In Reversal of Fortune, Court of Appeals Finds Ambiguity in Executive’s General Release

Last May, we covered a decision by a Michigan federal court that torpedoed Debourah Mattatall’s claims against her former employee, Transdermal Corporation.  Now, thanks to a recent decision by the U.S. Court of Appeals for the Sixth Circuit, Mattatall’s claims have been brought back to life.

To briefly recap the facts, Mattatall used to own a company called DPM Therapeutics Corporation.  She sold it to Transdermal and entered into a Stock Purchase Agreement and Employment Agreement with that company.  According to Mattatall, Transdermal didn’t comply with its obligations, and she sued it in federal court.  But the court quickly granted summary judgment, finding that Mattatall gave up her claims in a settlement agreement that resolved other litigation against her.

In that litigation, DPM’s minority shareholders challenged the sale to Transdermal, and Transdermal countersued those shareholders.  The parties to the litigation, including Mattatall, resolved the dispute and entered into a settlement agreement and a general release.  The release stated that “Transdermal, DPM, [another controlling owner], and Mattatall and each [minority shareholder] … release[d], waive[d] and forever discharge[d] each other” from any claims arising before the agreement was signed.  In Mattatall’s subsequent lawsuit against her employer, Transdermal, the district court ruled that this language released all claims that any party to the agreement had against any other party – even though Transdermal and Mattatall were on the same side in the shareholder litigation, and Transdermal reassured Mattatall that she wasn’t releasing her unrelated claims against it before she signed.  Because her claims against Transdermal fell within the “unambiguous” and “broadly worded” terms of the release, this evidence was irrelevant, and Mattatall was out of court.

The Sixth Circuit read the agreement differently, finding two reasonable constructions of the release language.  Admittedly, it said, the “language of the release, viewed in isolation, [was] broad enough to bear the construction given it by the district court.”  But “read in context of the Settlement Agreement as a whole,” the release could also be interpreted as one resolving the dispute between the minority shareholders on one hand and Transdermal, DPM, and the majority owners (including Mattatall) on the other.  Indeed, if the parties weren’t viewing this as only a release by these two warring groups as to each other, then it wouldn’t have been necessary to use two “ands” in the listing of parties (saying that Transdermal, DPM, [another controlling owner], and Mattatall and each [minority shareholder]” released claims against each other).  After finding the agreement ambiguous, the court pointed to extrinsic evidence that left the “distinct impression that Debourah Mattatall, upon raising reasonable concerns about the apparent scope of the release, was reassured both by Transdermal’s counsel and her own that her extraneous contract rights were preserved.”  Thus, summary judgment was inappropriate. 

As the Sixth Circuit’s opinion shows, when a contract includes language that, in isolation, contradicts one party’s position, the fight is not over.  That party can still argue that the language must be read in context of the entire agreement, and if that context permits a different reading, then the problematic phrase is not dispositive.  This can make the difference between a court deciding your dispute as a matter of law and a jury having the opportunity to consider the surrounding evidence and interpret the contract.  The argument that isolated language must be read in context is important not just for contract disputes, but for any dispute in which a court must interpret a legal writing, such as a law passed by Congress.  Indeed, in the near future, the Supreme Court will decide a case that requires it to decide whether Congress meant to forbid tax subsidies for health insurance exchanges created by the federal government when it passed the Affordable Care Act.  The outcome of that case will likely get a lot more press than Mattatall’s victory.

• Breach of Contract
• Civil Litigation
• Summary Judgment