A recent unanimous decision by the United States Supreme Court in the trademark infringement case of Digital Equipment Corp. v. Desktop Direct, Inc., 114 S.Ct. 1992, 31 USPQ2d 1010, (June 6, 1994), has a serious and important message for all parties contemplating the settlement of any litigation in the United States Federal Court system. Under Digital there is now an increased uncertainty as to whether a settlement negotiated, bought and paid for, will necessarily terminate a U.S. litigation or protect the parties from the exposure to delay, expense and uncertainty of the very trial which the settlement itself was designed to avoid.
In Digital the defendant had settled its trademark dispute with the plaintiff Desktop. The terms of the settlement agreement included a complete dismissal of the case. Nonetheless, shortly thereafter Digital found itself back in court for a full trial on the merits of basically the same dispute which it thought had been "settled". The plaintiff Desktop, with obvious second thoughts as to the merit and value of the agreement it had reached, applied to the same court which had approved the settlement agreement to rescind that same agreement and to reopen the dismissed case. Desktop claimed that Digital had failed to disclose material facts during settlement negotiations which, if disclosed, would have resulted in Desktop's rejection of Digital's settlement proffer. The trial court proceeded to grant Desktop's application to set aside the settlement agreement and to reopen the litigation, thus placing the parties back in court awaiting trial.
Specifically, Desktop alleged that during the settlement negotiations Digital misrepresented the date it had acquired knowledge of Desktop's trademark. Desktop Direct, Inc. v. Digital Equipment Corp., 993 F.2d 755, 757 (10th Cir. 1993). The District Court concluded, on unspecified grounds, that a fact finder "could" determine that if true this would be a material misrepresentation, warranting rescission. (Beyond noting the ambiguity of this ruling, neither the Court of Appeals nor, subsequently, the Supreme Court subsequently addressed the slenderness of the reed on which Desktop sought to base its attempt to avoid its contractual obligation to terminate the litigation. Apparently, full and unfettered access to the U.S. courts was viewed as more important than the enforcement of a private contract, no matter the resultant consequences to the judicial system in terms of burden on the parties and collateral delay for other litigants.)
Digital endeavored to avoid trial and protect and enforce its rights under the settlement agreement by attempting an immediate interlocutory appeal from the trial court's ruling. However, the Tenth Circuit Court of Appeals dismissed Digital's effort as involving an issue "insufficiently important" to warrant an immediate appeal as of right. Id. 993 F.2d 755, 758-760. This appellate ruling departs from those of several other Courts of Appeals: Forbus v. Sears, Roebuck & Co., 958 F.2d 1036, 1039-40 (11th Cir.), cert. denied, 113 S.Ct. 412 (1992); Grillet v. Sears, Roebuck & Co. , 927 F.2d 217, 219-20 (5th Cir. 1991); Janneh v. GAF Corp., 887 F.2d 432, 434-36 (2d Cir. 1989); cert. denied, 498 U.S. 865 (1990); but see Tramstech Industries, Inc. v. A & Z Septic Clean, 5 F.3d 51 (3d Cir. 1993), cert. pending No. 93-960. Those courts had recognized that a private settlement agreement provided a sufficiently final and important right which, in the interests of justice and judicial economy, ought to be decided at an early stage, as opposed to delaying vindication until after months and perhaps years of expensive and wholly unwarranted resumed litigation in the trial court.
Digital then sought review of the Tenth Circuit's ruling by certiorari to the U.S. Supreme Court, and that court accepted petition for review to resolve the evident differences of opinion among the several U.S. Courts of Appeals. The resulting Supreme Court decision is couched by the Supreme Court as a procedural one, concerning only the proper application of the federal statute which limits appeals as of right to "final" decisions only. In fact, however, the Supreme Court's ultimate rejection of Digital's appeal is a ruling of substance and great importance to all litigating parties who desire and believe that their agreements in settlement of litigation and avoidance of trial should be final and binding.
Speaking unanimously through Justice Souter, the Supreme Court firmly rejected Digital's contention that "the right not to stand trial" embodied in a private settlement agreement was sufficiently valuable and important to justify the availability of immediate appeal from the trial court's order which now jeopardizes the implementation of the agreement. Instead, Justice Souter states that "rights under private settlement agreements can be adequately vindicated on appeal from final judgment [i.e. only after a full trial on the merits]." 31 USPQ2d at 1013. The Court gave short shrift to Digital's argument that avoiding the expense and uncertainty of trial is usually a dominating motivation for any settlement of litigation.
Did the Supreme Court leave any hope that tighter drafting or more explicit language in a settlement agreement might pass muster to obtain certainty? Not really. Despite the Supreme Court's statement that there was no need to decide as a general proposition that a privately conferred right could never support an immediate appeal as of right, 31 USPQ2d at 1017, it went on to point out that the public policy against piecemeal litigation (embodied in the finality requirement of the appeals statute, 28 U.S.C. §1291), cannot be "trumped routinely by the expectations or clever drafting of private parties." Id.
The Digital opinion did comment that an immediate appeal might still be available under another statute, 28 U.S.C. § 1292, which provides for permissive certification of an interlocutory appeal at the joint discretion of both the trial judge and the Court of Appeals. This may be small comfort. Apparently, in Digital the trial judge either did not, or would not, certify that very question under the § 1292 procedure. Thus, the alternate discretionary route to the Court of Appeals was here, in fact, unavailable to Digital.
What guidance can be given those negotiating a settlement agreement and seeking to avoid the Digital problem?
Mr. Justice Souter does point out in a footnote an "important" right that can be privately contracted for in a settlement agreement and which the United States Courts will recognize as providing certain protection from trial. That right is embodied in the Federal Arbitration Act, 9 U.S.C. § 1, et. seq. specifically in a recently enacted amendment thereto, 9 U.S.C. § 16. These sections essentially do provide for an immediate appeal from any trial court order which rejects a party's assertion that resolution of a dispute belongs before a commercial arbitrator and not in a federal court.
Of course, securing the immediate right to an appeal from an order vitiating the very purpose of a settlement agreement is no guarantee of success on appeal. Nonetheless, after Digital it would seem that the clearest and most certain route to avoid post-settlement exposure to full court trial, as faced Digital, is to include a well-drafted arbitration clause in every settlement agreement which is designed to terminate with finality a litigation in the U. S. Federal Court system. This still does not mean that an ongoing dispute can not or will not materialize, but it does appear to ensure that any such dispute will be resolved by arbitration and not by federal trial.
Moreover, concern that an action in U.S. federal court could still lie on grounds similar to those raised by Desktop (i.e. of "fraud and misrepresentation in the inducement of the [settlement] contract", thus claiming complete rescission of the entire contract, including the arbitration clause), appears to have been answered in Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 398, 403-406 (1967) (a federal court may consider "fraud in the inducement" as a defense to an agreement to arbitrate only if the fraud relates specifically to the arbitration clause itself and not to the contract generally). See Three Valleys Municipal Water District v. E.F. Hutton & Co., Inc., 925 F.2d 1136, 1139-40 (9th Cir. 1991).
As a further precaution, a clear documentary record should be established of the informational exchanges between the negotiating parties and, if possible, a recitation in the agreement that the parties acknowledge they have satisfied themselves that they have sought and received with "due diligence" all information which they believe necessary to evaluate and enter into the terms of settlement.