Settlement Fundamentals (Federal)

Settlement Fundamentals (Federal)

Posted on 11-02-2018

By: Jim Wagstaffe and The Wagstaffe Group

This article discusses how to negotiate and finalize a settlement in a federal case and covers topics such as pre-suit settlements, settling after a complaint is filed and after entry of judgment, releases and interpreting them, overbroad and standard terms in a release, confidentiality issues, oral settlements, judicial settlement conferences, partial settlements, and class action settlements.

BECAUSE VERY FEW CASES PROCEED TO TRIAL, MANY disputes end with the parties entering into a settlement agreement. Therefore, the parties’ object is to be familiar with the procedures for finalizing settlements, whether they are reached before a lawsuit is initiated or after one has begun. Parties must also be strategic about determining whether and how to enforce a settlement agreement and to oppose an effort to enforce a settlement.

Pre-Suit Settlements

Settlements reached before the complaint is filed are formalized by a release. A release is simply a contract by which a claimant discharges the person against whom the claim is made from any liability arising out of the incident.

Ordinarily, the release is prepared by defense counsel or defendant’s insurance carrier. It may be accompanied either by a draft for the agreed-on amount, or a letter stating that a draft for the agreed-on amount will be provided on plaintiff’s return of the executed release.

Overbroad Provisions in Release

The plaintiff should review the release carefully for provisions that are unnecessarily broad. The release may state that the plaintiff surrenders all claims against the payors “and all other persons.” Such language could preclude the plaintiff from proceeding against later-discovered responsible parties or against the defendant’s insurer.

A release of “any and all claims,” if not limited to the specific claim being settled, raises an issue as to which claims are released.1

The plaintiff should check for language in the release that obligates the plaintiff to “indemnify and hold defendant harmless” against all “valid and invalid” claims by third parties. This language exposes the plaintiff to unnecessary risk of expense and loss from third-party lawsuits against the defendant and should not be signed.

Defendant’s Concerns with Overbreadth and Confidentiality Issues

Often, the plaintiff will negotiate for a mutual release, which will raise concerns for the defendant similar to those of the plaintiff, including ambiguity over the persons to whom the release applies, the scope of the release, and any overbroad indemnification provision.

The defendant may want to keep the terms of the release confidential and should be aware that the plaintiff may not treat such a request as a formality or a standard term. The defendant may want to raise the issue during the negotiations and should keep in mind that, if court approval is required to finalize the release, the court may not separately order the settlement be kept confidential unless the parties mutually agree to do so.

Problems with Standard Terms

Both sides should watch out for standard terms the parties presume will be included in the written agreement after reaching an oral settlement, such as an integration clause, which allows the parties to sign the agreement in counterparts. Care should be taken with terms such as confidentiality, governing law, enforceability, and dispute resolution methods. These provisions may lead to issues down the road if they are not negotiated at the time of the settlement discussions.

Parties should negotiate whether the agreement will contain an attorney’s fees clause providing for fees in the event of a later breach of the agreement. Such a provision is not to be presumed, and its scope and content can be highly debatable. Discuss an attorney's fee provision before concluding any oral recitation of a settlement.

Interpreting a Release

Unless the settlement agreement contains a valid choice-oflaw provision, the effect of a release of state-law claims is governed by the law of the forum state, while federal common law governs the effect of a release of federal claims.2

Whether a general release (of “all claims or causes of action, known or unknown”) includes claims of fraud inducing the settlement depends on applicable state law3 . A release normally discharges only the settling defendant unless its terms provide otherwise. However, a settlement and release may reduce the claims against other defendants in tort cases.

A settlement cannot affect claims of nonparties even if they had a direct interest in the lawsuit and could have intervened but chose not to do so.4

An exception to this rule is:

Employment practices authorized by a consent judgment in employment discrimination cases cannot be challenged by nonparties who had actual notice of the case and a reasonable opportunity to object to the judgment, or whose interests were adequately represented by someone who had challenged the judgment on the same grounds.5

Settling After Complaint Is Filed

Attorneys must be authorized to settle—attorneys have no authority to settle cases solely by virtue of their general power to handle the case. Instead, an attorney can only enter a binding compromise if the client has authorized the attorney to do so.6 An attorney’s authority to settle a lawsuit is “entirely separate from his authority to represent a client in litigation and will not be presumed.”7 An attorney’s authority to settle cannot be created by the attorney’s own representations. But the client’s representations to opposing parties regarding the attorney’s power to act on the client’s behalf may clothe the attorney with apparent authority to settle with persons to whom such representations were made.8

Liability insurance policies generally authorize the insurer to settle claims against the insured without the insured’s consent. In such cases, federal courts cannot undo a settlement between the claimant and the insurer that the insured perceives to be contrary to its interests, such as a settlement that the insured thinks is damaging to its reputation.9

Duty to Notify the Court

Counsel must notify the court expeditiously when a case is settled. As part of a pretrial conference order, some judges order counsel to notify the court immediately upon settlement.10 If such notice is not timely given, costs unnecessarily incurred by the court (fees for impaneling jury, etc.) and sanctions may be assessed against counsel for the settling parties.

Upon receiving notice of settlement, the court ordinarily will set a date by which the settlement papers and dismissal forms must be submitted to the court.

Some judges, upon learning of a settlement, issue an order closing the case for administrative purposes.11 Other judges enter a dismissal with prejudice and without costs, subject to a condition that either party may inform the court within a designated period of time (for example, 30 days) that the settlement was not completed and may request that the case be restored to the active calendar.12

Finalizing the Settlement

Although a dispute that settles before a complaint has been filed can be finalized through a release, more elaborate procedures are required to implement settlement agreements reached after suit has been filed. Whether the settlement is negotiated out of court or at a settlement conference, once an action has been filed, a release alone will not conclude the pending suit.

Settlements reached outside court are usually implemented by a stipulation of dismissal signed by the settling parties.13

Typically, a stipulation of dismissal is prepared by defense counsel and forwarded to plaintiff’s counsel for execution.

The stipulation of dismissal must be “signed by all parties who have appeared.”14 Dismissals signed by counsel alone are generally sufficient; the parties need not sign individually. This is implicit in Rule 11, which provides that when a party is represented by counsel, counsel’s signature is required on all papers filed with the court.15 Nevertheless, to avoid any question of authorization, it is good practice to obtain the client’s signatures on the dismissal, or a separate written authorization from the client for the dismissal.

A stipulation for dismissal is not self-executing. The action is not terminated until the stipulation is filed with the court.16 To preserve cross-claims for contribution against third parties in a personal injury action, the defendant may defer filing a stipulation for dismissal executed as part of a settlement.17

Oral Settlement Agreement

A lawsuit may be settled by oral agreement between counsel with the client’s authorization. As long as the oral settlement was in fact authorized, the client’s later refusal to sign the written agreement does not invalidate the settlement.18

Settling at a Judicial Settlement Conference

When settlement is reached at a court settlement conference, the judge will often cause the agreement to be put on the record—that is, the terms will be stated in open court, and taken down by a court reporter, or entered in the minutes, or both.19

An on-the-record settlement agreement serves a number of purposes:

  • It provides a record of the exact terms of the agreement.
  • It assures that all settling parties actually heard and consented to the same settlement terms.
  • It provides a basis for enforcement of the settlement, if necessary.

The typical procedure for on-the-record settlements is as follows:

  • The judge will take the bench and note the presence of the attorneys and the parties (or a representative of the insurance carrier as to parties defended by an insurance carrier).
  • One of the attorneys will then be asked to state the terms of the settlement (usually the payment of a certain sum of money in exchange for a dismissal with prejudice, a release, and a mutual waiver of costs).
  • Opposing counsel will be asked to confirm that the settlement, as stated, accurately embodies the agreement.
  • The judge may then question the parties, asking whether they understand the settlement terms; whether they have any questions for their attorneys; whether they understand that the settlement puts an end to their claims and that they may not later reopen the case or sue again; and whether they accept the settlement as stated.
  • The judge may (or may not) proceed to enter a judgment of dismissal based on the proceedings in court.

Alternatively, the judge may render a conditional dismissal and set a time within which the parties are to execute whatever documents are required to memorialize their incourt agreement. The in-court settlement is generally binding even though it is contemplated that the terms will thereafter be reduced to a signed writing. If a party refuses to sign the written memorial of the oral settlement, the remedy is a motion to enforce the settlement.

Settling After Entry of Judgment

When the parties settle after judgment is entered, they may attempt to have the judgment vacated or set aside (so-called vacatur).20 Sometimes, the parties are simply trying to clear the record or terminate a judgment lien. But they may also seek to avoid collateral estoppel or res judicata effects. Because of the latter consideration, the setting aside of a judgment is not automatic. Rather, the court must balance “the competing values of finality of judgment and right to relitigation of unreviewed disputes.”21

When the case is already on appeal, settlement does not automatically result in vacatur, even if the settlement agreement stipulates that the judgment be set aside. Because judicial precedents are valuable to the community as a whole, “mootness by reason of settlement does not justify vacatur of a judgment under review.”22

Confidentiality Order

Parties to a settlement agreement often want to keep the terms secret (for example, for privacy reasons, to deter similar claims against the defendant by others, etc.). To obtain a court order of confidentiality, however, good cause must be shown.23

Parties seeking a confidentiality order must show, with specificity, that disclosure will result in clearly defined and serious harm to them. The court must balance the parties’ interests against the public interest in access to information concerning judicial proceedings. The interest in effecting a settlement should be only one factor in the court’s determination.24 Even if good cause exists for a confidentiality order, nonparties may generally inspect any document filed with the court. The public’s common-law right of access to judicial documents provides “a separate and independent basis for obtaining this information.”25

The public’s right of access may be outweighed, however, if the court determines that disclosure “could result in improper use of the material for scandalous or libelous purposes or infringement upon trade secrets.”26

The public’s right of access may not apply to documents filed under seal pursuant to a valid protective order based on a determination that good cause exists to protect the information from public disclosure.27 Before seeking a confidentiality order, you should make sure the client understands that such orders are not automatically approved. In addition, because the effectiveness of a confidentiality order is limited by a nonparty’s ability to review the confidentiality order, the better practice may be to opt against a confidentiality order in favor of written confidentiality agreements between the parties with provisions for liquidated damages or refund of settlement payments upon breach.

Settling Specific Claims

In addition to general procedures for effectuating settlement, counsel should determine whether special procedures are required to effectuate settlement of a particular type of claim.

Unrepresented Minors and Incompetent Persons

If a minor or incompetent person is not represented in an action, the court must appoint a guardian ad litem “or issue another appropriate order” to protect that person.28

Federal courts generally require that claims by minors and incompetents be settled in accordance with applicable state law.29

Class Actions

Settlement of a class action must be approved by the court and, after notice is given to all potential class members, the settlement is reviewed again at a fairness hearing.30

False Claims Act/Qui Tam Actions

A private citizen may bring a lawsuit on behalf of the United States against a defendant who has presented to the government a false or fraudulent claim for payment (for example, fraudulent overcharges by government contractors).31 Because the action is maintained on behalf of the United States, courts may not grant a voluntary dismissal in a False Claims Act suit without the U.S. Attorney General’s consent to the dismissal.32

Partial Settlements

Usually, when a judgment is rendered against one of several joint tortfeasors, that entity may seek to hold other tortfeasors liable for their fair share of the judgment on principles of contribution and indemnity. However, when a plaintiff has already settled with one or more of these tortfeasors, an issue arises over whether this settlement bars contribution claims, because the settling tortfeasor has, at least theoretically, already paid some share of the liability.

In diversity cases, absent a choice of law provision, choice of law analysis may be required to determine which state’s law will apply to this issue. Therefore, counsel contemplating a partial settlement needs to consider the laws of each state having a significant interest in the settlement in assessing whether such a settlement will bar indemnity and contribution claims by the non-settling tortfeasors. In actions based on federal law, whether a settlement with one of several tortfeasors bars indemnity claims by the others or bars the settling defendant from suing non-settling parties for contribution is a question of federal law, unless a statute provides otherwise.33 However, in suits under the Federal Tort Claims Act, federal courts look to state law.34

If there is no relevant federal statute, the effect of a partial settlement must be determined under federal common law.35

Admiralty Cases

The Supreme Court has adopted a “proportionate share approach” in admiralty cases. Under this approach, settlement with one of several tortfeasors reduces the plaintiff’s claim against the others “by the amount of the equitable share” of the settling defendant’s liability.36

Under this approach, if plaintiffs settle too cheaply with one defendant, they cannot hope to make up the difference against the others. Conversely, if they negotiate a windfall settlement, it does not reduce the non-settling defendants’ liability.37 In proportionate share cases, the jury determines both the amount of damages and the proportionate liability of all defendants—settling and non-settling. The jury verdict is then reduced by the settlor’s share of liability, so that the nonsettling defendants pay only the share for which the jury found them liable.38 Because the litigating defendants pay only their equitable share of the judgment, there is no basis for any claim for equitable indemnity or contribution against the settling defendant.39

It is presently unclear whether the McDermott “proportionate share” approach in admiralty cases applies to other federal actions based on comparative fault.

In diversity cases and on supplemental claims in federal question cases, the allocation of damages among defendants should be determined by state law because it is outcome-determinative.

Under pre-McDermott case law, when one of several defendants settled a 42 U.S.C.S. § 1988 civil rights claim, the amount paid in settlement was offset against the damages recoverable against the other defendants (that is, the claim was reduced pro tanto).40

Securities Litigation

Securities Act or the Securities Exchange Act of 1934 or Rule 10b-5 thereunder are jointly and severally liable for whatever judgment is rendered against them. This allows the plaintiff to collect the entire judgment against any of these defendants. Those who pay the judgment may then obtain contribution from others responsible for the violation in proportion to their fault.41

Defendants whose violations were unintentional are liable only in proportion to their responsibility for the violation, as determined by the trier of fact.42

There are two exceptions to the proportionate responsibility rule:

  • All defendants are jointly and severally liable to small investors (plaintiffs whose net worth is less than $200,000 and whose damages exceed 10% of that amount).
  • If any defendant is insolvent, each of the other defendants must pay up to an additional 50% of its liability to make up the shortfall in plaintiff’s recovery.43 Upon entry by the court, a pretrial settlement bars any claim for contribution by non-settling defendants against the settling defendant. Likewise, settling defendants cannot seek indemnity or contribution against anyone else.44 Rather, any judgment later rendered against a non-settling defendant must be reduced by the settling defendant’s percentage of responsibility for the violation (or by the settlement amount paid by that party, if greater).45

A bar order in a partial settlement of a securities fraud class action case bars only contribution and indemnity claims (or disguised claims for such relief). A bar order cannot affect the non-settling defendants’ independent claims (for example, for fraud or breach of contract) against the settling defendants.46

James M. Wagstaffe is a renowned author, litigator, educator, and lecturer, and the premier industry authority on pretrial federal civil procedure. He is a partner and co-founder of Kerr & Wagstaffe LLP, where he heads the firm’s Federal Practice Group. See his full bio here:

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RESEARCH PATH: Civil Litigation > Settlement > Practice Notes

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1. See Sheehan v. Atlanta Int’l Ins. Co., 812 F.2d 465, 468–69 (9th Cir. 1987) (when release extended not only to defendant but also its insurer, language including insurer barred claim against insurer for unlawful settlement practices); see also Morison v. General Motors Corp., 428 F.2d 952 (5th Cir. 1970). 2. See Renwick v. Bennett (In re Bennett), 298 F.3d 1059, 1064 (9th Cir. 2002) (settlement agreement designated law governing disputes arising under agreement); Lockette v. Greyhound Lines, Inc., 817 F.2d 1182 (5th Cir. 1987). 3. Green Leaf Nursery v. E.I. DuPont de Nemours & Co., 341 F.3d 1292, 1297 (11th Cir. 2003) (under Delaware law, party fraudulently induced to execute general release may opt to either rescind release or sue for damages). 4. See Martin v. Wilks, 490 U.S. 755, 761 (1989) (consent decree based on settlement between city and black firefighters could not bar claims by white firefighters). 5. See 42 U.S.C.S. § 2000e-2(n) (overruling Martin, 490 U.S. 755, in these kinds of cases); United States v. City of N.Y., 198 F.3d 360, 366 (2d Cir. 1999). 6. Malave v. Carney Hosp., 170 F.3d 217, 221 (1st Cir. 1999) (“This rule rests on the salutary proposition that the decision to settle litigation belongs to the client, not the lawyer . . . The rule logically implies that a settlement agreement entered into by an attorney is ineffective if the attorney did not possess actual authority to bind the client”); Garabedian v. Allstates Eng’g Co., Div. of Allstates Design & Dev. Co., Inc., 811 F.2d 802, 803 (3d Cir. 1987). 7. Higbee v. Sentry Ins. Co., 253 F.3d 994, 999 (7th Cir. 2001); See Kinan v. Cohen, 268 F.3d 27, 32–33 (1st Cir. 2001) (evidentiary hearing generally required if attorney’s authority disputed). 8. See Fennell v. TLB Kent Co., 865 F.2d 498, 501–02 (2d Cir. 1989). 9. Caplan v. Fellheimer Eichen Braverman & Kaskey, 68 F.3d 828, 835 (3d Cir. 1995) (settlement prevented insured from later suing claimant for malicious prosecution). 10. Fed R. Civ. P. 16(c)(2)(l). 11. Penn W. Assocs., Inc. v. Cohen, 371 F.3d 118, 127 (3d Cir. 2004). 12. Muze, Inc. v. Digital On Demand, Inc., 356 F.3d 492, 494 (2d Cir. 2004). 13. 13. Fed. R. Civ. P. 41(a)(1). 14. Fed. R. Civ. P. 41(a)(1)(A) (ii). 15. See Fed. R. Civ. P. 11. 16. Orsini v. Kugel, 9 F.3d 1042, 1045 (2d Cir. 1993). 17. Id. 18. Moore v. Beaufort County, 936 F.2d 159, 163 (4th Cir. 1991); see Dacanay v. Mendoza, 573 F.2d 1075, 1078 (9th Cir. 1978). 19. Doi v. Halekulani Corp., 276 F.3d 1131, 1138 (9th Cir. 2002). See Lynch, Inc. v. Samata-Mason Inc., 279 F.3d 487, 490 (7th Cir. 2002) (“standard practice” is to dictate terms to court reporter when settlement is reached during informal conference). 20. 20. See National Union Fire Ins. Co. v. Seafirst Corp., 891 F.2d 762, 765 (9th Cir. 1989). 21. Ringsby Truck Lines, Inc. v. W. Conference of Teamsters, 686 F.2d 720, 722 (9th Cir. 1982); see In re Memorial Hospital of Iowa County, Inc., 862 F.2d 1299, 1300 (7th Cir. 1988) (judgment cannot be vacated because “history cannot be rewritten”). 22. U.S. Bancorp Mortg. Co. v. Bonner Mall P’ship, 513 U.S. 18, 29 (1994). 23. See Pansy v. Borough of Stroudsburg, 23 F.3d 772, 786 (3d Cir. 1994) (analogizing to Fed. R. Civ. P. 26(c) protective orders in discovery proceedings). 24. Pansy, 23 F.3d at 787. 25. Phillips ex rel. Estates of Byrd v. General Motors Corp., 307 F.3d 1206, 1212 (9th Cir. 2002); Jessup v. Luther, 277 F.3d 926, 929 (7th Cir. 2002). 26. Phillips, 307 F.3d at 1212. 27. See Phillips, 307 F.3d at 1213 (party seeking access must present “sufficiently compelling reasons why the sealed discovery information should be released”); but see Jessup, 277 F.3d at 929 (sealing does not affect public’s right of access to court files when court simply approved settlement and ordered settlement agreement filed under seal at parties’ request). 28. Fed. R. Civ. P. 17(c)(2). 29. See Robidoux v. Rosengren, 638 F.3d 1177, 1182 (9th Cir. 2011) (in determining best interest of minors, court considers whether settlement amount is fair and reasonable). 30. Dennis v. Kellogg Co., 697 F.3d 858, 864 (9th Cir. 2012); see Ehrheart v. Verizon Wireless 609 F.3d 590, 593 (3d Cir. 2010). 31. See 31 U.S.C.S. § 3729(a)(1). 32. See 31 U.S.C.S. § 3730(b)(1). 33. Musick, Peeler & Garrett v. Employers Ins. of Wausau, 508 U.S. 286, 294 (1993). 34. See 28 U.S.C.S. § 2674; Owen v. United States, 713 F.2d 1461, 1464 (9th Cir. 1983). 35. McDermott, Inc. v. AmClyde, 511 U.S. 202, 207–08 (1994) (maritime claims); In re Masters Mates & Pilots Pension Plan & IRAP Litig., 957 F.2d 1020, 1032 (2d Cir. 1992) (ERISA claims); Miller v. Christopher, 887 F.2d 902, 903 (9th Cir. 1989) (maritime law claims); Franklin v. Kaypro Corp., 884 F.2d 1222, 1228 (9th Cir. 1989) (federal securities fraud claims); but see Texas Industries, Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 646–47 (1981) (no federal common law right of contribution in antitrust cases). 36. McDermott, 511 U.S. at 209. 37. McDermott, 511 U.S. at 221. 38. See Franklin v. Kaypro Corp., 884 F.2d 1222, 1231 (9th Cir. 1989). 39. McDermott, 511 U.S. at 210–12. 40. Miller v. Apartments & Homes, 646 F.2d 101, 110 (3d Cir. 1981); see Corder v. Brown, 25 F.3d 833, 840 (9th Cir. 1994). 41. 15 U.S.C.S. § 78u-4(f)(2)(A) & 8. 42. 15 U.S.C.S. § 78u-4(f)(2)(B)(i); see Eichenholtz v. Brennan, 52 F.3d 478, 487 n.16 (3d Cir. 1995) (McDermott rationale applies to securities class action settlements). 43. 15 U.S.C.S. § 78u-4(f)(2)(B)(i). 44. 15 U.S.C.S. § 78u-4(f)(7). 45. 15 U.S.C.S. § 78u-4(f)(7). 46. In re Heritage Bond Litig. v. U.S. Tr. Corp., 546 F.3d 667, 676 (9th Cir. 2008); Gerber v. MTC Elec. Techs. Co., 329 F.3d 297, 306 (2d Cir. 2003) (decided under federal common law).