Federal Circuit Enforces Agreed-To but Unsigned Settlement Terms

MedPointe Healthcare v. Walter Kozachuk (Fed. Cir. 2010)(nonprecedential)

Kozachuk is a former employee of MedPointe’s predecessor company and as part of his employment agreement, Kozachuk had agreed to assign “any and all inventions, discoveries, or improvements made, discovered, or conceived by him during his employment.” About 18-months after leaving his job, Kozachuk began filing patent applications on clinical uses of the drug Felbamate for the treatment of neurological problems. In 2004, MedPointe sued – claiming ownership rights and breach of the employment agreement.

Settlement: In May 2008, the parties reached an agreement on the material terms of a settlement. The terms (including the transfer of patent rights to MedPoint and a small payment ($60k) to Kozachuk) were put “on the record” by the magistrate judge who was mediating the settlement negotiations. Kozachuk, however, refused to sign the final settlement agreement and instead argued that he had been inadequately represented in the negotiations. Despite the lack of a signed document, the district court agreed to enforce the settlement, ordered Kozachuk to sign the documents and hit Kozachuk with $30k in sanctions.

On appeal, the Federal Circuit affirmed. Applying New Jersey law, the court found that a settlement agreement “is a binding contract enforceable regardless whether it has been reduced to writing” and that a contract is created once the parties agree upon the “essential terms of the settlement.” The kicker here was that Kozachuk had agreed to the terms on the record.

Kozachuk’s complaints of inadequate assistance of counsel went nowhere: “In light of Kozachuk’s high level of education, his obvious familiarity with the litigation process, and his failure to express any lack of understanding except after the fact, the court did not clearly err in finding that a binding settlement agreement had been formed.”

Appellate Jurisdiction: One issue not addressed by this case is why the Federal Circuit is hearing the appeal of an employment dispute. I looked up the original complaint to find the answer: The complaint seeks to correct inventorship of the patents under 35 U.S.C. § 256. As such, the case arises under the US patent laws and therefore provides the Federal Circuit with appellate jurisdiction over the final judgment. Hunter Douglas, Inc. v. Harmonic Design, 153 F.3d 1318, 1330 (Fed. Cir. 1998).

17 thoughts on “Federal Circuit Enforces Agreed-To but Unsigned Settlement Terms

  1. Thanks Alun,

    I was thinking about the assignment portion, because while the patent is indeed personal property, there is federal law concerning assignments of patents:

    35 U.S.C. 261 Ownership; assignment.
    Subject to the provisions of this title, patents shall have the attributes of personal property.

    So while I recognize the state law impacts, I would think that federal rules trump (at least any Title 35 jurisprudence).

  2. Anon, 35 USC 261 (federal law) defines patents as personal property, which in turn makes them subject to state law, but only in terms of how they are disposed of. There is no additional federal law to trump anything. So, as Ned says, this is a New Jersey contract law case, and it’s only useful elsewhere in so far as other states may or may not have similar law.

    OTOH, of course the inventorship issues under 35 USC 256 are solely federal law.

    I hope this makes sense. I am only a patent agent, not an attorney.

  3. “If the attorneys for both sides in a Federal district court tell the judge they have reached a settlement, and the judge then immediately calls in the court reporter and asks the attorneys to repeat that and the basic details on the record [as I have seen done], I would like to see how one side would subsequently get out of it, and I do not see what state law would have to do with it?”

    The mediations I’ve participated in that actually settled were conducted exactly like Paul describes above. I think such a settlement is a far cry from being just an oral agreement. One could argue that the court transcription is the reduction to writing (or that an audio recording is analogous to one and accomplishes the same purpose).

  4. This seems like a really straightforward case. Pretty much every student learns in the first week of contract law that oral agreements are binding, unless covered by the statute of frauds or some similar exception, and that is the law of every state. The only interesting question, as Dennis has already pointed out, is whether an agreement to assign a patent is covered by the statute of frauds at 35 USC 261. But that got settled long ago in Dalzell v. Dueber Watch Case Mfg. Co., 149 U.S. 315 (1893).

  5. If the attorneys for both sides in a Federal district court tell the judge they have reached a settlement, and the judge then immediately calls in the court reporter and asks the attorneys to repeat that and the basic details on the record [as I have seen done], I would like to see how one side would subsequently get out of it, and I do not see what state law would have to do with it?

  6. There is at a conceptual level no reason to invalidate unsigned settlement agreements given the general reach of the Statute of Frauds as generally defined at common law. Perhaps one can characterize a license as an agreement “in contemplation of marriage”…;)

    However, not every state has implemented the Statute of Frauds as it pertains to many classes of contracts, including various types of agreements in settlement of a lawsuit.

    Being a matter of contract law the CAFC was, of course, bound by the law of the state in which the contract was crafted, be it oral or in bullet list fashion and unsigned.

    This said, many states have enacted specific statutory requirements mandating that certain classes of settle agreements must be in writing and signed by the party to be charged. IIRC, California and NY are two such states. Interestingly (to me anyway), the case law in some of the states striking down settlement agreements that would otherwise be compliant with the Statute of Frauds appear to have done so on the basis that “boiler plate” was not included.

    As for “signed writings” of a promise to assign, while certainly the proper thing to do to save future headaches, the only mandate of which I am aware is that an actual assignment must be in writing so that it can be properly filed with the USPTO.

    Merely as an aside, might someone be able to articulate how the CAFC assumed jurisdiction of this appeal? I only skimmed the opinion by the CAFC, so perhaps I missed a key point. As I read it there was no issue concerning inventorship, but only obligations under a pre-existing agreement executed while the defendant was in the plaintiff’s employ.

  7. In Texas (including the E.D.), the oral settlement agreement would not be enforceable. It would not even be enforceable until it was filed with the court. Ironically, the seminal case is a state court mandamus proceeding to enforce a settlement agreement in a breach of contract case. The breach? Failure of an investor to fund efforts to patent and commercialize an inventor’s technology. See, Rizk v. Millard, 810 S.W.2d 318, 321, and link to litigation-essentials.lexisnexis.com.

  8. instead argued that he had been inadequately represented in the negotiations

    shoulda
    woulda
    coulda

  9. Another interesting topic raised by the case is whether an agreement to assign patent rights need to be in writing.

    For agreements concerning patents specifically, wouldn’t federal rules trump state contract law?

  10. Another interesting topic raised by the case is whether an agreement to assign patent rights need to be in writing.

    Under 35 USC 261, the actual assignment of rights must be in writing. However, writing is apparently not necessary for an enforceable agreement to assign.

  11. Many contracts have a 3 day right of rescission in NJ… even after it’s been signed. Not legal advice and might not be applicable here, but just for some thought …

  12. Putting the gratuitous NJ bashing aside, in which state is it that you practice that no oral agreements are enforceable? If oral agreements were never enforceable there would be no need for a statute of frauds. Usually the problem with enforcing oral agreements is not that they are per se unenforceable, but that there is insufficient certainty about the terms because there is a he-said-she-said dispute between the parties about material terms.

    Here the material terms were on the record, and there was a clear offer, acceptance, and consideration in the form of reciprocal obligations to make a payment on the one hand, transfer rights on the other hand, submit to arbitration, etc. A dispute over Immaterial terms, e.g., whether payment must be made with a cashier’s check or by a wire transfer, should not be a basis for rescission as to the material terms, and I would argue that there is an obligation to deal in good faith to work out the immaterial terms.

    The only basis I can see for him getting out of it (besides fraud and the like) would be if the final written instrument presented to him had material terms that were not negotiated and were not part and parcel of the prior agreed terms. We don’t have the draft of the written agreement in front of us, but I submit that the court would not have ordered him to sign the settlement documents if they differed materially from the agreement on the record.

  13. I’ve had my doubts about IANAE before, to the point where I found it no longer useful to engage him/her on this blog.

    This previous comment by IANAE has solidified my estimation of his/her legal acumen: “As far as I’m concerned, an agreement is an agreement is a contract…”

    Sorry, IANAE.

  14. This is a good warning to me as a practitioner to state upfront that these are negotiations and there is no settlement until something is signed.

    It’s remarkably clear on the facts that both parties agreed to the terms of the settlement, and one later changed his mind and decided he wanted more money.

    As far as I’m concerned, an agreement is an agreement is a contract, particularly when it’s explicitly and unambiguously agreed during court-mediated settlement discussions.

    If it’s agreed in advance that there’s no settlement till something is signed, they should sign on the spot. What’s the point of mediation if you finally get the parties to agree after four years of litigation, and then one guy weasels out of the agreement the next day and drags the other party to the Court of Appeals?

    I like this decision. Serves the guy right, having to pay the other party’s costs.

  15. Another good reason not to live in Jersey. I suspect this decision left out a lot of details though. For example, what aspects of the settlement agreement was he contesting? If only the amount, then I’m fine with the result. If it was something else, could that something else have been considered essential? This is a good warning to me as a practitioner to state upfront that these are negotiations and there is no settlement until something is signed.

  16. It would be nice to know whether the NJ contract law on settlement agreements was generally applicable across the US. Generally, I would think fairness should allow someone to back out of a deal until he or she has signed unless there has been detrimental reliance by the other party on the “preliminary agreement.” A lot of time, the devil is in the details.

    This really is a case about NJ contract law.

Comments are closed.