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I think this is the most likeliest outcome, Mo. The answer to whether Fenene shafted the Pats, or the Pats medical staff wasn't thorough enough will have to wait for BB's memoirs to be published, but it just makes too much sense for the Pats not to just give up on the 2.5 he already has, and get a credit for the rest.
If both sides go the legal route, most of what would be gained by either party would be eaten up in the legal process. As usual, only the lawyers win. I think Fenene would agree, since he already stole $2.5MM from the Pats and any legal battle for the rest will cost him more, relatively speaking, than a deep pocketed multi-billion corporation.
IIRC from the threads on the topic when he was cut, going after the money they already gave him would be pretty murky. I think the Pats would have prove he was hurt prior to the signing, and that would be tough since (IIRC) he practiced a few days and he could claim he got hurt then. That would be hard to disprove.
For Fanene a settlement of sorts may be preferrable but not because of legal fees. The NFLPA covers those for players filing grievances. If he's trying to come back it may be in his best interest not to have his medicals dragged through the mud. If he's not, he will likely persue the $1.35M he is owed because "that's a lotta dough".
Personally I've never believed they had a leg to stand on or any intention of persuing it. They were simply embarassed at making a mistake and when that happens in a Kraft owned organization Jonathan tends to get somewhat pre-emptively defensive.
They got all his medicals from Cincy, although they signed him before they finished reviewing them (or perhaps before they even arrived some have claimed). They administered 2 physicals, one pre signing and a second pre camp after he experienced some discomfort during early offseason OTA's. He passed both. Early arthritic changes are not easy to identify during routine physicals. Fanene wouldn't be the only player on the team experiencing them, either, who hasn't yet been actually diagnosed with arthritis and is playing through it's early stage.
If you really, truly go digging for trouble you'd be hard pressed to field a team.