Government investigations are risky and expensive and, in the case of companies, commonly lead to settlements. Companies often resolve investigations even if they believe the government is wrong on the law or the facts, or both, and when (and sometimes because) the law on important issues is unsettled.
In our most recent article, we discussed how judicial scrutiny is becoming a growing challenge in securing approval of settlements of government enforcement proceedings. In this article, we look not at how to get a settlement approved but, rather, whether a private party may undo a settlement with the government because of a subsequent development in the law or related legal proceedings. The short answer is—possibly, but with great difficulty, as we explain below.
Parties seeking to vacate settlement agreements face an uphill battle. Courts and agencies are hesitant to consider challenges to final settlement agreements, which they consider to be binding contracts, negotiated at arms length, based on an understanding that the law and other circumstances may change which lead to regrets about the settlement. Both the judicial and executive branches have a strong institutional interest in finality, which, among other things, conserves public resources and permits attention to be devoted to current matters rather than a reconsideration of matters that were concluded in the past. Private litigants have a similar interest in finality—with the caveat that in the case of a significant change in the legal or factual landscape a private party may believe that justice requires a reconsideration of the settlement.
Settlements involving injunctive relief, or other ongoing obligations, are most amenable to the argument that changes in circumstances warrant relief. Unlike legal remedies, such as the payment of a fine or restitution, injunctive relief imposes continuing restrictions or obligations such as a bar from an industry or maintenance of compliance programs. Future violation of the terms of the remedial order can lead to severe consequences. Since injunctive relief compels ongoing actions or forbearance, the Federal Rules of Civil Procedure allow courts to vacate the order if applying it is “no longer equitable,” and case law has set forth a similar standard. Under these circumstances, inquiry as to the fairness of continuing to enforce obligations and restrictions is justified when changes in the facts or the law cast doubt on the basis for the injunctive relief. Nonetheless, the burden on a party seeking relief from the terms of a settlement is high.
Two administrative cases in which the Securities and Exchange Commission (SEC) vacated consent orders against defendants based on changes in the facts or the law illustrate how relief from a settlement may be grounded in ongoing sanctions which become, in light such changes, unfair. In a 1989 case, Mabon, Nugent & Co., the company entered into a consent order with the SEC, not disputing the factual finding that it had failed adequately to supervise an employee. The order “censured Mabon, Nugent and ordered it to comply with certain undertakings to improve its compliance.” Following entry of the company’s consent order, the SEC enforcement staff failed to prove in a separate proceeding that the employee had actually violated the law. Although the company’s consent order had been final for nearly six years, the SEC vacated the order because the result of the case against the employee had “thus eliminated an essential basis for its finding that Mabon, Nugent had failed to supervise an employee who committed a violation.” The SEC acknowledged that while these were “unusual circumstances,” it was “appropriate” to vacate the order against Mabon, Nugent.
In the 2007 case of In the Matter of Tudor Investment Corp., a company had agreed to a cease-and-desist order based on certain short-selling activities which were enjoined at the time. However, ten years later, those same activities were determined to be lawful and the SEC repealed the rule underlying the order. However, because the cease-and-desist order was still active, Tudor was barred from engaging in what was now lawful short-selling activity. Although it was nearly a decade since the original order had been entered, Tudor argued that it should be vacated to “eliminate any ambiguity and to clarify that Tudor may participate in the same lawful short-selling activities as other market participants.” The SEC agreed and vacated the order, once again considering it “appropriate” given “all the circumstances.”
In the criminal law context, the Federal Rules of Criminal Procedure similarly allow defendants to withdraw a guilty plea for a “fair and just reason,” such as, for example, if the conduct they were convicted of is later determined to not be a crime. Such cases are unusual, and courts hesitate to permit withdrawal of guilty pleas absent unusual circumstances. Nevertheless, defendants have been permitted to withdraw a guilty plea when the U.S. Supreme Court or the highest state court narrows the scope of a criminal statute or renders it unconstitutional.
In sum, in the civil context, arguments concerning fairness are not likely to succeed when the obligations under a settlement have been completed or consist solely of legal remedies, such as by paying a fine. Courts will almost certainly conclude that the parties assumed the risk of a change in the law or facts when they agreed to the settlement. However, if a settlement imposes ongoing obligations or restrictions, and the law or facts have changed in a way that renders the justification of the prior settlement doubtful, a private party may be able to bear the heavy burden of justifying relief from the settlement, and certainly the most onerous terms of the settlement.