Settlement Negotiators Beware: Verbal Negotiations May Have Unintended Consequences

However, is a federal court required to follow state law requiring that such settlement agreements be evidenced by a writing?

In a recent case involving these issues before a federal court, the answers were surprising. More specifically, in K.W. Muth Co., Inc. v. Bing-Lear Mfg. Group, L.L.C., No. 01-CV-71925, pending in the United States District Court, Eastern District of Michigan, the plaintiffs in a patent case wrote a letter 'accepting' a number of terms discussed weeks earlier by the defendant as mere possibilities during a settlement meeting. In their letter, the plaintiffs also 'accepted' other terms never even discussed. Defendants immediately notified plaintiffs that because of the above facts, and because no settlement offer was ever made or pending, there was no settlement agreement. Plaintiffs then filed a motion with the court seeking to enforce the fictional settlement agreement.

The court determined that a federal district court enjoys an 'inherent power' to enforce oral settlement agreements. The court based that determination on a statement made in the Sixth Circuit decision of Kukla, 483 F.2d at 621, the statement being that it 'has been consistently recognized as the trial court's 'inherent power to summarily enforce settlement agreements entered into by parties litigant in a pending case.” Of interest to practitioners in various jurisdictions, the cases cited in the Kukla decision in support of the 'inherent power' determination included decisions of the Third, Fifth, and Seventh Circuits. Id. Accordingly, it is submitted that such 'inherent power' under such circumstances could be invoked in other jurisdictions.

Based on such 'inherent power,' the court held that an alleged settlement agreement in a patent case should not be viewed as a mere contractual dispute controlled by otherwise applicable state law, but that it should be viewed as an outgrowth of federal patent litigation. Relying on such 'inherent power,' the court determined that underlying state law requiring evidence of a settlement agreement in writing need not be followed. The court made this determination in reliance on its 'inherent power' despite 1) the lack of federal contract law one could turn to for guidance ' law which does not and cannot exist pursuant to the Erie Doctrine enunciated in Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817 (1938); and 2) the fact that in determining the validity and enforceability of settlement agreements, courts typically turn to the applicable state law. See, eg, Bamerilease Capitol Corp. v. Nearburg, 958 F.2d 150, 152 (6th Cir. 1992) (Court determined it is error to 'fail to look to state law when determining the enforceability of the settlement agreement.'); In re Beverly Hills Bancorp, 649 F.2d 1329, 1332-33 (9th Cir. 1981).

Like other cases in which oral settlement agreements have been disputed, the court then ordered an evidentiary hearing to determine whether the parties had in fact reached an enforceable settlement agreement. See, eg, Fishburn v. Barker, 518 N.E.2d 1054, 1055 (Ill. App. 1988) (jury trial held to determine existence of oral settlement agreement). Fortunately for the defendants, after weighing the evidence presented at the evidentiary hearing, the court denied plaintiffs motion to enforce the fictional settlement agreement.

The problem with such a scenario is that terms proposed by a party as mere possibilities during settlement negotiations may be misinterpreted by the opposing party as a firm offer which could be later accepted. Worse yet, an opposing party, knowing that such terms were merely proposed as possibilities, could purposefully 'accept' such terms in order to force an evidentiary hearing. Even worse, an opposing party, by mistake or with intent, could 'accept' terms never even discussed. In such a case, if an evidentiary hearing is ordered, the dispute unfortunately boils down to the word of one party against the other.

In order to avoid the enforcement of terms discussed during negotiations, or the possibility of having to defend against allegations of a settlement never agreed to at a evidentiary hearing, it is recommended that precautionary steps be taken before entering into any settlement negotiations. More specifically, the opposing party should be informed in writing, before entering into any negotiations, that any and all terms discussed or even agreed to during settlement negotiations are not enforceable until a settlement agreement has been reduced to writing and executed by all parties ' in other words, any agreement is conditioned on the acceptance by the parties in writing.

On the flip side, in the event no such precautionary measures are desired or taken, and in the event you believe a settlement agreement has been orally agreed to, it is recommended that you write a confirming letter to the opposing counsel as soon as possible. The letter should not only confirm all of the terms agreed to, it should also provide that unless you hear to the contrary within a specified time period that you will assume the terms set forth in your letter are correct. If opposing counsel fails to respond, but later repudiates the existence of such an agreement, and in the event there is no writing requirement in your jurisdiction, you can then move to enforce the agreement and use the letter as evidence of the agreement.

John M. Halan is a partner in the intellectual property firm Brooks & Kushman, located in Southfield, MI. He focuses his practice primarily on patent, trademark, and associated commercial litigation, and has argued a number of appeals before the United States Court of Appeals for the Federal Circuit.

Many corporate and litigation counsel know that oral settlement agreements may be enforceable. However, such counsel should be aware that terms discussed as mere possibilities during settlement negotiations may be mistakenly or knowingly misconstrued by an opposing party as an actual settlement agreement or an offer to settle. The former, or acceptance of the latter, could lead to two undesirable results if opposing counsel seeks enforcement by the court. First, the court could require an unwanted lengthy and expensive evidentiary proceeding to determine whether or not such an agreement occurred ' an outcome which would be based solely on the credibility of the witnesses involved. Second, and even worse, the court could enforce an unintended settlement agreement. In fact, if the underlying lawsuit is pending in federal court, such unintended and unwanted results could occur even if the otherwise applicable state law has a writing requirement.

Based on a policy favoring the settlement of lawsuits and the avoidance of costly and time-consuming litigation, many courts have held that a trial court may enforce an oral settlement agreement. See , eg , Kukla v. National Distillers Products Co. , 483 F.2d 619, 621 (6th Cir. 1973); Taylor v. Gordon Flesch Co. , 793 F.2d 858, 862 (7th Cir. 1986). This may be true even if the parties contemplate that a written agreement embodying the terms agreed to will later be prepared and executed. See, eg, Matter of Estate of McCormick, 926 P.2d 360, 363 (Wyo. 1996)

However, the operative word is 'agreement.' What happens if the alleged oral agreement is disputed? Or what happens if the alleged oral settlement agreement is based on an acceptance of terms discussed merely as possibilities during settlement negotiations? Some states require that settlement agreements be in writing or at least be evidenced by a signed document. See , eg , Michigan Mut. Ins. Co. v. Indiana Ins. Co. , 637 N.W.2d 232, 234-235 (Mich. App. 2001)( citing Michigan Court Rule 2.507(H)). In some such states, until the writing requirement is met, a party may disavow an otherwise undisputed oral settlement agreement. See , eg , Gojcaj v. Moser , 366 N.W.2d 54, 59 (Mich. App. 1985)

However, is a federal court required to follow state law requiring that such settlement agreements be evidenced by a writing?

In a recent case involving these issues before a federal court, the answers were surprising. More specifically, in K.W. Muth Co., Inc. v. Bing-Lear Mfg. Group, L.L.C., No. 01-CV-71925, pending in the United States District Court, Eastern District of Michigan, the plaintiffs in a patent case wrote a letter 'accepting' a number of terms discussed weeks earlier by the defendant as mere possibilities during a settlement meeting. In their letter, the plaintiffs also 'accepted' other terms never even discussed. Defendants immediately notified plaintiffs that because of the above facts, and because no settlement offer was ever made or pending, there was no settlement agreement. Plaintiffs then filed a motion with the court seeking to enforce the fictional settlement agreement.

The court determined that a federal district court enjoys an 'inherent power' to enforce oral settlement agreements. The court based that determination on a statement made in the Sixth Circuit decision of Kukla, 483 F.2d at 621, the statement being that it 'has been consistently recognized as the trial court's 'inherent power to summarily enforce settlement agreements entered into by parties litigant in a pending case.” Of interest to practitioners in various jurisdictions, the cases cited in the Kukla decision in support of the 'inherent power' determination included decisions of the Third, Fifth, and Seventh Circuits. Id. Accordingly, it is submitted that such 'inherent power' under such circumstances could be invoked in other jurisdictions.

Based on such 'inherent power,' the court held that an alleged settlement agreement in a patent case should not be viewed as a mere contractual dispute controlled by otherwise applicable state law, but that it should be viewed as an outgrowth of federal patent litigation. Relying on such 'inherent power,' the court determined that underlying state law requiring evidence of a settlement agreement in writing need not be followed. The court made this determination in reliance on its 'inherent power' despite 1) the lack of federal contract law one could turn to for guidance ' law which does not and cannot exist pursuant to the Erie Doctrine enunciated in Erie R.R. Co. v. Tompkins , 304 U.S. 64, 58 S.Ct. 817 (1938); and 2) the fact that in determining the validity and enforceability of settlement agreements, courts typically turn to the applicable state law. See , eg , Bamerilease Capitol Corp. v. Nearburg , 958 F.2d 150, 152 (6th Cir. 1992) (Court determined it is error to 'fail to look to state law when determining the enforceability of the settlement agreement.'); In re Beverly Hills Bancorp, 649 F.2d 1329, 1332-33 (9th Cir. 1981).

Like other cases in which oral settlement agreements have been disputed, the court then ordered an evidentiary hearing to determine whether the parties had in fact reached an enforceable settlement agreement. See , eg , Fishburn v. Barker , 518 N.E.2d 1054, 1055 (Ill. App. 1988) (jury trial held to determine existence of oral settlement agreement). Fortunately for the defendants, after weighing the evidence presented at the evidentiary hearing, the court denied plaintiffs motion to enforce the fictional settlement agreement.

The problem with such a scenario is that terms proposed by a party as mere possibilities during settlement negotiations may be misinterpreted by the opposing party as a firm offer which could be later accepted. Worse yet, an opposing party, knowing that such terms were merely proposed as possibilities, could purposefully 'accept' such terms in order to force an evidentiary hearing. Even worse, an opposing party, by mistake or with intent, could 'accept' terms never even discussed. In such a case, if an evidentiary hearing is ordered, the dispute unfortunately boils down to the word of one party against the other.

In order to avoid the enforcement of terms discussed during negotiations, or the possibility of having to defend against allegations of a settlement never agreed to at a evidentiary hearing, it is recommended that precautionary steps be taken before entering into any settlement negotiations. More specifically, the opposing party should be informed in writing, before entering into any negotiations, that any and all terms discussed or even agreed to during settlement negotiations are not enforceable until a settlement agreement has been reduced to writing and executed by all parties ' in other words, any agreement is conditioned on the acceptance by the parties in writing.

On the flip side, in the event no such precautionary measures are desired or taken, and in the event you believe a settlement agreement has been orally agreed to, it is recommended that you write a confirming letter to the opposing counsel as soon as possible. The letter should not only confirm all of the terms agreed to, it should also provide that unless you hear to the contrary within a specified time period that you will assume the terms set forth in your letter are correct. If opposing counsel fails to respond, but later repudiates the existence of such an agreement, and in the event there is no writing requirement in your jurisdiction, you can then move to enforce the agreement and use the letter as evidence of the agreement.

John M. Halan is a partner in the intellectual property firm Brooks & Kushman, located in Southfield, MI. He focuses his practice primarily on patent, trademark, and associated commercial litigation, and has argued a number of appeals before the United States Court of Appeals for the Federal Circuit.