Lessons About Enforcing Settlements From the School of Hard Knocks

 

As a mediator, I am in the business of getting lawsuits settled, so I take special note of court opinions where a party tries to get out of a settlement by alleging such things as fraud, economic duress, and most recently in Starpoint Properties, LLC v. Namvar, a California Court of Appeal case, coercion. Early in my career I settled a lawsuit during trial but the plaintiff attempted to back out of the deal. It took several months and additional legal fees to finally get a court order to enforce the settlement. As a result, I like to report on “settlements gone bad” cases to illustrate how settlements can fall apart and help others learn from what I and others have learned from the school of hard knocks.

The Starpoint Properties case, involving allegation of breach of contract and fraud, was settled when the parties agreed that the lawsuit would be dismissed in exchange for the right to purchase certain real property owned by the defendants in Los Angeles. The settlement agreement also included a stipulation for entry of judgment, which provided that Starpoint would be entitled to judgment in the amount of $8,362,000, plus interest, against all of the defendants named in the complaint, if any one of four events was to occur. Additionally, the stipulation expressly stated that defendants had waived their right to appeal any judgment issued pursuant to the stipulation, as well as any right to receive notice that judgment would be entered pursuant to the stipulation. When negotiating the terms of the settlement agreement and the stipulation, all parties were represented by counsel.

After three of the four events listed in the settlement agreement and stipulation occurred, Starpoint filed the stipulation and judgment was entered ex parte.  Defendant’s attempted to set aside the judgment by alleging that Starpoint coerced them into entering the settlement agreement. However, the trial court found that the claim of coercion was unfounded, and denied the motion. Defendants then appealed but the Court of Appeal found the appeal was untimely; it also noted that the matter would have failed on the merits of the case. Finally, the Court awarded attorney fees to Starpoint as the settlement agreement provided that the prevailing party would be awarded attorney fees in any action to enforce the settlement agreement.

Lessons Learned

Perhaps the most important take-away from the Starpoint case is that settlement agreements have consequences, and the courts will enforce the intent of the parties as expressed in the agreement, as it would for any contract. The court rejected many of the claims on appeal based upon the language of the settlement agreement. For example, the defendants claimed that the trial court erred in entering judgment against them on an ex parte basis, without giving them an opportunity to appear. The argument, however, was found to be without merit because appellants expressly waived their right to receive notice in the settlement agreement, and such waivers are valid under California law.

The Court of Appeal also noted other aspects of the settlement contract that could not be ignored: it expressly stated that the parties had entered into the agreement”voluntarily,” and “with full knowledge of its significance,” and that its terms had been “negotiated at arms’ length among sophisticated Parties represented by counsel.” Some may view such language as “boilerplate”, but unambiguous terms of a settlement agreement will be enforced by the courts. In this case, the Court of Appeal could not find any reason to overturn the order of the trial court-even in the face of a claim of coercion.

OVERCOMING BARRIERS TO CONFLICT RESOLUTION

 

Yesterday a district court judge appointed a special master to mediate a lawsuit between four major record labels and Jammie Thomas, a Minnesota woman who allegedly downloaded and distributed more than a thousand songs on the internet in violation of federal law. The case is deemed by many to be a vanguard in the music industry’s effort to thwart the practice of peer to peer (P2P) file sharing, which is costing the music world a bundle, according to industry experts. The strategy seems to be that the threat of a lawsuit and heavy fines will deter music lovers from unlawfully downloading and distributing music to their friends.

The special master/mediator, Jonathon Lebedoff, a former chief magistrate judge of the District of Minnesota, has a great deal of mediation experience-he was responsible for the settlement of the Dalkon Shield litigation, for example. Nevertheless, the good judge must overcome a number of barriers to resolve this conflict.

Barrier No. 1-Mediation is Less Likely to Succeed if it is Involuntary

Mediation is based on the premise that parties who voluntarily participate in the process and agree to devote their time, money, and resources toward problem solving will be sufficiently invested to find a way to resolve their dispute. In this case, the record industry and Ms. Thomas were ordered to mediate the case prior to July 16, 2010, and Plaintiffs’ representative, Recording Industry Association of America, was ordered to pay the special master $400 per hour to conduct the mediation. In my experience, parties who are ordered to mediate a dispute rarely have the requisite personal investment to fully engage in the mediation process and maximize the opportunity to settle the case. They simply show up to comply with a court order but their hearts are not into it. Furthermore, unless the parties decide it is in their mutual best interest to have one side pay for the mediator, it is unwise to force one side to pay for the mediator because the side being forced to pay the full freight will resent it and the side going along for the free ride will not be sufficiently invested in the process to care if it succeeds or not.

Barrier No. 2-Bad Timing Can Destroy the Chances of a Successful Mediation

The best time to mediate a case is when both sides feel they have sufficient information to analyze the risks of trial and calculate the reasonable range of settlement. If parties attempt to mediate too early, the defense may feel it needs more information before a reasonable offer can be made; mediate too late and the plaintiff may have spent so much money on the litigation that its only viable option to recoup its fees and costs is to proceed with trial. If you wait to mediate the case until after the verdict, then the prevailing party has less risk to consider and will be less flexible in the negotiations.

In the Jammie Thomas case, the special master/mediator is being asked to mediate a dispute that has already resulted in two jury verdicts in favor of the record companies. The first trial resulted in a jury award of $222,000 in statutory damages which was thrown out by the trial judge. The second trial resulted in a jury award for $1,920,000 in statutory damages which the trial judge reduced to $54,000.

Thus Judge Lebedoff must try to facilitate a settlement by helping Ms. Thomas see the wisdom of  paying all or part of the $54,000 and convincing the record companies to waive their right to appeal the trial judge’s reduction of their seven-figure verdict. This will not be easy.

Barrier No. 3-Litigation Risk Analysis Should Include Collectability

Assuming liability and damages have been properly analyzed, the collectability of a judgment must be factored into a litigation risk analysis. In other words, does the defendant have sufficient assets to satisfy a judgment? If not, it may be very difficult to settle the dispute. With nothing to lose, a party may not feel it necessary to work out a compromise.That seems to be the case with Ms. Thomas.

Ms. Thomas is a young mother of four who works as a natural resource coordinator for the Millie Lacs Band of Ojibwa Indians. While I know nothing about her finances, it is interesting that the record companies are the ones who seem anxious to get the case settled, not Ms. Thomas. Perhaps they realize that they are spending a lot of money to enforce a judgment that may not be collectable.

Greg Sandoval of CNET News reported in January 2010 that Ms. Thomas rejected a settlement offer of $25,000. In response, according to Mr. Sandoval, the record companies released the following statement, "It is a shame that Ms. Thomas-Rasset continues to deny any responsibility for her actions rather than accept a reasonable settlement offer and put this case behind her[.]"

Barrier No. 4-A Zero-Sum Attitude in a Dispute Resolution Setting

Commercial mediation works very well when all the parties share the same objective: the resolution of a dispute. But when a party simply wants to prove it is right and that the other side is wrong, reason or logic rarely prevail in a mediation session. This zero-sum attitude does not take into account the emotional and financial toll of a trial, an appeal, and perhaps more trials and appeals.

This seems to be the situation that Judge Lebedoff faces as the mediator in the Jammie Thomas case. One of her defense lawyers told CNET that they have always sought a $0 award and that the defense lawyers planned to challenge even the reduced damage award. And though the Plaintiff record companies appear to want to settle the case, Mr. Sandoval reports that they would be just as happy to appeal the ruling of the district court judge that greatly reduced the statutory damage award.

Fortunately, all of these barriers can be overcome if the parties will set aside their trial advocacy skills and focus on their negotiation advocacy skills.This change in attitude coupled with the problem solving skills of Judge Lebedoff can overcome any barrier that may exist. Best wishes to Judge Lebedoff and the parties in the upcoming mediation.