Managing the law of unintended consequences with lessons from BP and Gulliver

The core provisions of a settlement agreement must be carefully crafted, reviewed and followed

What can happen after a settlement agreement is finalized is just as important as what happens before it was signed. Two recent cases illustrate the unintended consequences when a final resolution was lost through faulty drafting, by post signature conduct of the parties, or by a fundamental misunderstanding of what it was to which the parties actually agreed.

This was evident in the 5th Circuit Court of Appeals’ unique post-settlement decision in the Deep Water Horizon matter. The appeal addressed issues, which arose under a settlement agreement approved by the district court in December 2012. That settlement included a mechanism for presenting and processing claims for business losses arising out of the April 2010 Deepwater Horizon disaster in the Gulf of Mexico.

The district court made a key ruling, as directed by the 5th Circuit pursuant to a prior appeal in October 2013. The ruling was that the applicable settlement agreement did not require claimants for certain business losses to provide evidence of causation between the spill and the losses claimed. One of the signatories to the settlement agreement, British Petroleum (BP), argued that the settlement agreement required a causal link and consequently that the district court’s interpretation of the settlement was incorrect. BP argued that it had not agreed to the interpretation of the settlement agreement made by the district court.

BP asserted that the district court’s and the claims administrator’s interpretations of Exhibit 4C of the controlling settlement agreement were erroneous. On Oct. 2, 2013, the court of appeal wrote three separate opinions providing “guidance” to the district court for reconsidering the necessity of matching revenues and expenses when processing business and economic loss (BEL) claims under the controlling settlement agreement.

In the current appeal, BP contended that the “class definition” and footnote 1 of a key Exhibit (4B) to the applicable settlement agreement required claimants to prove that they were proper class members. Footnote 1 of Exhibit 4B states: “This Causation Requirement for Business Economic Loss Claims does not apply to …Entities, Individuals, or Claims not included within the Economic Class definition.” However, the court of appeal noted that causation for BEL claims is primarily addressed in Exhibit 4B to the settlement agreement. It provides for the use of proof of loss as a “substitute for proof of causation.”

 

The court of appeal noted that the settlement agreement (Exhibit 4B), by its terms, exempted claimants from certain geographic regions and in certain industries from presenting any evidence of causation. That exemption appears in a section under the heading “Business Claimants for Which There is No Causation Requirement.”

After the settlement agreement was signed and approved, BP sought to override the language disclaiming the need for evidence of causation. Relying on a footnote contained in Exhibit 4B, BP sought to dismantle the framework of exemptions, presumptions and formulas that allow business claimants to submit evidence of their income and expenses before and after the disaster. BP argued that only if a claimant can prove its injuries are traceable to BP’s conduct, will Exhibit 4B’s forswearing of the need for proof of traceability to BP’s conduct apply. The 5th Circuit, in a divided opinion, rejected that argument.

The 5th Circuit’s reading of the settlement agreement resulted in a conclusion that the settlement agreement did not require a claimant to submit evidence that the claim arose as a result of the oil spill. The court noted that the provision was a contractual concession by BP to limit the issue of factual causation in the processing of claims. The court reasoned that causation — or in Rule 23 terms, traceability — was not abandoned but it was certainly subordinated.

As a recent Florida case demonstrates, courts generally will not hesitate to invalidate a settlement once a breach of a settlement agreement’s confidentially provision is disclosed.

In Gulliver Schools, Inc. v. Snay, a Florida court ruled that a posting on a social media site violated the confidentiality provisions of a settlement agreement.

After litigating the matter, a settlement was reached with Gulliver agreeing to pay the plaintiff a substantial settlement. The settlement agreement contained a confidentiality provision, which prohibited the plaintiff from discussing the settlement with anyone except his attorneys, advisors and his spouse.

Shortly after the agreement was signed, the plaintiff told his daughter that the case had settled. The daughter then posted on Facebook that her father had prevailed in the litigation.

After learning of the Facebook post, the school refused to pay the plaintiff the settlement funds. The plaintiff then moved to enforce the agreement, and the trial court found no breach of confidentiality. The school district appealed and the Florida 3rd District Court of Appeal reversed the decision of the trial court.  

The court of appeal reasoned that the settlement agreement was clear and that the confidentiality provision prohibited the plaintiff from disclosing, either directly or indirectly, “any information” regarding the existence or terms of the settlement to anyone except his spouse, or his lawyers. The court noted that the plaintiff breached the confidentiality provision by discussing the settlement with his daughter. She then advertised that the plaintiff had been successful in his lawsuit.

Clients must be counseled that even a seemingly private conversation about a confidential settlement agreement with third parties (however trustworthy) who are not bound by the agreement could breach the confidentiality provisions of the agreement. It is important to remind clients to carefully consider the potential consequences of improper disclosure before discussing confidential settlements in public.

Both of these high profile matters demonstrate that the specific language of the core provisions of a settlement agreement, including the confidentiality provisions, must be carefully crafted, reviewed and followed. Otherwise, it’s work and time lost to both the outside and corporate counsel.

Contributing Author

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David McMahon

David McMahon is the Managing Partner in Barger & Wolen LLP’s San Francisco office. His practice focuses on large complex litigation. He has worked on...

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Contributing Author

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Robert G. Levy

Robert Levy is a partner in the San Francisco office of Barger & Wolen LLP. For the past 33 years, he has been defending major...

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