Enforcement of Settlement Agreements in Federal Court

Most lawsuits settle, and most settlements after the case has been filed will involve the court.  Actions in federal court are no different, with few going to trial and the vast majority being settled before the court makes a final determination by substantive motion.  When one of the parties to the settlement agreement breaches the agreement, however, enforcement can present an obstacle.

How to have a Settlement Agreement Enforced in Federal Court

The court must first have  an independent jurisdictional basis to consider an an enforcement action, giving it the authority to act. Second, the party seeking to enforce the terms of an agreement must be prepared to establish the breach using the same standard that would apply in a separate matter.

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A pair of decisions out of the Distrct Court for the District of New Jersey illustrate how these standards are applied.

Federal Court Must Have Independent Jurisdictional Basis to Enforce Settlement Agreements

We start with a case in which the parties did not adequately preserve the continuing jurisdiction of a federal court to enforce the terms of a settlement agreement in United Aerial Advertising Inc. v. Township of Lakewood. 

Federal Courts must have an independent basis for jurisdiction.  It is not sufficient that the case was litigated in a district court.  Once the matter is settled, however, the original case is converted into a contractual agreement.  Unless there is some independent basis for federal court jurisdiction, the court may lack the power to enforce an agreement. 

The original basis fort jurisdiction is gone, and unless the parties take some affirmative act to preserve the court’s jurisdiction.  Here there was a lawsuit involving the plaintiff’s business of towing advertisement on small planes using Lakewood Airport, which resulted in a settlement agreement.  Lakewood Airport suspended the plaintiff’s operations after a crash.  The plaintiff sued to enforce the agreement.

The settlement agreement provided that , “[t]he court will retain jurisdiction of this matter for purposes of enforcing the settlement.”  The dismissal order, however, did not retain jurisdiction with the New Jersey District Judge who presided over the matter or refer to the settlement agreement.

On a motion by the defendant to dismiss a complaint that the defendant was in breach of the agreement, the court dismissed the complaint.

Clarity Required When the Parties Want the Federal Court to Retain Authority to Enforce a Settlement

District courts rely on their ancillary jurisdiction to enforce settlements as part of their ability to manage their dockets.  That ancillary jurisdiction exists, however, over settled cases only the the order of dismissal explicitly retains enforcement jurisdiction or the order incorporates the settlement agreement by reference. 

In the Third Circuit, the general phrase “pursuant to the terms of the Settlement” in a dismissal order is inadequate.  What will work is language“ expressly states that the terms of the settlement are ‘incorporated herein by reference and the Court shall retain jurisdiction over the settlement agreement to enforce its terms.’ “  Having failed to meet the standard, the court lacked the independent jurisdictional basis to enforce the terms of the agreement.

In a case in which there is no independent jurisdictional basis, the party seeking to enforce the agreement will have recourse to the state courts.  And, if there is diversity jurisdiction because all of the parties are from different states and the amount in dispute is greater than $75,000, the case may proceed in federal court under that basis.  Here, however, the federal cause of action was converted to a state law contract claim.

The Breached Settlement Agreement is Treated as a Breach of Contract Claim Under State Law

Once the issue of the enforcement of a settlement agreement is reached on the merits, the court will apply the same standard for the enforcement action as it would if it were an independent lawsuit for breach of contract.  That standard, can be demanding if there are material factual issues that are in dispute.

In a case before District Judge Shipp  in the District of New Jersey, Ortho-Clinical Diagnostics, Inc. v. Fulcrum Clinical Laboratories, the parties reached an agreement to resolve a contract dispute dispute with payments to made in installments.  They submitted a consent order, entered by the Court, that provided it was “ORDERED that this Court shall
retain jurisdiction and, subject to the terms of the Settlement Agreement, this case may be reopened
in accordance with those terms.”

Since there was no jurisdictional issue, the court examined the merits, noting that summary enforcement of a settlement agreeement, like summary judgment, deprives a party of the right to  trail.  To prevail, the party must establish the same elements as on a motion for summary judgment, that there is no genuine dispute of material fact and the party seeking enforcement is entitiled to judgment as a matter of law.

Settlement agreements are contracts governed by state contract law.  They must be based on an offer and acceptance and supported by consideration.  And, in what is a frequently litigated requirement  the settlement agreement must be sufficiently definite to define the agreement and permit enforcement.

As the judge noted, not every possible term has to be included, but the basic essentials must be clear.  The fact that the parties had intended to execute a written agreement later but failed to do so is not grounds to avoid enforcement.  Settlements are favored under New Jersey law and the courts will always “strain” to find an agreement.

In this case, the only defense offered to the enforcement action was that the defendant was now willing to honor its commitments.  That position, however, was not contemplated by the contract and in light of the clear breach of its terms, the court enforced the agreement and awarding the plaintiff its attorneys’ fees as provided in the settlement.

Other cases may be less clear.  If there is a dispute about performance or if the terms are ambiguous or not sufficiently definite, it may be difficult to secure enforcement in a summary (i.e., without a factual hearing or trial).  To assure enforcement, the same care that goes into the drafting of a formal contract should be exercised in memorializing a settlement.

Jay R. McDaniel

 

 

Tags: Contract, Federal J, Federal Jurisdiction, Settlement Agreement