In April 2014, a US federal court in Delaware granted a defendant’s request to enforce an oral settlement agreement in a patent infringement dispute.
The court had issued an order finding in favor of plaintiff Endo Pharmaceuticals on its patent infringement suit against Mylan Pharmaceuticals.
Less than an hour later, Mylan filed a letter with the court informing the judge that the parties had reached a settlement agreement in principle before receiving the court’s opinion.
Endo filed a letter in response claiming that the parties “did not reach an agreement to settle, and are not working on drafting settlement papers.”
Mylan then sought the court’s help to enforce the purported settlement.
After the conclusion of the patent trial in 2013, but before the judge issued her opinion, the court directed the parties to meet and confer regarding settlement.
Executives for both companies met at an airport hotel in Philadelphia in December. Before that meeting, Mylan’s Global General Counsel for Patent Litigation conveyed the company’s initial settlement offer to Endo by phone.
At the meeting in Philadelphia, Endo’s representative made a counter-offer.
The representatives continued to speak over the following weeks.
By January, Mylan told Endo that the company was waiting for internal approval of Endo’s latest offer, but in the meantime Mylan emailed a draft settlement agreement to Endo.
The cover email for the draft settlement stated:
We are still awaiting final management approval, but in the meantime, in order to keep the ball rolling, we have put together a draft settlement and license agreement for your review.
The court noted that neither party viewed this draft agreement as a counter-offer.
The court held a teleconference with the parties to discuss the status of settlement negotiations. Endo reported that it has made an offer that “was probably the final [offer] or something extremely close to it.” Mylan’s attorney replied that he was still awaiting final approval or disapproval from senior management.
That final approval came on January 27.
Mylan’s counsel called Endo’s counsel on his cell phone and told him that Mylan accepted Endo’s final offer. Mylan’s counsel then recited the three terms of that offer and Endo’s counsel responded “That’s great.”
During their brief call, the representatives also discussed the draft agreement, which Endo’s counsel said appeared to have previously-undiscussed terms that represented “significant issues to be resolved.”
Mylan’s counsel told Endo’s counsel to “mark up” the draft to reflect his concerns.
The parties also agreed that they could notify the court that there had been an agreement in principle.
However, the parties did not agree to tell the judge to hold her decision in abeyance.
About twenty minutes after the parties’ phone call, the judge issued her opinion in favor of Endo.
Mylan’s counsel contacted Endo’s counsel to confirm whether he would stand behind the settlement agreement. Endo’s counsel told her that they did not have a settlement agreement and that nothing had been reduced to writing.
Upon Mylan’s motion to enforce the settlement agreement, the court found that under Delaware law,
A contract comes into existence if a reasonable person would conclude, based on the objective manifestations of assent and the surrounding circumstances, that the parties intended to be bound by their agreement on all essential terms.
Mylan contended that Mylan had orally accepted Endo’s offer.
Endo countered that the oral agreement was unenforceable because:
- There was no meeting of the minds.
- The parties intended for any settlement to be in writing.
- The oral agreement did not address all essential settlement terms.
The court noted that “a contract is created upon the valid acceptance of an offer,” and that it was undisputed that Endo made a final offer and that Mylan accepted it.
The court also noted that as long as an agreement has been reached with respect to the essential terms, the settlement agreement is enforceable even where the final settlement might have involved negotiations over non-essential terms.
The court said that an oral contract does not need to be reduced to writing in order to be enforceable, and that an oral settlement is enforceable even through the parties intended that the agreement be embodied in a formal written settlement contract.
The judge found it significant that the parties agreed that the court should be notified of the settlement.
This case is important in showing circumstances under which a settlement agreement can be enforced by a court even before a final agreement is written – let alone signed.
Parties who reach such “informal” agreements should be aware that they won’t necessarily be able to back out of them — and thus should consider carefully what they are agreeing to.
Parties can also protect themselves from being bound by an oral agreement by starting negotiations with a statement, email or letter of intent stating that only a written and signed agreement will be binding on the parties.
