What You Say in an E-mail Can and Will Be Used Against You: The Fifth Circuit Holds Settlement Discussion Conducted By Business Principals Created a Legally Binding Settlement

Christopher T. James, Kasi Chadwick

April 11, 2017

As technology continues to change and shape the way business is done, when faced with litigation, business principals sometimes attempt to reach a business resolution outside of the courtroom. While a business resolution avoiding litigation is undisputedly a favorable outcome, parties to a conflict should be careful in brokering their own solutions. Last week, despite the fact a formal settlement agreement had not been executed—or even drafted—a federal judge in Texas found that e-mail exchanges between business principals constituted an enforceable settlement agreement.

In the underlying lawsuit, Plaintiff Neurovision sued companies in February 2016 alleging that the defendants’ nerve monitoring products infringed on two patents belonging to Neurovision. After a failed mediation attempt, the parties continued their efforts to reach a resolution via e-mail.

In e-mail exchanges between the business principals, Defendant Medtronic agreed to make a payment to Neurovision and to withdraw its review petitions from the Patent Trial and Appeal Board in exchange for Neurovision dropping their case against Medtronic and granting Medtronic a license to the patents. In response to Medatronic’s offer, Neurovision’s owner responded “we accept your offer,” in addition to summarizing the material terms to the agreement. Then without disputing any of the terms recited by Neurovision’s owner or his “acceptance,” Medtronic’s director wrote, among other things: “This is excellent news. Thanks for working through.”

Counsel for Medtronic then e-mailed Neurovision’s counsel with only “a final clarifying edit.” Further, all drafts of the agreement that were exchanged included clauses indicating that the agreement was effective upon signing, contained “WITNESS HEREOF” clauses, and empty signature blocks. Neurovision executed the draft agreement.

Then Medtronic had a change of heart. Medtronic e-mailed Neurovision a few days later and attempted to back out of—what would later be determined to be an enforceable—settlement agreement. Specifically, Medtronic informed Neurovision that Medtronic “does not intend to execute the settlement agreement in its current form” because “circumstances changed materially last week…” The next day, Neurovision filed an emergency motion to enforce the settlement agreement.

Arguing that there was no enforceable settlement agreement, Medtronic asserted that: (1) the e-mail exchanges did not qualify as a valid settlement agreement; and (2) the subsequent and more complete agreement that was signed by Neurovision was enforceable. The Court only addressed the first holding that: (1) the e-mail exchanges between the business principals contained all the material terms necessary for settlement; and (2) that the business principals had agreed to a deal. Therefore, the business principals of Neurovision and Medtronic had entered into a binding and enforceable settlement agreement by e-mail.

The lesson here concerns the degree of caution that should be exercised when seeking to settle disputes outside of litigation. Business principals should be wary that, even where there has not been pen-to-paper as to a formal settlement agreement, representations made by the parties to one another can—and per the Fifth Circuit will—bind them.