Now Everything’s Settled—Or Is It? Practical Tips for Creating Binding Settlements in Federal Cases

Luckily, most in-house counsel and Human Resources professionals never have to litigate the issue of whether the company and an employee who have putatively settled an employment dispute have in fact reached a binding settlement. However, the issue does arise from time to time. Indeed, our Firm recently prevailed on a relatively rare motion to enforce a settlement agreement in the Southern District of Texas.  See Lee v. Gulf Coast Regional Blood Center, Civil Action No. 4:19-cv-04315 (S.D. Texas), Memorandum and Opinion.  That experience allows us to offer several practical insights into how to effectively negotiate settlement agreements in federal court. These insights can be useful for in-house counsel and other corporate employees involved in the litigation and settlement process as they work with outside counsel to develop strategy.

Typically, the parties negotiating a settlement will agree on the material terms of a potential settlement, then defer to their attorneys to draft a memorializing document and, if necessary, hash out any details on the non-material terms. Occasionally, however, one party may experience “buyer’s remorse” and attempt to claim that no settlement was reached by refusing to sign the memorializing document. While that unenviable position may be unavoidable and outside of an employer’s control, there are several steps that the employer’s legal team can take to ensure it receives the benefit of its bargain.

Define the universe of material terms early on. This is the most crucial step. In federal courts in the Fifth Circuit, there is a two-stage analysis to determine whether the parties have reached an enforceable settlement agreement. First, the party seeking to enforce the agreement must prove that the parties reached an agreement regarding all material terms. Only then does the resisting party receive the opportunity to show that the agreement is otherwise invalid. See Metropolitan Transit Auth. of Harris Cnty., No. H-14-1297, 2016 WL 3906295, at *3 (S.D. Tex. July 19, 2016).

If counsel memorializes the material terms that are under negotiation early in the process in an email or written document, this will make it easier to show that later in the process, agreement on those specific terms was reached. This also forces the employer’s legal team to think carefully about the terms that are material to the employer as well, leading to more carefully tailored negotiations.

Ascertain any limits on the scope of opposing counsel’s authority. The law presumes that counsel of record for a party has authority to negotiate and accept settlement terms. Mid-South Towing Co. v. Har-Win, Inc., 733 F.3d 386, 391 (5th Cir. 1984). A party claiming that her counsel lacks authority therefore has the burden of proving that counsel lacked authority. Id. at 390.

Nevertheless, opposing counsel or, more likely, the plaintiff may later claim that any agreement reached between counsel was outside the scope of plaintiff’s counsel’s authority. The company’s counsel should clarify with opposing counsel the limits of that counsel’s authority if there is any indication in the negotiations that opposing counsel is not acting with full authority, as this may preclude later disagreements about whether there was authority to enter into a binding agreement.

Commit as much of the negotiations to writing as possible. While this is certainly a challenge given the fast pace at which some negotiations move, it is a best practice to at least send an email after important telephone conversations to memorialize the points raised in the call. This serves as important evidence later because if there was a misunderstanding, opposing counsel can clarify in a response. Opposing counsel’s lack of a response could likewise be viewed as agreeing that the memorialization is accurate.

The Bottom Line

No employer wants its legal team to invest significant time into negotiating a settlement and then be forced to litigate its enforcement. Yet employers may sometimes find themselves in that situation. The best way to summarize the foregoing tips would be to “build a clear record.” If the legal team approaches a negotiation with the mindset that the opposing party may refuse to sign a memorializing document, this will help to focus on making clear statements (preferably written) at every stage of the negotiation that will serve as evidence that a binding settlement was made. For example, use precision with terms of art such as “offer” or “accept.” If a proposal is being offered to solicit feedback, but not as an “offer” in the legal sense, counsel should state as such to prevent any misunderstandings.

Such a mindset will prove invaluable if the settlement is derailed. The added benefit is that in the majority of cases where the opposing party genuinely does want to settle, building a record using clear statements will ensure the parties are on the same page with respect to terms and facilitate a smoother negotiation process.

** Note that the foregoing applies in federal court. Texas Rule of Civil Procedure 11 requires an agreement to be signed by both parties to be enforceable, which has been applied to settlement agreements. Still, even in Texas courts, building a record and using clear statements would be beneficial.