By: Donald L Swanson
Defendants see “both an unenforceable settlement and a binding unilateral agreement simultaneously emerging, like Schrödinger’s cat,” from their lawsuit with Plaintiff, but “only one exists” and “the District Court did not err in finding the settlement agreement valid.”
–From Rivera v. Sharp, Case No. 21-2254, at 2 (3rd Cir., decided July 13, 2022).
Fourteen years ago, Plaintiff sues Defendants for employment discrimination.
The parties mediate their dispute, resulting in an oral agreement releasing Plaintiff’s claims in exchange for payment of a monetary sum, complete with a pledge of confidentiality.
Then, none of the agreed terms happen. Instead, Plaintiff files an unsealed “motion to enforce settlement,” revealing the existence of the deal and many of its material terms, including the settlement amount.
Defendants demand that Plaintiff withdraw the motion because it breaches confidentiality requirements.
What Defendants do not do is walk away from the agreement. Instead, they mail Plaintiff a modified Mutual Release Agreement (“MRA”) containing:
- a merger clause incorporating the oral settlement; and
- a statement that neither party has disclosed or would disclose the agreement or its terms—even though disclosure had already happened.
Plaintiff signs the MRA, and mails it back to Defendants.
Defendants respond with a letter refusing to pay because Plaintiff has not moved to seal the still pending, and still public, motion—but Defendants do not mention rescission.
Dissatisfied, Plaintiff files another unsealed motion to enforce the settlement, which also contains confidential terms.
Trial Court Rulings
Months later, a Magistrate Judge (i) denies Plaintiff’s second motion to enforce, and (ii) dismisses the entire case, holding that Plaintiff’s first unsealed filing breaches the oral agreement.
Then, the District Court weighs in, vacates the Magistrate’s decision, and returns everyone back to square one, giving the Defendants another chance to rescind.
But Defendants still don’t rescind. Instead, Defendants move the District Court to:
- excuse Defendants’ performance of their payment obligation, and
- dismiss Plaintiff’s case for failure to comply with confidentiality.
Plaintiff opposes the motion.
In its ruling on the Motion, the District Court agrees with Plaintiff:
- it grants her second motion to enforce payment of the settlement amount, plus interest; and
- it declares that, while Plaintiff materially breached the agreement’s confidentiality requirement, Defendants have waived their right of refusing to pay.
Appeal to the Third Circuit Court of Appeals follows.
Third Circuit Affirms
The Third Circuit affirms. Here’s why.
The scope of this appeal is narrow: whether Defendants can now raise, for the first time, their right to rescind the oral settlement agreement memorialized in the MRA.
Defendants have forfeited their right to rescind the agreement.
Defendants argue that they rescinded the oral agreement twice:
- in November 2009, when Plaintiff first files her public motion that reveals material terms; and
- in March 2010, when Plaintiff does the same thing, again.
Each of these material breaches would entitle Defendants to rescind the mediated agreement because of this basic contract principle: when one party to a contract breaches the agreement, the non-breaching party may stop performance and assume the contract is avoided.
However, Defendants never rely on this entitlement. Instead, Defendants respond to Plaintiff’s motions by:
- arguing that the oral agreement remains enforceable, but
- asking the District Court to excuse Defendants’ performance.
Only on appeal to the Third Circuit, for the first time, do Defendants argue for rescission. Unfortunately for Defendants, the Third Circuit:
- generally does not consider arguments raised for the first time on appeal; and
- will not do so in this case.”
Defendants may not enforce the settlement without performance.
Instead of arguing for rescission, Defendants argue to the District Court that Plaintiff’s material breaches allow Defendants to avoid their obligations under the settlement, while still obliging Plaintiff to perform hers.
The District Court properly rejected Defendants’ argument. That’s because basic contract principles allow the non-breaching party to either:
- “stop performance and assume the contract is avoided”; or
- “continue its performance and sue for damages.”
Put another way: “Under no circumstances may the nonbreaching party stop performance and continue to take advantage of the contract’s benefits.”
In this situation, Defendants waived Plaintiff’s breaches of the settlement by (i) continuing to negotiate, after learning of Plaintiff’s breaches, and (ii) leading Plaintiff to believe the settlement remains alive.
The result is that enforcement of Defendants’ waiver is necessary to avoid injustice.
Even though the Rivera v. Sharp opinion is designated by the Court as “Not Precedential,” it provides insight into dealing with a mediated settlement agreement that has been breached.
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