The Critical Path: Tools for Resolving Construction Disputes : California Construction Lawyer & Attorney for Dispute Resolution in Los Angeles, San Diego & the S.F. Bay Area

Even after twenty years, the so-called “McDonald’s coffee case” or “hot coffee case” is still the poster child of tort reform advocates and the rally cry of consumer attorneys. The former decry a legal system which permits such “frivolous” lawsuits while the latter complain that public relations firms distort the facts of the case to engender public sympathy for big business. Let’s pivot away from the politics of the case and, going back in time, look at the lawsuit from a neutral perspective-as people who want to resolve a dispute as efficiently and effectively as possible. Like a mediator.

The hot coffee case is reported in Wikipedia. Using the facts reported in the article, let’s consider what risks were involved in the case and identify some of the barriers to settlement. What was it about the settlement negotiations that made trial a better option for the parties than a settlement? In other words, using Fisher and Ury’s term from their national bestseller Getting to Yes, what was the BATNA-the best alternative to a negotiated agreement-for each party, and why was trial deemed to be a better option than the settlement terms that were offered? This is a question every litigant must consider in order to properly prepare for settlement negotiations.

Your BATNA becomes evident through rigorous risk analysis of the legal, economic, and emotional aspects of the dispute. You should also consider these things from your opponent's perspective. Unless you attempt to view the case from the other side’s perspective of the risks and rewards of the case, you may force your opponent to engage in a trial that no one really wants. Therefore the key to effective negotiations is finding a reasonable settlement range that takes into account the risks and rewards of trial for both sides. The plaintiff will not agree with the lowest number in the settlement range and the defendant won’t agree with the highest, but once both parties find themselves in the same settlement range, settlements almost always happen. It is the mediator’s job to help them get there. Unfortunately, it appears the parties in the hot coffee case were never in the same range until after the trial.

The Accident

• A 79-year-old woman ordered a 49-cent cup of coffee from a drive-in window at a McDonald’s restaurant. The cup had a warning label about the hot coffee.
• McDonald’s served coffee at 180-190 degrees. At that temperature, the coffee would cause third-degree burns in two to seven seconds.   
• While sitting in the passenger seat of a parked car, the woman placed the cup between her legs and pulled the lid toward her to remove it. In the process, she spilled the coffee on her lap.
• She suffered third-degree burns on six-percent of her skin and lesser burns over sixteen percent. She was hospitalized for eight days, underwent skin grafting, and spent the next two years receiving medical treatment.
• Her past medical expenses were $10,500; her future medical expenses were $2500; and her lost income was $5000 for a total of approximately $18,000.

 Pre-trial Settlement Negotiations

The plaintiff made a pre-lawsuit offer of settlement in the sum of $20,000. McDonald’s offered $800.  McDonald’s also rejected a pre-trial offer of $90,000, and then a $300,000 offer, and a final pre-trial mediator’s proposal of $225,000.

Trial, Verdict, and Post-Trial Settlement

At trial, the plaintiff introduced evidence of measures that could have been taken to reduce the risk of burning and evidence of 700 other burn victims. The jury returned a verdict that awarded the plaintiff $200,000 in compensatory damages and $2.7 million in punitive damages. The punitive damages were apparently based on plaintiff’s counsel’s argument that McDonald’s took in $1.35 million in coffee sales per day, and the jury awarded two days worth of sales as a punishment for what happened. The jury did find the plaintiff was 20% at fault, so the compensatory damages were reduced to $160,000. The judge reduced the punitive damages to three times the compensatory amount, for a total of $640,000.

Eventually the parties entered into a confidential settlement prior to the filing of an appeal, presumably in an amount that substantially exceeded McDonald’s initial offer of $800.

Observations

The settlement value of the hot coffee case must be analyzed from a pre-trial and post- verdict perspective.

Pre-trial: What were the chances the jury would find McDonald’s liable? Was the warning on the cup sufficient? Did the plaintiff have any comparative fault? McDonald’s pre-trial offer of $800 seems to indicate that it did not believe a jury would find the company liable under the facts of the case. In addition, the $800 was more than the $714 average settlement given to 700 other burn victims. The defense may have also factored in the high cost of litigation the plaintiff would face and expected a considerable discount from the plaintiff as a result.

The plaintiff though had real injuries and verifiable damages of $18,000. The plaintiff may have felt that the initial settlement offer of $20,000 was reasonable given her actual damages and considerable pain and suffering. Two-thousand dollars for pain and suffering would be more than fair and reasonable, plaintiff must have thought. But did the plaintiff factor in the possibility that a jury would not find McDonald’s liable? Did she really have a 100% chance of success? Could it have been a 75% chance, or some other number? Even if she was 100% certain that McDonald’s would be liable, did she consider that a jury might find that she was also at fault and that her damages could be reduced by some amount on a comparative fault basis?

McDonald’s turned down plaintiff’s pre-trial settlement offer of $90,000. Given the $160,000 of compensatory damages actually awarded by the jury, it seems the $90,000 offer was within a reasonable range. Without more information it is hard to tell the dynamics at this point, but it seems McDonald’s had a totally different view of the case, probably because the medical expenses were only $10,500. McDonald’s probably thought that even if it were found to be liable, an award for pain and suffering would not be more than 3 or 4 times the medical expenses, so the cap on the damages would be limited to no more than $52,000. Therefore, a settlement of $90,000 was unacceptable to McDonald’s because it represented a valuation that was almost two times the amount plaintiff was likely to get on her best day of trial.

McDonald’s then turned down plaintiff’s pre-trial settlement offer of $300,000 and the mediator’s settlement proposal of $225,000. Very interesting: generally the plaintiff would have attempted a compromise by going below her last number which was $90,000. Why did the next offer go up, and not down? Probably because the plaintiff uncovered evidence to support a claim for punitive damages, so the price of settlement went up. It is a funny thing though-most businesses do not want to settle a case based upon potential punitive damages. That is because the burden of proof is so high that it is hard to get punitive damages, so businesses adopt the attitude, “if you want punis you’re going to have to take them from me at trial.” It is a business risk they are often willing to take.

McDonald’s may have thought they could keep evidence of the other burn victims out of the trial by filing a motion to exclude such evidence. I noticed in the court docket numerous motions to exclude filed by McDonald’s, including a “Motion to Exclude Prior Deposition Testimony and Photographs of other Burn Injuries at Trial. (08/04/1994)” Apparently the motion was denied which then let the jury consider McDonald’s prior knowledge of the danger of the 190 degree coffee which apparently led to an award of punitive damages.

I recommend that every trial risk analysis include the possibility of favorable and unfavorable outcomes for law and motion matters. For example, what are the chances of excluding certain evidence and if the motion fails, could the potential damages increase? From the plaintiff’s side, a risk analysis may include the possibility of losing a motion for summary judgment or the impact on damages if a motion to exclude evidence is granted.

A final thought about punitive damages:  court’s have the authority to reduce awards for punitive damages if the amount is deemed to be excessive on constitutional grounds. Here, the trial court reduced punitive damages to three times the compensatory damages. The days of huge punitive damage awards of ten, fifteen, or a hundred times the amount of the compensatory damages are long gone. The U.S. Supreme Court opinion in the State Farm v. Campbell case (where the compensatory/punitive damages ratio was 145:1) a few years ago changed all of that. Plaintiffs need to account for that in their risk analysis and expectations. Trial courts seem to be limiting punitive damage awards in most cases to three or four times the compensatory damages, and if they don’t, an appellate court probably will.

Post-Verdict: at this stage the dynamics have shifted in plaintiff's favor. McDonald’s will have to pay $640,000 plus interest unless the verdict is reversed on appeal. Why then would plaintiff settle for an amount less than $640,000? Because there is a chance the she could lose on appeal. Then she would have to retry the case with a different jury which means an uncertain outcome and additional litigation expense. As a result, the parties settled the case.

Final Thoughts

There are other factors to consider when evaluating the settlement value of a case: the costs of litigation, the possibility of having to pay the other side’s costs and attorney fees if you do not prevail,  the time value of money, etc.. There are also other costs that are harder to gauge:  the emotional toll of participating in a trial, the time commitment, added pressures on family and business colleagues, and much, much more.

I am a great believer in the benefits of settling disputes prior to trial. It requires a realistic view of the facts and the law by both parties. That view must be shaped by realistic assumptions. You cannot compare the strongest parts of your case with the weakest parts of your opponent’s case and expect to have a meeting of the minds.

Disputes happen but reasonable people can usually find ways to resolve them in a cost-effective manner. When they cannot even agree on a possible settlement range, settlement is not possible and the dispute will spill into court. Who will wipe up the mess? A jury of your "peers"-strangers really-who may not even know what it is like to drink hot coffee.

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As a mediator, I am in the business of getting lawsuits settled, so I take special note of court opinions where a party tries to get out of a settlement by alleging such things as fraud, economic duress, and most recently in Starpoint Properties, LLC v. Namvar, a California Court of Appeal case, coercion. Early in my career I settled a lawsuit during trial but the plaintiff attempted to back out of the deal. It took several months and additional legal fees to finally get a court order to enforce the settlement. As a result, I like to report on “settlements gone bad” cases to illustrate how settlements can fall apart and help others learn from what I and others have learned from the school of hard knocks.

The Starpoint Properties case, involving allegation of breach of contract and fraud, was settled when the parties agreed that the lawsuit would be dismissed in exchange for the right to purchase certain real property owned by the defendants in Los Angeles. The settlement agreement also included a stipulation for entry of judgment, which provided that Starpoint would be entitled to judgment in the amount of $8,362,000, plus interest, against all of the defendants named in the complaint, if any one of four events was to occur. Additionally, the stipulation expressly stated that defendants had waived their right to appeal any judgment issued pursuant to the stipulation, as well as any right to receive notice that judgment would be entered pursuant to the stipulation. When negotiating the terms of the settlement agreement and the stipulation, all parties were represented by counsel.

After three of the four events listed in the settlement agreement and stipulation occurred, Starpoint filed the stipulation and judgment was entered ex parte.  Defendant’s attempted to set aside the judgment by alleging that Starpoint coerced them into entering the settlement agreement. However, the trial court found that the claim of coercion was unfounded, and denied the motion. Defendants then appealed but the Court of Appeal found the appeal was untimely; it also noted that the matter would have failed on the merits of the case. Finally, the Court awarded attorney fees to Starpoint as the settlement agreement provided that the prevailing party would be awarded attorney fees in any action to enforce the settlement agreement.

Lessons Learned

Perhaps the most important take-away from the Starpoint case is that settlement agreements have consequences, and the courts will enforce the intent of the parties as expressed in the agreement, as it would for any contract. The court rejected many of the claims on appeal based upon the language of the settlement agreement. For example, the defendants claimed that the trial court erred in entering judgment against them on an ex parte basis, without giving them an opportunity to appear. The argument, however, was found to be without merit because appellants expressly waived their right to receive notice in the settlement agreement, and such waivers are valid under California law.

The Court of Appeal also noted other aspects of the settlement contract that could not be ignored: it expressly stated that the parties had entered into the agreement”voluntarily,” and “with full knowledge of its significance,” and that its terms had been “negotiated at arms’ length among sophisticated Parties represented by counsel.” Some may view such language as “boilerplate”, but unambiguous terms of a settlement agreement will be enforced by the courts. In this case, the Court of Appeal could not find any reason to overturn the order of the trial court-even in the face of a claim of coercion.

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I like to read and report on appellate court cases that illustrate the benefits of self-determination in the mediation process as opposed to court-imposed adjudication in the civil trial process. It may involve a little "Monday morning quarterbacking,"  but I don't consider it to be second quessing anybody but more like watching game film to learn from past competitions and prepare for the next contest.

Today I want to report on a new California Court of Appeal case involving a homeowner and a condominium owners’ association.  It addresses the voluntary dismissal of some but not all causes of action, the question of who is the prevailing party for purposes of awarding attorney fees, and the consequences of a fully executed settlement agreement that includes a waiver of known and unknown claims. These are typical issues in every lawsuit but looking at them from a “post-mortem” perspective can increase our capacity for pre-trial solutions.

WHAT HAPPENED

It is never a good sign when an appellate court admonishes one of the parties to get her “ducks in row,” but that is what happened in this condo case. The court stated:

 A party contemplating litigation to enforce the covenants, conditions, and restrictions of a condominium project should get the "ducks in a row." That is to say, such party should be ready to go forward procedurally and prove its case substantively. Failure to do so subjects the losing party to an award of attorney fees. Here, a condominium owner filed against a condominium association. In defending the suit, the Association incurred attorney fees of a quarter million dollars. Based on faulty reasoning, the owner dismissed eight of the ten causes of action on the eve of trial. She prevailed on no level whatsoever, let alone on a "practical level." But the trial court denied the Association any attorney fees, and the Association appealed. We conclude that the denial was an abuse of discretion as a matter of law. The condo owner did not realize her "litigation objectives" on these causes of action. The Association did realize its "litigation objectives" and was the prevailing party on a "practical level." It is entitled to attorney fees as mandated by the Legislature.

Dismissal

There are potential consequences when a lawsuit is dismissed either voluntarily, as was the case in the condo case above, or involuntarily due to some court action. Depending on the state statute, the court will determine which side is the prevailing party and award that party the costs of litigation and under certain conditions, attorney fees. In the condo case, the plaintiff may have to pay up to $250,000 in attorney fees to reimburse the condo association, the prevailing party. It should be noted that a trial court can also award litigation costs and attorney fees to the prevailing party after a civil trial.

When conducting a pre-trial risk assessment, I believe it is imperative that all parties to a lawsuit consider the possibility of having to pay not only their own costs and fees but also the costs and fees of the other side. Parties must be realistic about the risks posed by the prevailing party statutes, especially given the discretion courts are given in making the determination of who is the prevailing party.

Attorney Fees

In most states, such as California, attorney fees are awarded to the prevailing party if there is a contractual or statutory basis for such an award. For example, many contracts have attorney fee provisions which provide that in the event there is litigation over the subject matter of the contract, the prevailing party will be awarded its attorney fees. Some states have enacted laws to advance a favored public policy that include attorney fee provisions to the prevailing party. In the condo case, for example, the condo association filed a motion pursuant to California Civil Code section 1354, subdivision (c), which provides: "In an action to enforce the governing documents" of a common interest development, "the prevailing party shall be awarded reasonable attorney's fees and costs."  

Litigants should be aware of the potential for having to pay the other side’s costs and attorney fees and conversely, that the other side may have to reimburse them if they prevail. Both sides of the issue should be considered when evaluating the risks and benefits of trial. Paying the other side’s attorney fees and costs is a bitter pill to swallow, especially if the issue was not fully evaluated and discussed prior to trial.

My friend at Construction Law Musings, Chris Hill, has a good post today on attorney fee provisions in construction contracts at www.constructionlawva.com.

Settlement Agreements

Settlement agreements generally contain very broad language to ensure that all claims and causes of action related to the issues in dispute are forever discharged and released. In California, Civil Code section 1542 provides that a person cannot release unknown claims. However, it is a common practice among lawyers to include a waiver of section 1542 so that the settlement and release agreement resolves all known and unknown claims that exists between the parties. This issue came up in the condo case.

The homeowner filed suit against the condo association in 2004 and settled the case in 2005, resulting in a settlement and release agreement that included a provision waiving all rights to known and unknown claims. The homeowner filed a second lawsuit against the condo association in 2008. In response the condo association argued that the homeowner’s claims were barred by the terms of the 2005 settlement agreement. The trial court agreed and so did the California Court of Appeal:

 Accordingly, we reject [homeowner's] argument that the 2005 release did not apply to unknown claims against Association that arose prior to the release. If an argument such as this were given currency, a release could never effectively encompass unknown claims. A releasor would simply argue that release of unknown or unsuspected claims applied only to known or suspected claims, making it ineffective as to unknown or unsuspected claims.

Settlement agreements are contracts. They are subject to the rules of evidence and are interpreted by the courts according to state contract law. They should be carefully drafted and reviewed before they are signed. You must be sure to precisely limit the release language to what is intended by both parties. For example, in the condo case the defendant condo association carved out of the release the homeowner’s obligation to pay monthly homeowner dues and assessments. Sometimes it is simply a point of negotiation, with the defendant wanting the release to be as broad as possible and the plaintiff wanting it to be as narrow as possible. Broad or narrow, both parties must think through the consequences of the release agreement so as to avoid any future surprises.  

As a mediator, I am an advocate for clarity, objectivity, reason, finality, and fairness. Cases like the condo case reinforce what I learned over a twenty-five year career as a trial lawyer: the outcome of a trial is never certain. The most effective trial lawyers are also effective problem solvers and counselors at law. They thoroughly consider each aspect of the dispute, they weigh the risks and rewards of trial, and they carefully explain all of the facets of the litigation to their clients. In my experience, well-prepared attorneys and well-informed clients can usually find a way to resolve a lawsuit prior to trial. Being part of the process that includes such preparation and perspective is one of the great privileges of being a mediator.

Resolving disputes through mediation is both challenging and rewarding. However, the certainty and finality of mediation also means there is less drama and truama when compared to a civil court trial. No "hail Mary" passes to win the game; no last second field goals to save the day. Instead the steady and sure process of mediation is more like the "Three Yards and a Cloud of Dust " reference that was used in the 1960's and '70's to describe the Ohio State Football teams of the legendary coach Woody Hayes, who famously said that when you throw the football three things can happen and two of them are bad(an incomplete pass or an interception). He preferred to run the football even if it meant a gain of only three yards and then a cloud of dust when the runner was tackled. A football team that strings together enough three yard gains (3.4, to be exact), will eventually cross the goal line. And so it is with mediation: parties that stick with the procees and grind it out will usually reach the goal of resolving their dispute, and when that happens, both sides win.

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Conflict is inevitable in our adversary system of justice. The term “adversary system” is defined as “the jurisprudential network of laws, rules, and procedures characterized by opposing parties who contend against each other for a result favorable to themselves.”(Black’s Law Dictionary, Fifth Edition., p.49, italics added.) Since contention is a fundamental aspect of civil litigation, those of us who practice the art and science of mediation must find ways to help adversaries set aside their arsenals of advocacy skills and pick up, for a season, the tools of constructive problem solving.  

The Greek philosopher Diogenes once asked Alexander the Great what his plans were. Alexander answered that he planned to conquer and subjugate Greece. Then what? Diogenes asked. Alexander said that he planned to conquer and subjugate Asia Minor. And then? Alexander said that he planned to conquer and subjugate the world.

Diogenes asked the question again: What next? Alexander the Great told Diogenes that after all that conquering and subjugating, he planned to relax and enjoy himself. Diogenes responded: Why not save yourself a lot of trouble by relaxing and enjoying yourself now?

Mediators often employ the same line of questioning to the opposing sides in a civil dispute. Given the fact that victory in trial is not an absolute, a mediator might ask the following kinds of questions (slightly exaggerated for effect):

Mediator: If the case does not settle, what are your plans?

Trial Lawyer: I am going to use every conceivable resource to discover everything I need to know to win at trial.

Mediator: Then what?

Trial Lawyer: I am going to depose every witness I can round up.

Mediator: Then what?

Trial Lawyer: I am going to hire the best experts in the industry, and they will review all of the documents and all of the deposition transcripts in the case.

Mediator: And then what will you do?

Trial Lawyer: I will write a knock-out motion for summary judgment and if that does not work dozens of motions in limine to severely limit the other side’s evidence at trial.

Mediator: What next?

Trial Lawyer: I will prepare extensively for trial, hire trial consultants, develop fancy exhibits, and convince the jury with my winning arguments.

Mediator: If you win, what will you do next?

Trial Lawyer: I will take whatever measures are necessary to collect the judgment…unless the other side files an appeal.

Mediator: Why don’t you save yourself a lot of trouble and your client a lot of money now by engaging in serious settlement negotiations?  

Disputes happen; they are inevitable. Helping parties see beyond the conflict, the emotions, and the blame is what mediation is all about. In a variety of ways and means, a mediator will help the parties look objectively at the questions of liability, damages, costs, and collectability. The mediator will ask the parties to view the conflict, not through their eyes and experiences, but through the eyes and experiences of those who will sit in judgment, the judge and the jury. Often this point of view sheds new light on questions affecting every civil dispute:

• What do you think you will get in monetary terms if you go to trial?

• What are your chances of obtaining that outcome?

• What will it cost you to get that outcome?

• What are your chances of collecting the judgment?

Finally, another story about Alexander the Great and Diogenes: 

While Diogenes was conducting some research, Alexander anxiously asked, “How can I help you?” Diogenes replied simply: “Please step out of my light!”

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My high school English teacher, Mrs. Clegg, did her best to instill in me a love for Shakespeare. She taught me to look for metaphors and similes in the great bard’s work, and to apply them to my life. Take Juliet’s famous line:”That which we call a rose by any other name would smell so sweet” (Shakespeare’s Romeo and Juliet). I took that to mean that names or titles mean less than the actual substance of a person’s character. Sadly, I never did learn to love Shakespeare, but I have come to recognize Shakespearean moments when, for example, two factions look at the same thing and draw completely different conclusions. Such will be the reaction of owners and contractors when they read Greg Opinski Construction v. City of Oakdale, a California Court of Appeal decision that was published two weeks ago.

For real property owners, the opinion, which is favorable to their interests, may have them thinking that written notice provisions by any other name would smell so sweet. On the other hand, for contractors and subcontractors, the opinion may be reminiscent of an alternative explanation of Shakespeare’s famous line which suggests it was an inside joke about the unsanitary bathroom conditions of the Rose Theatre, a local competitor of the bard’s Globe Theatre. Thus a “Rose” by any other name would smell so sweet.

The owner in the Opinski case rejected the contractor’s claims for time extensions because they were not presented in writing as required by the contract. Past appellate court decisions have given contractors a little wiggle room on oral modifications to the contract. Basically, if there was no prejudice to the owner, the written notice provisions were not strictly enforced. However, the court in Opinski held that contractors must strictly comply with written notice provisions. The contractor’s failure to do so resulted in a waiver of the claims.

LESSONS LEARNED

Contractors claiming additional time and money must strictly comply with written notice provisions. The written notice should strictly comply with the contract requirements in terms of formatting, form of delivery, and service on the owner's designated representative. The Opinski case should dispel the notion that the old “I know they knew” argument will hold up in court.

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NUMBER ONE: Exchange with your opponent salient information about the case well in advance of the mediation. If you represent the plaintiff you may want to ask defense counsel what additional information, if any, is necessary for the defense to be fully prepared for the mediation. If you represent the defendant you will want to be sure the plaintiff’s counsel is fully informed about your view on the liability and damages issues. Last minute exchanges of information frustrate the mediation process because there will be insufficient time for the other side to analyze the information and review it with experts, management, and other people of influence.

NUMBER TWO:  Set a target settlement range prior to mediation. Your settlement range should be analyzed by considering your alternative to a negotiated agreement (BATNA). Your BATNA "is the standard against which any proposed agreement should be measured. This is the only standard which can protect you both from accepting terms that are too unfavorable and from rejecting terms it would be in your best interest to accept. (Robert Fisher & William Ury, Getting to Yes: Negotiating Agreements Without Giving In ( Penguin Books 1991).

 NUMBER THREE: Analyze in advance your risk versus concession points. You should consider at what point the risks of trial outweigh the concessions you must give to reach a resolution of the dispute. These are your ROCR points (Risks Outweigh Concessions for Resolution), and their confluence leads to settlements.

NUMBER FOUR: Prepare an effective mediation brief. Your brief should focus on the key facts of the case pertaining to liability and damages. While briefs are very helpful to mediators they serve the dual purpose of informing your opponent about the strengths of your case. Some lawyers do not exchange their briefs with opposing counsel. I think that is a mistake. A well-written brief sent to opposing counsel well in advance of the mediation allows you to inform the decision makers on the other side about your view of the world. If there is some information for the mediator’s eye’s only, you can add a confidential section to the mediator’s brief. For example, you may have some information you intend to use at trial that you don’t want the opponent to know about but could be useful information for the mediator.

NUMBER FIVE: Prepare your client for the mediation. You should have a pre-mediation meeting with your clients to discuss your settlement strategy, the risks of trial, the costs of litigation, including attorneys fees and expert fees, the implications of a statutory offer to compromise and the possibility of paying the other side’s fees and costs, evidentiary problems and motions in limine that could limit your ability to put on your case, the possibility of an appeal and the length of time and the costs associated with an appeal, collectability issues, and any other fact that would help your client make an informed decision with regard to the settlement value of the case.  

NUMBER SIX: Ensure the presence of the decision makers. Nothing sinks a mediation faster than not having the captains on board and engaged in the process.

NUMBER SEVEN: Show respect for other parties. The objective in mediation is to find a solution to a problem. People who feel disrespected are generally more interested in saving face than they are in resolving the dispute. While you do not have to agree with the things that are being said by your opponent, you should show respect for the other side’s point of view.   

NUMBER EIGHT: Be willing to listen. Effective listening may be the greatest skill-set you can bring to the mediation. Unless you attempt to see things from the other side’s point of view, you will not be able to see your case from the most important vantage points: the jury box and the bench. After all, the judge and the jury are duty bound to carefully listen to the other side at trial; you should be equally engaged and attuned in mediation.

NUMBER NINE: Remain flexible. Enough said.

NUMBER TEN: Don’t hold on to unreasonable expectations. You should not expect to settle the case based on the terms you might receive on your best day of trial. You should go into the mediation with a settlement range based on a realistic risk analysis that considers the strengths and weaknesses of your case and even takes into account the things you cannot control, like an unfavorable jury, the exclusion of a key piece of evidence, or a disastrous witness.

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Judges are people too. Some of them even have a sense of humor. Years ago Justice Sills of the California Court of Appeal began his opinion in a mechanic’s lien case I was handling with these words: “This case presents a real doozy of a puzzle in mechanic’s lien law.” At that point in my career I didn’t know that judges used words like doozy in their learned opinions.

Recently, as reported in the legal humor blog Lowering the Bar (and repeated in the Wall Street Journal Law Blog), Kentucky state judge Martin Sheehan penned a doozy of a ruling that expressed his feelings about the settlement of a case that had been set for trial in his courtroom. The judge wrote:

Such news of an amicable settlement [has] made this court happier than a tick on a fat dog because it is otherwise busier than a one legged cat in a sandbox and, quite frankly, would have rather jumped naked off a 12 foot step ladder into a five gallon bucket of porcupines than have presided over a two week trial . . which, no doubt, would have made the jury more confused ...and made the parties and their attorneys madder than mosquitoes in a mannequin factory.

Continuing his humorous theme, the judge concluded his ruling by asking his clerk to “engage the services of a structural engineer to ascertain if the return of the file to the clerk’s office will exceed the maximum structural load of the floors of said office.”

Over the years I have seen judges equally happy about the settlement of a case, although they were a tad more reserved about it than Judge Sheehan. But in my opinion their joy came from more than just the relief that the settlement helped to free up a busy court calendar or even the recognition that the settlement would result in cost-savings to the county. No, my sense of things is that judges really are people with hearts and feelings. They are public servants who are dedicated to serving people, and they know people are often best served when the fighting stops and healing begins. They know that parties who settle their lawsuits are happy as clams at high tide.

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Mediation is the antidote to the uncertainty of trial and most often leads to the timely, cost-effective resolution of disputes. In mediation, the people with “skin in the game,” the litigants, not jurors, judges, or appellate court justices, decide how and when the conflict will end.  On the other hand, litigants who proceed through trial are subject to the rules of the court and the full power of the state to enforce court judgments and decrees. If an appeal is filed, the process of resolving the dispute may be extended for years.    

The uncertainty of trial and the power of the state were illustrated in Garbell v. Conejo Hardwood Floors, a recent decision published by the California Court of Appeals, where the jury did not view the expert testimony the way one of the parties expected. The trial court did not view the law the way the other party expected. And the appellate court took away the cost award, including consultants and experts fees, of the party that lost the case but was deemed the prevailing party by the trial court. The purpose of this post is to summarize the salient points of the decision and in the LESSONS LEARNED section below, apply them to a hypothetical mediation and pre-trial risk analysis.

Here’s what happened: The Garbells had an $822,000 fire loss at their home, only half of which was covered by insurance. The insurance company paid $424,000 to the Garbells for the covered part of the loss and filed a subrogation action against the flooring contractor who was accused of starting the fire. The homeowners also filed a claim against the flooring contractor to recover the $400,000 of personal property destroyed in the fire that was not covered by insurance. The flooring contractor settled with the insurance company in the subrogation action but defended itself against the claims of the homeowners at trial. The jury found that the damages were $822,000, with the flooring contractor being responsible for fifty-five percent of the loss and the homeowners being responsible for forty-five percent on comparative fault principles. . As a result, the trial court awarded $28,000 in damages to the homeowners, representing the net amount after the subrogation payment and the homeowners’ comparative fault were taken into account. In addition, the trial court awarded costs to the flooring contractor because the homeowners had rejected a $100,000 settlement offer from the flooring contractor and only received a net award of $28,000. Both sides appealed the judgment.

On appeal, Canejo Hardwood contended there was insufficient evidence for the Garbell’s expert to conclude that a carelessly discarded cigarette caused the fire and even if the fire was caused by a cigarette, there was no evidence that the cigarette belonged to one of its workers. Canejo Hardwood also argued that it did not have control over the garage where the fire started after its men left for the day. The Court of Appeal noted, “The jury disbelieved this theory. While we might have reached a different conclusion based upon the evidence, we do not second guess the jury. We therefore conclude there was sufficient evidence of causation to support the jury's finding of negligence.”

The Appellate Court also rejected the Garbell’s argument that the trial court miscalculated their damages by deducting the insurance payment they received after determining comparative fault for the total property loss. The court reached this decision following an extensive review of subrogation laws and the collateral source rule, with the court concluding there was no error in the damage calculation.

Finally, the Appellate Court did agree with the Garbell’s that the trial court erred in awarding costs to Canejo Floors. The court determined that for purposes of awarding costs, the trial court should have looked at the gross amount of the judgment-$452,000-instead of the net award of $28,000. Since the judgment of $452,000 exceeded the Code of Civil Procedure section 998 offer to compromise, costs should not have been awarded to Canejo Floors, and the case was remanded to the trial court for a reconsideration of the motion for costs.

LESSONS LEARNED

A pre-trial risk analysis of the legal and economic implications of going to trial is always appropriate. You want to see if you can negotiate a settlement that is better than an uncertain result at trial. The term negotiators often use is BATNA: what is your best alternative to a negotiated agreement? In other words, what are your chances of getting a better result at trial than you can through negotiations. Here are a few things you might consider in a hypothetical pre-trial assessment:

·         Plaintiff has damages that exceed $822,000.

·         If plaintiff gets everything he wants, he will be awarded $398,000 after the insurance company gets compensated $424,000 on its subrogation claim.

·         Defendant offers to settle the case for $100,000.

·         Plaintiff does not want to accept the $100,000 but knows there may be a settlement range of $398,000 to $100,000. This is where a good mediator can help the parties bridge the gap.

·         How can Plaintiff justify taking less than $398,000 and convince the defendant to pay more than $100,000?

·         Plaintiff must realize that his claim could be reduced through comparative fault principles. Is it possible that a jury could find the plaintiff at fault for 45% of the $822,000 loss? If so, is there some percentage of your claim that you would discount to take this possibility into account? Is it possible that the jury could find the plaintiff entirely at fault because the defendant did not have control over the garage at all times?

·         Defendant must realize that it is possible that the jury will find that the plaintiff has no comparative fault. Is there some amount more than $100,000 that you would be willing to pay to take this into account?

·         If there is comparative fault, what is the likelihood that the court would deduct the subrogation payment from the net amount after the comparative fault calculation?

·         Even if you think there is no implicating evidence because the fire destroyed the evidence of the cause of the fire, what are the chances that a jury will believe the testimony of plaintiff’s expert witness?

·         Given these factors, is there a way to reach a compromise? If you are the defendant, do you want to spend more on experts and consultants when you realize you may not get your costs of litigation back because the plaintiff need only prove damages above your 998 offer when it is undisputed that the loss exceeded $822,000 and even after the subrogation claim is paid off, the plaintiff will still have a good shot at getting a damage award above $100,000.01? And if you are wrong, plaintiff will be the prevailing party so that you won’t get your costs back and there will be a chance you will have to pay the plaintiff’s costs

·         Is there an attorney fee provision that you should consider? What are the chances that the other side will be deemed the prevailing party? What are your chances of being the prevailing party? Do you want to take the risk of paying your own attorneys fees, and those of your opponent?

·         If there is an appeal, what are the chances of prevailing, how long will it take, and how much more money will you have to spend?

There is no doubt that some cases must be resolved by trial. This usually happens when the parties’ pre-trial valuations of the case are wildly disparate. But in most cases, reasonable, objective people can find a way to look at the legal and economic factors to find a way to reach a compromise. Sometimes the gap is closed when an additional factor is taken into account: the emotional toll of a trial on litigants, including the pressure felt by families, shareholders, and partners, and the diversion of time, money, and energy from the people and goals that matter most in life.

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Most of my mediations involve traditional bargaining over money. Sometimes referred to as “positional bargaining,” the process looks something like this: Party A has a claim against Party B for breach of contract, negligence, etc. Party A wants money as compensation for the loss. Party B does not want to pay any money or at least not the amount being claimed. They attempt to settle the matter through numerous rounds of offers and counter-offers, with the mediator assisting the parties in the process.  Most often the matter will be settled, with Party A feeling he did not get enough money and Party B feeling he paid too much.

While the everyday world of most mediators who assist in the resolution of civil disputes involves traditional bargaining, the initial mediation training they receive focuses on interest-based bargaining which often results in thoughtful solutions for mutual gain. For example, an orange is held up and the story is told of two sisters who both want the fruit. The subsequent fight is elegantly resolved when the sisters begin to speak to each other about their interests, and they learn that one wants to eat the fruit and the other simply wants the peel as part of a recipe for dinner; they rejoice to learn that both of their interests could be met by carefully pealing the orange.

A similar example of resolving a dispute through interest- based bargaining is the story of sisters fighting over their deceased mother’s wedding ring. Family unity is wonderfully restored when the sisters start talking about what they really want: one wants to wear the ring and the other wants to remove the diamond from the ring and have it made into a necklace. The conflict is resolved when the one who wants to wear the ring decides to replace the diamond her sister wants with her own birthstone.  

While these stories nicely illustrate how family conflicts can be resolved, does interest-based bargaining actually work in the rough and tumble world of business disputes or personal injury claims? When there is a fight over money, can the parties fashion a resolution that involves more than money? The answer to that question is this: it depends. It depends if there is an ongoing relationship that both parties want to preserve. For example, in the construction industry, a construction dispute between a general contractor and a subcontractor could be resolved if the subcontractor expressed an interest that goes beyond a cash settlement and the contractor expressed an interest in preserving a relationship with a valued subcontractor. Perhaps the subcontractor would take less than he thinks he is owed if the general contractor agreed to give the subcontractor opportunities to bid on future work.

Interest-based bargaining can also be used to successfully resolve a business dispute where the parties have more than just money with which to bargain. The Facebook litigation between Mark Zuckerberg and his former Harvard colleagues, who claimed that Facebook was based on their idea for a social network called Connect U, is an example of this. It has been reported that the case was settled by Facebook paying $65 million, with $20 million paid in cash and $45 million being paid in the form of a stock swap for Connect U stock. This appears to have met Facebook’s interest in limiting its cash contribution to the deal while giving the Connect U people value in the form of Facebook stock which, if you follow the markets at all, turned out to be a good deal.

There may be situations in personal injury cases that would benefit from interest-based bargaining. Perhaps the plaintiffs are interested in preserving the memory of a loved one who is lost in a tragic accident or motivated to see that measures are taken to prevent such accidents in the future.  A defendant unable to meet the financial demands of such a plaintiff could expand the settlement potential of the case by addressing plaintiff’s non-monetary interests in the form of a memorial or some form of educational platform.

It is wise to think about the other side's interests, even in adversarial proceedings. The bottom line is that interest-based bargaining in business disputes or personal injury matters can work under certain circumstances. When a dispute arises the parties should consider whether there are non-cash considerations that could be explored as additional incentives to settle a dispute. 

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