Many, if not most, lawsuit settlement agreements contain a confidentiality provision requiring that the terms of the agreement not be made publicly available and that those involved in the lawsuit not disclose the terms of the agreement. Both sides want confidentiality, at times because they don’t want to admit liability, but often for a variety of other reasons, including protecting business trade secrets and other sensitive information. Many lawyers and scholars have argued that a confidentiality clause must be included in every settlement agreement.
Yet if it is conventional wisdom that good cases settle while bad cases go to trial, isn’t there a lot that could be learned if lawsuit settlements were made available for public scrutiny? It’s an interesting question, but one that makes for a potentially contentious debate.
Before going further, let me point out that for purposes of this post, I’m only considering tax-related lawsuit settlements -- that is, only cases involving tax issues that have been filed with a trial court, tax court, or independent tax tribunal and are subsequently settled. I am not extending this discussion to settlements between a taxpayer and a tax authority that take place after an assessment has been issued but before formal litigation has begun.
With that in mind, let’s turn back to the question whether settlements in tax cases should be made publicly available. Or to phrase it more precisely, would the benefit of the information gleaned from making tax lawsuit settlements publicly available outweigh the parties’ desire for confidentiality?
The answer depends on the end goal. That is, what information would be considered useful? Unless a case has been sealed, there is a considerable amount of information about a lawsuit that is a part of the public record. For example, the mere existence of the case, the names of the parties, and the allegations being made by the plaintiff would be known once a complaint was filed in court. And whether a case was settled could easily be inferred by looking at the docket to see whether the case was voluntary dismissed.
Still, by keeping settlements in tax cases confidential, the broader tax bar is being deprived of valuable information about how parties reach the settlement terms. The public may also have an interest in the litigation, and it would be deprived of any information about how the case was ultimately resolved. Tax is a subject matter that affects the public as a whole, so keeping litigation secret undermines the public’s ability to find out information that might affect it.
That said, those in favor of confidential settlements have argued that parties to a litigation have a right to enter into a contract ending their dispute and that settlement is the most efficient means to resolve cases. Prominent scholars have said that parties do not check their privacy and property rights at the courthouse door, and that divulging certain settlement information would infringe on those rights.
As mentioned above, tax, as a field of law, does affect the general public, though it admittedly does not affect the welfare of the public to the extent that product liability cases might. Still, if nearly all cases are settled out of court, the public -- and the tax bar -- has an interest in knowing about these cases and what the IRS or the state tax authority was willing to concede to settle.
One option, albeit imperfect, would be to require open settlements, but not include settlement amounts or damage awards. That way, the public and the tax bar would receive information about the substance of the litigation, but monetary amounts would be kept private.
Whether or not that is the right option -- and undoubtedly there are many more -- this is a debate worth having.