Oral Class Action Settlement Reached Through Mediation Unenforceable Because Parties Did Not Agree on Attorneys’ Fees and Other Material Terms

A recurring issue in post-mediation litigation is whether a barebones term sheet or other agreement in principle reached at the conclusion of mediation remains binding and enforceable even if subsequent negotiations to document the settlement in a more detailed formal agreement break down.

We discussed this issue in an earlier post concerning mediation of the dispute over the founding of Facebook. In that case, the Ninth Circuit found that a short term sheet agreed upon after a day of mediation addressed all material terms and was therefore binding and enforceable, notwithstanding an understanding that additional settlement terms would be incorporated into a much more detailed formal agreement to be drafted at a later date. But in a recent Florida federal court decision, a Magistrate Judge found that an oral class action settlement reached through mediation was not binding and enforceable because certain material terms such as the scope of injunctive relief, and the amount of the plaintiff’s attorneys’ fees, had not been agreed upon. Zamber v. American Airlines, Inc., No. 16-23901-CIV, 2019 WL 2262914 (S.D. Fla. May 28, 2019).

In Zamber, a putative class of customers who had purchased travel insurance from Allianz after booking flights with American Airlines (American) sued American for failing to disclose that it received a commission from Allianz for each policy sold. After actively litigating the case, the parties and Allianz (which was never named as a defendant) agreed to mediation before a retired District Court Judge. On the eve of plaintiff’s deadline to move for class certification — after three mediation sessions and multiple discussions — the parties and Allianz reached an oral “agreement in principle” for Allianz to pay $11 per policy with a cap of $25 million, and attorneys’ fees to be paid out of the $25 million. There was some wrangling over the wording of the notice of settlement to the Court, but the parties finally agreed upon:

The parties have reached an agreement in principle on the financial terms of a class settlement. They are negotiating remaining terms of the settlement and expect to finalize them shortly. As a result, the parties move this Court to stay discovery and all deadlines pending submission of a motion for preliminary approval of their settlement within thirty (30) days (emphasis in the original).

Negotiations to finalize the remaining terms broke down in part because of attorneys’ fees. Defendants insisted that plaintiff’s counsel not seek more than 10% of the common fund as an attorneys’ fee.  Plaintiff’s counsel responded that it was not permitted to negotiate its fees until after settlement negotiations concluded, but observed that the Eleventh Circuit allowed for attorneys’ fees in the range of 25-30% of any common fund.

American subsequently filed a motion to restore the case to the Court’s active docket on the ground that while it had agreed to certain financial terms (i.e., the $11 per policy payment, and $25 million cap, including attorneys’ fees), a host of other purportedly “material” terms remained unresolved, including the amount of plaintiff’s attorneys’ fees, the scope of the class, payment of administrative fees, the nature of the injunctive relief, and whether Allianz would execute the settlement agreement (since it was not a party to the action but funding the settlement). American further noted that the mediator had declared an impasse.

The named plaintiff countered with a motion to enforce the settlement, contending that the parties had agreed to all material settlement terms, and only ancillary terms remained to be negotiated. Among other points, it argued that attorneys’ fees were not a material term because, as noted, plaintiff’s counsel was not permitted to negotiate its fees until after settlement negotiations concluded, and in any case, it was solely within the Court’s power to determine a reasonable attorneys’ fee. It further maintained that while the concept of injunctive relief (which was included in the oral settlement) was material, the specific scope of the relief was not.

The Court first reviewed the factual contentions of the parties in considerable detail; suffice to say, the record was fairly muddy. It then cited caselaw holding that where “the parties intend that there will be no binding contract until the negotiations are reduced to a formal writing, there is no contract until that time,” but also acknowledged that a court may enforce the terms of an oral class action settlement when the parties have agreed upon all material terms.

Reviewing the parties’ arguments, the Court held that the mediator’s declaration of an impasse was not dispositive. It also rejected American’s argument that all of the terms it had characterized as “material” were truly essential. But it concluded that the scope of injunctive relief, whether Allianz would execute the settlement agreement, and the amount of plaintiff’s attorneys’ fees constituted material terms that remained unresolved.

Concerning attorneys’ fees, the Court acknowledged that courts, and not the parties, set the fees in class actions. But it observed that “parties can agree to make recommendations or take positions or agree to clear-sailing provisions or otherwise attempt to provide a zone of attorney’s fees that the Court would likely agree to when approving the settlement.” The Court further acknowledged that fees should not be negotiated until after all other material terms have been agreed upon. But it held that this required sequence does not render attorneys’ fees an immaterial term.

In sum, the Court concluded that the parties’ oral settlement agreement addressed certain, but not all, material settlement terms, and therefore recommended that the District Court Judge deny the motion to enforce, reinstate the case, and establish a new trial schedule.

Zamber creates awkward precedent for plaintiff’s counsel who wish to avoid any charge that they negotiated their attorneys’ fees prematurely, but also do not want to give defendants an out to renege on essential financial terms agreed upon after mediation pending the drafting of a more formal agreement. To address this Catch-22 created under Zamber, in cases where the parties agree on financial terms but defer resolution of the amount of attorneys’ to a more formal agreement, plaintiff’s counsel can provide in any term sheet or other agreement in principle reached through mediation that settlement terms are not contingent on an agreement on attorneys’ fees, and that attorneys’ fee do not constitute a material term of the settlement.