Oral Settlement Conference Created a Binding Agreement But Did Not Implicitly Terminate Significant Obligations Under a Prior Settlement

Authored by D. Brian Kacedon, John C. Paul, and Daniel F. Roland

Most courts strongly encourage settlement, as compromises save them and their litigants from expending valuable resources. Settlement, however, does not always end the controversy: when parties agree to end multiple litigations in one settlement, determining exactly which rights are gained (or lost) at settlement can lead to even more disputes. This holds particularly true when an agreement is not memorialized in writing after an oral settlement conference.

A recent case in the Eastern District of New York illustrates the challenge of ending two cases with one settlement. In Carson Optical, Inc. v. Hawk Importers, Inc.,¹ the same parties were involved in two different litigations. The first partially settled, obligating the defendants to refrain from certain activities and leaving the amount of attorneys' fees unresolved. The second case settled later, the defendants arguing that the second settlement not only ended both cases but also eliminated all existing obligations under the first settlement. In the court's view, to be released from the prior obligations, the defendants were required to expressly raise the issue as a condition of the second settlement. Because they failed to do so, the court deemed that the later settlement did not alter the obligations in the first settlement.

Background

In 2003, under the name of two corporate predecessors, Carson Optical, Inc. filed an action in district court (Carson I) against defendants Hawk Importers, Inc., Shyam Baheti, and Ram Baheti (collectively, Hawk). The claims arose out of Hawk's manufacture, distribution, and sale of optical magnifying devices that allegedly infringed Carson's copyright, trademark, and other rights. The parties settled the suit in 2004 and entered into a Stipulation of Settlement, which included Hawk's agreement to refrain from distributing or selling more than 100 identified products—the so-called “no-fly list.”

Years later, Carson wanted to reopen the case and enforce the terms of the Stipulation because it alleged that Hawk violated the agreement by selling no-fly products. The court reopened the case and granted Carson, among other things, injunctive relief to prohibit Hawk from selling infringing items. The Second Circuit affirmed the district court's decision and sent the matter to the court for a determination of attorneys' fees to be awarded to Carson.

In 2012, while the issue of attorneys' fees was still pending before the district court in Carson I, Carson brought a second suit against Hawk (Carson II) relating to infringement and unfair competition regarding the sale of other products. The judge held a seven-hour settlement conference, which concluded with the parties agreeing to dismiss the claims and counterclaims in Carson II and dispose of the Carson I matter. The agreement was not memorialized in writing at that time.

After the conference, both parties were given the opportunity to file a joint stipulation that confirmed the case had ended voluntarily. Before the deadline for filing the stipulation, Hawk filed a motion to enforce a draft agreement, without Carson's consent, that purportedly memorialized the terms of the settlement. As part of its motion, Hawk argued that the agreement entered at the settlement conference terminated all preexisting obligations between Hawk and Carson, including the obligation not to sell items on the no-fly list. In response, Carson submitted an affidavit by its counsel, which stated that the conference had not included any discussions about the Carson I settlement, either between the parties alone or on the record before the judge. Hawk apparently did not provide any evidence to dispute that account.

The Carson Decision

To decide the motion, the court first addressed whether the parties reached a binding agreement at the settlement conference. The court relied on contract principles to determine whether the parties intended to be bound by the settlement on the record. Despite the lack of a written agreement, the court found that a binding agreement had been reached because (1) the parties expressly agreed to be bound, (2) the court transcript revealed that the parties entered a detailed agreement, far beyond mere outlines of an agreement, and (3) settlement agreements are the type of contract appropriately set forth in open court.

After deciding the agreement should be enforced even without a signed writing, the court looked at the scope of the agreement and the issue of whether it should consider Carson's affidavit when assessing scope. Hawk sought to have the affidavit excluded under the rule of evidence (Rule 408) that renders statements made during settlement negotiations inadmissible at trial. The court rebuffed this argument, pointing out that Rule 408 does not bar evidence offered to prove the intent of the parties and the scope of the settlement. Finding that the affidavit was helpful evidence, the court deemed it appropriate to consider it when resolving the motion.

To determine if the settlement in Carson II ended Hawk's obligations from Carson I, the court also scrutinized the relationship between the parties and the events following the settlement conference. In the eyes of the court, Hawk was desperate to overturn the prior settlement agreement because of the impact on its business prospects. The court noted that the no-fly list was an important element of the settlement in Carson I, as evidenced by the subsequent litigation to enforce Carson's rights under the agreement. The court further noted that the total dollar amount of the settlement in Carson II reflected the range of attorneys' fees expected to come from the matter still pending in Carson I, which suggested that the agreement in Carson II did not include the release of obligations sought by Hawk. Reasoning that freeing Hawk from the obligations of the no-fly list would represent a sea change in the status quo, the court found that it was incumbent upon Hawk to expressly reference this change during the conference if it were part of the agreement reached on the record.

The failure to raise the preexisting obligations during settlement, the court noted, might have been a tactical attempt to shoehorn the concession into the settlement even though it was not part of the parties' mutual understanding. If the no-fly list were part of the negotiations, the court reasoned, Hawk would have contested the affidavit stating otherwise, and it did not. The court also deemed that Hawk's request to have it endorse a one-sided version of the agreement further supported the notion that Hawk might have been acting with a lack of transparency.

The court, therefore, held that the parties did enter into an enforceable agreement, but not one that altered the relief granted in Carson I.

Strategy and Conclusion

This case demonstrates the value of expressly memorializing the terms of any settlement agreement, particularly for material terms that affect preexisting obligations. If a settlement is reached orally, the parties should strive to state all the material terms on the record, and they should be cognizant of what they say—or do not say—in an oral settlement conference, as those words may later bind them. The case also demonstrates that a court may scrutinize significant alleged changes in prior obligations and may be unwilling to enforce such changes in obligations, instead finding it incumbent on the parties to expressly reference such changes in a written agreement.

Endnotes
¹The Carson II decision can be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2013/Carson_Optical_v_Hawk_Importers.pdf.

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