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For litigants searching for predictable outcomes following mediation, knowing what your jurisdiction requires to enforce a settlement agreement is key.

The perils of mid-litigation settlements

By John D. Hanify and Jason C. Weida

court_artIn March, Comcast Corp. v. Behrend was decided by the U.S. Supreme Court in favor of reversal. Justice Antonin Scalia’s opinion for the court held that the class improperly had been certified under Fed. R. Civ. P. 23(b)(3).

In particular, the 3rd Circuit erred in refusing to decide whether the class plaintiffs’ proposed damages model could show damages on a classwide basis. Under proper standards, the model was inadequate, and the class should not have been certified.

The vote was 5-4 with Justices Stephen G. Breyer and Ruth Bader Ginsburg writing an unusual joint dissent, portions of which they read from the bench. Justices Sonia Sotomayor and Elena Kagan joined the dissent.

Of equal importance to practitioners is what happened in Comcast as it moved procedurally toward the Supreme Court. Indeed, the case (nearly) settled two weeks before the Supreme Court granted certiorari last year.

In mid-2012, the parties traveled to Massachusetts to participate in mediation. Like many mediations of complex cases, the mediator sponsored a settlement term sheet that included a total price and other terms pertaining to allocation and release. The term sheet was executed by Comcast’s general counsel and outside counsel, as well as counsel for the class.

The next day, the parties confirmed by email that their respective negotiators had authority to settle on those terms, prompting the mediator to respond: “Confirmed on both sides. We have a settlement. Congratulations.” The parties then reported the settlement to the District Court.

Two weeks later, the Supreme Court granted Comcast’s certiorari petition. Comcast informed class counsel that it viewed the term sheet as nonbinding because material terms had not been fully negotiated. Comcast confirmed its intention to pursue its appeal in the Supreme Court.

In response, the class moved to enforce the term sheet as a binding settlement agreement. The District Court denied that motion in late September, reasoning that the term sheet was “merely an ‘agreement to agree’ that is not capable of being enforced.”

The District Court found that several of its key terms were “expressly subject to further discussion and negotiation,” including “the services portion of the monetary term, constituting two-thirds of the total value of the Settlement Fund.” That important aspect of the deal had yet “to be negotiated” as the term sheet itself confirmed.

After extensive hearings, the District Court found that the settlement was not binding, thus leaving the door open to Supreme Court review. Obviously, a binding settlement would have mooted the case.

For litigants searching for predictable outcomes following mediation, knowing what your jurisdiction requires to enforce a settlement agreement and, in particular, when settlement should be reported in the first place, are key. This article discusses those requirements in the 1st Circuit.

Unappealing circumstances

To begin with the basics, a party to a settlement agreement may seek to enforce it when the other party reneges. The forum for enforcement depends on the circumstances. If the settlement collapses before the District Court dismisses the original action, a party that seeks to keep the settlement intact may file a motion for enforcement in the same action.

If, however, the District Court has already dismissed the underlying action, the disappointed party may have to bring an independent action for breach of contract. Malave v. Carney Hosp., 170 F.3d 217, 220 (1st Cir. 1999); accord United States v. Hardage, 982 F.2d 1491, 1496 (10th Cir. 1993).

That could be problematic, depending on one’s venue preferences, because an independent action filed in federal court must have an independent basis of jurisdiction. Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375, 381-82 (1994).

Breach of contract does not usually qualify as a federal question, so a party in that situation may have to bring an enforcement action in state court unless it could invoke diversity jurisdiction. F.A.C., Inc. v. Cooperativa de Seguros de Vida de P.R., 449 F.3d 185, 190 (1st Cir. 2006).

As a result, parties that report settlement prematurely can find themselves seeking relief from a federal appellate court or in a state court obviously unfamiliar with the underlying suit. Neither circumstance is appealing; either could be costly in both time and treasure.

District Court judges have dealt with premature reporting in a variety of ways. Some judges have viewed a report of settlement as binding.

In Wang Laboratories, Inc. v. Applied Computer Sciences, Inc., a patent case involving data processing systems, the District Court dismissed the case after it was reported settled. 741 F. Supp. 992, 998-999 (D. Mass. 1990). When that representation turned out to be premature, the court refused to reopen the case on estoppel grounds and enforced the settlement as reported:

“In order to protect the integrity of its own processes and fairly, consistently, and equally address the concerns of all litigants who await and need the attention of the judiciary, the Court will judicially estop [the defendant] from now claiming that settlement was not reached on April 22, 1988 as represented to the Court on that date.”

The Federal Circuit, however, reversed. 958 F.2d 355, 359 (Fed. Cir. 1992). The panel held that no one party reported settlement prematurely in order to obtain an unfair litigation benefit.

According to the Federal Circuit, it was understandable that “the parties, on the verge of settlement, would seek to avoid the use of possibly unnecessary judicial resources when they thought agreement had been reached. … When each party stated, albeit incorrectly, that agreement was imminent, it was intended to benefit both the parties and the court, not to advantage one party over another.”

For that reason, the panel concluded, “[o]ne party should not be judicially estopped when it turns out that such a joint representation was incorrect.”

Other judges have treated reported settlements as more tentative, with mixed results. In White v. Fessenden School, a case seeking to re-enroll a disabled student in a private school, the parties reported an oral settlement addressing most material terms. 358 F. App’x 208, 210-12 (1st Cir. 2009).

Entering a so-called nisi order, a practice sometimes used to clear dockets and spur a final disposition, the court dismissed the case without prejudice but gave either party the option to reopen the case within 60 days. When settlement discussions later unraveled, the plaintiffs filed a motion to enforce within the 60-day dismissal period.

Despite its seemingly flexible nisi order, the District Court ultimately granted the plaintiffs’ motion and enforced the settlement. On appeal, however, the 1st Circuit reversed, reasoning that the parties never agreed on the terms of the student’s re-enrollment, which was central to the litigation.

The District Court entered a similar nisi order after a reported settlement in Quincy V, LLC v. Herman, 652 F.3d 116, 120-21 (1st Cir. 2011). There, a plaintiff initially agreed to settle the case but later balked and refused to sign a mutual release. The other party moved to enforce the settlement, although it did so after the 60-day dismissal period had expired.

Nevertheless, the District Court reopened the case, enforced the settlement, and ordered the release to be signed. The plaintiff appealed on the ground that the District Court relinquished its jurisdiction when it dismissed the complaint.

The 1st Circuit rejected the plaintiff’s argument and affirmed. It construed the motion to enforce as an implicit Fed. R. Civ. P. 60(b) motion to reopen. Because the motion had been filed within one year, as required by Rule 60(c), the panel held that allowing the motion was well within the bounds of the District Court’s discretion.

Painful but not unreasonable

These cases show that premature reports of settlement elicit unpredictable results and often require a trip to the 1st Circuit, which may simply compound the uncertainty.

In Wang, although the defendant was able to obtain favorable appellate relief, the Federal Circuit’s holding is not authoritative in this circuit and, in any event, does not appear to be dispositive of the underlying estoppel question.

It should be noted that, while a favorable construction of the plaintiff’s motion in Herman saved the settlement, District courts rarely grant Rule 60(b) motions in the first instance; and the 1st Circuit reviews grants and denials of such motions only for abuse of discretion. Valley Citizens for a Safe Env’t v. Aldridge, 969 F.2d 1315, 1317 (1st Cir. 1992) (Breyer, C.J.).

It may be painful but not unreasonable for courts, encountering joint and unqualified reports of settlement, to take the parties at their word and conclusively end the proceedings.

There is very little substitute for settlement reports to the court that are carefully conditional, settlement agreements that are fully negotiated, or patient mediators who do not unwittingly catapult the parties out of court.

John D. Hanify is a partner at Jones Day, where he heads litigation for the Boston office. Jason C. Weida joined the Boston office as a litigation associate following a clerkship at the 1st U.S.

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