How to Enforce Settlement Agreements In Federal Court

I once represented a plaintiff in a Federal question case (based on the Computer Fraud and Abuse Act) that settled with the defendant making installment payments over time.  In the settlement agreement, I took great pains to emphasize that if the defendant missed a payment, I could immediately move to reinstate the case and accelerate the settlement amount plus fees and costs.  For good measure, I provided that the court retains jurisdiction to enforce the settlement terms if the defendant defaulted.  I thought I was doubly protected.  Defendant’s counsel signed off on all the terms.

We then entered a stipulation to dismiss.  The court dismissed the suit with prejudice.  I remember feeling vaguely uneasy about the “with prejudice” language but quickly reminded myself that (a) dismissals with prejudice AND with the court retaining jurisdiction (seemingly an oxymoron) are entered all the time in State court and (b) the defendant’s counsel requested the with prejudice language as an inducement for getting his client to agree.  After a ton of time and money on this case, both sides were anxious to put this one to bed.

Fast forward about 4 months into an 18-month payment arrangement and the defendant defaulted and my demand letter for compliance went unanswered.  I quickly filed a motion to vacate the dismissal, to reinstate and enter judgment for the full settlement amount – just as the settlement agreement allowed me to.  Imagine my shock when the court denied my motion?!  Apparently, the “with prejudice” language has teeth.

I then filed a motion to vacate the dismissal under FRCP 60 – the rule that governs motions to vacate judgments on the basis of mistake, fraud, inadvertence or other reasons “that justify relief.”  The Court denied this motion too. My only remedy was to now file a breach of contract action in State Court for breach of the settlement agreement (the contract).  While we were able to recover some additional payments from the defendant after we filed in state court (before the defendant filed for bankruptcy protection), I had to consider the question of what I could have done differently?

Key Settlement Enforceability Rules

Federal courts don’t like to babysit settlement agreements (who knew?!).  Seventh Circuit caselaw provides that when a case is dismissed pursuant to a stipulation to dismiss, the court does not automatically acquire jurisdiction over disputes arising out of an agreement that produces the stipulation.  Kokkonen v. Guardian Life Ins. Co. v. Am., 511 U.S. 375, 378 (1994); McCall-Bey v. Franzen, 777 F.2d 1178, 1188 (7th Cir. 1985)(rejecting suggestion that federal judges have inherent power to enforce settlement agreements arising from lawsuits that were previously before them). 

An important rule in the 7th Circuit is that “[a] settlement agreement, unless it is embodied in a consent decree or some other judicial order or unless jurisdiction to enforce the agreement is retained (meaning that the suit has not been dismissed with prejudice), is enforced just like any other contract.”  Lynch, Inc. v. SamataMason, Inc., 279 F.3d 487, 489 (7th Cir. 2002). 

The 7th Circuit holds that a district judge can’t dismiss a suit with prejudice and at the same time retain jurisdiction to enforce the settlement agreement: it’s a contradiction in terms.  A signed stipulation of dismissal does not vest the Court with jurisdiction over an ancillary contract dispute just because the parties included retention of jurisdiction language in the stipulation.   Parties cannot confer federal jurisdiction by agreement.  Lynch, 279 F.3d at 489. 

What About FRCP 60?

I was also surprised that my Rule 60 motion to vacate motion was denied.  But, it turns out the standard for Rule 60 relief is high.  Like life-and-death high.  In Nelson v. Napolitano, 657 F.3d 586, 589 (7th Cir. 2011), the Court held that there may be “some instances” where a Federal court will vacate a voluntary dismissal on plaintiff’s motion, but it would have to be on the order of “a defendant faking his own death with a fraudulent death certificate in order to induce a plaintiff to voluntarily dismiss.”

The take-away:

In dismissing an action in Federal Court (at least in the 7th Circuit), it’s a bad idea to put “with prejudice” language in a dismissal order or stipulation if you want to be able to reopen the case at a later date (such as where a defendant misses an installment payment). 

Even better, try to put the settlement payment terms in the dismissal order.  This will increase your chances of getting the court to enforce a settlement if the defendant defaults. 

If you can’t reinstate a case because of prior “with prejudice” language, then file a new suit for breach of contract (for breach of settlement agreement) in state court.

Post-Employment Restrictive Covenants – Illinois Law Basics

In Northwest Podiatry Center, Ltd. v. Ochwat (2013 IL App (1st) 120458), the First District reversed key elements of a trial court’s preliminary injunction order in a lawsuit filed by a podiatry center against two former doctor employees.  The plaintiffs – the podiatry firm and its founder – sued two former podiatrists who left to form a competing firm and who took some employees with them and tampered with an exclusive contract between plaintiffs and one of their key referral sources.

The trial court granted the plaintiff’s preliminary injunction petition and enforced the non-competes against the two doctor defendants. ¶¶ 13-14.  The doctors appealed.

The First District gutted much of the trial court’s injunction. In doing so, the Court applied the main rules that control when a post-employment non-compete is enforceable:

– A restrictive covenant must be reasonable and necessary to protect a legitimate employer business;


– The factors considered include: (a) hardship to employee; (b) effect on general public; (c) geographic (distance) and temporal (duration) scope and (d) activities restricted;


– Non-compete provisions are strictly construed and any ambiguities are resolved in the employee’s favor;


– A restrictive covenant ancillary to an employment contract must be reasonable;


– A non-compete is reasonable where (i) its scope is no greater than necessary to protect the employer’s interest; (ii) it doesn’t impose an undue hardship on the employee; and (iii) the non-compete is not injurious to the public;


– the party seeking to enforce a restrictive covenant must show the restriction is necessary to protect its business needs;


– restrictive covenants should be narrowly tailored to only curtail employee conduct that threatens the employer’s interests;


– a court can “blue pencil” a restrictive covenant: if the restriction is too broad, the court can narrow it.
¶¶ 38-39, 46, 56.

Applying these rules, the First District held: (1) the trial court’s “privileges restriction” injunction (requiring one doctor to cede many of his hospital privileges) was overbroad as it lacked any temporal limit; (2) the injunction activity restriction was too broad because it enjoined defendants from conduct that was never agreed to in the employment contracts; and (3) the trial court properly enjoined  defendants from doing business with plaintiffs’ main referral source since Plaintiff had an issue exclusive contractual relationship with it and defendants clearly tampered with that arrangement.

The Court also weighed in on what a departing employee can and can’t do in connection with laying the ground-work to outfit and join a competitor.  Employees can plan, form and equip a competing corporation while working for their employment, but may not begin competition.

Employees can also freely compete with a former employer and solicit former customers of the employer as long as they wait until after they’ve stopped working for the employer and don’t violate a valid non-compete or steal a customer list. ¶ 60.  Corporate officers, though, are held to a higher standard: they owe fiduciary duties of loyalty to their employer and can be held liable for transactions that began, or for information learned while the officer was still with the employer.

The Court upheld the trial court’s finding that one of the defendants breached his fiduciary duties by actively exploiting the maniaged care firm (plaintiffs’ exclusive referral partner) for his personal gain by undercutting plaintiffs’ pricing. ¶¶ 61-62.

Conclusion:

As employment law practitioners know well, careful drafting of employment contract restrictive covenants is paramount.  Non-compete provisions should be reasonable in terms of time and space, and non-disclosure and non-solicitation clauses should be specific and clear.  Northwest Podiatry provides a good summary of Illinois law governing injunctions, the enforceability of employment restrictive covenants, and a corporate officer’s fiduciary duties to a former corporate employer.

Recovering Your Attorneys Fees In Litigation: Illinois’ 8 Factored Test

A recent Illinois Fourth District case provides a quick summary of  the factors a court considers when determining prevailing party attorneys’ fees under the Illinois Consumer Fraud Act (CFA) and spotlights the “mere continuation” exception to the rule governing corporate successor liability.

In Clayton v. Planet Travel Holdings, 2013 IL App (4th) 120717, the plaintiffs sued a travel agency, a successor agency and the principal of both agencies for consumer fraud and breach of contract based on a botched vacation package.

Plaintiff sought to recover the $11,000-plus deposit plaintiffs made when the travel agency failed to timely book a group trip.  After a bench trial, the court awarded the plaintiffs just under $6,000 in compensatory damages and attorneys’ fees and costs of over $30,000.  All three defendants – the predecessor and successor agencies and the corporate principal appealed.

Held: Affirmed.

Attorneys’ Fees Factors

The Appellate Court affirmed the trial court’s damage and fee awards noting that the CFA allows the winning party to recover its reasonable attorneys’ fees.  815 ILCS 505/10a(c); Clayton, ¶ 24.

The factors a court considers when determining what is a reasonable fee are: (1) the skill and standing of the attorney; (2) nature of the case; (3) novelty or difficulty of the issues and work involved; (4) importance of the matter; (5) degree of responsibility required; (6) the usual and customary charges for comparable services; (7) benefit accruing to the client; and (8) whether the was a reasonable connection between the fees charged and amount involved in the litigation. ( ¶ 25)

A trial court is able to use its own knowledge, experience and case familiarity in examining the fee question and its award is reviewed under an abuse of discretion standard.  (¶ 25).  The Appellate Court found that the plaintiffs properly documented their fees and costs and claimed fees of over $30,000 was reasonable for over four years of work.  Id., ¶ 30.

Mere Continuation Exception

The Fourth District also affirmed the trial court’s money judgment against the agencies’ principal.  He operated the predecessor agency for several years, sold its assets to himself for $1, later dissolved it and then formed a “new” agency with an almost identical name.

However, in the 13-month interim period between the dissolution of the first company and formation of the second one, The principal continued to operate the travel agency business as a sole proprietorship. (¶¶ 36, 41)

The “mere continuation” rule is an exception to the general rule that a successor corporation is not liable for the transferor’s debts. The exception applies where “the purchasing corporation is merely a continuation or reincarnation of the selling corporation” or where the new corporation maintains the same or similar management and ownership, but “merely wears different clothes”.  ¶ 40.  In any mere continuation calculus, the key element is identity of ownership.

Held: Corporate officer is personally liable for the judgment under the mere continuation rule.

Reason: After the dispute with plaintiffs had already crystallized, the corporate principal engineered the sale of the predecessor agency to himself for a dollar and continued to operate the business as a sole proprietorship. (¶ 41).

Some 13 months later, the principal formed the similarly named successor agency.  During that time span, the principal operated the sole proprietorship from the same address and used the same checking accounts as the prior corporation.  He also filed tax returns on behalf of both Agencies entities and generally operated the travel business without interruption.  Id.

Based on these factors, the Court found that all three same-sounding travel businesses shared a common ownership. ¶ 41. The Court held that  the principal  couldn’t escape personal liability for the corporate debts because he continued the travel business as a sole proprietorship after the former agency dissolved.  ( ¶ 42)

Conclusion: Clayton is instructive on the factors an Illinois court considers when passing on an attorney fee petition and in discussing the mere continuation rule for corporate successor liability.  The case’s main lesson is that if a corporate agent  dissolves a corporation and later forms a separate company – but continues to run the business as a “dba” or sole proprietorship in the interim – that agent can be personally responsible for any obligations arising before the new corporation is formed.