After months or years of hard-fought litigation in the federal district court and days or weeks of intense negotiations, your client and your opponent have shaken hands on a settlement which calls for performance over time – say periodic payments by the de-fendant. You carefully draft your agreement. It contains the pay-ment terms; confidentiality clauses; disclaimers of admissions of liability regarding the under-lying facts of the lawsuit; mutual releases; a stipulation for a dismissal of the complaint and counterclaims with prejudice and a consent that the federal judge may enforce the settlement agreement if a party defaults – all the standard terms. You get the agreement signed, the initial payment made and the suit dismissed with prejudice. Simple, right? Not in federal court since Kokkonen v Guardian Life Insur-ance Company of America,1 and certainly not in the Seventh Circuit since Shapo v Engle,2 and the recent Dupuy v McEwen.3
Kokkonen was a diversity case which settled. The substance of the settlement was recited before the district judge on the record and the case was dismissed with prejudice pursuant to F.R.Civ. P. 41(a)(1)(ii). The parties then disagreed over the obligation of the plaintiff to return certain files to the defendant pursuant to the settlement agree-ment and the defendant moved the court to enforce the terms of the settlement agreement. The court sided with defendant and entered an enforcement order, but the plaintiff appealed claiming the court lacked jurisdiction.
The Supreme Court started its analysis by noting that federal courts are courts of limited jurisdiction.4 Enforcement of a settlement agreement is not just a continuation of the underlying suit which has now been dismissed and requires its own basis for federal jurisdiction.5 The Supreme Court held that, in order for a federal district court to be able to enforce a settlement agreement, it must make the agreement part of the order of dismissal – either by incorporating the terms of the settlement agreement into the order of dismissal or by including a provision in the order retaining jurisdiction over the settlement agreement.6 Since the order merely dismissed the case with prejudice, the Supreme Court reversed.
The parties often want the district judge who is familiar with the case to be able to enforce the terms of the settlement agreement if there is a default or a dispute, rather than start over in another court. One or both parties often do not want to incorporate the terms of the settlement agreement into the order of dismissal, since that would make the terms public7 — remember your confidentiality clause – and could subject the defaulting party to contempt for violation of a court order.8 So you stipulate that the district court shall dismiss the action with prejudice, but shall retain jurisdiction to enforce the terms of the settlement agreement. That keeps the terms of the settlement agreement con-fidential, but satisfies Kokkonen to give the district court jurisdiction over the settlement agreement. That is the order that was entered by numerous district courts after Kokkonen.9
This seemed an acceptable solution. The plaintiff was able to enforce his settlement in the district court and the defendant had the res judicata effect of a dismissal with prejudice. In Lynch v Samata Mason, Inc., 279 F.3d 487 (7th Cir. 2002), the Seventh Circuit complicated these settlement waters. The magistrate judge in Lynch dismissed the litigation with prejudice, following a settlement negotiated before him, and stated in the dismissal order that he was retaining jurisdiction to enforce the settlement agreement. The Seventh Circuit noted:
"An initial question is the significance of that purported retention. It had no sig-nificance. Having dismissed the entire litigation, the court had no jurisdiction to do anything further, and so if SamataMason wanted to enforce the settlement agree-ment and Lynch balked, SamataMason would have to sue Lynch under the law of contracts."10
This statement in Lynch was technically dicta and did not have much impact on settlement practice at the time. District courts either ignored Lynch and continued entering dismissals with prejudice which sought to retain jurisdiction to enforce settlement agreements11 or questioned its applicability in light of Kokkonen.12 In Shapo v Engle, 463 F.3d 641 (7th Cir. 2006), the Seventh Circuit restated and affirmed what it had said in Lynch: if the case is dismissed with prejudice, the court cannot retain jurisdiction over a settlement agreement.
Shapo v Engle involved a series of jurisdictional issues relating to finality of the judgment, dismissal with or without prejudice, re-tention of jurisdiction over a settlement agreement and whether a collateral agreement for attor-neys’ fees was part of the settlement agreement. After deciding that a judgment that did not liquidate the pre-judgment interest due was never-the-less final for purposes of appeal because the district court thought it was, the Seventh Circuit went on to state:
"An even more serious problem is the conjunction of dismissal with prejudice with retention of jurisdiction to enforce the settlement agreement. **** [A]s we explained in Lynch v SamataMason, Inc., 279 F.3d 487, 489 (7th Cir. 2002), a district judge cannot dismiss a suit with prejudice, thus terminating federal juris-diction, yet at the same time retain jurisdiction to enforce the parties’ settlement that led to the dismissal with prejudice."13
In an epilogue to the opinion, the Seventh Circuit sought to explain "what a judge should do who wants to ensure a final judgment in order to preclude further litigation between the same parties, by operation of the doctrine of res judicata, but to retain jurisdiction over some incidental matter that may take years to resolve…"14 The answer was that either the settlement agreement should contain a release or " the district court should state that the judgment is being entered in order to allow the parties to enforce it and that the ‘without prejudice’ language shall not allow them to reopen issues resolved by the judgment."15
In Dupuy v McEwen,16 the Seventh Circuit dealt with, among other issues, an order dismissing part of a class action that had settled with prejudice, but retaining jurisdiction as provided in the parties’ stipulation. The Seventh Circuit made clear that such orders are ineffective. The court stated:
"The district judge’s attempted retention of jurisdiction to enforce the stipulation is the troublesome part of the last order. In Lynch v Samata Mason, Inc. [cite] and Shapo v Engle [cite] we ruled, in reliance on Kokkonen v Guardian Life Ins. Co., [cite], that when a suit is dismissed with prejudice, it is gone, and the district court cannot adjudicate disputes arising out of the settlement that led to the dismissal merely be stating that it is retaining jurisdiction.17
The Circuit Court noted two articles by Magistrate Judge Denlow which criticized its doctrine and cited contrary cases.18 It then proceeded to rebut the arguments raised by Magistrate Judge Denlow.19 To the argument that defendants won’t settle without dismissal with prejudice lest they be exposed to repeat suits by the plaintiff, the Seventh Circuit notes that the defendant can obtain a release as suggested in Shapo v Engle which would make the dismissal with prejudice redundant. To the argument that a dismissal with prejudice offers more than a release because it can be plead as res judicata, the Seventh Circuit posits that the release is an accord and satisfaction which can also be plead as an affirmative defense. Since the district court can enforce the release if it has retained jurisdiction over the settlement, the defendant does not even have to plead it in the second suit.
After Lynch v SamataMason, Shapo v Engle and DuPuy v McEwen, parties in the Seventh Circuit have two mutually ex-clusive options for settlements which contain continuing obli-gations: dismissal with prejudice without retention of jurisdiction over the settlement agreement or dismissal without prejudice and retention of jurisdiction over the settlement agreement.20 According to the discussions in Shapo v Engle and DuPuy v McEwen, the Seventh Circuit does not feel that requiring a dismissal without prejudice to retain jurisdiction over the settle-ment places either party in any jeopardy. Unfortunately for parties and their lawyers, the situation may not be as clear cut as the Seventh Circuit might hope. Attorneys have had decades of precedent interpreting the rami-fications of a dismissal with prejudice. There is simply no precedent interpreting the various potential ramifications of dismissal orders in the post Lynch-Shapo-Dupuy world.
Two potential problems regarding dismissals without prejudice which were not addressed by the Seventh Circuit suggest themselves. First, the doctrine of res judicata flowing from a dismissal with prejudice binds, not only the parties, but also their privies.21 Can a party bind its privies to the same extent in a release not signed by the privies? Will an order as part of a dismissal without prejudice that the parties may not relitigate issues as suggested in Shapo v Engle bind privies to the same extent as the doctrine of res judicata? Second, when a case is dismissed without prejudice, the dismissal normally is not a final and appealable order.22 A suit which is voluntarily dismissed without prejudice is treated as if it had never been filed.23 What happens to the finality and enforceability of collateral orders in the suit, such as good faith settlement findings, which may be important to one or more of the parties?
The inventive litigator can probably come up with numerous other issues unforeseen by the Seventh Circuit. If the plaintiff insists on a dismissal without prejudice in order to retain district court jurisdiction over the settle-ment agreement, do you want to advise your defendant client that it doesn’t really matter that he is only getting a dismissal without prejudice, rather than a dismissal with prejudice? If a defendant insists on a dismissal with pre-judice, do you want to advise your plaintiff client that a new suit in state court where you have to get new service on the defendant is just as good as a motion before the district judge who is familiar with the case and already has juris-diction over the defendant in case the defendant defaults on the settlement? It seems the Seventh Circuit has given parties a new issue to dispute on the way to a potential settlement.
Attempting to craft a settlement in the post Lynch-Shapo-Dupuy jurisprudence of the Seventh Circuit is one thing, but what do you do if you now want to enforce a previous settlement agreement in federal court where the case, unfortunately, was dismissed with prejudice. If you have complete diversity and the amount at issue in your dispute under the settlement agreement is over $75,000, you are in luck. In Blue Cross and Blue Shield Ass’n v American Express Co.,24 the district court enforced a settlement agree-ment after dismissing the case with prejudice, but retaining jurisdiction over the settlement agreement. The Seventh Circuit noted that the dismissal order did not satisfy Lynch in order to give the district court continued jurisdiction over the settlement agreement,25 but decided that it didn’t matter since there was complete diversity and over $75,000 in dispute.26 "As long as § 1332 supplies authority to decide, the court may act without a fresh complaint."
If you do not have diversity jurisdiction, can you amend the dismissal order under F. R. Civ. P. 60(a) or (b) to satisfy Lynch-Shapo-Dupuy? If you are within one year of your judgment, you can attempt to amend under Rule 60(b)(1) for mistake, inadvertence or excusable neglect. If you are beyond one year, there is Rule 60(b)(6) — any other reason justifying relief — or Rule 60(a) — clerical mistake, neither of which have the one year time limit.
In Stevens v Smith,27 plaintiff, who was seeking to enforce a settlement agreement after a dismissal with prejudice, sought to reopen the judgment under Rule 60(b)(6). The District Court acknowledged: "[u]unfortunately, in drafting the dismissal order, the parties (and ultimately the court) erred by dismissing the case with prejudice."28 Never-the-less, the court determined that the breach of the settlement agreement is not an exceptional circumstance sufficient to vacate the dismissal order under Rule 60(b)(6).29 In Blue Cross and Blue Shield Ass’n v American Express Co., 467 F.3d 634, 636 (7th Cir. 2006), the Seventh Circuit opined that the arguments advanced there for amendment of the judgment to comply with Lynch and Shapo, which arguments were not described by the Circuit Court, would not justify Rule 60(b) relief.
Unfortunately, Rule 60(a) faired no better in Blue Cross and Blue Shield as a way to amend a dismissal order. The district court had amended the dismissal order under Rule 60(a)’s clerical mistake to attempt to comply with Lynch and allow enforcement of the settlement agreement. The Seventh Circuit did not buy it.
"There may have been a legal miscue – the Association and the district judge failed to appreciate Kokkonen’s sig-nificance – but Rule 60(a) cannot be used to change language that was poorly chosen, as opposed to incorrectly transcribed. [cite] The past cannot be rewritten; Rule 60(a) allows a court to correct records to show what was done, rather than change them to reflect what should have been done.30
Absent diversity or the ability to amend your judgment to one without prejudice, there is always suit in state court under the law of contracts on the settlement agree-ment.31
While public policy wisely encourages settlements,32 the Seventh Circuit has seen fit to place procedural roadblocks in the way and give lawyers for plaintiffs and defendants new issues to contest on the way to settlement. Until all the potential ramifications of this relatively new case law are clarified, attorneys can only exercise caution, research and careful drafting if they wish to retain federal jurisdiction over a settlement and then hope that they guess right as the law inevitably develops.
1 511 U.S. 375, 128 L.Ed.2d 391, 114 S. Ct. 1673 (1994)
2 463 F.3d 641 (7th Cir. 2006)
3 ___ F.3d ___, 2007 WL 2178032 (7th Cir. July 31, 2007)
4 511 U.S. at 377.
5 511 U.S. at 378.
6 511 U.S. at 381.
7 Jessup v Luther, 277 F.3d 926, 929 (7th cir. 2002) (Consent decrees are judicial orders and therefore public except insofar as particular provisions may be concealed in order to protect trade secrets or other compelling interests in secrecy).
8 See D. Patrick, Inc. v Ford Motor Co., 8 F.3d 455, 460 (7th Cir. 1993).
9 See e.g. Wilfong v Rent-A-Center, Inc., 2002 U.S. Dist. LEXIS 28016 (S.D. Ill., Oct 4, 2002); Porter v Chicago Board of Education, 981 F. Supp. 1129 (N.D. Ill., 1997).
10 279 F.3d at 489.
11 Mirfashi v Fleet Mortgage Corp., 205 WL 1950386, *14 (N.D. Ill. Aug 11, 2005); Wagner v Mayflower Transit, L.L.C., 2004 WL 3401721, *1 (N.D. Ill. June 15, 2004)
12 Woodcock Brothers Transportation Group v Transport Resource, Inc. 2003 WL 1873928 (N.D. Ill. April 14, 2003). See also Morton Denlow, "Federal Jurisdiction in the Enforcement of Settlement Agreements: Kokkonen Revisited," 2003 Fed. Cts. L. Rev. 2 (2003).
13 463 F.3d at 643
14 463 F.3d at 646
16 2007 U.S. App. LEXIS 18162 (7th Cir. July 31, 2007).
17 Dupuy v McEwen, 2007 U.S. App. LEXIS 18162 *6.
18 Morton Denlow, "Federal Jurisdiction in the Enforcement of Settlement Agreements: Kokkonen Revisited," 2003 Fed. Cts. L. Rev. 2 (2003); Morton Denlow, "What Is an Attorney to Do? Ensuring Federal Jurisdiction Over Settlement Agreements in Light of Recent Seventh Circuit Cases," The Circuit Rider: The Journal of the Seventh Circuit Bar Association, May 2007, p. 24.
19 Dupuy v McEwen, 2007 U.S. App. LEXIS 18162 *6.-8.
20 In Morton Denlow, "What Is an Attorney to Do? Ensuring Federal Jurisdiction Over Settlement Agreements in Light of Recent Seventh Circuit Cases," The Circuit Rider: The Journal of the Seventh Circuit Bar Association, May 2007, p. 24, Magistrate Judge Denlow at page 27 sets out a table containing seven types of settlement dismissals and their potential issues.
21 San Remo Hotel, L.P. v City and County of SanFranscisco, 545 U.S. 323, 336, n. 15, 125 S. Ct. 2491, 162 l.Ed.2d 315 (2005).
22 Muzikowski v Paramount Pictures Corp., 322 F.3d 918, 923 (7th Cir. 2003).
23 Beck v Catterpillar, Inc., 50 F.3d 405, 407 (7th Cir. 1995).
24 467 F.3d 634 (7th Cir. 2006)
25 467 F.3d at 636.
26 467 F.3d at 638.
27 2007 U.S. Dist. Lexis 51100 (W.D. Wis., July 13, 2007).
28 2007 U.S. Dist. Lexis 51100 *4.
29 2007 U.S. Dist. Lexis 51100 *6.
30 467 F.3d at 637.
31 Lynch v SamataMason, Inc. 279 F.3d 487, 489 (7th Cir. 2002).
32 McDermott, Inc. v Amlyde, 511 U.S. 202, 215, 114 S. Ct. 1461, 128 L.Ed.2d 148 (1994).
John McGinnis has been engaged in civil litigation in state and federal courts for thirty-three years. He concentrates on commercial, con-struction, mort-gage and lien foreclosure, and real estate liti-gation. His office is in Chicago. John was counsel for the appellant in Shapo v. Engle.