The American court system relies on civil cases to settle. Without settlements, court dockets would back up for months or even years. People are surprised to hear that perhaps only 2-3% of civil cases go to trial.
Why should you care about civil settlements? Because they are an every-day occurrence that impacts people and businesses.
Most people do not fully understand what a settlement is and how it affects them. This post will look at the infamous StarKist tuna settlement and help you understand how to settle the right way.
The Tuna Case
In 2013, consumers sued StarKist for failing to put enough tuna in its 5-ounce tuna cans. Two years later, StarKist agreed to a $12 million settlement. Consumers were given the choice to take $25 in cash or $50 worth of tuna.
For the next 4 years, the settlement was delayed by court challenges. There were legal issues with the tuna vouchers and then issues with calculating the plaintiff's attorney fees. These and other issues made the settlement approval process drag out.
Ultimately, the $12 million settlement didn't go very far. Lots of consumers made claims against StarKist and legal disbursements were apparently higher than expected.
Long story short – consumers recently received checks in the amount of $2.38 or tuna coupons of $5.03! Obviously, people were unhappy with the outcome. StarKist could have offered consumers a cash settlement at any time. Instead, they offered tuna coupons because they knew people wouldn't redeem them (thus saving StarKist money). By offering the tuna coupons, StarKist incidentally caused the settlement to be delayed by several years. I'd be willing to bet that StarKist and the attorneys in the case were happier than the consumers stuck with $5 worth of tuna.
The Lesson: Make sure your settlement is an enduring agreement that will end the dispute.
Settlement = A Contract
A Settlement Agreement is an enforceable, binding contract. It may be an oral or written settlement. Usually, settlement of a civil lawsuit involves the defendant paying money to the plaintiff to dismiss the case. While contracts require “consideration” to be valid, the payment of money or the exchange of promises should make the settlement binding.
It is best to have a written, signed settlement agreement that carefully details the settlement. A 1-2 page Settlement Agreement may be fine for a small, simple dispute. When Wells Fargo pays $575 million to settle predatory loan lawsuits, the Settlement Agreement looks like a book.
In general, oral settlements are not advised for civil lawsuits. But sometimes, cases are settled at the courthouse. The judge may have the parties put their settlement “on the record”, which means they state the agreement in front of the judge and into the court's recording system. Even in those cases, judges generally want the attorneys to write up the agreement. It's only in certain types of cases (evictions and small claims court) that the court will write up the settlement as part of an order.
Example – Oral Settlement
Oral settlements outside of court can be binding, but be careful. For example, say you back into your neighbor's car and break her tail light. You offer her $100. She accepts your offer and takes the $100. Is this a valid settlement? Probably. If she later sued you for damaging the light, you would tell the judge that the case was already settled for $100. The judge would likely dismiss the case. On the other hand, say that you taped a $100 bill to the windshield. She takes the $100 but says she's still suing you. Is this a settlement? Probably not, because there is no mutual agreement. She could probably still sue you.
What Should a Settlement Agreement Have?
Whether you have an informal dispute or a formal lawsuit, a settlement agreement may be necessary.
Several paragraphs are important, but it depends on the nature of the dispute, the number of parties, the complexity of the settlement, and whether attorneys are involved. Here are some basic provisions that most Settlement Agreements have:
- Recitals: Recitals summarize the background of the dispute and the scope of the settlement. A recital often starts with “WHEREAS, . . . . “ Technically, the recitals are not part of a settlement contract. However, they can help interpret the settlement if there is any ambiguity. Sometimes, the Settlement Agreement incorporates the recitals to avoid any question of the validity of recitals.
- Parties: This should be obvious, but you'd be surprised at how often people and business entities are misnamed. Failing to name the proper person or company can lead to big problems in the future.
- Payment Terms: If money is changing hands, the Settlement Agreement should describe it. The agreement should describe the “who, what, when, where, and why” of the payment. Don't underestimate the importance of these details. If the defendant is not trustworthy, don't let him “worm” out of the deal. Nail him down. A payment term that requires the defendant to pay by a “reasonable” method within a “reasonable” time is not detailed enough. He might wait 6 months and send you a box of pennies. The tighter you can make the language, the less chance of any hiccups in the payment.
- Dismissal of Lawsuit: The parties may dismiss some or all claims. This is an important paragraph and one that should be easy to draft. List the claims and parties involved in the dismissal, and state whether the dismissal is with or without prejudice. As discussed below, it probably will be a dismissal with prejudice.
- Governing Law and Venue: A Settlement Agreement is a contract, and contracts should state the governing law and venue in case of a future dispute. If both parties are from Minnesota, then Minnesota law should govern. But business litigation can involve parties from different states or countries. Contracts might be interpreted differently in different jurisdictions. Be clear on which law applies to the Settlement Agreement and what court will be used in the event of a breach.
- Integration Clause: This clause simply says that the Settlement Agreement is a full, final, and complete agreement between the parties. In other words, any prior offers or settlement discussions are irrelevant. What counts is the final written agreement. If there are any documents or information necessary to the settlement, you can (and should) attach those as an exhibit or appendix to the Settlement Agreement.
- Confidentiality: This requires the parties to be silent about the settlement terms. There is usually an exception for revealing the settlement to a lawyer or tax accountant, but the parties usually cannot otherwise discuss the case or settlement. A breach of this provision may be grounds for damages or even invalidating the agreement.
- No Admission of Liability: This is a standard provision in settlements. The defendant pays to get a dismissal but does not agree that he or she was liable. These clauses are important for a defendant that has related lawsuits or professional license issues. Apologies are generally non-starters in settlement talks and agreements.
- Non-Disparagement Clause: This prevents the parties from bad-mouthing each other after the settlement. A confidentiality paragraph protects this to some degree. But the non-disparagement clause directly protects the parties' reputation, which is important to businesses. Not every settlement has this clause, but it can be useful.
- Breach: If a party fails to follow the Settlement Agreement, the other party can sue for damages or possibly undo the agreement. In most cases, there are no problems. But you have to plan for a potential breach. The defendant may not make the settlement payment, or the plaintiff may refuse to sign dismissal documents. Do yourself a favor and protect yourself with a breach-of-settlement provision.
- Release of Claims: This is perhaps the most important provision in a Settlement Agreement for a defendant. He or she is paying the plaintiff to end the case. No defendant wants to be sued again for the same thing. The defendant will want a full release of claims in which the plaintiff (and any future heirs or successors) agree not to sue again for the same thing. The Release can be a separate document or included as part of the Settlement Agreement. Releases are enforceable and subject to only a few potential defenses (such as fraud or mistake).
Dismissal With or Without Prejudice?
One issue that comes up with settlements is whether the plaintiff dismisses the case “with prejudice” or “without prejudice”.
Generally, the defendant requires a dismissal “with prejudice”, meaning that the plaintiff can never bring that same lawsuit again. Most settlements involve dismissal with prejudice.
Settlements rarely involve a dismissal “without prejudice”. A defendant is paying the plaintiff to dismiss the case for good and avoid the uncertainty of litigation. Under Minnesota Rule of Civil Procedure 41, a plaintiff can only dismiss without prejudice on his own if it's early in the case or if the defendant agrees to it. Usually, dismissals without prejudice happen when a plaintiff files a case in the wrong court.
If you are a defendant settling a case, make sure the Settlement Agreement says “dismissal with prejudice”. You will then likely need to file a “Stipulation and Order for Dismissal” with the court so that the judge can formally dismiss the case.
Things That Happen With a Settlement
Don't expect a handshake, a hug, or an apology as part of a settlement. You might deserve one, but they almost never happen after a dispute. These things often do happen:
- Your attorney drafts settlement documents and you sign them (with or without a notary).
- The judge signs off on a dismissal of the case.
- There is a transfer of money, property, land, or other thing between the parties.
- The parties may need to speak with their accountant about any tax issues related to the transfer of money or assets.
- The parties have a beer to celebrate a good settlement or a beer to forget an unfavorable settlement.
Settlements are important because they avoid the cost an uncertainty of litigation. Settlements give parties control over the outcome of the case and their future rights. If you settle a dispute or lawsuit, make sure you do it right.