Legal Updates

Tips For Employers And Schools In Negotiating And Drafting Litigation Settlement Agreements

You have suffered through months, maybe years, of protracted litigation and discovery. Allegations of misconduct have flown back and forth between the parties. At last, the parties have resolved their differences and decided to move on. The only thing standing between you and the finish line is the settlement agreement. You can breathe easy. Or can you?

While litigation settlement agreements are often concluded quickly and smoothly, that is not always the case. The process of moving from a settlement in principle to a signed, legally enforceable settlement agreement can be slow and contentious. As part of that process, it is critical that employers and educators ensure that the terms of the settlement are carefully thought through and appropriately memorialized in the settlement agreement.

This article discusses some practical considerations and tips for employers and educators in drafting and negotiating settlement agreements.

The Basics

To back up for a moment, when reaching a settlement in principle – typically, agreement on the amount of a settlement payment – a litigant should explicitly note that the settlement is provisional and contingent on the parties’ execution of a formal, written settlement agreement. Otherwise, if the parties are unable to conclude a formal settlement agreement, one of the parties may nonetheless ask the court to declare that a binding settlement has been reached and dismiss the litigation, thereby giving rise to avoidable expense and uncertainty.

Assuming that a formal settlement agreement is reached, then the basic terms that the agreement should identify include the parties, the claims at issue, the pending litigation, payment terms (if any), and the released parties. As set forth below, most settlement agreements operate to release multiple parties.

The settlement agreement also should incorporate customary representations and warranties, e.g., that each side has had counsel review the agreement, that no assignment of claims has been made, and that no party is admitting liability. The agreement should identify which state’s law will govern and the venue for any lawsuit seeking to enforce the agreement. In addition, the agreement should contain an integration clause reflecting that the agreement represents the parties’ complete understanding of their respective rights and obligations.

The Details

In addition to those basic points, there are a number of other critical issues that employers and educators should keep in mind in negotiating and drafting settlement agreements:

Notify the insurer: If an insurer is involved, the insurer should be kept apprised of all settlement negotiations and be allowed to review the settlement agreement prior to execution. Failure to do so could cause the insurer to refuse to pay the settlement amount and related attorneys’ fees. The settlement agreement should also specify that the insurer is being released from all claims.

Request broad releases: Employers and schools should push for broad releases, extending to the institution itself as well as all current and former employees, directors, trustees, and other agents. For a settlement agreement involving a school, it may also be appropriate for the release to encompass students and their parents. If the claimant is a minor, the school or employer should generally require that the minor and his or her parents/legal guardians execute releases.

Provide for prompt dismissal: The settlement agreement should provide a specific mechanism and timeframe for dismissing the litigation at issue. In general, the claimant should agree to file a stipulation of dismissal, with prejudice, with the court within a certain number of days (generally, no longer than a week) after receipt of the settlement proceeds. The claimant’s failure to do so should be specifically identified as a breach of the agreement. Finally, a form stipulation of dismissal should be attached to the settlement agreement.

If necessary, obtain court approval: Certain settlement agreements may require court approval. For example, in many states, a settlement agreement involving a release by a minor requires court approval. In most cases, court approval is required to resolve wage claims brought under the Fair Labor Standards Act. Failure to obtain court approval can jeopardize an otherwise proper settlement agreement.

Consider how to allocate the settlement proceeds: For a settlement payment made in the employment context, the organization should confer with its counsel to ensure that any allocation of the settlement amount requested by the plaintiff – for instance, among taxable wages, non-taxable tort damages, and attorneys’ fees – is appropriate. The settlement agreement should also include a representation that the recipient of the settlement proceeds has consulted a tax advisor.

Be mindful of statutory prerequisites: Settlements of employment claims can have statutory prerequisites. For example, a release of claims under the Age Discrimination in Employment Act (“ADEA”) must (i) specifically reference the ADEA; (ii) state that the employee has been advised, in writing, to consult with an attorney prior to executing the release; (iii) not extend to claims arising after the date the release is signed; (iv) permit the employee to take at least 21 days (or, in the case of a reduction in force or other “group termination,” 45 days) to review the agreement before signing it; and (v) allow the employee to revoke the agreement within seven days after signing it. An ADEA release that does not meet these requirements may be voidable.

Non-disparagement covenants should be narrowly tailored: Settlement agreements often contain mutual non-disparagement provisions. In the case of a school or employer, it is important that such a covenant apply only to those individuals whom the organization can closely control – such as top-level managers or administrators, as well as trustees/directors. A blanket non-disparagement covenant could lead to allegations that the settlement agreement has been breached by a low-level employee who may not even know that the agreement and non-disparagement covenant are in place.

Provide a mechanism to address potential breaches: Settlement agreements often contain provisions calling for penalties in the event one side breaches the agreement. This can take many forms, including liquidated (i.e., pre-specified) damages. At the very least, the settlement agreement should provide that the breaching party will be responsible for paying the other party’s reasonable attorney’s fees in the event it is forced to file suit to compel the breaching party’s compliance with the agreement.

The Bottom Line

It is vital that settlement agreements be carefully negotiated and drafted, to ensure that they accurately reflect the parties’ intent and that any statutory requirements are met.

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If you have any questions about these issues, or settlement agreements generally, please feel free to contact one of our experienced litigators.