Helpful But Prejudicial Trial Evidence May Come at a Cost

By Michael W. Mitchell and Edward Roche

Be careful what you ask for. If that juicy prejudicial evidence seems just too good to pass up, you should consider the Fourth Circuit’s recent decision in 'Macsherry v. Sparrows Point.'

Trials are expensive and emotionally draining. No business or individual wants to go through a trial twice when once would suffice. And if you think your client is unhappy to try a case twice, think how unhappy they will be if they won the first round with inadmissible evidence and then they lose the second round when the evidence is excluded.

If that juicy prejudicial evidence seems just too good to pass up, you should consider the Fourth Circuit’s recent decision in Macsherry v. Sparrows Point, LLC. In Macsherry, the court reversed a plaintiff’s trial win because he (i.e., his lawyer) introduced, and the trial court allowed the jury to hear, evidence of the parties’ settlement negotiations. That evidence was likely very helpful to the plaintiff at trial, but it was also the reason the plaintiff had to retry the case.

Admission of Evidence and Review on Appeal

When a party seeks to admit evidence at trial, the other side may object. The objection could be on a number of grounds—that the evidence is not relevant, that it is unduly prejudicial, that it is inadmissible hearsay, that it cannot be shown to be reliable, or a number of other grounds. The trial court then must decide whether or not that evidence may be admitted under the rules of evidence (the Federal Rules of Evidence in federal court or the equivalent state rules in state court).

A frequent issue on appeal is whether the trial court made the right decision in admitting or excluding evidence. The losing party on appeal may argue that the judge or jury’s verdict at trial should be overturned because the jury saw or heard evidence it should not have heard.

An appellate court should reverse a trial verdict based on the improper admission of evidence if:

1. The evidence should not have been admitted under the rules of evidence; and
2. The improperly admitted evidence was not harmless—it potentially made a difference in the outcome of the trial.

Accordingly, a certain piece of evidence may turn a trial in a party’s favor but then lead to reversal on appeal, sending the winning party back to the drawing board.

‘Macsherry’ and Admission of Evidence of Settlement Negotiations

In Macsherry, the defendants were in the business of buying parcels of industrial property, redeveloping them, and selling them at a profit. The defendants hired the plaintiff, Macsherry, as their boots-on-the-ground representative for the environmental cleanup of a site in Baltimore. The defendants agreed to pay him an annual salary.

Macsherry claimed that the defendants also agreed to pay him 0.75% commission on the price for which the defendants eventually sold the property. Thus, when the defendants ultimately sold the property for $110 million, Macsherry claimed that he was entitled to commission of $825,000.

But the defendants argued that the two sides had not agreed to a commission component to Macsherry’s compensation. The parties had exchanged various drafts of the agreement, but neither could provide a final version. At trial, both parties presented evidence on whether or not the defendants had agreed to pay Macsherry a commission.

Macsherry himself testified. He stated that, during a phone conversation with one of the defendants, Macsherry sent a document indicating that he was owed 0.75% of the sales proceeds. Macsherry testified that the defendant responded: "I know I owe you a commission. I don’t believe you deserve a commission as big. What will you take?" Those supposed statements by the defendant were termed the "Compromise Statements."

The defendants urged the trial judge not to allow Macsherry to include the Compromise Statements in his testimony. Under Federal Rule of Evidence 408, a party generally may not use evidence of settlement negotiations. More specifically, they may not use efforts to "compromise" a "disputed claim" as evidence that the claim is valid, or to prove the amount of damages for the claim. Rule 408 reflects a policy decision that the inadmissibility of settlement discussions will promote full and frank settlement discussions without impairing a party’s right to have the case decided on the merits if the case does not settle.

The trial court in Macsherry nevertheless allowed the jury to hear the Compromise Statements. The trial court reasoned that there was not a true "disputed claim" at the time the alleged Compromise Statements were made. Before that time, the defendants had avoided Macsherry’s attempts to discuss commission, so the parties had not recognized that there was an actual dispute.

The jury ruled in Macsherry’s favor and awarded damages for $825,000 in commission. The jury also awarded $175,000 in additional damages based on its conclusion that the defendants did not have a good-faith basis for withholding the commissions.

The Fourth Circuit’s Decision

The defendants appealed, arguing that the jury never should have heard the Compromise Statements. The Fourth Circuit agreed that the trial court should have excluded the Compromise Statements. It held that a "disputed claim" existed as to the commission payment at the time the Compromise Statements were allegedly made, even though the parties had not explicitly recognized that they were in a dispute.

This led the Fourth Circuit to consider whether the admission of the Compromise Statements constituted "harmless error." Even if an appellate court determines that the trial court has committed an error, such as the erroneous admission of evidence here, the appellate court still will not reverse the trial court’s decision if the error was harmless. Here, the Fourth Circuit determined that the error may have made a difference to the jury’s conclusion that the defendants owed Macsherry a commission, and especially to its determination that the defendants should pay additional damages because they lacked a good-faith basis for its position on the commissions.

As a result, the Fourth Circuit overturned the judgment and ordered a new trial.

Takeaways from the ‘Macsherry’ Decision

Every litigant wants to win at trial. It is difficult to resist the temptation to introduce helpful but inadmissible evidence, especially when that evidence could sway the jury against our opponent. But clients need lawyers who will resist a temptation that only prolongs the cost and the result. Usually the judge protects us when the temptation is too great. The Macsherry decision serves as a stark reminder of that perfect storm when temptation wins and we are able to convince the court to let in the evidence.

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This article was first published on LAW.COM on October 7, 2020, and is republished here with permission. ©2020 ALM Media Properties, LLC. All rights reserved.