Ten Things: Settlement Agreements – Making Sure it’s Really Over

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 accidently accepted a settlement offer that you (a) really did 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.  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,[1] 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.[2]

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.

Sterling Miller

March 31, 2016

Follow me on Twitter @10ThingsLegal and LinkedIn where I post short articles of interest to in-house counsel daily. 

(If you find this blog useful, please click “follow” in the top right so you get all new posts automatically, pass it along to colleagues or friends, and “Tweet” it. “Ten Things” is not legal advice or legal opinion.  It is intended to provide practical tips and references to the busy in-house practitioner and other readers. You can find this blog and all past posts at www.TenThings.net.  If you have questions or comments, please contact me at either sterling.miller@sbcglobal.net or smiller@hilgersgraben.com).

My first book, “The Evolution of Professional Football,” is available for sale on Amazon and at www.SterlingMillerBooks.com.

[1] Federal Rule of Evidence 408 regarding admissibility of settlement discussions, or use the state equivalent if you are in state court.

[2] See Robert H. Ellis, “Making Certain the Settlement You Intend is the Settlement You Get,” Litigation, Volume 42, Number 2, Winter 2016

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30 comments

  1. Well done sir.

    I found your article after a settlement agreement we resolved four years ago was reopened by the other side. I have incorporated many of your suggestions into our own settlement agreement template.

    From a first year lawyer to a vet like you, thanks again for your guidance!

    Like

  2. Thanks for sharing this sterling. Settlements are not a simple thing as you have shown here, there is so much that goes into settlements and it’s really good to know these ten things you’ve mentioned here to be confident that the agreement is an actual agreement. Keep up the good work.

    Like

  3. Is a publicly traded company absolutely required to report monies received in a litigation settlement via an 8k? Does an NDA on the settlement change this at all?

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    1. Hi Chadwick – it would depend on whether the amount of the settlement was “material.” Usually, it would take a pretty large amount of money to meet that threshold but the answer is fact specific to the publicly traded company. If the litigation is listed on the company’s quarterly reports, then you should look deeper into whether an 8K is needed. If the litigation was not material enough to even make listed, it’s difficult to see how the settlement would be an 8K event. A confidentiality provision in a settlement agreement would not trump the need to disclose (if it is a disclosable event). If you’re not sure which way to go, I would ask your public markets counsel. Rgds – and thanks for reading – Sterling

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  4. Thanks for the great information. If a case involves multiple parties being sued and you settle with one party should the settlement agreement be AGREED ORDER OF DISMISSAL WITH PREJUDICE or without?

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    1. Hi Terri – I think any time you settle a lawsuit, you should ensure that the settlement includes a dismissal with prejudice of all claims (including those that they could have brought related to the same subject matter). In the situation you note, it appears that the settlement will only be with one of the parties. So, the claims of the other parties are still there to deal with but the claims of the party settling would be gone forever. Thanks for reading and for taking the time to write. Rgds – Sterling

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  5. Hello, great article. I am contemplating a settlement and release agreement currently, and the “Defendant’s” counsel only provided a space for me to execute on the agreement, do you think it is odd that they are not signing the document?

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  6. From a 30 year atty. Thanks much for the well written and reasoned article. I am incorporating several of your suggestions in a pre litigation settlement agreement .

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  7. Hello, great posts, I am in Fort Worth,Texas, After reading this blog I am concerned about the agreement my son signed 9 days ago. He settled out of court. My son invested 100K in a small business, also bought a van for10k in 2015. Him and his friend were 50 50 owners.

    He filed a lawsuit in Dec. 2016 against his partner and the seller of the van. His lawyer did nothing to help the case. After a year and a half, and paying 35k to this lawyer, the lawyer drops him 1 month before trial.

    Two continuances had been filed, judge would not allow a third. Now he is pro-se. Judge enters the court and immediately ask can this lawsuit be settled out of court? Opposing said yes then my son said yes. he’s totally not prepared for this.

    The business partner basically stole the business, ousted my son and kept him locked out, he contributed nothing. My son settled for 15K paid over 15 months 1K every month for 15 mo. Huge loss, there is nothing in the settlement that talks about what happens if the partner stops making a pmt. and there may be other issues. This was just done 9 days ago.

    Do you look at agreements? or can you tell me what i can or need to do. Of course he is regretting signing the agreement so much so he is going to see a Doc. for depression. Our relationship is pretty much ruined also. The agreement is simple, 7 pgs. long. Just wondering if you can help us.

    Than you. Anna Ford

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    1. Hi Anna – well, I cannot do anything legal other than for my employer so I cannot review your agreement or provide you with legal advice. Unfortunately, unless the settlement agreement was entered into under duress or fraud (very hard to prove), it’s a binding agreement. If his partner breaches, then it would be a breach of contract claim. In most case, you can collect attorney’s fee for breach of contract in Texas. These are just some general ideas for you to consider and everything would require a review of the facts and agreement. But it will be tough to do anything about the agreement your son apparently signed voluntarily. If you would like to speak with a lawyer and do not know one, I can make a recommendation.

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      1. Yes please if you don’t mind I would appreciate a recommendation very much. We’re stressing right now cause the settlement agreement says nothing about if the defendant does not make his monthly pmt. to my son what happens, what do we do. He is a week late, how long do we wait to say something etc.
        Thanks so much, Anna and Brandon Ford
        Fort Worth, Tx.

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  8. These were some great tips on finalizing settlement agreements. I thought you made a great point about making sure you consider the tax implication of receiving a settlement and how that should be processed by consulting with a tax professional. I don’t think many people consider the tax implications, and it makes sense because litigation can be a very emotional situation so it’s hard to think of some of these practical things when you’re going through litigation. Thanks for the great advice. https://wiseadvice.biz/litigation.html

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  9. I signed a settlement agreement and agreed order with Chase bank in 2015 I signed the deed over and did a cash for keys. Chase paid me and took possession of the property. I kept getting notices for property taxes for the past 2 years. I finally got in touch with Chase atty who informed me Chase could not sell property in 2026 so they decided to give me back the property and sent me a letter in 2016 informing of their decision. Problem is they sent the letter to the property I signed over to them and I no longer had access to and not directly to me. Now house is condemned due to damage done to property. I want to reopen the case but it was dismissed with prejudice. Chase violated the contract and the order

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  10. I was married in Chile and we signed a pre nup agreement at the time . During the many years that we have been married and living in California we had separate IRA accounts and checking and savings acc. We also have separate credit cards. Now we are going through a divorce and I request that only the house and furniture should be divided . Am I right on that ?

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    1. Sorry, but I cannot provide you with any legal advice. Plus, this would be covered by divorce law which I have no background in. My advice would be to seek a divorce lawyer to represent you. That way you should get what you are entitled to. Rgds

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  11. I was excited to find this website. I wanted to thank you for ones time for this particularly fantastic read!! I definitely savored every bit of it and i also have you book marked to look at new stuff in your web site.

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  12. Hi, near the end of a settlement. The settlement was a price we agreed to for a noncompete agreement with a previous employee.

    We receive the draft back from his attorney which took us by surprise. It lists the same elements as you mentioned as above as far as making it a mutual agreement as he “might” have claims against us that he has not brought up. Then it lists protecting his employees, spouse and the company that he works for. I brought these concerns up to our lawyer and he says it’s normal because a settlement is releasing all parties of everything. I still don’t feel right about it and I’m not comfortable signing until I did a little more research. Any help or advice?

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    1. Hi Jack – well, I cannot give you legal advice but from the blog post what you are describing is a general release vs. specific release. It is pretty common that whoever is settling wants a general release, i.e., everything up to now is now resolved. I have seen protecting employees, the company, etc. So, this is not that unusual. That said, you are the client and you should express your concerns to your counsel. Regards and thanks for reading the blog.

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  13. Sterling, awesome literature to add to MUST HAVES TO SAVE MY ASS! Hypothetically, as we do not ask for nor receive legal advice, if a corporation is transacting in a state they have not received authorization to transact, breached contracts, and tries to enforce arbitration? There cannot be a contract if the consumer had no clue of the corporation’s misstatements correct? Hypothetically.. Thanks brotha keep up the fine work, we need ya!

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    1. Hi Brian – thanks for the note and the hypothetical. I know that if such a company tired to use the courts of the state where it is not registered to do business the court would terminate the suit or put it on hold until the company corrected the problem. I am not sure about arbitration because that is a contract enforced in a private setting. It could possibly be a defense to the arbitration. But, I suspect the better answer is that the arbitration would proceed. Doesn’t mean the person wouldn’t have a lot of defenses to the claim. Interesting question. Thanks for sending. Rgds

      Like

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