Patent Law

Is Your Settlement Agreement Durable? Leaving Terms Open for Future Agreement

By Les Weinstein, Michael Young, John Leo Wagner, Eric van Ginkel, and Victoria Pynchon

Though the recent Ninth Circuit opinion of Nutraceuticals v. Mucos Pharma (.pdf) is notable for setting the standard for preliminary injunctive product recall relief in a trademark infringement action, IP ADR's interest is stimulated by the settlement agreement that purportedly resolved the parties' dispute but failed to head-off this expensive and protracted litigation (after the preliminary injuncitve relief hearings; the appeal; and, the return of the case to the trial court, what further litigation damage do the parties have the stomach and budget to sustain?)  With apologies to Strunk & White & my 8th grade English teacher who first assigned The Elements of Style for the hopelessly run-on sentence above.

So we weigh in on the Settlement Agreement that failed to settle the parties' dispute, which ominously provided that

[w]ithin 30 days after the Effective Date, MUCOS and Marlyn shall use their good faith efforts to enter into a formal distributorship agreement containing the following terms and such other terms as may be mutually agreed to or are customary in the industry.' No such formal agreement was ever executed.

Though the impossible to define "good faith" provision saves this clause from being an illusory "agreement to agree," the parties - already having been at odds - cannot both have anticipated that a "formal distributorship agreement" would follow.

What are the parties to do when they are ready to settle their past disputes but not yet ready to craft the agreement that will govern their future relations?  Here are a few suggestions from someone who helps IP attorneys close deals the principals are not quite yet prepared to cast in stone:

• give the parties more than thirty days to conclude a deal that likely requires lengthy negotiations and strategic planning on both sides
• create consequences (or at a minimum, options) in the event the parties "good faith efforts" fail to produce an agreement such as the grant or withdrawal of benefits likely traded to get the deal done in the first place
• include in the settlement agreement a detailed list of provisions both parties are required to negotiate in "good faith."  Such a list:
  • should anticipate those deal points upon which the parties would have to agree (or concede) so that unexpected demands would not scuttle the planned negotiation prematurely; and,
  • provides a structure for the parties to follow in the weeks followingthe conclusion of the Settlement Agreement that keeps paranoia about the other side's intent to over-reach or engage in bad faith somewhat at bay.
• Consider whether a neutral third party should be included either in negotiating the future relationship, either as a facilitator of agreement or as a neutral decision-maker on terms the parties are willing to submit to that individual

There are dozens more ways future agreements premised upon "good faith" obligations to negotiate can be enhanced.  The parties to the dispute are always in the best position to brainstorm what those provisions might be.  Based twenty-five years of legal practice and five of neutral practice, I give any skeletal "good faith" negotiation provision a 10% chance of success.  My pessimism is, of course, based on the fact that all I ever see is conflict - never the happily successful agreement crafted by a first-rate transactional lawyer so I'll ask my friend Ken Adams -- he of Adams Drafting -- to chime in here if he has the time and inclination.

Full post as published by IP ADR Blog on July 03, 2009 (boomark / email).