02 Nov 2018

Drafting a Settlement Agreement Checklist (Federal)

Settlement Negotiations

Make preparation for a settlement from the start of the case. You should generally do all of the following:

✔ Retain relevant documents. To avoid the loss of documents potentially relevant to settlement agreement negotiations, send a retention of documents notice (also known as a litigation hold letter) to all appropriate parties as soon as possible.
✔ Decide whether (and when) to make offer. Assess the potential for prevailing in the underlying court case. Then, consider any potential liability as well as your client’s appetite for litigation and publicity. Always weigh the costs versus the benefits of litigating rather than settling. For more on timing, see Stages of Litigation below.
✔ Evaluate the reasons for settling. You should discuss with your client their reasons for settling and how those reasons may play into the negotiations.
✔ Assess motivating factors to settle.When deciding how to negotiate a settlement agreement, consider the motivating factors of both parties, such as:
- The parties’ financial situations
- Viability of the asserted claims
- The likelihood of success during litigation
✔ Confirm client’s ability to settle. Ensure the client has the ability to timely make any required payments and to provide/perform any other consideration provided for in the agreement.
✔ List all covered parties. At the outset of settlement negotiations, list all individuals and entities—both for the plaintiff and the defendant—that the agreement will cover.
✔ List all legal issues to be settled. List all claims your adversary may legally release via settlement. Verify the agreement covers these claims.

Review the ethical obligations for settlement negotiations that are detailed in:

Model Rule of Professional Conduct 4.1
Any pertinent state ethics rules

Stages of Litigation

Each stage of litigation will give rise to different motivating factors to settle:

✔ Pre-litigation stage. With little certainty as to the outcome at this stage, both parties face different types of pressures, which may lead to a settlement. For the plaintiff, the pressures include costs and statutes of limitations. For the defendant, they include potential publicity and costs.
✔ Motion to dismiss. The defendant should make the motion where appropriate to incentivize the plaintiff to settle. Whether or not the defendant wins, the plaintiff will learn that litigation will, in all likelihood, be cumbersome, costly, and long. This can be a motivating factor to settle sooner rather than later.
✔ Plaintiff’s deposition and discovery. If the plaintiff is not familiar with litigation, they may be more willing to settle after this first real encounter with the litigation process.
✔ Alternative dispute resolution/third-party involvement. Use non-binding mediation to test your position in front of a neutral party. Many times, it will expose weaknesses in both parties’ cases, encouraging an early settlement.
✔ Summary judgment. Even if you prevail at summary judgment, you may still want to settle to preclude an appeal.
✔ Trial or post-judgment. You may wish to settle post-judgment to preclude an appeal.

Standard Terms

Standard terms should not be included in the agreement without being scrutinized. Care should be taken with terms such as:

✔ Confidentiality
✔ Governing law
✔ Enforceability
✔ Dispute resolution methods

Identify Relevant Parties

Name the proper parties to the settlement in the agreement and identify all parties with specificity. Parties may include:

✔ All parties to the lawsuit
✔ Affiliates
✔ Subsidiaries
✔ Parent or holding companies
✔ Exclusive licensees and non-exclusive licensees
✔ Franchisors and franchisees

Recitals

Recitals appear at the start of the agreement and provide background of the settlement and underlying dispute, such as:

✔ The settlement’s date of execution
✔ The parties to the settlement
✔ A description of the plaintiff’s claims that are subject to the settlement
✔ A statement that the parties have voluntarily entered into the settlement to fully resolve the dispute

No Admission of Liability

Nearly all settlement agreements include a paragraph in which the parties represent that they agree to resolve the dispute without the defendant admitting liability in the underlying civil case. These statements generally include language stating the settlement:

✔ Was entered into solely for the purpose of allowing the parties to avoid further litigation

✔ Does not constitute an admission by either party of any wrongdoing, contractual obligation, or of any duty whatsoever

Basic Settlement Terms

Make sure the settlement:

✔ Clearly states all the consideration being provided and any performance terms related to such consideration
✔ Addresses any issues relevant to the payment of any settlement proceeds, such as:
- The amount
- Timing
- Potential tax consequences of settlement payments
- Whether the recipient will be entitled to receive interest or late charges for any delinquent payments
✔ Clearly identifies if there is pending litigation or another proceeding that will be resolved as a result of the settlement and details the action to be taken by the parties with respect to such pending matter (such as dismissal)
✔ Addresses the parties’ respective obligations regarding attorney’s fees and costs incurred in entering into the settlement agreement
✔ Includes an integration clause stating that the agreement constitutes the parties’ entire agreement and supersedes all prior negotiations/other agreements
✔ States that the agreement is legally binding on the parties and their successors, assignees, etc.
✔ States that the party representatives who sign the agreement are authorized to do so and bind the party
✔ Set forth where future cases must be filed, the law that must be applied, and the court that will have the authority to hear the case (consider whether the court should retain jurisdiction for purposes of enforcing the terms of the settlement agreement)
✔ Includes a non-disparagement provision that prohibits defamatory or disparaging comments against opposing parties and permits the disparaged party to seek redress for disparagement

Release

Settlement agreements generally contain a release to at minimum avoid a future dispute over the same claims at issue in the current dispute. When drafting the release, you should:

✔ Unless otherwise agreed to, include language providing for a general release that will cover all actual or potential claims, whether known and unknown, that the releasing parties may have had, may have, or may acquire in the future relating to the subject matter of the settlement
✔ Specify that it is a mutual release, if agreed upon
✔ State explicitly which claims are not released if not a comprehensive release
✔ Make the release binding on successors in interest and any relevant third parties

Unless the settlement agreement contains a valid choice-of-law 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.¹

Confidentiality Provision

One benefit to settling out of court is that the details are not part of the public record. Many settlement agreements incorporate a confidentiality clause that strictly prohibits the parties from disclosing certain details of the case. When considering your need for confidentiality in the agreement:

✔ Evaluate whether public disclosure of settlement terms is likely to prompt copycat lawsuits
✔ Decide what terms, if any, should be confidential (e.g., monetary terms)
✔ Be realistic about the practicality of very broad confidentiality provisions that prohibit the parties from even discussing the facts of the case and arguments advanced in the litigation
✔ Consider the need for providing specific language that dictates the parties’ response to public inquiries about the dispute and settlement
✔ Give the confidentiality provision teeth by explicitly stating the penalty for violation

Contemplate Potential Breach

If the agreement contemplates non-monetary obligations, you should address the steps the parties must take in the event of a breach:

✔ Include a provision that any violation of the agreement will cause the non-breaching party irreparable harm and that the parties have the right to obtain injunctive relief to enforce the settlement
✔ Provide a notice and cure provision to avoid liability for an inadvertent breach
✔ Consider including an alternative dispute resolution clause to resolve future disputes about the settlement agreement
✔ Consider a term awarding attorney’s fees and costs to the prevailing party if there is a dispute regarding performance or enforcement of the settlement agreement

Checklist provided by James M. Wagstaffe, 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: https://www.lexisnexis.com/en-us/practice-advisor-authors/profiles/james-wagstaffe.page.

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