid. 408(b)) – Macsherry contended that they also prove bad faith for award of statutory enhanced damages – that did not rescue the statements from the general exclusion. The evidence was submitted to the jury without any limitation. Moreover, courts have construed “Rule 408(b) to exclude purposes inseparable from proving or disproving the validity or amount of the disputed claim,” and here, “because the defendants’ bad-faith liability for Macsherry’s claim to a commission under Md. Code Ann., Lab. & Empl. § 3-507.2(b) is inseparable from the underlying validity of that same claim, the district court erred in admitting the Compromise Statements to prove Macsherry’s entitlement to enhanced damages.”

Finally, the panel holds that the error was not harmless within the meaning of Fed. R. Civ. P. 61. “[I]t’s difficult to imagine any more probative evidence on the question of the defendants’ good faith than an admission by CDC’s owner that Macsherry was entitled to a commission on the Hilco sale.”