One clarification though - we weren't looking to push her out. She informed us (me, actually) that she was looking to quit and wanted to walk away. I'd asked her to stay on for a while and she did. In the end, she was planning again to quit and, instead, I offered the paid leave of absence.
We definitely could (should?) have taken steps to avoid the lawsuit early on and we probably didn't treat the case as seriously as it ended up being, but that's much easier seen in hindsight, I think.
I wonder if a clean break (with severance) would have avoided this issue altogether - I'm not exactly sure that would have worked either.