Settlement agreement (transaction)

A settlement agreement is the contract by which the parties, through mutual concessions, bring an existing dispute to an end or prevent a future dispute (Article 2044 of the Civil Code). It must be made in writing. In intellectual property, it is the most common means of resolving infringement, opposition or validity disputes, whether it is concluded before any proceedings, during proceedings or after a judgment under appeal. It differs from mediation, which is an assisted negotiation process that may result in a settlement.

Conditions of validity

A settlement requires a dispute, existing or potential, and mutual concessions, whose existence the court reviews without assessing whether they are equivalent. Abandoning a claim without anything in return is a waiver, not a settlement. The parties must have capacity to dispose of the rights concerned, which calls for checking the signatories’ authority and, where there is an exclusive licence or co-ownership, the consent of the other parties concerned. A settlement may cover economic rights, but an author cannot waive moral rights in advance. The clauses must define precisely the acts covered, the territories, the titles and the period concerned, failing which the scope of the waiver will be disputed.

Effects of the settlement

A settlement bars the parties from bringing or continuing court proceedings between them with the same subject matter. It settles only the disputes it covers, and it is interpreted strictly: the parties are deemed to have waived only the rights they intended to include. It binds only the parties and does not amount to an acknowledgement of validity or infringement as regards third parties, unless it contains an admission or no-challenge clause. The parties may have it approved by the court to make it enforceable. It frequently sets out undertakings for the future, for example a withdrawal of products, a licence, a trade mark coexistence agreement or a no-challenge clause, whose performance is secured by a penalty clause.

Limits and risks

A settlement is not immune from competition law. An agreement by which a patent holder pays a competitor to delay its market entry may constitute a restriction by object, as illustrated by the pay-for-delay agreements penalised by the European Commission and the Court of Justice. A settlement may also be annulled for fraud or duress, and its performance may give rise to separate litigation, the court then dealing only with the obligations it creates. Its confidentiality, generally stipulated, does not prevent it from being produced in court where its performance is at issue.

Key points

A settlement ends the dispute through mutual concessions recorded in writing and bars any new action between the parties on the same subject matter. Its drafting determines its scope, which is interpreted strictly. Define precisely the acts, titles and territories covered, check the authority and the consent of licensees or co-owners, provide for a penalty clause and verify compliance with competition law before signing.

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This glossary entry is general in scope and does not constitute legal advice.

Dhenne Avocats litigates patent disputes before the Paris Judicial Court, the Paris Court of Appeal and the Unified Patent Court. When the question arises in a real case, the right moment is almost always before proceedings are issued.

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