Federal court jurisdiction over settlement agreements.
There are good reasons for trying to return the resulting breach-of-contract dispute to the federal court. These include the court's familiarity with the case facts and issues, the court's interest in reinforcing settlement agreements based on litigation that was previously before it, and efficiency and economy for both parties.(1)
But getting back into federal court could be difficult. The defendant may claim that the federal court lacks jurisdiction. To qualify for federal court, cases must raise questions of federal law or involve litigants from different states ("diversity of citizenship"), and the amount in controversy must be $50,000 or more. Breach of contract is not normally a federal issue, which brings the court's subject-matter jurisdiction into question, and the parties may not be diverse.
At this point, plaintiffs generally have two options. They can seek to reopen the original case under Federal Rule of Civil Procedure 60(b), which allows courts to vacate final judgments and settlement agreements when new information makes them untenable. Or they can argue, if the facts warrant it, that the defendant is in contempt of a court order and ask to have it enforced.(2)
This is a complex problem. The circuits are split over whether federal courts may retain or regain jurisdiction over settlement agreements in disputes previously before them. Currently, cases with substantially similar facts may have remarkably different outcomes in different circuits.
This article will start by exploring the plaintiff's options in these disputes in light of statutory and case law. It will go on to discuss further complicating factors--recent changes in the law of supplemental jurisdiction, both ancillary and pendent, as well as two relevant and competing judicial policies: finality of judgments and meeting the parties' expectations that they can return to federal court in the event of a dispute over the terms of settlement.
Federal Rule of Civil Procedure 60(b) can be a successful vehicle for getting a disputed settlement back into federal court. The rule provides that
on motion and upon such terms as are just, the court may relieve a party or a party's legal representative from a final judgment, order, or proceeding for the following reasons:
(1) mistake, inadvertence, surprise, or excusable neglect;
(2) newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under rule 59(b);
(3) fraud (whether heretofore denominated intrinsic or extrinsic), misrepresentation, or other misconduct of an adverse party;
(4) the judgment is void;
(5) the judgment has been satisfied, released, or discharged, or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that judgment should have prospective application; or
(6) any other reasons justifying relief from the operation of the judgment.
The motion shall be made within a reasonable time, and for reasons (1), (2), and (3), not more than one year after the judgment, order, or proceeding was entered or taken.
The circuits are split over when--or whether--the federal court can reassert jurisdiction.
In a leading case in the Sixth Circuit, Aro Corp. v. Allied Witan Co., the plaintiff successfully used Rule 60(b)(6) to bring the defendant back into federal court for violating a settlement agreement.(3) The Sixth Circuit ruled that federal courts have "inherent" power to enforce settlement agreements they originally recorded.
Aro initially filed a patent infringement suit against Allied in federal court. Allied then licensed the patent from Aro and the parties agreed to dismiss the action without prejudice. The court so ordered. Within a year, however, Aro alleged that Allied was in breach of the license and filed a motion to vacate the dismissal under Rule (60)(b)(6).(4)
Allied argued that the federal court now lacked subject-matter jurisdiction because the primary issue was contractual and there was no diversity of citizenship between the parties. The court was not persuaded, commenting, "Jurisdiction rests upon the same footing as when the case began ... since federal courts have consistently exercised their inherent power to enforce agreements settling cases in which the court originally had jurisdiction."(5)
On appeal, the Sixth Circuit upheld the district court's finding that the contract entered into between the parties "cannot be viewed independently of the original suit; its formation was an outgrowth of [the original] case." The court also observed that "to permit the absence of diversity to divest the court of jurisdiction after settlement, when it could not have done so prior to settlement, would be to exalt form over substance and to render settlement in such cases a trap for the unwary."(6)
The Sixth Circuit held that vacating the order of dismissal under Rule 60(b)(6) was proper. Indeed, "the court below had not only the inherent power but ... the duty to enforce the agreement [that] had settled the dispute pending before it."(7)
Rule 60(b), however, is a limited remedy because it can only be invoked if the claim is timely. A claim based on a mistake or inadvertence must be brought within a year; a claim based on "any other reason justifying relief," within a "reasonable time."
Often, no breach of the settlement agreement occurs until years after the case was dismissed. For example, in Rolex Watch U.S.A. v. Bulova Watch Co., Rolex first sued Bulova for Lanham Act and state law violations in 1983.(8) That year the parties signed a settlement agreement. Ten years later, Rolex alleged that Bulova had broken the agreement, and moved for an order restoring the case to the court's active docket.
Bulova countered that the federal court lacked subject-matter jurisdiction. The court reluctantly agreed, determining that since the original case had been dismissed over 10 years earlier, vacating the dismissal under Rule 60(b)(6) would be untimely. The court considered exercising ancillary jurisdiction. (Under the doctrine of ancillary jurisdiction, federal courts that have jurisdiction because of the parties' diversity of citizenship can hear related state law claims that, if presented separately, would not meet the federal diversity or jurisdictional amount requirements.) But the court found that
no Circuit Court has probed the rationale for exercising ancillary jurisdiction. [Therefore,] if this court were writing on a clean slate it might exercise ancillary jurisdiction over the settlement agreement that led to a court-ordered dismissal of the federal claims. But, given the weight of contrary authority, this court would be unwise to do so when the court's decision could be overruled and where Rolex could obtain, in substance, the same result by other means.(9)
Contempt of Court
If the dispute arises too late for Rule 60(b)(6) to apply, how can the plaintiff get the case back into federal court? Contempt proceedings may be used in special cases.(10)
If the settlement agreement was approved by the court and made part of a court order, some courts have indicated that they may retain jurisdiction over the agreement. For example, in McCall-Bey v. Franzen, the Seventh Circuit said that federal courts lack "inherent" jurisdiction to enforce settlement agreements between parties, but they may do so when they have expressly retained jurisdiction by court order.(11)
Though it is not spelled out in the opinion, the rationale seems to be that the breaching party is in contempt of court for violating the court-ordered agreement, and the district court has jurisdiction to enforce its own order. In cases like this, jurisdiction is said to be "retained" by the court.
On the other hand, if the settlement agreement was not originally reviewed or approved by the court, the situation is stickier. In Fairfax Countywide Citizens v. Fairfax County, the Fourth Circuit concluded that even if the enforcement action was timely and therefore Rule 60(b) could be used to set aside the earlier settlement, the U.S. district court lacked authority to entertain a breach-of-settlement action because the agreement had not been incorporated into a court order and there was no independent basis for federal jurisdiction.(12) In the Fourth Circuit, then, the district court can do nothing unless the action is timely, so Rule 60(b) applies, and the court originally approved the settlement.
However, at the other end of the spectrum, the U.S. District Court for the District of Massachusetts (First Circuit) found that jurisdiction was proper even where Rule 60(b) could not be used because the action was untimely and even if the court had never approved the settlement agreement.(13) The reason given was the court's "inherent power to supervise and enforce settlement agreements entered into by parties to an action pending before the court."(14) This rationale allows the court to exercise jurisdiction without reopening the original litigation under Rule 60(b)(6).(15)
This case law leads us to four possible situations.
* Scenario 1: The court originally approved the settlement agreement and Rule 60(b) applies. These are the strongest circumstances supporting federal jurisdiction over a breach-of-contract claim. The original case can be reopened under Rule 60(b) and the contract matter decided under the doctrine of ancillary jurisdiction pursuant to Fairfax.
Strict construction of Fairfax in the Fourth Circuit requires both that Rule 60(b) must apply and that the settlement agreement was incorporated into the district court's dismissal order.(16)
In contrast, the Sixth Circuit under Aro requires only that Rule 60(b) apply. Apparently this court would approve jurisdiction even if the district court had never reviewed and approved the settlement agreement.(17)
* Scenario 2: The court approved the settlement agreement, but Rule 60(b) does not apply. Only the Seventh Circuit found jurisdiction proper in this situation--for a reason not examined by the Fourth or Sixth Circuits. In McCall-Bey, the Seventh Circuit found that there was no "inherent federal jurisdiction to enforce agreements to settle federal suits" and that Rule 60(b), if applicable, would not confer jurisdiction. But the court retains jurisdiction by virtue of having originally approved the settlement agreement.(18)
Note the latitude given by the Seventh Circuit in determining what constitutes a court's "approval" of a settlement agreement. The district court's order read, in its entirety, "Order cause dismissed pursuant to stipulation of the parties." The stipulation, in turn, referred to the settlement agreement. The Seventh Circuit found that the district court had retained jurisdiction over the agreement and later disputes about it.(19)
* Scenario 3: The court did not approve the settlement, but Rule 60(b) applies. Under this scenario, as discussed above, the Sixth Circuit in Aro found that the court had "inherent" jurisdiction to enforce a settlement agreement. By contrast, the Fourth Circuit in Fairfax held that even if the district court could reopen the litigation under Rule 60(b), it would have no independent ground for federal jurisdiction and therefore no ancillary jurisdiction over a settlement dispute.(20)
Similarly, the Seventh Circuit in McCall-Bey found that the only effect of applying Rule 60(b) would be to "restore the plaintiff's original civil rights suit to the trial calendar. The judge could not, on the authority of Rule 60(b), have ordered the defendants to comply with the settlement."(21) The Eighth Circuit agreed in Adduono v. World Hockey Association.(22)
* Scenario 4: The court did not approve the settlement agreement, and Rule 60(b) does not apply. After a thorough review of the case law cited above, the Rolex court found that unless Rule 60(b) applied or the court had made the settlement agreement a part of its order, it had no ancillary jurisdiction over the dispute. If the court did not retain original jurisdiction over some aspect of the case, it cannot later invoke ancillary jurisdiction over the case.(23)
By comparison, the Hamilton court found it had "inherent" ancillary jurisdiction and that vacating the prior dismissal under Rule 60(b) was a mere formality--a "procedural hangup."(24)
In summary, if Rule 60(b) applies but the agreement was not incorporated by a court order, the issue is whether the court has ancillary jurisdiction if the settlement agreement is violated. If Rule 60(b) does not apply but the court has reviewed the agreement, the issue is whether the court retains jurisdiction over subsequent settlement agreement disputes. Finally, if Rule 60(b) is not applicable and the court has never reviewed the settlement agreement, the issue then is whether the court has "inherent" jurisdiction.
Amended Federal Code on Jurisdiction
Of these three types of jurisdiction--ancillary, retained, and inherent--only the first is codified. Ancillary jurisdiction is one of two doctrines included under the rubric of "deivative" jurisdiction. The other is pendent jurisdiction.(25)
The doctrine of pendent jurisdiction allows a federal court that is considering a federal question to adjudicate related state law claims based on the same facts when judicial economy warrants hearing all the claims together.(26)
The objective of both doctrines is to prevent piecemeal litigation. They have now been codified as "supplemental jurisdiction" under 28 U.S.C. [sections]1367:
(a) [In] any civil action of which the district courts have original jurisdiction, the district court shall have supplemental jurisdiction over all other claims that ... form part of the same case or controversy under Article III of the United States Constitution. Such suplemental jurisdiction shall include claims that involve joinder or intervention of additional parties.(27)
The key provision of [sections]1367--paragraph (c)(3)--states that the district court may decline supplemental jurisdiction over a party's claim "if the court has dismissed all claims over which it had original jurisdiction."
The question arises: Should this provision be applied only to state law claims that were part of the original action before the federal claim was dismissed? Probably. If so, under the new statute, the court would not have jurisdiction over a state law breach-of-settlement-agreement action brought after the federal claim was dismissed.
However, another way to interpret the new statute is that the district court may still exercise jurisdiction over a breach of the agreement after the original federal claim is dismissed. As one commentator said, "The 'may' in 'may decline' will therefore have a major role to play."(28)
It seems clear that Congress did not set out to directly codify either the Fairfax or Aro holdings. But a breach-of-settlement-agreement claim is certainly one of "all other claims that ... form part of the same case or controversy...."(29) And the court may exercise jurisdiction even if the district court has dismissed all the original claims.(30)
Did Congress set out to give the courts jurisdiction to the outer limit of the Constitution's "case or controversy" requirement? If so, this reading of [sections]1367 may give plaintiffs who do not have a court-ordered settlement and cannot ask the court to reopen the case under Rule 60(b) a chance to have the federal court hear the breach-of-settlement claim.
Two competing policies seem to be at work here, which may be the reason for the split in the case law.
The first policy is derived from the parties' understandable expectation that the federal court will resolve later disputes arising out of cases it has heard. Our system tends to favor having one court resolve all or most of the disputes between particular parties. As previously noted, this is the reason for supplemental jurisdiction--it prevents piecemeal litigation.(31)
The second policy, finality of judgments, mandates that at some point both litigation and the court's jurisdiction over a matter must end.(32)
* The parties' expectations. Since most federal litigation is resolved by settlement agreements, the parties may expect them to be enforceable in federal court. For one thing, federal procedural interests may be involved.(33) For another, the original action and settlement agreement may be particularly suited to the federal forum. If the original litigation concerned patent rights or a Title VII cause of action, for example, a followup dispute might require the court to decide federal issues best left to the federal judiciary. These concerns, along with principles of judicial economy, support the federal court's resolving the dispute.(34)
* Finality of judgments. The opposing doctrine, also known as res judicata, states, "Public policy dictates that there be an end of litigation; that those who have contested an issue shall be bound by the result of the contest, and that matters once tried shall be considered forever settled as between the parties."(35)
Under this doctrine, the initial federal litigation is regarded as having been ended by a deliberate choice of the parties, who negotiated a voluntary contract that was accepted by the court as terminating the litigation. That should also have terminated the court's jurisdiction over the dispute; otherwise the litigation would never really end.
The doctrine of finality of judgments is so strong that it prevents legitimate claims that could have been brought in the original action, but were not, from being litigated later.
Under this doctrine, the only way the court can exercise jurisdiction over a subsequent settlement dispute is by vacating the original dismissal and then exercising ancillary jurisdiction over the newer dispute. "Retaining" jurisdiction over the settlement agreement would encroach on finality of judgment.
Tipping the Balance
In the main, these policy arguments balance each other. The applicability of both Rule 60(b) and the courts' contempt powers must be examined in each case. Supplemental jurisdiction alone is no help when the state law claims are brought after the original case is dismissed. Inherent jurisdiction may impinge too heavily on finality of judgments. The courts have yet to resolve the interplay, and how the recent changes in Title 28 will affect the case law also remains to be seen.
Counsel must be ready to argue for or against supplemental jurisdiction and the applicability of Rule 60(b). Also, counsel would do well to carefully monitor how the court dismisses the original suit and to make sure the record of reasons for the dismissal is clear.
Counsel should also understand the case law, the local rules, and the current court procedures before settling. At least one federal district court--for New Hampshire--has amended its local rule so no judgment is issued on cases resolved by settlement.(36) One implication of this local rule is that counsel there may not be able to argue that the court "approved" the settlement agreement executed by the parties.
One thing is clear. The best time to address the question of what will happen if a settlement agreement is broken is before the agreement is executed and a dismissal is filed.
(1)See Rolex Watch, U.S.A. v. Bulova Watch Co., 820 F. Supp. 60, 61 (E.D.N.Y. 1993).
(2)Another option may be to argue that Fed. R. Civ. P. 41 gives the court jurisdiction over the breach-of-settlement claim. Rule 41 provides that the original suit may be dismissed voluntarily "upon such terms and conditions as the court deems proper." It can be argued that the settlement agreement is one of these terms and conditions, and that the court automatically retains jurisdiction to enforce this agreement. However, the only court that has considered this argument rejected it. See McCall-Bey v. Franzen, 777 F.2d 1178, 1183-84, 1187 (7th Cir. 1985).
(3)531 F.2d 1368 (6th Cir. 1976).
(4)Id. at 1370.
(6)Id. at 1371.
(8)820 F. Supp. 60.
(9)Id. at 63.
(10)Fed. R. Civ. P. 70 provides, "If a judgment directs a party to execute a conveyance of land or to deliver deeds or other documents or to perform any other specific act and the party fails to comply within the time specified, the court may direct the act to be done at the cost of the disobedient party by some other person appointed and the act when so done has like effect as if done by the party.... The court may also in proper cases adjudge the party in contempt." (Emphasis added.) 18 U.S.C. [sections]401 gives federal courts the power to punish contempt of its authority including "disobedience or resistance to its lawful writ, process, order, rule, decree, or command."
(11)777 F.2d 1178, 1189-90; see also Rolex, 820 F. Supp. 60, 61.
(12)571 F.2d 1299 (4th Cir. 1978); see also Adduono v. World Hockey Ass'n, 824 F.2d 617, 619-20 (8th Cir. 1987).
(13)See Hamilton v. School Comm., 725 F. Supp. 641 (D. Mass. 1989).
(14)Id. at 645 (citing dicta in Dankese v. Defense Logistics Agency, 693 F.2d 13, 16 (1st Cir. 1982)).
(15)Id. at 647.
(16)Fairfax, 571 F.2d 1299, 1303.
(17)Aro, 531 F.2d 1368, 1371.
(18)McCall-Bey, 777 F.2d 1178, 1189.
(19)Id. at 1181.
(20)Fairfax, 571 F.2d 1299, 1305-06.
(21)McCall-Bey, 777 F.2d 1178, 1186 (rejecting Aro).
(22)Adduono, 824 F.2d 617, 620.
(23)Rolex, 820 F. Supp. 60, 62 (citing Fairfax, 571 F.2d 1299, 1305).
(24)Hamilton, 725 F. Supp. 641, 646; see also McCall-Bey, 777 F.2d 1178, 1195, 1197 (dissenting opinion finding that Fairfax is an "isolated case").
(25)Fairfax, 571 F.2d 1299, 1305.
(26)See United Mine Workers v. Gibbs, 383 U.S. 715 (1966).
(27)See David D. Siegel, Changes in Federal Jurisdiction and Practice Under the New Judicial Improvement Act, 133 F.R.D. 61, 63 (1992).
(28)Id. at 68.
(29)28 U.S.C. [sections]1367(a).
(30)28 U.S.C. [sections]1367(c)(3).
(31)See 133 F.R.D. at 63.
(32)See McCall-Bey, 777 F.2d 1178, 1187.
(33)See Hamilton, 725 F. Supp. 641, 647.
(34)See id. at 648.
(35)W.L. Gore & Assocs. v. C.R. Bard, Inc., 977 F.2d 558, 560 (Fed. Cir. 1992)(quoting 452 U.S. 394 (1981)).
(36)See Local Rule 17(b), U.S. Dist. Ct. for the Dist. of New Hampshire.