CHAPTER 7 Problematic Settlement Terms
Strive for a good deal but not for all the marbles. Otherwise, the other kids get mad and run to tell the teacher. No one needs that.
The best settlement agreements are negotiated and drafted with an understanding of all available options with which parties can increase the value of the deal. This means that attorneys must also grasp which terms are unavailable because they are statutorily prohibited, judicially barred, or disallowed by rules of professional conduct.1 Due to the great variation in laws among jurisdictions, settlement agreement terms that are unlawful in one state may be perfectly legal in a neighboring state. Accordingly, attorneys must do their due diligence in researching the laws of the jurisdiction in which the case is being settled.
1. Settlements Conditioned upon Majority Vote of the Settling Plaintiffs or Defendants
In cases with multiple plaintiffs, the availability of a settlement might depend on the defendant's ability to resolve the entirety of the lawsuit in one agreement. If all plaintiffs agree to the proposed terms, the matter is easily resolved. However, agreement to a settlement cannot be coerced by a majority vote of plaintiffs (or defendants in multidefendant cases).2 Litigation is not a democratic affair.
2. Terms Requiring the Cooperation
Any settlement agreement that depends on the cooperation of a non-party to the agreement runs the risk of failure if that party does not voluntarily perform its obligations.3 Possible solutions may be to:
v Include the necessary party in the agreement even if not a party to the litigation.4
v Impose only the obligation that the parties to the settlement agreement make good-faith efforts to secure third-party approval or cooperation, such as a favorable decision from a zoning board.
v Ensure that the agreement survives the third party's nonperformance, such as the continued validity of a settlement agreement made on appeal if the appellate court refuses to dismiss the case prior to issuing a decision.
3. Collusion
Collusion is cooperation's evil twin.
But, gosh, do they look alike.
The distinction between cooperation and collusion is subtle. A cynic might say that cooperation is what's allowed, and collusion is cooperation what's not allowed. Courts are especially averse to indicia of collusion between settling parties and against nonsettling defendants and insurers.5 The classic type of collusion is the Mary Carter agreement in which a settling plaintiff and settling defendant secretly agree to cooperate against a nonsettling defendant at trial. Among businesses, collusion can take many forms, including segregating sales territories, dividing customers, refraining from participating in bidding on the same contracts, and agreeing to price fixing.6 Among individuals, collusion against third parties also undermines settlement agreements.7
4. Disguised Penalties
If you're not fooled, don't count on convincing
a court of the same.
Liquidated damages provisions are unconscionable when they constitute disguised penalties.8 To the drafter of a settlement agreement, penalties can provide an option designed to encourage the opposing party's compliance. All too often, however, liquidated damages provisions are a place where drafters are tempted to hide penalties for breach of an agreement. Sometimes, the liquidated damages provision will equal or exceed a party's total payment obligations—a clear penalty.9 Other times, a liquidated damages provision will be included, even though damages for the covered breach are not actually difficult to ascertain, or settlement agreements will incorporate acceleration clauses that penalize parties upon late payment.10 To be sure, there is nothing inherently illegal or even unwise about liquidated damages provisions or acceleration clauses if they are calculated to make the nonbreaching party whole. What may be an impermissible penalty in one jurisdiction may be allowable in another.11
5. Preferential Treatment
Too much cooperation, like candy, can be sweet and lead to the worst stomachache.
Agreements specifying the price at which a particular product must be bought or sold may be void as against the public policy of the jurisdiction. For example, many states bar vertical price fixing or agreements not to resell products below a specified price. Employment-related terms such as noncompete and no-rehire provisions may be fine in one state but not another.
Another example of potentially preferential treatment is a "most favored customer" clause that allows a business partner to receive goods or services at the settling party's best rate. As Oracle Corporation learned, this sort of provision can lead to serious trouble. Oracle gave some of its customers lower rates than it charged the federal government—with which it had a most-favored-customer clause. Oracle then faced a whistleblower lawsuit from its own employee, a suit by the federal government for breach of its most-favored-customer term, and a shareholder derivative suit for incurring liability from the breach of the term with the government.12 Even when the preferential treatment of a customer in a settlement agreement does not violate a settling party's other agreement, the promise to give a settling counterparty the "best" price can be difficult to assess or comply with.
"In practice . . . it is challenging to satisfy most favored customer clauses because they often contain ambiguous comparative terms that make compliance an onerous undertaking. Specifically, in a world of complex products and services, it often is difficult—if not impossible—to identify 'similar' products sold pursuant to 'similar' terms and conditions."13 Similarly, exclusive-rights or exclusive-licensing provisions are problematic in that they contractually bind parties together even after they have demonstrated that they are willing to feud against each other. More problematically, an exclusive-licensing provision may make it difficult or impossible for a party to merge with or be acquired by another company.
6. Restrictions on an Attorney's Right to Practice
Some defendants have attempted to reduce their exposures by attempting to co-opt particularly successful plaintiffs' attorneys by buying their silence or nonrepresentation in similar cases.14 However, settlement agreement terms constraining the types of clients that an attorney may represent in the future are void.15 Similarly, agreements by an attorney not to use information learned during representation of the settling party are generally void.16
7. Preventing or Undermining Administrative Agency Investigations and Proceedings
The agreement of the parties cannot make that good which the law maketh void.
— Edward Coke
Administrative agencies are able to penalize parties for settlement agreement terms that undermine the agencies' ability to carry out their duties. Purported waivers by employees of their rights to participate in agency actions and investigations have led to significant monetary penalties for employers. Indeed, the problem with respect to settlement agreements that are related to actual or potential administrative agency proceedings is finding language sufficiently strong in preserving the right to communicate and...
