There are few things as wasteful and painful as litigation. And that’s from someone whose career started as a litigator and, after a long tenure in-house, now works for a litigation boutique! While sometimes it is simply unavoidable and necessary, any in-house lawyer can tell you that litigation is expensive, time-consuming, distracting, frustrating, risky, and very difficult to predict outcomes. As a result, ending litigation is usually a great feeling (sometimes celebrated with bottles of expensive champagne). Still, litigation rarely ends with a jury verdict or bench decision. It usually ends with a settlement, i.e., an agreement by the parties to the litigation to end the matter based on some agreed upon terms. Sounds simple, right? It’s not.
A settlement agreement is an extremely important document and should receive the same level of attention to detail as any other complex contract your company might enter into. There are many ways a settlement can go “wrong” and that is why the agreement is not something to leave solely to the outside lawyers once the “deal has been made.” In-house counsel need to be intimately involved with the documentation and execution of the deal. Simply put, careers can end because of “bad” settlement agreements. You do not want to be on the receiving end of a settlement agreement that turns out NOT to be the deal you (and the CEO or Board) thought you had to end the litigation. Since many in-house lawyers rarely deal with litigation, let alone settlement agreements, this addition of Ten Things will discuss some of the key things you need to keep in mind when settling litigation so you can do your best to make sure it’s really over:
1. Scope of the release – the claims. The core of a settlement agreement is the release of claims, i.e., the part that says the dispute over “Claim X” is resolved. The key is making sure that the release covers the claims you want it to cover. The first thing to consider is the scope of the claims to be released and whether you are agreeing to a specific or a general release. A “specific” release will resolve only the specific claim(s) at issue in the litigation. For example, if the defendant failed to pay you $500,000 under the contract, the specific release would resolve that issue only. A general release is broader and is usually worded as “any and all claims” the plaintiff has against the defendant, whether alleged in the lawsuit or not. In our example, not only is the claim for $500,000 resolved but any other claims the plaintiff might have against the defendant are also released. Sometimes the language of a general release goes as far as to release any claims “known or unknown.” Whether you want a specific or general release (known or unknown) depends on which side of the table you are sitting. Regardless of where you sit, the important thing is to know the difference and ensure that you work with your outside counsel to get the release you and the business want in place.
The second issue around scope of the claims released is whether the claims will just be dismissed or dismissed with “prejudice.” If the claims are just dismissed, they can be filed again. If the claims are dismissed with prejudice then they are completely extinguished and cannot be filed again by the plaintiff. Generally, the parties dismiss claims with prejudice in a settlement agreement because they want the dispute to be 100% over. Whether or not this happens depends on what the parties have negotiated, the consideration for the release, and other factors. Just be sure to think through which one you want and then ensure that’s what the settlement agreement states.
2. Scope of the release – the parties. Once you figure out the scope of the claims you will release, you must state which parties are covered by the settlement/release. For example, if you are a defendant resolving a claim over a patent license you may want to ensure that all of your affiliated companies are covered by the release, so they are not sued down the road by the same plaintiff over the same patent. On the other hand, if you are the patent owner, you may want more money to release all of the affiliated companies vs. just the entity you sued. Corporations typically want to ensure that not only are they released, but also their officers, directors, employees, agents, affiliates, parent companies, etc. are covered. Whether or not this is agreeable will depend on the circumstances. Sometimes the plaintiff will want a “mutual” release where the defendant releases any claims it might have against the plaintiff. While this makes perfect sense if there are counterclaims, it doesn’t always make sense if the defendant has not filed or raised any claims of its own. To further complicate things, sometimes there is a need to consider releasing third-parties, i.e., parties unrelated to either the plaintiff or defendant. For example, co-defendants such as alleged joint tortfeasors. Again, the key is to be sure to think through, with counsel, the “who” as much as the “what.”
3. Get the logistics right. The other side to the litigation emails you and writes “We’ll pay you $400,000 to settle.” You respond back with “Sounds interesting, let me think about it.” In your head you’re thinking “This is a great offer. I should just accept it.” While you may think it’s great, it’s not for you to decide. From a common sense and ethics standpoint, you need the client to agree to accept the offer. For the in-house world, unless the business delegated the decision to you, that’s either the business unit involved in the litigation or, if the stakes are high enough, the C-Suite or even the Board of Directors. Regardless of who gets to make the decision to accept any settlement offers, you need to be sure you have a process in place to get the necessary input and approvals from all of the right people. If it’s at the Board of Directors level that will mean some type of formal vote and delegation of signature authority — all of which you will need to properly document in the minute book. Moreover, you may have a very hands-on C-Suite or Board which means they might want to read the proposed settlement agreement and weigh in with comments or suggestions. Understand upfront whether this is the case and build in the necessary timing to allow this to happen without “surprising” anyone at the last moment with a ridiculously short turn-around time. And don’t be afraid to ask the other side about the logistical process they need to go through. It will save you and the other side a lot of pain and worry if you both understand the process each needs to go through to get sign-off internally. To ensure a smooth ending, spend time thinking about all of the “process issues” and steps that you need to deal with to get from settlement authority to settlement signature.
4. Contingencies. In a perfect world, the parties sign the settlement agreement, the payment (or whatever consideration provided) occurs instantly, and everyone goes home happy — the process completely finished and done. As you can guess, that isn’t the way it works 90% of the time. There are almost always contingencies that need to be dealt with, including having those contingencies clearly spelled out in the settlement agreement. The goal in a settlement agreement (and in settlement negotiations) is what some call “perfect communication.” The closer you can get to that goal, the less problems you will have both before and after the settlement is signed. For example, if you are receiving $400,000 from the defendant to settle the litigation, is that in a lump sum or in installments? If a lump sum, how long does the defendant have to pay? What happens if they don’t pay? What happens if the ninth and tenth installments are not paid? Your job (and that of outside counsel) is think about all of the things in the settlement “deal” that need to happen so that each side gets the benefit of their bargain, especially your side. That means for each contingency there needs to be some type of consequence if the other side fails to execute, e.g., if they don’t make a payment what happens? Does the settlement become void? Is there a pre-signed consent judgment you can file? Among the easiest things you can do in a settlement agreement to prevent problems is to include time frames for things to occur (i.e., don’t leave critical steps open-ended that could leave you holding the bag). Think about what you are giving up and how can that be reversed if the other side defaults. The consequences then need to be set out clearly in the agreement. As I used to tell my business colleagues when we were doing a business deal: we need to plan for the divorce in the contact and hope it never happens. The same rule applies to settlement agreements.
5. Confidentiality. While the company may be very excited you settled the lawsuit, it may not want the entire world to know the terms of the deal. As you are working on the settlement, think about the terms you want to keep confidential (and be sure to bring the business into the analysis as you may miss something they are passionately concerned about). It’s likely both sides will want to include a confidentiality provision. Even so, you will probably need to make some exceptions. For example, you’ll want to be able to share the document with your outside attorneys, accountants, and auditors. If you’re a publicly traded company, there may need to be some accommodation for you to disclose parts of the settlement in a Form 8K or in a quarterly filing. What you want to disclose and what you must disclose may not be the same thing, so keep that in mind and be sure the C-Suite and Board understand this as well (i.e., don’t let them be surprised if terms of the settlement they thought were going to be confidential need to be disclosed). You may also need to disclose the settlement agreement to the court (and you may even need court approval, such as in a bankruptcy context). The court, in turn, may need to make the document public or perhaps a redacted version. Consider including a provision for a joint media statement with the parties agreeing in the settlement that this statement is the full extent of what either side will disclose to the media. Otherwise you and the other side may get tied up in an escalating game of each “spinning” the settlement as a victory.
6. The insurance company/indemnitor. If you have insurance that covers the claim and the insurance company has been providing a defense (or paying for a defense) and will be paying some or all of any cash settlement, then you will need to discuss the settlement with them before you finalize anything. However, if the insurance company has been stiffing you on its obligations (i.e., breaching the policy), not paying defense costs, and/or otherwise making it clear they do not think they are responsible then it’s probably not necessary to involve them as them they have, by choice, not been involved to date and have waived any rights to be involved now. Likewise, if you sought indemnity from a third party for the litigation costs and the claim, you likely need to involve them in the decision to settle, especially if they have already acknowledged responsibility and are paying the defense costs. The key is to anticipate who needs to be brought in to the process and when that needs to occur.
7. Worry about the tax/accounting implications. Stephen Hawking will tell you that everything in the universe comes down to one thing – gravity. Finance will tell you that is crap – everything comes down to taxes. While taxes may not drive the entire universe they certainly drive business decisions and anything Legal does that throws a company off-course with respect to its tax strategy is most unwelcome and will make you very unpopular with the number-crunchers. Money, products, or services changing hands through a settlement agreement can have an impact on taxes and on financial reporting (e.g., cash flow, profit, loss, etc.) just like any other contract, and this is especially a concern for publicly traded companies. As you work through your settlement agreement terms be sure to consult with Finance early in the process, both the tax side and the accounting side. You want to make absolutely sure that any tax or accounting impacts are fully vetted and understood before there is an agreement. You may need to reword the agreement or re-cast the consideration given or received in a different manner in order to match up with the appropriate tax structure or accounting treatment. And don’t be surprised if the other side asks for wording changes along these lines as well. Don’t worry if your positions clash, that’s just part of the normal craziness of settlement negotiations.
8. Enforcing the settlement. Part of “planning for the divorce” mentioned above is what to do if there is a breach of the settlement agreement, e.g., the other side does not make the required payments. You need to have this covered in the document itself. Do you want the same court to keep jurisdiction of any disputes around the settlement or do you want a different court to handle it? Maybe you want confidential arbitration? Be sure to also consider choice of law, injunctive relief, attorneys’ fees and costs, interest, and so forth. Just like any other contract, the parties can plan for how disputes will be handled. This is an area worth investing time on as you plan and negotiate the agreement.
9. Create a “settlement team.” Here is one thing that always happens during settlement negotiations: you start to doubt the strength of your position and you start to rationalize why the other side’s positions make sense – even if they didn’t before you sat down at the table. If you happen to be in or beginning trial when the settlement discussions start, this is a bad place for your trial team to be mentally. The last thing you need is for your lead trial lawyer — on the eve of trial — to be coming up with reasons why your case sucks and a settlement makes sense. They need to be thinking like Vikings about to storm the shores of Northumberland – taking names and kicking butt. The solution is to create a separate “settlement team” to handle the negotiations and documentation of the settlement, leaving the trial team “out of the loop” so they can focus all of their energies on winning the case. There will certainly be coordination with some of the trial team, but not much. Make it on a need to know basis only. Otherwise, your trial team members might start thinking about what they will be doing when they get home vs. tearing someone up on cross-examination.
10. “Accidental” settlement agreement. If your response in paragraph three above had been “Sounds like we have a deal.” vs. “Let me think about it”, you may have accidentally accepted a settlement offer that you (a) really did not mean to accept and (b) you did not have authority to accept. This means that you need to be very careful during settlement negotiations, especially when exchanging drafts or term sheets via email, to not somehow create a binding settlement agreement you did not otherwise mean to accept. Sometimes in the frenzy of trying to get to a resolution of your dispute, you can let your guard down and get lazy with language or not otherwise be clear about the conditions under which you will accept the core settlement proposal from the other side. For example, you may be happy with the $400,000 in cash but you also need a dismissal with prejudice, an agreed media statement, a release that covers your affiliated companies, and payment by a certain date to make Finance happy. If you end up with just the $400,000 and none of the other terms because you (or outside counsel) were too quick to write “agreed” without stating your conditions, just imagine the unpleasant conversation with the CEO/CFO or the Board.
Remember to take some basics steps in any settlement negotiation to make it clear that nothing is final until you agree it’s final. For example, if you get a term sheet from the other side proposing ten terms they are offering to settle, respond to each one. A court may find that the terms you did not specifically respond to were “accepted.” When you do respond, include your own material terms that you need in order to agree to a settlement. Don’t be shy. Barf it up. It’s better to get everything on the table now vs. seeing your settlement agreement blow up because the other side claims you sprung an unacceptable term on them well after the fact. The best thing to do is be maniacal in your written discussions of proposed settlement terms and consider including the following language in all material communications with the other side regarding the settlement:
- All discussions and correspondence regarding a settlement are confidential, covered by FRE 408, and are for negotiation purposes only. There is not yet any authority to enter into a final, binding agreement on behalf of [the Company]. The execution of a separate, formal agreement is a material term of any settlement and there is no settlement without one. Other materials terms exist and [the Company] will not agree to any settlement without agreement on those terms as well.
It may seem a little clunky (it is), but it is certainly better to over-protect yourself and the company from any claim that a settlement was reached before you intended.
I wrote this post from the standpoint of settling actual pending litigation. The principles above apply equally well to disputes that have not arisen to actual litigation but need to be resolved nonetheless. Likewise, while U.S.-focused, most of these suggestions should work outside the U.S. as well (but it’s worth researching the rules that apply where you practice). As excited as you may be to settle the case, especially those long-running, high-risk matters, always take a deep breath and be sure you methodically take all of the proper steps to ensure that not only are you getting the settlement you want but you’ve also taken all reasonable measures to ensure that when the agreement is signed, that it is truly the end of the litigation.
March 31, 2016
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My first book, “The Evolution of Professional Football,” is available for sale on Amazon and at www.SterlingMillerBooks.com.
 Federal Rule of Evidence 408 regarding admissibility of settlement discussions, or use the state equivalent if you are in state court.
 See Robert H. Ellis, “Making Certain the Settlement You Intend is the Settlement You Get,” Litigation, Volume 42, Number 2, Winter 2016