Avoiding collateral damage: vacating a judgment as part of a settlement.

• Author: Drummy, John B.
• Position: Conning the IADC Newsletters

This article originally appeared in the December 2009 Appellate Practice Committee Newsletter.

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The immediate consequences of an adverse judgment are apparent. An unsuccessful litigant faces the costs of complying with the remedy imposed by the judgment, whether an award of money damages, the grant of an injunction, and/or a declaration of legal rights.

The losing party may also face the prospect of collateral damage--costs or consequences beyond those directly associated with the judgment. Such collateral costs might include adverse publicity, damage to the litigant's personal or business reputation, and the precipitation of subsequent lawsuits (including class actions) in which the adverse party may rely on modern doctrines of claim or issue preclusion. In some instances, the potential collateral costs of an adverse judgment might far exceed the immediate costs of complying with the judgment.

The primary route through which a party may seek relief from a judgment is by appeal as of right and certiorari. (1) An appeal may result in a judgment being vacated based upon the merits or errors in the process or procedure employed in reaching the decision. While this route offers the potential for avoiding both the direct costs and the collateral consequences of an adverse judgment, an appeal is statistically unlikely to result in a reversal.

Under certain circumstances, however, a secondary route offers the opportunity to avoid at least the collateral consequences of an adverse judgment. A judgment may be vacated, in the absence of a determination on the merits, where a case becomes moot, including mootness caused by a settlement. Although the limitation on judicial power conferred by Article III of the United States Constitution prohibits a decision on the merits when a case becomes moot, an appellate court "may make such disposition of the whole case as justice may require,'" including vacating the judgment entered by the lower court. (2) District Courts also have authority to vacate a judgment, but the source of authority is separate and independent from that granted to appellate courts.

Authority of an Appellate Court to Grant Vacatur

The power of an appellate court to vacate a judgment (vacatur) is supplied by 28 U.S.C. [section] 2106. That statute reads:

The Supreme Court or any other court of appellate jurisdiction may affirm, modify, vacate, set aside or reverse any judgment, decree, or order of a court lawfully brought before it for review, and may remand the cause and direct the entry of such appropriate judgment, decree, or order, or require such further proceedings to be had as may be just under the circumstances. In exercising this power, an appellate court should be guided by equitable principles. "The principal condition to which [courts] have looked is whether the party seeking relief from the judgment below caused the mootness by voluntary action." (3) This is because "[a] party who seeks review of the merits of an adverse ruling, but is frustrated by the vagaries of circumstance, ought not in fairness be forced to acquiesce in the judgment." (4) The same is true where review is prevented by, or mootness results from, the unilateral action of the party who prevailed in the lower court, (5) from legislative action, (6) or executive branch action, at least where the sole party seeking vacatur is not the office or agency whose action caused the matter to become moot. (7)

Concepts of fairness do not dictate the same result where mootness results from a settlement. "Where mootness results from settlement ... the losing party has voluntarily forfeited his legal remedy by the ordinary processes of appeal or certiorari, thereby surrendering his claim to the equitable remedy of vacatur. The judgment is not unreviewable, but simply unreviewed by his own choice" just as if the losing party failed to initiate an appeal in the first instance. (8)

There are, however, circumstances where vacatur is appropriate and available in cases that are settled after the entry of judgment. An appellate court "will vacate a judgment or order mooted by settlement where the relief is equitably justified by exceptional circumstances." (9) The mere fact that a settlement agreement provides for vacatur is not an exceptional circumstance. As the Supreme Court said in Bonner Mall,

[T]he determination is an equitable one, and exceptional circumstances may conceivably counsel in favor of such a course. It should be clear from our discussion, however, that those exceptional circumstances do not include the mere fact that the settlement agreement provides for vacatur-which neither diminishes the voluntariness of the abandonment of review nor...