You've Made Your Bed, Now Lie In It – Binding Settlement Agreement Defeats A Post-Settlement Judgment

On June 20, the district court granted Casper's motions for summary judgment of non-infringement, while denying as moot other summary judgment motions and the joint motion to stay. Casper subsequently informed Serta Simmons that it would not make the payment required by the settlement agreement as it considered the agreement to be "null and void" in light of the summary judgment order. Casper also moved for fees and costs under 35 U.S.C. §285 and 28 U.S.C. §1927.

Serta Simmons moved to re-open the docket and enforce the settlement agreement, but the district court denied these motions. The court held that the notice of settlement did not constitute a dismissal and did not moot the issues in the case, as it only sought to stay deadlines and indicated that dismissal depended on Casper's future performance. The district court also held that it lacked subject matter jurisdiction to enforce the settlement agreement once the summary judgment order issued, but noted that Serta Simmons could bring a claim in state court. The district court denied Casper's motion for fees and costs.

Serta Simmons appealed the summary judgment and the denial of its motion to enforce the settlement. Casper cross-appealed the denial of its motion for fees and costs.

Settlement Moots an Action Including Pending Motions

The Federal Circuit (Judges Dyk, Plager, and Stoll) first addressed whether the settlement agreement mooted the underlying infringement case, superseding the later entry of the summary judgment order. The Federal Circuit held in the affirmative, rejecting Casper's argument that the case was not mooted because the settlement agreement called for future performance by the parties. The appellate court therefore vacated the entry of judgment and the order granting summary judgment.

The Federal Circuit relied on its prior decision in Exigent Tech., Inc. v. Atrana Solutions, Inc., 442 F.3d 1301 (Fed. Cir. 2006). In Exigent, the parties had signed an "Agreement in Principle Term Sheet" with a formal settlement agreement to be negotiated within five business days. 442 F.3d at 1304-05. The district court granted summary judgment of non-infringement the same day. Id. The Federal Circuit determined that the district court erred by not determining first whether the Term Sheet was an enforceable agreement, which would have rendered moot the entry of final judgment. Id. at 1312. Discussing Exigent, the panel noted that "a binding settlement generally moots an action despite the fact that the settlement agreement requires further implementing steps to be taken." 950 F.3d at 852-53. The Federal Circuit also cited to similar decisions from other circuits holding that "a settlement involving all parties and all claims moots an action … even if they contain executory terms." Id. at 853.

Casper cited two Seventh Circuit cases in support of its position, but the Federal Circuit noted that they were not binding, questionable on the merits, and distinguishable. In Selcke v. New England Ins. Co., the settlement agreement was not considered final until payment was made. 2 F.3d 790, 791-92 (7th Cir. 1993). As for Gould v. Bowyer, 11 F.3d 83 (7th Cir. 1993) (No. 92-3697), 1993 WL 13036997, at 5, the Federal Circuit looked beyond the decision to the appellant's briefing, in which the appellant conceded that the settlement agreement potentially required further action by the court. See, Brief of Defendant-Appellant Larry Bowyer, Gould v. Bowyer.

In dicta, the Federal Circuit noted that district courts may refuse to enforce or uphold settlement agreements that are "contrary to law or public policy," but that was not an issue in the present case.

District Courts Retain Jurisdiction to Enforce Settlement Agreements In "Ongoing" Cases

The Federal Circuit next turned to whether the district court erred in denying Serta Simmons's motion to enforce the settlement agreement. The district court's decision relied on Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 376-377 (1994). There, the parties had executed a "Stipulation and Order of Dismissal with Prejudice" as part of a settlement, but failed to reserve jurisdiction in the district court to enforce the settlement agreement. The Supreme Court held that, because the district court had dismissed the action and the motion to enforce the settlement agreement came after dismissal, the district court no longer had ancillary jurisdiction over the agreement. Id. at 381-382.

Distinguishing Kokkonen, the Federal Circuit noted that this decision "did not hold that a federal court cannot grant a motion to enforce filed before a dismissal of the case." 950 F.3d at 854. The Federal Circuit looked to guidance from other circuits and found persuasive pre-Kokkonen caselaw. For example, in Meetings & Expositions, Inc. v. Tandy Corp., 490 F.2d 714, 717 (2d Cir. 1974), the Second Circuit held that "a district court has jurisdiction to enforce a settlement agreement when the proceedings are ongoing." See also, BCM Dev., LLC v. Oprandy, 490 Fed. Appx. 409, 409 (2d Cir. 2013) (unpublished) (applying Meetings). The Federal Circuit further noted Casper's concession that "a court has jurisdiction to enforce a settlement if the 'enforcement issue is raised during the pendency of the original case.'" 950 F.3d at 855.

In view of the above, the Federal Circuit held that "a district court has jurisdiction to enforce a settlement agreement that resolves patent infringement claims if the motion to enforce is filed before the case is dismissed and the proceedings are ongoing." Id. Because the Federal Circuit vacated the summary judgment order, as discussed above, there was no final judgment dismissing the parties' claims, and the district court therefore retained jurisdiction to enforce the settlement agreement. Id.

Accordingly, the Federal Circuit vacated the order denying Serta Simmon's motion to enforce the settlement agreement and remanded the case to the district court to enforce the agreement.

Casper No Longer the Prevailing Party for Fees

Because the Federal Circuit vacated the summary judgment of noninfringement, Casper was no longer a prevailing party and therefore was not entitled to fees under Section 285. The Federal Circuit also concluded that the settlement agreement precluded Casper's claim for fees related to pre-settlement litigation conduct under Section 1927, as it provided that "the Parties [are] to bear their own litigation costs and fees." Id. The Federal Circuit therefore affirmed the district court's denial of Casper's motion for fees and costs.

Takeaways from the Case

In Serta Simmons, Casper was unable to avoid its obligations under the settlement agreement even though it subsequently "won" on summary judgment two days after settling. While the general holding of Serta Simmons is that an executed, binding settlement agreement will moot the underlying action (and any subsequent orders on the merits that may issue prior to dismissal), the decision raises several strategic issues for parties to consider before finalizing any settlement agreements during the pendency of dispositive motions:

• Non-finality of settlement agreement. First, if a party wishes to avoid mooting the underlying case (g., to leave open the possibility of receiving an order on a pending dispositive motion), it could seek terms stating that the settlement is not final until a future action by a party, similar to the agreement in Selcke. The agreement should clarify whether any future payment is a condition precedent that must be satisfied before the settlement agreement is binding and enforceable (as in Selcke), or whether it is a contractual obligation to make a future payment under an already binding and enforceable settlement agreement (as in Serta Simmons). The agreement could also expressly provide that the settlement agreement will become null and void upon the issuance of any order on any pending substantive motion, to cover a situation as in Serta Simmons.
• Staying litigation pending settlement discussions and performance. If the parties' primary goal is to suspend upcoming deadlines while waiting for a decision on a dispositive motion, the parties could attempt to jointly move to modify the scheduling order and extend deadlines, or temporarily stay the upcoming deadlines, based on the parties' ongoing settlement discussions (without relying on an executed settlement agreement). While some judges may require an executed agreement in order to stay a case, others may be open to at least pushing out deadlines for a short period while the parties engage in settlement discussions and make efforts to satisfy their performance obligations under any resulting settlement agreement. This strategy could be coupled with the preceding one, and the parties could inform the court that they have executed a near-final settlement agreement that only requires some future performance to become final.
• Retention of settlement enforcement To ensure that the district court retains jurisdiction to enforce the settlement agreement post-execution and after the case terminated, the parties should ensure that the settlement agreement expressly specifies that disputes arising out of the agreement will be resolved by the district court, to avoid the outcome of Kokkonen.
• Impact of settlement on pending motions. Parties who are negotiating a settlement during the course of litigation should be mindful of the timing of settlement versus pending motions. It is unlikely that Casper would have agreed to a settlement, had it known that summary judgment in its favor would have issued so quickly (and before any reply briefs were filed). That said, given the uncertainty both in the timing of any decisions on the pending motions and their outcome, there may be numerous business and other reasons for parties to seek a quick settlement. The Serta Simmons decision reinforces the takeaway that parties entering settlement agreements during the pendency of motions should do so with the understanding that they may be mooting the underlying litigation and thereby effectively withdrawing their respective motions.

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Rudy Y. Kim chairs Morrison & Foerster's litigation department in the firm's Palo Alto office. Chris Han is an Associate in Palo Alto and a member of the firm's Intellectual Property Group.