Two developments occurred regarding mediation confidentiality during the first week of February.

First, on Monday, February 1, 2016, the Ninth Circuit Court of Appeals heard oral argument in Craig Milhouse v. Travelers Commercial Insurance, Case Nos. 13-56959 and 13-57029.  Dr. and Mrs. Milhouse suffered the total loss of their home in Yorba Linda, California in November 2008, when the Yorba Linda Freeway Complex fire swept through their neighborhood.  After filing a claim with their insurer, Travelers Commercial Insurance Company (“Travelers”), but reaching no resolution, they agreed to mediate the dispute and attended mediation on October 5, 2010.  No settlement was reached. Two days later-on October 7, 2010- Dr. and Mrs. Milhouse filed suit in Orange County Superior Court which the defendant Travelers removed to federal court based on diversity jurisdiction.

In August 2013, the case was tried before a jury. The issues were whether Travelers had breached its contract with the plaintiffs and breached the implied covenant of good faith and fair dealing (or, in essence, acted in bad faith) in not settling their claim. Prior to trial, both sides submitted approximately 35 motions in limine, one of which addressed the issue of mediation confidentiality; that is, any communications occurring during the mediation would be inadmissible.  Because the district court judge requested the parties to limit the motions, allegedly both counsel withdrew their motions on this topic and simply agreed in writing that mediation confidentiality would apply.

However, at trial, counsel for Travelers elicited testimony about what had occurred during the mediation to show that the reason the case had not settled was because of the extreme demands made by Dr. and Mrs. Milhouse and their counsel and not because of Travelers’ recalcitrance. Counsel for the Millhouses objected to the testimony on grounds of hearsay and lack of foundation but not on grounds of mediation confidentiality. The court allowed the testimony determining that the parties had waived mediation confidentiality. More importantly, the court ruled that even if the parties had not waived it, the statements would be admitted to provide due process to Travelers to defend itself against claims that it had acted in bad faith by refusing to settle.

The jury found that Travelers had breached its contract with plaintiffs and awarded damages to plaintiffs but also found that Travelers had not acted in bad faith so that plaintiffs were not entitled to punitive damages.

In response to post-trial motions, the trial court essentially affirmed the jury award. Both parties appealed to the Ninth Circuit. Among other things, counsel for the Milhouses argued that admitting the testimony about what had occurred during the mediation was prejudicial error.

Based on the questions posed by the Ninth Circuit panel during oral argument, it appeared that the appellate judges did not agree. The panel questioned counsel for the Milhouses where in the record had he preserved the objection of mediation confidentiality to which counsel replied that there was simply an agreement in writing with opposing counsel after the trial court insisted that the motions in limine be limited. The appellate judges noted that while counsel had objected to the testimony on the grounds of double hearsay and lack of foundation, he had not raised the objection on the grounds of mediation confidentiality and there was nothing “in the record” to show that counsel had agreed that mediation confidentiality would apply. To the appellate court, this objection had not been preserved.  The appellate court suggested that counsel had waived it, rejecting the notion that the California statutes absolutely precludes an implied waiver of mediation confidentiality.

Further, the panel wondered whether there had been actual prejudice, askin