This article was originally published in Law360 on Feb. 18, 2026 — shared with permission.

A persistent misconception in civil litigation is that Rule 408 of the Federal Rules of Evidence and state analogs like California Evidence Code Section 1152 bar any reference to settlement communications in pleadings. 

Rule 408 prohibits using settlement offers, related negotiations or consideration exchanged in compromise to prove or disprove liability or the amount of a disputed claim, but allows such evidence for other purposes, such as showing bias, countering claims of undue delay or proving obstruction when relevant. California’s counterpart, Section 1152, bars the use of settlement offers, related statements or humanitarian payments to prove liability.

Sometimes, this manifests as opponents seeking to strike references to settlement communications in complaints, arguing that there is a blanket prohibition on references to any alleged settlement discussions that preceded the civil litigation. But this view conflates rules of evidence with rules of pleading.

The U.S. District Court for the Northern District of Indiana’s Nov. 18 decision in Cloudbusters Inc. v. Tinsley clarifies this misconception: While settlement communications may be inadmissible to prove liability, they are not automatically subject to being struck from complaints under Rule 12(f) of the Federal Rules of Civil Procedure.¹ Rule 12(f) allows a court to strike “an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter” from a pleading, either on its own or on a party’s motion filed before responding or within 21 days of service when no response is permitted.

For practitioners, particularly those in California, understanding this distinction is essential — especially when the settlement process itself may give rise to allegations of misconduct, such as fraud, bad faith or misrepresentations.

The Cloudbusters Framework

In the Cloudbusters case, a trademark and trade secrets dispute, Cloudbusters sued Ryan Tinsley, its former IT manager; another company named Practice42 LLC; and a new law firm with which Tinsley had contracted, the Law Office of Audrey Ehrhardt PLLC.

It alleged trade secret misappropriation, breach of contract and tortious interference after Tinsley allegedly took proprietary information for the benefit of Practice42 after his employment.

The defendants moved to strike three paragraphs of the complaint along with an attached proposed mutual release agreement, arguing they improperly referenced settlement communications barred by Rule 408. The settlement discussions at issue arose from meetings held immediately after Tinsley resigned.

On Feb. 17, 2025, Cloudbusters’ CEO met with Practice42’s CEO to address Tinsley’s resignation and recent conduct. During a follow-up virtual meeting the next day, the defendant law firm shifted the conversation toward potential resolution by proposing to contact Tinsley and discussing “terms to buy him out from Cloudbusters” — an offer Cloudbusters declined.

The talks escalated on Feb. 19, when the law firm terminated services with Cloudbusters and sent a proposed mutual release agreement containing settlement terms, including monetary payment and a mutual release of claims, marking the first formal settlement document exchanged between the parties. The mutual release agreement was included as an exhibit to the complaint.

The court rejected the argument that this settlement information should be struck. Specifically, the court rejected the motion to strike references to settlement communications for five key reasons.

1. Pleadings are not evidence.

The court reiterated that pleadings are not evidence, and that Rule 408 is a rule of admissibility, not a rule limiting what may appear in a complaint. Courts regularly decline to strike settlement-related allegations because their admissibility is better addressed if and when a party attempts to introduce them at summary judgment or trial.

The court also cited cases holding that Rule 408 does not bar inclusion of such materials in a complaint, only their evidentiary use.

2. Rule 12(f) does not include “inadmissible” matter.

Next, the court noted that Rule 12(f) permits striking only “redundant, immaterial, impertinent, or scandalous” matter — not inadmissible matter.

Applying the principle of expressio unius est exclusio alterius — “the expression of one thing is the exclusion of the other” — the court noted that the omission of “inadmissible” in the statute was intentional. If the federal rules intended courts to strike allegations solely because they might later be inadmissible under Rule 408, “inadmissible” would appear in the rule’s text.

3. Settlement communications are discoverable.

The court also assessed settlement communications in the context of discovery. Specifically, the court held that because Rule 408 does not create a category of documents shielded from discovery, the fact that a paragraph references settlement discussions does not justify striking it from a complaint.

The court noted that information need not be admissible to be discoverable, and that the defendants’ position was inconsistent with discovery principles.

4. Rule 408(b) provides exceptions.

Settlement communications may be admissible for nonliability purposes — e.g., to show bias, intent or delay. As such, the court held that the plaintiffs did not have to prove an exception applies at the pleading stage.

5. Motions to strike are disfavored.

The U.S. Court of Appeals for the Seventh Circuit views motions to strike skeptically because they waste resources and risk delaying litigation. Since the case was in its early stages, the court refused to make premature admissibility determinations. Striking allegations now, the court explained, would contradict the general preference for resolving cases on their merits.

The Takeaway

Cloudbusters underscores a straightforward but often misunderstood principle: Rule 408 governs trial admissibility, not pleadings. Allegations referencing settlement communications are not automatically improper simply because the communications may later be excluded as evidence.

Rule 12(f) does not authorize striking inadmissible matter, settlement communications remain discoverable, exceptions may apply, and motions to strike are generally disfavored.

Together, these points confirm that courts generally disfavor Rule 408 as a basis for policing the contents of complaints or later pleadings, such as discovery responses. Instead, the proper time to address admissibility is when evidence is actually offered for discernible purposes, thus ensuring that relevant allegations remain in the pleadings so that cases can proceed on their merits.

California’s Parallel Framework

Section 1152 is an evidentiary rule, not a pleading bar.

California courts likewise treat Section 1152 as a rule of admissibility, not a rule of pleading. Section 436 of the California Code of Civil Procedure — California’s version of Rule 12(f) — permits striking matter that is “irrelevant, false, or improper,” but again, does not include “inadmissible.” Courts disfavor motions to strike unless the challenged material clearly has no bearing on the case.

Settlement communications are relevant in several circumstances.

Like Rule 408, Section 1152 allows settlement communications for any other purpose besides proving liability. California courts recognize several such purposes:

• Fraud or bad faith in the settlement process — communications used to perpetrate fraud are not protected;
• When the settlement communication is the wrongful act, e.g., extortionate demands, misrepresentations or abuse of process;
• Evidence of pattern, context or state of mind, which can be relevant in fraud and fiduciary duty cases; and
• To negate defenses such as delay, explicitly allowed under Section 1152.

Practical Guidance: When Settlement Communications Actually Belong in a Complaint

Settlement communications should be pled when they form part of the alleged fraudulent or wrongful conduct; they require agreement with a false narrative designed to conceal wrongdoing; the sequence of negotiations shows scienter, concealment or a continuing scheme; or they include factual admissions or evidence of state of mind.

In terms of drafting strategies, focus on the conduct. Describe what the defendant did — not that it was styled as a settlement offer. If communications may be business discussions rather than settlement discussions, plead both.

If the settlement offer was intended to goad the recipient to affirm a false narrative, allege that. Further, explain and identify the nonliability purpose — i.e., intent, knowledge, pattern of conduct or bad faith. This is especially critical when settlement efforts themselves advance fraud.

Responding to Motions to Strike

When opposing a motion to strike settlement-related allegations:

• Emphasize that Section 1152 is an evidentiary rule, not a pleading bar.
• Point to Section 436’s omission of the term “inadmissible.”
• Stress that settlement communications remain discoverable.
• Invoke California’s disfavor of motions to strike.
• Challenge the “settlement” characterization if it’s ambiguous.
• Identify applicable exceptions, even though they are not required at this stage.

Conclusion

Neither Rule 408 nor Section 1152 bars parties from alleging settlement communications in their pleadings. Cloudbusters reaffirms that these statutes govern admissibility, not what may be alleged.

For California practitioners, this distinction is critical where settlement demands further a fraudulent or bad faith scheme. Properly framed, settlement communications can and should be included in complaints when they reveal intent, advance the fraud or constitute the wrongful conduct itself.

With careful pleading and clear identification of the relevant nonliability purpose, practitioners can ensure that bad faith or fraudulent settlement conduct is not insulated simply because it arose during ostensible negotiations.

---

¹ Cloudbusters Inc. v. Tinsley, No. 2:25-cv-208-GSL-AZ (N.D. Ind. Nov. 18, 2025).