First published in LES Insights
A plaintiff executed a settlement agreement received from the defendants, but later asserted that its acceptance of the agreement was contingent upon the defendants’ execution of the settlement by a specified deadline. Even though the defendants failed to sign by the deadline, the court enforced the agreement, finding that the signing deadline was not a material term of the settlement.
Sometimes, after the parties appear to have reached a settlement, a party may try to add a contingency that threatens the enforceability of the agreement. Recently, in Adaptix, Inc. v. ASUStek Computer Inc.,1 the plaintiff, Adaptix, executed a settlement agreement received from defendants, ASUStek Computer Inc. and Asus Computer International (collectively "ASUS"), but later asserted that its acceptance of the agreement was contingent on ASUS’s execution of the settlement agreement by a specified date. Although the defendants failed to comply, the court enforced the agreement. In the court’s view, the signing deadline was not a material term. It was not specified in the agreement itself and even when Adaptix sent its executed agreement to ASUS, it did not include in the accompanying email any precondition that ASUS must sign by a specified date. The Adaptix decision may have implications for enforcing settlement agreements in litigations when the other party tries to renounce.
Adaptix sued ASUS for patent infringement. During settlement discussions, Adaptix sent ASUS an email on December 25, 2014, asking ASUS to "confirm that we are targeting getting this [settlement] done this year (which was a condition of our offer)." Five days later, Adaptix summarized the remaining terms of the negotiation and stated that it would "not agree to signing this particular deal beyond 2014." ASUS responded the same day attaching the final agreement and requesting that Adaptix execute the copies.
In response, Adaptix stated that it needed to receive ASUS’s signed copy of the agreement by December 31 or the offer would be withdrawn. On December 31, ASUS stated that it could not sign the agreement that day because its office was closed for four days for a Taiwanese holiday. ASUS also asked why Adaptix needed the execution so quickly. Adaptix responded three hours later with a copy of the final agreement signed by Adaptix, and noted that it "made just a few minor changes" and "assumed these changes would be acceptable." In that email, Adaptix also asked ASUS to forward a signed copy of the agreement "as soon as possible," without referencing any precondition that ASUS sign by the end of the day.
Later that day, however, Adaptix asserted that it needed the fully executed agreement by "tomorrow or the offer is withdrawn." The next day, January 1, Adaptix asserted that there was no agreement and that the settlement amount would increase if ASUS still wished to settle the litigation. ASUS moved the court to enforce the original settlement.
The district court decided the motion in ASUS’s favor, holding that the parties were bound by the terms of the settlement agreement. Applying principles of state contract law to determine whether a contract had been created, the court explained that under California law the settlement would be enforced if there was a complete agreement and the parties had agreed to the settlement terms or authorized their counsel to settle the dispute. Adaptix and ASUS did not dispute that there was a complete agreement but did disagree on whether a binding settlement agreement existed. The court first reviewed the language of the agreement itself and observed that it did not mention or require that ASUS sign the agreement by the end of 2014. According to the court, if Adaptix intended the execution in 2014 to be a material term, "the term should have been included in the agreement—not thrown in a last-minute email as an afterthought."
The court next analyzed the parties’ communications. Adaptix had sent an executed agreement to ASUS on December 31, 2014, the court observed, and that email did not include any precondition or requirement for the parties to sign the agreement before January 1, 2015. Instead, it only asked ASUS to sign the agreement "as soon as possible."
In addition, according to the court, Adaptix’s conduct was "vague at best" such that ASUS had no reason to believe that failure to sign by the end of 2014 would be fatal to the agreement. Lastly, the court determined, Adaptix’s "minor" changes to the agreement did not prevent the formation of a contract. Accordingly, the court held that Adaptix’s purported signature requirement did not nullify the agreement and that the parties were bound by the settlement.
Strategy and Conclusion
This case highlights complexities that can arise when a party seeks to enforce or withdraw from a settlement agreement that has not been fully executed. Although the enforcement of contracts is determined by state law, parties should be mindful that material terms might include only those terms contained within the four corners of the agreement. Thus, during negotiations, a party should consider including desired contingencies or preconditions into the agreement itself.