A Guide to Release of Claims Settlement Agreements

Guide to a Release of Claims Settlement

A release of claims settlement agreement is a legal document where one party agrees to relinquish their right to make certain legal claims or pursue legal action against another party. These agreements are usually part of a broader settlement of a legal dispute, acting as the final step in the process of settling and putting an end to the lawsuit in question. When properly written and executed, a release of claims often resolves all disputes between the parties . When there were multiple lawsuits between the parties with some still pending when the release was executed, the release may be limited to only those lawsuits that have already been resolved. It is important to understand what lawsuits the release applies so that appropriate product liability laws are followed, to be sure that the release is enforceable in all states the parties may sue one another in; and it is important to be sure that no lawsuits remain pending between the parties that could interfere with the release or could be barred as a result of the release.

Key Terms of a Release

A Release of Claims Agreement is an agreement whereby a party (or sometimes parties) agrees to settle and release claims they have against another party (or parties). While settlements can be reached on an informal, semi-structured or formal basis, there are certain key components of a comprehensive Release of Claims Agreement.
The Parties. The parties to the Release of Claims Agreement must be clearly defined. All parties should be identified by at least first name and last initial and the capacity in which each party is acting. For example, Release of Claims Agreements with current and former employees of a company should include the following:
While recent definitions of the ADEA and OWBPA make it clear that a "covered employee" may release any claim available against the employer, even claims not expressly provided for under the ADEA, it is often customary to include specific language in the agreement releasing claims under Title VII, the ADEA, the OWBPA and the ADA.
The Scope of the Release. The release of claims should be broadly worded to prohibit the releasor from making any claims of the same type or related category to that which was released. A common, yet broad, catch-all provision is as follows: The Releasee is a broad term that is meant to refer to all of the named defendants as well as anyone else affiliated with the named defendants. Depending on the factual context, these terms can be narrowed down.
The Consideration. It is important that the consideration terms are included in the body of the Release of Claims Agreement. If the employee is receiving a lump sum payment, the following provision may be appropriate:

Legal Benefits and Importance

The legal implications for both parties to such an agreement are significant. First and foremost, the existence of the agreement itself may prevent other lawsuits filed by the same plaintiff against the same defendant later on. In many cases, the language in the Release of Claims Settlement agreement is so specific that it prevents future lawsuits filed by the plaintiff against any other party or other similar individuals or entities that might otherwise be sued in the case.
The ability to assure finality to all disputes is one of the primary reasons it is important to enter into a Release of Claims Settlement agreement with a plaintiff in a fair whistleblower case. A well drafted Release of Claims Settlement Agreement should set forth the specific language that overall resolves all claims between the plaintiff and defendant(s).
Even if an individual defendant enters into a settlement agreement with a whistleblower lawsuit plaintiff, the fact that a different, unrelated defendant refuses to enter into a settlement agreement with the same whistleblower lawsuit plaintiff may present issues and questions in later litigation. If the terms of the Release of Claims Settlement agreement are correct, then the whistleblower lawsuit plaintiff is forever precluded from bringing any future lawsuits against the same defendant or the co-defendants.
Without a comprehensive Release of Claims Settlement agreement with a plaintiff in a Whistleblower case, there is a risk that a second lawsuit will be filed against that defendant by the plaintiff. This is because the settlement agreement entered into with one individual defendant will not necessarily protect the plaintiff from suing the other individuals separate and apart from the defendant.

Common Features of a Release

Based on the complexity of drafting comprehensive releases in every settlement negotiation and the need to preserve some of the negotiating power, releases more often than not contain "common clauses". Some of the most common clauses include:

1. Confidentiality

A confidentiality provision is used to preserve the secret nature of the terms of the agreement. In addition to the terms, a confidentiality provision prohibits the disclosure of any information that relates to the negotiations, conduct and settlement of the claims. The majority of jurisdictions have adopted the Restatement view that destroys the confidentiality of settlement agreements, even if provided for in the settlement agreement. See Restatement (Second) Contracts § 186; UCC § 1-205(5); Rothberg v. Pahlavi, 31 Misc. 2d 153, 160 N.Y.S.2d 677 (Sup. Ct. 1957).

2. Non-disparagement

A non-disparagement clause obligates both parties to refrain from making negative statements about the other party. In addition, the employer will often include a provision which prohibits the employee from disparaging the employer to third parties. For example, the non-disparagement clause would state that the employee agrees not to make defamatory remarks pertaining to the employer’s current or past employees.

3. Indemnification

An indemnification agreement is the promise of one party to protect the other from any loss, damage or liability arising from an act, omission or event. An indemnification agreement may also be used to coerce the other party to cooperate with authorities.

4. Non-solicitation

Many settlement agreements include a non-solicitation clause that prohibits the employee from soliciting the employer’s clients, employees, contractors, agents and vendors. Non-solicitation agreements are particularly important to encourage individuals who may have inside knowledge about employer’s business or customers. Most often a court will hold a non-solicitation clause enforceable if it is reasonable and is designed to protect the employer’s legitimate business interests.

Drafting a Release of Claims Settlement

An effective release of claims settlement agreement has a number of basic components. The first is for the release to be mutual. Both signatories to the release of claims settlement agreement must be releasing claims. This means that both parties must warrant that they have not filed claims in any court, or with an administrative agency, and both parties must warrant that any claims that may exist in an internal grievance procedure or in a mediation or other alternative dispute resolution forum have been resolved. In this way, both parties are assured that they are receiving value in return for the release of claims. Employers are well-advised to require the employee to execute the release of claims settlement agreement prior to the payment of severance pay, if any.
An effective release of claims settlement agreement must also state that the employee is waiving claims against not only the terminating entity but also for any related entities that are identified. For example, it is appropriate to identify affiliates or subsidiaries of the terminating entity in the recitals of the release of claims settlement agreement if the intent is to release such entities from any future claims the employee may have against them. The same is true with respect to an officer, director , manager or shareholder of the terminating entity. It is also appropriate to include in the terms of the release of claims settlement agreement an agreement that the individual shareholder or corporate officer will be released along with the entity from any claims the employee may have against him or her under the law regarding the fiduciary duty of care or the fiduciary duty of loyalty or allegations that the termination of employment was retaliatory or was wrongful in any other way.
Another major component of an effective release of claims settlement agreement is to provide that the employee has twenty-one days to review the terms of the release and to consult with counsel. In the case of employees over age forty at the time of the termination, there is an additional requirement that the employee be advised in writing of his right to consult with counsel regarding the terms and to be provided with seven days following execution of the release of claims settlement agreement to revoke it. The employer may not require the employee to accept the revocation of the release of claims settlement agreement. Finally, the terms of the release of claims settlement agreement must state that revocation is only effective if it occurs within the seven-day period. Employers are well-advised to demand that the release of claims settlement agreement contain a provision that the employee will be deemed to have waived its right of revocation by negotiation of the cheque or the instrument that would otherwise be subject to his ability to revoke the release of claims settlement agreement.

When Is a Release of Claims Appropriate

Circumstances exist, most commonly where the total amount of the settlement is less than the amount of a single plaintiff’s damages, in which case the other plaintiffs and/or claimants will be willing to limit their claims in order to accommodate the settlement and allow their claims and recoveries to be dismissed in exchange for the benefits of early receipt of a portion of the funds. Where the claims are brought by or on behalf of a group of persons or entities (e.g., a group of class members in a class action), it may be in the best interests of all of those persons or entities to enter into an agreement that limits their claims and allows them to recover. This is so, even though the defendant may insist that the claims be limited to those for which the defendant is willing to pay the settlement amount.
A release of claims has the obvious advantage that its execution generally can be obtained in most situations regardless of the number of persons or entities involved. Thus, a single plaintiff, a number of plaintiffs sharing a common cause of action, a typical class action where a single plaintiff can sue for the class under Rule 23 of the Federal Rules of Civil Procedure or similar state rule, or a representative plaintiff for a number of different persons and entities with individual insurance coverage claims, may find that the defendant insists that its claims be limited to enable the defendant to settle with some or each of the others.
A release of claims is particularly desirable to effect a settlement where there is a reasonable prospect that other proceedings can be commenced to evaluate the merit of the claims being settled, and the defendant is unwilling to pay any more than the amounts in the release of claims settlement agreement and wishes to reserve defenses as to any unliquidated claims that might be asserted.
There are occasions when the release of claims may be valued by the claimant or claimants because (1) the availability of discovery and/or expert testimony to prove the unliquidated claims cannot be justified economically given the amount being offered to settle the claim or suit; or (2) the time and cost of proof precludes the plaintiff from pursuing the normal lawsuit channels.

What Mistakes to Avoid

Unfortunately, many common pitfalls arise when a release of claims settlement agreement is drafted or signed and they can jeopardize the enforceability of the release. The most significant common pitfalls occur in an employer’s haste to generalize the release in order to expedite the settlement. Most employers initiate settlement discussions with the goal of including all potential claims in the release so that the employee is not permitted to sue in the future. However, especially in wage and hour lawsuits, it is equally important that the release be narrowly tailored and refer specifically to the potential claims being released. Broad language that unintentionally captures claims not intended to be released, or a release that fails to capture all claims that are likely to be released, can render a release invalid.
For example, one of the common pitfalls in a separation agreement is including a release of previously incurred overtime wages that have already been fully paid to the employee. A careful employer should consider what it and the employee are both intending to release and consider addressing any potential issues early in the process. A very common problem arises when an employer asks an employee to acknowledge in the release that "to the best of his or her knowledge," all wages, fringe benefits, and other amounts due have been paid. A simple revision to this language, specifying that the release does not include wages already received, can prevent a subsequent lawsuit to recover those wages.
No matter what type of release agreement it is, the employer should ensure that it is clear on its face so there is no ambiguity about the agreed upon terms.

Legal Representation

It is important to have an experienced law firm draft or review any release of claims settlement agreement to be sure the language of the agreement is exact and not overly broad, as well as to understand the rights that are being released and to be sure the parties are complying with the specific legal requirements for such agreements under the relevant laws .