Thank you for sharing!

Your article was successfully shared with the contacts you provided.
The case is settled. It was hard fought. There were numerous, often fractious, skirmishes. Sanctions motions were filed. But all of that has been resolved by the exchange of mutual releases at the time of settlement. Or has it? Recent decisions of the 3d, 4th and 9th U.S. circuit courts of appeal raise some sobering issues, and emphasize the importance of the language of the settlement agreement. Integrated Settlement Agreements. Bradley v. American Household Inc., 373 F.3d 373 (4th Cir. 2004), was a products liability action for injuries suffered due to an allegedly defective electric blanket. In discovery, the plaintiffs requested access to all returned electric blankets in the defendant’s possession and obtained court orders requiring their production and imposing some sanctions for non-production. The case then settled. In return for a $500,000 payment by the defendant, the parties entered into a “Full and Final Settlement Agreement” that contemplated the vacatur of the prior discovery/sanctions orders. Separately, the defendant agreed to produce to plaintiffs’ counsel (who had other claims against the defendant) thousands of pages of records relating to defective electronic blankets. Fines in nature of criminal contempt penalties Two years after the settlement was consummated, the plaintiffs moved to reopen the case, principally for violations of discovery orders that occurred prior to the settlement. The district court was troubled by the fact that the defendant had not suspended its document/returned-goods destruction policy during pendency of the prior litigation. The district judge imposed $300,000 in fines on the defendant and its counsel, ordered them to pay the plaintiffs’ attorney fees on the post-settlement sanctions motion, and forwarded its order to relevant lawyer disciplinary boards, all pursuant to the inherent power of the court and Fed. R. Civ. P. 37. All of the sanctions were reversed. The $300,000 in post-judgment fines were vacated without regard to the parties’ settlement agreement. The 4th Circuit ruled that these fines were in the nature of criminal contempt penalties because they were not compensatory in nature, were not determined by reference to any losses incurred by the plaintiffs, and were not designed to coerce compliance with the court’s order (e.g., to compel discovery). Targets of criminal contempt proceedings are entitled to an independent prosecutor and to have their guilt proved beyond a reasonable doubt, among other protections. Because these protections were not afforded to the defendants, the fines were vacated. The remaining sanctions-the referral to the attorney disciplinary boards and the substantial award of attorney fees and expenses-were civil in nature, and thus not subject to reversal on the same ground. It was only the language of the parties’ settlement agreement that saved the defendant and its counsel. The 4th Circuit stressed that the settlement agreement contained an integration clause, which provided that “this Settlement Agreement contains the entire agreement between the Parties.” The Bradley court held that this provision required rejection of the plaintiffs’ post-settlement sanctions motion because the motion was predicated on behavior outside of the four corners of the settlement agreement-namely, violation of discovery orders in the settled litigation (and, to a limited extent, the post-settlement provision of information regarding other returns). Indeed, the 4th Circuit stressed that the motion was irreconcilable with the settlement agreement, which was contingent on the district court’s vacatur of its prior discovery orders. The 4th Circuit also looked at the breadth of the release contained in the parties’ settlement agreement in rejecting the post-settlement sanctions motion. The release barred all claims, known or unknown. The court held that this language, coupled with the integration clause, barred any motion for relief based on presettlement conduct. Practice Pointer. It is not uncommon to settle claims simply by exchanging releases. Bradley emphasizes the importance of including an integration clause, either in the release or, as in Bradley, in an accompanying settlement agreement. It is also common to release claims “known or unknown.” Releasing claims “known or unknown,” however, can be more risky than it appears, as the next case illustrates. Unsettling Behavior. The individual defendant in Institute for Motivational Living Inc. v. Doulos Institute for Strategic Consulting Inc., 110 Fed. Appx. 283; 2004 U.S. App. Lexis 20834 (3d Cir. 2004) (unpublished opinion), was clever but did not read his settlement agreement carefully enough. The gravamen of the underlying lawsuit in Institute was that the defendants had misappropriated the plaintiffs’ proprietary intellectual property. As part of the settlement, the defendants were required to return to the plaintiff a laptop computer and all the data contained in it. Just minutes before the settlement was signed, the individual defendant deleted some data from the laptop. This was a direct violation of a discovery preservation order that was incorporated in the settlement agreement. The district judge imposed $50,000 in attorney fees and expenses as a sanction for the defendant’s violation. The defendant argued that-because he deleted the material a few minutes before he signed the settlement agreement-he could not be deemed to have violated that agreement or, therefore, the consent order. When confronted with the fact that the file deletion violated the previous discovery preservation order, which was incorporated in the settlement agreement, the individual defendant pointed out that the subsequently signed settlement agreement released all of the plaintiff’s claims, “whether known or unknown, of any nature whatsoever.” Unfortunately for the defendant, however, the definition of the “claims” released in the settlement agreement included only the claims in the complaint, and did not encompass any claims for contempt or sanctions. Further, the release applied to all claims “arising prior to the date of this Agreement.” But the defendant’s misconduct occurred on the date of the agreement. Consequently, sanctions were affirmed under the court’s inherent power, notwithstanding the language of the settlement agreement and release. Practice Pointer. Institute for Motivational Living teaches that there is a risk in the typical release language that absolves the opponent of unknown claims when there are specific executory obligations that the releasee is in a position to subvert. This issue could have been addressed with a separate representation by the defendants that they would provide the laptop with all of the data in existence as of the day before the parties came to any settlement understanding (or some other historical fixed date). Institute for Motivational Living also points out the importance of the definition of the claims that are being released. The broader the definition, the greater the care that must be given to the possible implications of misconduct that is occurring during the settlement process. Issue of appealability in settlement agreement Not Particularly Appealing. Lasar v. Ford Motor Co., 399 F.3d 1101 (9th Cir. 2005), was a products liability action in which defendant Ford and its defense counsel were sanctioned because the defense counsel, in his opening statement, ignored in limine rulings that barred any reference to the plaintiff’s consumption of alcohol on the date of the accident or his failure to use a seat belt. Relying primarily on its inherent power, the district court held defense counsel in contempt; required the corporate defendant to pay $5,400 to the clerk of court to reimburse the cost of empanelling the jury; and jointly assessed $61,400 in compensatory attorney fees on both the defendant and defense counsel. Ford thereafter settled the case. In the settlement agreement, Ford agreed not to seek reimbursement of the $61,400 in attorney fees that it paid to the plaintiff. The 9th Circuit ruled that this mooted any appeal by Ford challenging this sanction (and ruled that defense counsel had no standing to seek review of this sanction since the corporate defendant had paid it). The settlement agreement did not bar review of the $5,400 paid by Ford into court, and the 9th Circuit held this appeal ripe. The settlement agreement was held not to bar the defense counsel’s appeal of the contempt sanctions imposed on him because he “was not a party to the settlement.” This holding is important because typical release language, by its terms, encompasses a release by all of the releasor’s agents and attorneys, even though it is executed only by the party itself. Nonetheless, there has always been a question as to the effectiveness of that portion of a release given by the party ostensibly on behalf of nonsigning, third-party agents and attorneys. The language of the release at issue in Lasar is not reprinted in the decision. The 9th Circuit also ruled that settlement of the underlying case did not preclude the attorney from obtaining appellate review of the sanction against him because of the reputational harm resulting from the imposition of sanctions on him. Almost all of the sanctions, however, were affirmed on appeal. Practice Pointer. The lesson of Lasar is to address the issue of the appealability in the settlement agreement. If sanctions have been entered, the settlement agreement should clearly address whether, or to what extent, any appeal of the sanctions order has been waived. Gregory P. Joseph of Gregory P. Joseph Law Offices LLC in New York is a fellow of the American College of Trial Lawyers. He may be reached at [email protected].

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.