Settlement Fundamentals (Federal)

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

To read the full practice note in Lexis Practice Advisor, follow this link.

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: https://www.lexisnexis.com/en-us/practice-advisor-authors/profiles/james-wagstaffe.page.

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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).