More Thoughts on Settlement Agreements

More than five years after my original post about settlement agreements, I have drafted, revised, marked up, and rejected many more. And so I thought I would use this additional perspective to update my original post.

• Litigants, and even their lawyers, are often exhausted from the effort it takes to pursue litigation by the time a settlement agreement is proposed. They may be relieved that the matter is nearly over and ready to work on something new. This sense of imminent relief makes some people sloppy on details. Either side may be so eager to move on that they rush to agree to any settlement. So I remind people to be diligent and focus on the details of a draft agreement.

• Once a settlement agreement is signed, there may be a sense that the agreement itself should be the last step in a long dispute. Not so. Now the parties have to carry out the duties outlined in the agreement. Some people are annoyed that the agreement means they have to do things. Settlement agreements often include payments, voluntary dismissal paper submissions, and other work that is easy to forget if a litigant thinks the case is over.

• A good settlement agreement does not make it look like one side defeated the other. To give someone an incentive to settle, it makes sense to make them feel they’re getting something out of it, too. This moderate approach helps make the process move faster, especially if one side is eager to get it done.

• Many lawyers who work on contingency make it clear that settlement payments go to them, not the client. Contingency is common on the plaintiff’s side of employment cases, especially if a client isn’t making income due to the employment issue. Lawyers may structure the settlement payment in employment cases to ensure the money is appropriately taxed, designating only part of the payment as taxable wages. So if a settlement payment covers lost wages, attorneys’ fees, and compensation for emotional distress, then only the portion that replaces the plaintiff’s salary should be subject to employment tax. A well-drafted agreement addresses details that are easy to overlook, but whose omission could get expensive.

• Lawyers should also consider what to do if someone violates a settlement agreement and spell out the response in the agreement. Should the parties return to the same judge? Start a new lawsuit? Arbitrate? Discussing penalties ahead of time may prevent a crisis later on and deter someone from breach.

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Many lawsuits end because the parties agree to settle their claims. When that happens, the parties usually memorialize their settlement in an agreement. Although I discussed a key aspect of settlement agreements, the release, in a previous post, these agreements have other important clauses.

Why should you continue to read this post about settlement agreements?

• You agreed to do so as part of a settlement.

• Hearing about adversaries coming together to agree on things is the good news you needed today.

• Most settlements are confidential, so you’re having trouble finding information elsewhere about how this process works.

Since many settlement agreements are confidential, pictures from peace treaty signings are the closest I can get to relevant images. (Image Credit)

Recitals

Many settlement agreements begin with “whereas” clauses that define key terms and introduce a reader to the reasons why the parties are entering into the agreement. Many courts have held, however, that the statements in these clauses are not legally binding.

Voluntary Dismissal

The most important aspect of a settlement agreement is the release. This is what gives the defendant comfort that it will not need to litigate future cases with the plaintiff arising from the same subject matter.

But another major component of a settlement agreement is the provision in which a plaintiff agrees to end her lawsuit against the defendant. Often, the agreement will give the plaintiff a certain number of days after the agreement is executed to notify the court that she is withdrawing the case. Some agreements include a form for that withdrawal drafted by both parties.

Payment

Plaintiffs may agree to a settlement so they can finally receive money from defendants. The settlement agreement should specify not only the amount of the payment, but when it is due and how it will be paid as well.

Many settlement agreements discuss the tax treatment of the settlement agreement. For example, settlement agreements in employment disputes will specify which portion of the settlement payment is subject to payroll taxes and which is not.

No Admission, and Non-Disparagement Clauses

As I mentioned in an earlier post, people are concerned about their public reputations, not just whether they win or lose in court. A defendant may want to ensure that the plaintiff does not say negative things about them outside of court. To accomplish this, many settlement agreements contain non-disparagement provisions that require plaintiffs not to say anything negative about the defendant.

Some settlement agreements make the non-disparagement obligations mutual, so that neither party can say anything negative about the other.

A defendant may be concerned that someone may argue that the plaintiff’s allegations must be true since the defendant agreed to pay money. This is why many settlement agreements contain a statement that the defendant is not admitting liability, but is only settling with the plaintiff to avoid further litigation.

Confidentiality Provisions

Settlement agreements may also contain non-disclosure provisions that prevent the plaintiff from discussing the settlement. In the employment context, state laws may govern how and when an employer can ask an employee to keep information about discrimination confidential. But in commercial disputes, parties are generally free to agree to keep the terms of an agreement confidential.

Negotiating a Settlement Agreement

Every dispute is unique, so settlement negotiations vary. But generally speaking, parties do not just settle cases because they think they are going to lose. They settle for a variety of reasons, especially because the cost and burden of litigation may be greater than its rewards. Litigation is unpredictable (idea for website?), and the desired outcome is never guaranteed.

As a result, parties are often flexible at different stages of a dispute to discuss a settlement. Once the parties agree on general terms (such as the amount of money the defendant will pay the plaintiff), it is common for the parties to exchange drafts of a settlement agreement to ensure the specifics are acceptable to both parties.