In our two prior articles (The expanded role of courts in settling government investigations and Settlements with the government), we addressed issues that arise after a settlement agreement has been signed by the parties to a dispute: getting the agreement approved by a court, especially in a government enforcement action; and, after the agreement has been approved, modifying or undoing the settlement following significant changes in the facts or law. In this article we discuss an issue that arises just before a settlement agreement is executed – namely, what happens when the parties agree to settle in principle but one party changes his or her mind before the agreement is fully executed?

The primary question in such a dispute is whether an enforceable contract was created during settlement negotiations. If the dispute reaches a court the inquiry is very fact-specific. Two issues are particularly critical. First, the court seeks to determine the completeness of an agreement and whether there are any outstanding issues about what it considers to be material terms. The more gaps there are in the agreement, the less likely a court is to consider it binding and enforceable. Second, the court looks at how the parties acted after the agreement to determine their intent, for example, whether a party made a partial payment towards the agreed settlement or made representations to third parties that an agreement had been reached.

The first issue is illustrated by a June 2012 federal district court decision in Delaware. In LG Electronics, Inc. v. Asko Appliances, Inc., the court made clear that a settlement agreement, even if written, cannot be enforced if material issues remain subject to negotiation. In that case, LG sued rival washing machine manufacturers for infringing on several LG patents. After years of litigation, LG entered into settlement negotiations with one of the defendants, Daewoo. Under the terms of its initial agreement, Daewoo would receive a nonexclusive license to LG’s patents for products sold in theU.S., Europe andKorea for a $2.175 million royalty fee.

However, the agreement did not address whether the license applied to products made by Daewoo but sold under other names or to products sold in other regions. After the negotiation on these two issues died down, LG sought to enforce the rest of the agreement, arguing that the two unresolved points were “nonessential.” The Court, agreeing with Daewoo, found that the two terms were material to the agreement and that, without a meeting of the minds on all material issues, the settlement agreement was not enforceable.

On different facts, settlement agreements have been enforced when key terms have been agreed upon and, reflecting the second issue noted above, the parties have acted as if the settlement were in place. These circumstances were found in RE/MAX International, Inc. v. Realty One, Inc., in which the Eleventh Circuit in 2011 affirmed a district court decision to enforce a disputed settlement agreement.

In that case, a franchisor of a real estate brokerage system sued two real estate brokerage companies for anticompetitive business practices. After the trial ended in a mistrial, the parties began settlement negotiations. Eventually, all parties admitted in a settlement conference before the judge that they had reached an agreement and stated the general terms on the record. However, the agreement did not define specific terminology that might affect the parties’ obligations. Shortly after the conference, one of the defendants tried to withdraw from the agreement, arguing that it had never been written down, signed or finalized.

In a suit brought to enforce the agreement, the trial court held that the agreement reached at the settlement conference was enforceable because, among other things, the parties had reached agreement on all the key issues in the underlying dispute, and the parties had begun to act pursuant to the agreement, for example, by sending payment and publishing press releases – all of which was consistent with statements made to the court in the underlying dispute that the parties had reached a settlement. On appeal to the Eleventh Circuit, the Court focused on the parties’ statements to the court about reaching a settlement and held that the parties had agreed on all material terms. Even though several terms were left undefined at the court conference, that fact did “not undermine the crux of the agreement.” Furthermore, although the parties had not signed a written agreement, the Court held that “[t]he existence of a valid agreement is not diminished by the fact that the parties have yet to memorialize [it].”

When a court determines that the parties did not reach a binding agreement, some cases have applied equitable principles to determine whether a party reasonably relied on the settlement discussions to its detriment and was unfairly prejudiced thereby. Courts are hesitant to apply this principle and usually do so only when a party forgoes substantial rights in relying on its opponents’ representations. For example, courts have enforced an otherwise invalid agreement when a party executed written documents based on the settlement agreement and did not proceed to an immediately available trial or withdrew its pending appeal of a summary judgment order.

Settlement negotiations hold the promise of resolving an otherwise time-consuming and costly dispute but also present risks, as the cases discussed above suggest. Like other contracts, settlements should not be viewed as consummated and enforceable until they are fully executed by all parties. If a dispute is already in the midst of litigation, the agreement must also be approved by the court At times, parties begin taking actions in reliance on the settlement before an agreement has been fully executed or approved. In those instances, all involved need to be aware of the risk of yet another dispute—this time, over whether the settlement was genuine and final.