United States District Court, E.D. Michigan, Southern Division
I.E.E. INTERNATIONAL ELECTRONICS & ENGINEERING, S.A. and IEE SENSING, INC., Plaintiffs/Counter-Defendants,
TK HOLDINGS INC. and TAKATA A.G., Defendants/Counter-Plaintiffs.
At a session of said Court, held in the U.S. Courthouse, Detroit, Michigan on July 27, 2015
PRESENT: Honorable Gerald E. Rosen Chief Judge, United States District Court
OPINION AND ORDER
GRANTING IN PART PLAINTIFFS' MOTION TO ENFORCE SETTLEMENT AGREEMENT
GERALD E. ROSEN, Chief District Judge.
At the conclusion of a January 5, 2015 settlement conference conducted by the Court, the parties reached a settlement encompassing this and a related action, I.E.E. International Electronics & Engineering, S.A. v. TK Holdings Inc., Case No. 13-15190, and placed this settlement on the record. The parties then sought to reduce the terms of their agreement to writing, but this effort has reached an impasse. Accordingly, by motion filed on February 17, 2015, Plaintiffs ask the Court to enforce a written settlement agreement that, in their view, embodies the terms of the parties' settlement as reflected in the statements of the parties and their counsel at the January 5, 2015 settlement hearing.
As discussed below, the parties' impasse in their effort to reduce their settlement agreement to writing turns upon two points of disagreement. First, Plaintiffs take issue with Defendants' proposal to include a provision in the parties' written settlement agreement calling for Defendants to withhold a portion of their $1.1 million settlement payment in accordance with the purported dictates of German tax law. Next, Plaintiffs object to Defendants' effort to define the "affiliates" encompassed by the cross-licensing portion of the parties' settlement to include both present and future affiliates of the settling parties. Through their present motion, Plaintiffs invite the Court to break this impasse by enforcing a settlement agreement that lacks the provisions put forward by Defendants concerning tax withholding and the licensing rights of future affiliates. In response, Defendants insist that the provisions they have proposed are consistent with the intent of the parties as expressed at the time of the January 5, 2015 settlement conference.
Since Plaintiffs filed their present motion on February 17, 2015, the Court has convened two status conferences to address this motion, and has urged the parties to cooperatively resolve their differences as to the terms of their settlement. Unfortunately, the parties recently notified the Court that they remain at an impasse. Thus, it has been left to the Court to ascertain the terms of the parties' settlement as to the two above-cited points of dispute, and the Court now turns to this task.
Before addressing the parties' two specific points of disagreement as to the terms of their settlement, the Court first emphasizes what is not at issue in the present motion. In particular, the parties do not dispute that they reached an enforceable agreement at the January 5, 2015 settlement conference to resolve all of their claims in this suit and a related action, Case No. 13-15190. Rather, the disagreement between Plaintiffs and Defendants is more limited: they differ only as to how certain terms of their acknowledged settlement should be memorialized in a written agreement. Importantly, neither side contends that this disagreement is indicative of a broader failure to achieve a meeting of the minds as to all material terms of a settlement, and neither side suggests that the Court's resolution of this dispute will somehow unravel the settlement reached by the parties. Accordingly, with this understanding of what is and is not at issue, the Court considers each of the two points of disagreement raised in Plaintiffs' motion.
First, Plaintiffs take issue with Defendants' stated intention to withhold a portion of their $1.1 million settlement payment in order to comply with an obligation purportedly imposed on the paying Defendant, Takata A.G., under German tax law. As Plaintiffs observe, Defendants' counsel stated at the January 5, 2015 settlement hearing that "Takata will pay I.E.E. 1.1 million United States [d]ollars, " (1/5/2015 Settlement Hearing Tr. at 7), without in any way indicating that any taxes would be withheld from this payment. Defendants do not dispute this point, but they state that their tax advisors informed them after the January 5 hearing that the contemplated payment from a German corporation (Defendant Takata A.G.) to an entity in Luxembourg (Plaintiff I.E.E. International Electronics & Engineering, S.A.) was subject to tax withholding under German law. ( See Defendants' 2/23/2015 Response, Ex. 1, Groombridge Decl. at ¶¶ 8-9.) In Defendants' view, they have "no choice but to comply" with this obligation imposed on them by German law, (Defendants' 2/23/2015 Response at 14), regardless of the parties' failure to anticipate or address this legal obligation when they placed their settlement on the record.
The Court agrees with Defendants that the parties' silence on this issue when stating the terms of their settlement at the January 5, 2015 hearing cannot be construed as evidencing their tacit agreement that Defendants would both (i) pay the full $1.1 million settlement amount to Plaintiffs and (ii) shoulder the entire burden of the tax withholding obligation imposed by German law. Surely, it cannot be said that the parties' failure to address the subject of tax withholding at the January 5 hearing reflected some sort of shared understanding or meeting of the minds as to how this matter should be handled. Rather, this silence was almost certainly attributable to the parties' uniform failure to anticipate the possibility that Defendants' settlement payment might be subject to withholding. See McClusky v. Century Bank, FSB, No. 14-3419, 598 F.Appx. 383, 388 (6th Cir. Jan. 26, 2015) (finding it "significant" that the parties in that case had failed to make any reference to tax treatment and reporting issues in their settlement agreement, where "it is common practice for parties to address these matters in settlement agreements when the parties have, in fact, agreed upon them"). Against this backdrop of mutual unawareness that Defendants' payment would trigger a tax withholding obligation under German law, the Court must determine how this unanticipated obligation should be reflected in the parties' settlement agreement.
For two reasons, the Court finds that the parties' settlement agreement should be construed as requiring Defendants to withhold a portion of their $1.1 million payment in accordance with German tax law. First, it is a settled principle of contract interpretation that the terms of an agreement should be presumed to comply with applicable law. See Walsh v. Schlecht, 429 U.S. 401, 408, 97 S.Ct. 679, 685 (1977) (observing that "a general rule of construction presumes the legality and enforceability of contracts"); see also Restatement (Second) of Contracts § 203(a) ("[A]n interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect."). In this case, Defendants state without contradiction that they are compelled under German tax law to withhold taxes from their $1.1 million settlement payment to Plaintiffs. Consequently, if the parties' settlement agreement is to comport with German law, Defendants' payment obligation must incorporate the tax withholding duty imposed by this applicable law.
Next, in a number of cases addressing analogous circumstances, the courts have found that a settlement agreement's silence with regard to tax consequences leaves the paying party free to withhold taxes from its settlement payment in accordance with applicable law. In International Union, United Automobile Aerospace & Agricultural Workers v. Hydro Automotive Structures North America, Inc., No. 1:11-CV-28, 2015 WL 630457, at *2 (W.D. Mich. Feb. 12, 2015), for example, the parties to a class action reached a settlement agreement that "provide[d] for payments to individual class members in specified amounts, " but did not address the tax consequences of these settlement payments. The settling defendants argued that they were bound by federal tax law to withhold taxes from their payments to the class members, while the plaintiffs contended that the defendants should be required to "gross up" these payments "to ensure that the cash-in-hand for each class member equals the stated amount of the settlement payments recited in" the parties' settlement agreement. Hydro Automotive, 2015 WL 630457, at *2.
The court sided with the defendants in this dispute, finding that the silence in the parties' settlement agreement with respect to tax consequences did not "prohibit the Defendants from following federal law by deducting from any settlement payment the [federal taxes] Defendants believe are due, and from paying those withheld amounts to the appropriate governmental authority on behalf of the various class members receiving cash payments." Id. at *4. In so ruling, the court reasoned that "[i]f the parties had meant to guarantee a particular amount of cash-in-hand [to each class member], they would have had to say so expressly, especially in a tax situation like this that would require grossing up settlement payments to ensure a cash-in-hand outcome." Id. at *3. The court further explained that while the defendants' withholding "may result in less cash on hand for particular class members, " it was nonetheless true that "each class member would still be receiving the full value of the settlement" by having his or her applicable taxes withheld by the defendants and turned over to the taxing authority "for that class member's benefit." Id. In contrast, if the defendants were compelled to increase their payments to class members in order to offset the amounts withheld from these payments in accordance with federal tax law, the court observed that this "would require the Defendants to pay more than they agreed to pay in settlement, and would allow the class members to receive economic value beyond that promised in the Settlement Agreement." Id. (footnote omitted). Finally, the court explained that its ruling comported with the "principle that each side has to bear the tax consequences and other third-party benefits and burdens that go along with implementing the Settlement Agreement." Id. at *3 n.3; see also Powertech Technology Inc. v. Tessera, Inc., No. 4:10-00945, 2014 WL 2538973, at *5 ...