In our two prior articles (The expanded role of courts in settling government investigations and Settlements with the government), we addressed issues that arise after a settlement agreement has been signed by the parties to a dispute: getting the agreement approved by a court, especially in a government enforcement action; and, after the agreement has been approved, modifying or undoing the settlement following significant changes in the facts or law. In this article we discuss an issue that arises just before a settlement agreement is executed – namely, what happens when the parties agree to settle in principle but one party changes his or her mind before the agreement is fully executed?

The primary question in such a dispute is whether an enforceable contract was created during settlement negotiations. If the dispute reaches a court the inquiry is very fact-specific. Two issues are particularly critical. First, the court seeks to determine the completeness of an agreement and whether there are any outstanding issues about what it considers to be material terms. The more gaps there are in the agreement, the less likely a court is to consider it binding and enforceable. Second, the court looks at how the parties acted after the agreement to determine their intent, for example, whether a party made a partial payment towards the agreed settlement or made representations to third parties that an agreement had been reached.

The first issue is illustrated by a June 2012 federal district court decision in Delaware. In LG Electronics, Inc. v. Asko Appliances, Inc., the court made clear that a settlement agreement, even if written, cannot be enforced if material issues remain subject to negotiation. In that case, LG sued rival washing machine manufacturers for infringing on several LG patents. After years of litigation, LG entered into settlement negotiations with one of the defendants, Daewoo. Under the terms of its initial agreement, Daewoo would receive a nonexclusive license to LG's patents for products sold in theU.S., Europe andKorea for a $2.175 million royalty fee.