American Settles Libel Suit With Soviets : Litigation: The Russian negotiators admit that the charges of spying were a misunderstanding, businessman’s lawyer says.

After years of litigation between a Palo Alto businessman and the Soviet Union, a settlement was reached on the American’s lawsuit charging Moscow with libel for accusing him of being a spy and breach of contract, it was announced Monday.

“I’m satisfied,” the businessman, Raphael Gregorian, 61, said in a telephone interview. “It was a mutual decision.”

Gregorian’s Los Angeles attorney, Gerald L. Kroll, said Soviet negotiators admitted to “a misunderstanding” in accusing his client of spying. “It’s probably the first time ever the Soviets accused someone of spying and then admitted it was a misunderstanding,” he said.

The international legal tangle was broken 18 months ago when Kroll had a chance meeting in Los Angeles with Soviet Foreign Ministry spokesman Gennady I. Gerasimov, the lawyer said.

“He suggested steps to take to resolve it,” Kroll said.

Terms of the settlement, affirmed last week by U.S. District Judge David V. Kenyon in Los Angeles, were kept confidential. Signing it along with Kroll were American lawyers representing Medexport, a Soviet government firm.

For years, Gregorian was a welcome figure in Moscow business circles. His California International Trade Corp. generated $10 million a year in sales exporting such items as kidney dialysis and heart-lung machines and batteries for heart pacemakers. Suddenly, in 1984, the Soviets revoked his permit to sell medical supplies. Shortly afterward, the Soviet newspaper Izvestia printed a story denouncing Gregorian, accusing him of bribery, smuggling and espionage.

Gregorian maintained his innocence and declared that the article destroyed his reputation. He claimed the Soviets trumped up espionage charges to avoid paying him. Then, doing what no one had done before, he sued the Soviet Union in U.S. courts for libel. He also demanded that the Soviets pay for medical equipment still in Moscow.

In 1985, Kenyon entered a default judgment against the Soviet Union, awarding Gregorian total damages of $413,165, consisting of a $250,000 libel award against Izvestia and $163,165 in breach-of-contract damages.

The Soviets balked, angering Kroll who, in one colorful episode, took custody of a typewriter at an Izvestia correspondent’s Washington home as partial payment.

Following legal maneuvering, in which the U.S. State Department held that the Soviet Union was a sovereign power immune from legal action, Kenyon dismissed the libel award, but ruled in 1987 that the Soviets still owed Gregorian the $163,165 balance.

Kroll appealed to a federal appellate court, which reversed Kenyon’s decision and sent the case back to the federal judge last year for a new trial. The settlement precludes a trial.