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

The New York Giants are playing the New England Patriots in the Super Bowl, again. What would happen if the Patriots prepared for the game by focusing exclusively on their strengths and the Giants’ weaknesses while ignoring their own weaknesses and the Giants’ strengths?  That would be ridiculous, right? Bill Belichick, Tom Brady? Forget about it. No way. Those guys will be prepared for every contingency, every angle, and every trick play.

Preparing for mediation is a lot like preparing for a football game-it requires strategic thinking and careful planning. Yet oftentimes I see parties who refuse to recognize the strengths of the opposition or acknowledge any weaknesses in their own cases. They act as if no one will be contesting the outcome if the case goes to trial.  On the other hand, parties who prepare for mediation by conducting an objective risk analysis of the strengths and weaknesses of both sides of the case almost always find reasons to negotiate a successful resolution of the dispute.

 A recent story in a Wisconsin law blog illustrates this point:

National Maintenance and Repair, a tugboat shipyard and barge repair facility, on Tuesday requested that Madison County Circuit Judge Dennis Ruth prevent an economics expert from testifying on behalf of a man suing the company.

Shannon Blair, 41, is suing National Maintenance and Repair claiming his right arm was mangled when a large metal ball attached to a crane fell on it while he was working on a barge on the upper Mississippi River.

The company disputes Dr. Rebecca Summary's testimony in a 13-page motion to disqualify.

"Dr. Summary's calculation of lost earnings and fringe benefits lack an adequate and reliable foundation," the motion reads. "At deposition, Dr. Summary acknowledged that Plaintiff returned to work for National Maintenance on July 26, 2010. However, only her calculation of past lost wages accounts for this fact. With respect to future lost earnings and benefits, Dr. Summary inexplicably decided that Plaintiff would stop working on the first day of trial and would never work again. Such an assumption is unsupported in the evidence and is belied by reality."

She calculated Blair's lost earnings at $1.7 million.

"Even were the Court to accept Dr. Summary's figures and assumptions, her arithmetic is wrong. Using her own figures and assumptions, Dr. Summary overstates Plaintiff's alleged future lost wages by $251, 700," the motion states.

"As the foregoing illustrates, Dr. Summary's opinions do not bear sufficient indicia of reliability and the bases for her opinions are simply not trustworthy."

A party who ignores the possibility that such key evidence could be excluded will not be able to objectively consider the reasonable settlement value of the case, and the litigants will almost always be forced to go to trial because at least one side’s settlement value is based on unrealistic assumptions.  So on the question of lost earnings in this example, what are the chances that the motion will be granted? If it is fifty-fifty, the settlement value would be $850,000 (1,700,000 x .50), assuming 100% liability. What if liability is fifty-fifty? Then the settlement value of the lost earnings claim would be $425,000 (1,700,000 x .50 x .50). Even if the plaintiff got his expert testimony into evidence, what are the chances the damages will be reduced by $251,000 due to the alleged arithmetic errors? If there were a 25% chance of that, the plaintiff would have to do another calculation: $1,700,000 x .50 x .50 -251,000 x .25=$362,250. Under these circumstances from the plaintiff's perspective the reasonable range of settlement of the lost earnings claim is $425,000 to $362,250.

Of course the defendant may have some different assumptions about the likelihood of having its motion granted, so that the defendant's range of settlement may be different. That's okay. It should be expected.  So, for example, what if the defendant believes there is a 50% chance on liability, a 75% chance the motion will be granted, and a 10% chance the court will agree the math is wrong? The defendant's range of settlement would be $212,500 (1,700,000 x .50 x .25) to $187,500 (1,700,000 x .50 x .25-251,000 x .10).

Now we see a range of settlement that includes the plaintiff's high of $425,000 and defendant's low of $187,500. There is still a large gap but the parties are now within a reasonable range to get a deal done. By comparison, if plaintiff had assumed he had a 100% chance of defeating the motion and defendant assumed it had a 100% chance of having its motion granted, the range would have been $1,700,000 to $0. I can hear it now, "I am not going to dignify that number with a response. You tell him to get real or we will see him at trial!" And the plaintiff, "Zero? Are you kidding me? I'll see them in court!" Such failure to make reasonable assumptions about the likelihood of success almost always forces the parties into a trial that neither one really wants.

There are many variables that go into determining the settlement value of a case, and the more of them you take into consideration the more realistic the numbers will become. You would, of course, always factor in the likelihood of success on the questions of liability and damages, but what about the chances of winning or losing a summary judgment motion; a motion to preclude evidence; or some other dispositive motion? What about litigation costs and the possibility of having to pay the other side’s attorney fees if you lose? When two sides carefully think through these types of issues, they almost always come to the mediation within striking distance of each other’s settlement range and when that happens-TOUCHDOWN! Both sides win.

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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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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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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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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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Settlement agreements are contracts.They are subject to the rules governing the formation and enforcement of contracts. Each settlement agreement should be drafted to respond to the particular law, facts, and risks of the case. This is not be a simple "cut and paste" job.

If a settlement agreement is breached, a lawsuit can be filed to enforce the terms of the settlement. While there are reasons not to have an attorney fee provision in some commercial contracts, settlement agreements should have attorney fee provisions, in my view. An attorney fee provision is a deterrent to any party who may want to rescind a settlement agreement, as the losing party would have to pay the other side's attorney fees.This increases the risk of trying to undo a settlement and helps the parties maintain what they bargained for: the resolution of a dispute.

A recent California Court of Appeals case addresses attorney fees and choice of law provisions in settlement agreements. (Click here to read the case.) In the Aronson v. Advanced Cell Technology, the settlement agreement memorialized  the settlement of a lawsuit that had been filed in Massachusetts and included a provision that stated it would be enforced according to Massachusetts law.  The attorney fee provision provided that the Plaintiffs in the Massachusetts action would be entitled to attorney fees in connection with the enforcement of the settlement agreement. The agreement did not provide for any reciprocal recovery for the defendant in the event of a dispute.

The Massachusetts law conflicts with California Civil Code section 1717 which provides attorney fees to the prevailing party, plaintiff or defendant, even though the contract may specify that only one of them is entitled to attorney fees.The Massachusetts law, on the other  hand, does not provide reciprocity to the left out party so that only the named party would be entitled to attorney fees in the event an enforcement action were taken.

In Aronson, the plaintiffs in the Massachusetts action filed suit in California to enforce the settlement agreement. The lawsuit was later dismissed without prejudice, and the defendant moved for an award of attorney fees in the sum of $645,000. The defendant claimed it was the prevailing party because the case was dismissed. The trial court denied the motion on the basis of Civil Code section 1717(b)(2) which says there is no prevailing party when there is a voluntary dismissal. The defendant argued that this exception under California law does not apply because the settlement agreement was to be governed by Massachusetts law. However, under Massachusetts law, the defendant was not entitled to attorney fees because the settlement agreement only specified the plaintiff as the party entitled to attorney fees. To that point, defendant argued that Civil Code section 1717 actually applied to that aspect of the case so that the attorney fee provision was reciprocal. In essence, the defendant wanted California law to apply to one aspect of the settlement agreement and Massachusetts law to apply to another aspect of the settlement agreement. The Court of Appeal affirmed the trial court's order denying the motion for attorney fees and ordered the defendant/appellant to pay the plaintiffs/respondents' cost of appeal.

Lessons Learned

• While the opinion is not earth shaking, it does illustrate, once again, that the drafting of settlement agreements should not be a simple "cut and paste" job.
• Caution must be used when agreeing to a choice of law provision. Each state has its own laws which could result in unanticipated consequences.
• Before agreeing to a choice of law provision outside of your jurisdiction you should attempt to learn how the other state's laws could affect critical terms in your settlement agreement.

Other Points of Interest

The scope of the release is also an important consideration. From the defense perspective, the release should be broad as possible to include any and all causes of actions and claims. The plaintiff, of course, will want the release to be drafted as narrowly as possible so that only those rights that are at issue in the litigation are released. In construction defect cases, the owner will only want to release patent or obvious defects and reserve rights with respect to unknown claims or conditions. Similarly, the owner will not want the release to include any warranties that would otherwise be available under the terms of the construction contract or purchase agreement..  

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The Facebook litigation has been resolved...again. It was first resolved by way of settlement after a day of mediation. Then the Winklevoss twins claimed the settlement agreement was not enforceable on the grounds of fraud. As the Ninth Circuit Court of Appeals noted in affirming the decision of the district court: "For whatever reason, they [the Winklevosses] now want to back out [of the settlement]. Like the district court, we see no basis for allowing them to do so. At some point, litigation must come to an end.That point has now been reached." (Click here to read the case.)

I posted an article about this case on March 4, 2011. (See: The Social Network: Communications During Mediation Are Not In The Public Domain.) Based upon the questions of the Court during oral argument, it appeared the Winklevosses were waging an uphill battle. (See March 4 post featuring video of the hearing.) I was right.

The Ninth Circuit summarized the case as follows:

After a day of negotiations, Connect U, Facebook and the Winklevosses signed a handwritten , one-and-a-third page "Term Sheet & Settlement Agreement' (the Settlement Agreement). The Winkelvosses agreed to give up Connect U in exchange for cash and a piece of Facebook. The parties agreed that the Settlement Agreement was "confidential," " binding" and "may be submitted into evidence to enforce [it]. The Settlement Agreement also purported to end all disputes between the parties.

What struck me most about the opinion is how well the Court was able to simplify a complex case using plain English. I was also impressed  how important it is for clients to know what they are getting into when they sign a release. Courts will interpret release language broadly to effectuate the public policy that encourages settlements. In this case, "the Settlement Agreement grants 'all parties' 'mutual releases as broad as possible'; the Winklevosses 'represent and warrant' that '[t]hey have no further right to claim against Facebook' and 'no further claims against Facebook & its related parties.'"

Finally, it is important to point out the key role the confidentiality agreement had in the reasoning of the Court. The Winklevosses attempted to demonstrate fraud in the inducement of the settlement agreement by introducing evidence of what Facebook said during the mediation. The district court would not consider the evidence because of the protections afforded by the confidentiality agreement.

I'll end this post with the Court's matter of fact assessment of how all of this came down:

The Winkelvosses are not the first parties bested by a competitor who then seek to gain through litigation what they were unable to achieve in the marketplace. And the courts might have obliged, had the Winkelvosses not settled their dispute and signed a release of all claims against Facebook. With the help of a team of lawyers and a financial advisor, they made a deal that appears quite favorable in light of recent market activity.

Chief Judge Kozinski authored the opinion. It's a classic.  

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The NCAA Basketball Tournament, known as March Madness, is upon us. Each year college basketball fans are captivated by this great sporting event, where winners advance toward the championship and losers go home. Trials are like that: eventually there is a winner and a loser in every case. Except the loser does not always go home; sometimes he appeals. In a recent case the California Court of Appeals alluded to another march (Sherman's) and another kind of madness when it used the term scorched earth litigation to describe the hard fouling, take charge lawyering in the case.

 After the trial's conclusion, the court made a number of comments indicating the case was a "disaster" and had gotten completely "out of hand." Among other things, the court referred to "scorched earth litigation" and said that attorneys for both parties were "obstructionists." (Click here to read the case*) 

Scorched earth litigation tactics are often the product of what social scientists and negotiation experts call "attribution errors." When a person makes a mistake, he will attribute situational factors as the reason for the problem rather than blame himself: I was careless; I was exhausted; I was ill. On the other hand, the same person who makes allowances for himself will attribute the actions of his adversary to internal factors: he is dishonest; he is a cheater; he is immoral.

I have seen attribution errors by lawyers many, many times: A claim for extras is not because of a legitimate disagreement about the contract documents, but because the contractor intentionally underbid the work and now is asserting frivolous claims. An owner rejects a claim for extras not because he really believes the work is included in the contract price but because he wants to get something for free. Of course personalities and pettiness can create conflict, and there are those who prosecute or defend claims without good cause; but most often claims can be resolved when people are willing to attribute human error as the cause of the dispute rather than human failings.

That is not to say that construction claims are always easily resolved. Construction is a risky business, and when things go wrong parties do go into self-preservation mode. However, litigation is costly enough without burning money to destroy the other side. Objective risk analysis is essential. It is not enough to convince yourself that you are right, but can you convince a judge or 12 jurors? Will they be able to comprehend your arguments, sort through the piles of evidence, and make the correct decision? Have you spent enough time listening to the other side's arguments to see if there is any common ground or how a judge or jury might react to their side of the case?

In addition to a comprehensive legal analysis of a claim and an objective view of the psychological barriers to conflict resolution, serious consideration must be given to the economic analysis of a claim. Often parties will think in terms of the likelihood of success in prosecuting or defending a claim, with only a secondary thought being given to the costs of litigation and the risks of having to pay the other side's costs and attorneys fees. This phenomenon is illustrated in the recent construction law case mentioned above.

The plaintiffs were homeowners in Newport Beach, California. They filed a lawsuit against their home improvement contractor, alleging claims for breach of contract, fraud, accounting, and violations of California Business & Professions Code section 17200, a law designed to protect competitors and consumers from illegal, fraudulent, and unfair business practices. As a result, it appears the lawsuit was framed in such a way that the dispute was not just about the work being done right or on time or within budget, but the contractor was accused of fraudulent, illegal, and unfair business practices. (Attribution errors?) The contractor filed a cross-complaint for $84,000 against the homeowners and, apparently, the lawyers began the litigation equivalent of a  "full-court press" that eventually lead to the trial court judge's condemning remarks about scorched earth litigation.

Ultimately, the jury found against the homeowners and in favor of the contractor, awarding $20,401, substantially less than the $84,000 the contractor had sought. The contractor then filed a cost memorandum seeking more than $105,000 in costs.The trial court awarded a little more than $28,000 as the reasonable costs of the litigation. This amount included an award of $3700 out of the $36,000 sought for expert witness fees under California Code of Civil Procedure section 998, a law enacted to encourage settlements. The contractor appealed, claiming the trial court committed error by not awarding more for the costs of litigation. The court of appeals affirmed the trial court's order, and awarded the homeowners their costs on appeal.

Apparently attribution errors extended to the arguments before the court of appeals, as the appellate court noted:

[Contractor] somewhat histrionically insists there was a "procedural ambush" and a deliberate attempt to deprive [him] of the right to respond, rather than an error on the [Homeowner's] part.

And the scorched earth litigation continued on appeal:

After considering a 42-page opening brief, a 33-page response, a 39-page reply and a record exceeding 1200 pages on appeal from what should have been a simple motion to tax costs, one can perhaps begin to understand the trial court's reaction.

SCOREBOARD

First Half (trial court phase): Homeowners-$0; Contractor-$20,000 out of $84,000 in damages plus $28,000 out of $105,000 in costs.

Second Half (appellate phase): Contractor-$0; Homeowners- awarded costs of appeal.

We do not know how much the parties paid in attorney fees. Probably a lot. Presumably there was no attorney fee provision in the construction contract so each side had to bear their own fees.

I often wonder about cases like this. Would the contractor have come on so strong, spent so much money, and fought so hard if the lawsuit had been limited to construction issues instead of the additional allegations of fraud that impugned his reputation and character? What could have been done to avoid such an outcome? Here are a few questions worth considering the next time you are contemplating going to trial:

• Is it possible that you misjudged the motivation of the other side?
• Does the amount in dispute justify the expense of trial?
• Are you willing to bear the emotional toll and the distractions that trials entail?
• Have you thought about how a trial, win or lose,  will affect your family, partners, or shareholders?
• When deciding to take the case through trial, did you factor in your attorneys fees and costs of litigation and the possibility of having to pay the other side's attorneys fees and costs, including their expert witness fees? 
• Did you conduct an objective risk analysis of your chances of prevailing?
• Will a jury understand your case?
• If you factored in costs and fees, did you consider that the court might not award you all the costs and fees you would be asking for?
• Did you consider the possibility of an appeal and even a retrial?
• Did you factor in the time value of money?

Of course, some cases have to go to trial because the results of the parties' risk analyses are in different brackets (my last shot at a  March Madness reference, I promise). But in most cases, when parties objectively consider their legal and economic risk analyses, and the psychological barriers to resolving their conflict, common ground can be established and the dispute can be amicably resolved prior to trial.

 *The Court of Appeal designated the featured case as one not suited for publication in the Official Reports which means it can not be cited or relied upon by courts or parties.

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Benjamin Franklin, born 305 years ago this month, famously said, "A place for everything, everything in its place."  This is true for many things, including settlement agreements which are really just contracts for the resolution of disputes. However, like all contracts, settlement agreements have a place for certain things and certain things, such as provisions which identify the consideration being given, the scope of the release and waiver of rights, and much more, must be in their place. Most states have enacted laws that encourage the settlement of civil disputes and attempt to prevent them from being broken. Today's featured case is an example of the underlying public policy that favors the settlement of disputes.

In Blix Street Records v. Cassidy , the plaintiff tried to get out of a settlement agreement, initially lost at the trial court level, then won on appeal, but lost again at trial and ultimately on a second appeal.  Plaintiff's actions were emblematic of another Ben Franklin saying, "Necessity never made a good bargain."

Eva Cassidy was a popular singer and song writer who died in 1996. A dispute arose over royalty payments and motion picture rights associated with Ms. Cassidy's career. A trial began with the empaneling of a jury. During an extended break in the trial, the parties engaged in a mediation which resulted in a settlement. The handwritten settlement agreement contained a release and specified it was subject to judicial enforcement. The parties also agreed that they would prepare a formal settlement agreement after the mediation.

The parties sent an e-mail notification of the settlement to the judge. Later, however, the plaintiff owner of Blix Street Records, an attorney, began to have concerns about the settlement agreement. He believed it was one-sided in favor of the Cassidys, that material terms were missing, and that some of the existing terms were ambiguous. These concerns were not expressed to the other side nor to the court. As a result, the trial court, based on the representations of the parties that the case had been settled, dismissed the jury.

Subsequently, Blix Street Records hired another attorney who informed the Cassidys that the settlement agreement was neither binding nor enforceable. The Cassidys then successfully moved the trial court for an entry of judgment based on the settlement agreement. On appeal, the court held the settlement agreement was not enforceable because it lacked the necessary signatures of certain parties, and the case was remanded to the trial court. The Cassidys then amended their cross-complaint to add a breach of settlement contract cause of action, and the trial court ruled that even though the settlement agreement was not enforceable per the court of appeal's decision, Blix Street Records was judicially estopped from denying the enforceability of the settlement agreement because the court discharged the jury based on the representations of the parties, including Blix Street Records, that the case had been settled. Judgment was entered in favor of the defendants, and plaintiff appealed. In affirming the ruling of the trial court, the court of appeal stated:

Based on the facts, the trial court had sufficient evidence to conclude that Blix Street took two totally inconsistent positions in judicial proceedings—originally that there was an enforceable settlement agreement, but later that the settlement agreement was not enforceable. Blix Street was successful in asserting the first position because the trial court accepted Blix Street‟s position by terminating the trial and discharging the jury.There is no indication that Blix Street took the first position—that the contract was enforceable—as a result of ignorance, fraud, or mistake. Indeed, Straw, a lawyer, conceded that he believed the settlement agreement lacked material terms at the same time Blix Street was taking the position in the trial court there was an enforceable settlement agreement. Accordingly, the doctrine of judicial estoppel legally could be applied in this case.

 There is some Franklinesqe wisdom that can be taken from this case:

1. Undoing a settlement can put you in a worse position than the actual terms of the settlement. Here, Blix Street Records is subject to the terms of the release but some of the other parties are not. Addressing this anomoly, the court said: "Estoppel-whether judicial, equitable, or promissory-can, however, be used to bind a party to what would otherwise be an unenforceable contract."
2. If you have doubts, shout them out. Blix Street Records had misgivings about the settlement before the trial court dismissed the jury. This would be a different case had those concerns been expressed to the court earlier.
3. An ounce of preparation is better than a pound of cure, or something like that. Take a laptop to the mediation that is loaded with your standard form settlement agreement. That way you don't have to waste time and effort ensuring that your standard provisions are in place which will give you more time to thoughtfully draft any complicated provisions. 
4. If you can't dot every "i" be sure to cross every "t". In California, there is more than one way to enforce a settlement. If you can not get everyone's signature on the agreement, ask the judge to order everyone to court so the agreement can be put on the record. A settlement agreement is enforceable if it is in a writing signed by the parties or if the parties so stipulate before the court. (CCP 664.6)
5. Settlement agreements containing executory provisions benefit from 800 pound gorilla  riders. Under 664.6, if requested by the parties, the court may retain jurisdiction over the parties to enforce the settlement until performance in full of the terms of the settlement.

I'll end with one more quote from Ben: "A slip of the foot you may soon recover, but the slip of the tongue you may never get over." 

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Back in the day, the late, great actor Karl Malden pitched American Express Travelers Cheques in television commercials that depicted vacationers being robbed of their cash, followed by Karl’s earnest exhortation, “American Express Travelers Cheques: don’t leave home without them!” The point was that people could protect their money if they would use travelers checks while on vacation. Today I want to “pitch” the benefits of California Evidence Code Section 1123 (and similar statutes of other states) in securing your mediated settlements, and urge you not to leave a mediation without reference to Section 1123 in your settlement agreements. With a nod to Mr. Malden, I present the following scenario for your consideration.

Your mediation lasts late into the night and after many rounds of negotiations, you finally get to “yes,” that is, you reach a settlement. The parties then prepare and sign a term sheet setting forth the basic parts of the deal, with each side agreeing that a formal settlement agreement containing the “usual provisions” would be prepared within a few days. You shake hands with opposing counsel and return home with the feeling you have done a good day’s work. In a few days the unthinkable happens: instead of receiving a draft settlement agreement from opposing counsel, you get a call telling you the deal is off. Wait a minute, you think. California Code of Civil Procedure Section 664.6 says a written settlement agreement signed by the parties can be reduced to a judgment upon motion to the court, right? As you begin to prepare your points and authorities in support of your righteous motion, you decide to check out the chapter on mediation in the California Evidence Code. In shock, you read section 1119 and learn your settlement agreement may not be enforceable because agreements reached in mediation are deemed confidential, and are therefore inadmissible and not subject to disclosure.

You also read Fair v. Bakhtiari (2006) 40 Cal 4^th 189, which held a certain settlement agreement inadmissible under section 1119 because the agreement did not comply with Evidence Code Section 1123. Nervously, you turn to section 1123, hoping to find an exception to the general rule. You read the head note: “Written Settlement Agreement-Conditions for Disclosure.” Hallelujah! There is hope yet. You then read the magic language that makes settlement agreements reached in mediation admissible:

A written settlement agreement prepared in the course of…mediation is not made inadmissible if…any of the following conditions are satisfied:

(a) The agreement provides that it is admissible or subject to disclosure, or words to that effect.

(b) The agreement provides that it is enforceable or binding, or words to that effect.

(c) All parties to the agreement expressly agree in writing …to its disclosure.

(d) The agreement is used to show fraud, malice, illegality that is relevant to an issue in dispute.

Armed with this information, you argue in your motion that your signed settlement agreement somehow or in someway evidences the parties’ intent that it be admissible, binding, enforceable, subject to disclosure, or words to that effect. You promise yourself, however, that the next time you settle a case in mediation, the term sheet will include clear language that complies with one or more of the provisions of Section 1123, so the settlement, if necessary, can be enforced under CCP Section 664.6. While it would seem reference to any one of Section 1123’s subdivisions (a)-(c) is sufficient, you may want to use a “belts and suspenders” approach to your mediation term sheets by including something like the following provision:

It is the intent of the parties that this agreement is admissible, binding, enforceable, and subject to disclosure as provided by Evidence Code Section 1123 (a),(b), and (c), and while maintaining all other aspects of the mediation privilege, this agreement will not be deemed inadmissible under the provisions of Evidence Code Section 1119. In the event a formal settlement and release agreement is not prepared and executed by the parties within 15 days from today’s date, this agreement may be enforced pursuant to Code of Civil Procedure Section 664.6 and the court shall retain jurisdiction until its terms have been fully performed.

Alternatively, if you a prefer a bullet point format for the term sheet, you might add the following:

·        The parties intend this agreement to be admissible, binding, and subject to disclosure as provided by Evidence Code Section 1123.

·        This agreement is neither privileged nor inadmissible under Evidence Code Section 1119.

·        This agreement is enforceable pursuant to Code of Civil Procedure Section 664.6.

There is a lesson to be learned from the sad tale described above: You can protect and enforce your mediated settlement by taking the time to add a few additional words to your agreement that evidences the parties’ intent that it be admissible, binding, and subject to disclosure. If you don’t make the effort, like the vacationers whose cash was stolen in the old television commercials, your settlement could be taken from you.

Evidence Code Section 1123: don’t leave the mediation without it!

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The airwaves are full of cooking shows. Rachel this and Iron Chef that. But for me, it is the Man v. Food show that takes the cake and,  if you have ever watched the show, a lot more than that. The star of the show, Adam Richman, goes around the country taking on a variety of eating contest: eat a bucket of hotter- than -blazes chicken wings in 30 minutes, down 6 mammoth milkshakes in 90 minutes, and much, much more. My family has actually gone to eat at two of the restaurants featured on the show: a BBQ place in St. Louis and a Mexican food place in San Diego. Although we have not attempted the food eating challenges, we have enjoyed the meals and in unison have repeated Adam's mantra upon partaking of the delicious food-"Oh my goodness, oh my goodness." Anyway, in honor of Man v. Food, here is this week's post, subtitled The Secret to Cutting Onions and Deals(Without Crying).*

Resolving disputes is a little bit like cutting an onion: you have to pass through several layers before you get what you want, and along the way you will likely feel some discomfort. The secret to cutting an onion without crying is a primer for "getting to yes" in the world of dispute resolution.

·         Know the score about onions (and litigation). Onions are chock-full of a chemical compound called sulfoxide. When onions are cut, this compound is released into the air as a vapor. When the vapor encounters your eyes, it dissolves into a form of sulfuric acid, and your eyes become irritated. Armed with this knowledge, you can employ techniques that will minimize the discomfort, some of which are noted below. In litigation, you must know that 95% of all civil court cases are settled prior to trial (the percentage is even higher in Federal Court). Establish a litigation plan with that reality in mind. Take steps for an early evaluation of the strengths and weaknesses of your case. Early evaluation leads to early resolution, and early resolution will minimize your client's discomfort; and you will be considered a wise and trusted counselor

·         Use a sharp knife (to carve out your discovery). A dull knife will crush the onion cells more than a sharp blade, and the crushed cells will release more of the onion vapor into the atmosphere. Therefore, use a sharp knife! In litigation, you may be tempted to use discovery to crush your opponent. In reality, the dull knife of discovery can crush your ability to resolve your dispute in a reasonably efficient manner. You must use a sharp knife as a discovery tool! If your discovery plan is inefficient, the enormous cost of litigation for both sides may affect your ability to settle your case.  

·         Slice the onion under running water (and keep your vision clear).
In theory, if you cut an onion under running water the sulfoxide will not become airborne, and the irritant will not get into your eyes. Lawyers and their clients encounter many irritants in our adversarial system of justice that can blur their vision about the realities of their cases. In preparing for mediation, you must run your claims and defenses under the cool waters of reason, logic and experience. You must factor in your trial judge's practices, procedures, and proclivities with respect to the evidence you intend to present at trial. You must objectively consider whether you will be able to get into evidence all facets of your case in chief in order to properly evaluate the risk of trial.

·         Cover your eyes with protective goggles (but don't forget about the other people in the room).
This is a viable solution because the irritants in the air are prevented from touching your eyes, but the goggles will not protect anyone else in the room. Often, litigants will have the protective cover of counsel and feel confident about their chances at trial, but they may not consider the risks or consequences to the other people who may or may not be present in the conference room during negotiations: spouses and children; business associates; shareholders. Unless they've been through it before, your clients will not appreciate the personal and professional toll that is paid at trial. But you know, and you must help your client understand what a trial entails, not just in dollars and cents, but in terms of common sense. How many days or weeks of work will your client miss due to the trial? Will a spouse or child be required to testify at trial? These kind of questions must be fully considered before your client can reasonably gage the impact a trial will have on his personal and professional life.

·         Chill onions (and emotions) before cutting.
When onions are chilled the vapors are less likely to become airborne when the onion is cut. Similarly, emotions that rise up in litigation must be cooled down before mediation. Your fiery brand of advocacy that is so effective in trial will not serve you well during settlement negotiations. Such emotions will certainly offend the other side and most likely render you unable to read the signs and posturing that would otherwise signal progress toward settlement.

·         Don't chop the onion root (or settlement opportunity) until the very last.
The vapor that irritates your eyes is highly concentrated in the root end of the onion. You can minimize the tears by cutting the root end of the onion last. Likewise, you should never cut off the possibility of settlement, or at least be absolutely sure there is no possible way to resolve the dispute without a trial. Before terminating settlement discussions, you should always consider your BAT NA-best alternative to a negotiated agreement-before proceeding to trial. In other words, if you don't settle the case, what is the most likely outcome if the case proceeds through trial? What are the chances of prevailing? What will it cost in terms of time and money? Conversely, what are the chances you could lose the case at trial? If that were to happen, would your client have to pay the fees and costs of your opponent? These issues and many others must be clearly understood before cutting off settlement negotiations.

        Let's face it, no matter how you slice it, some cases must be tried. But given the statistical likelihood of settlement at some point prior to trial, it is essential that you develop the skills and aptitude of a problem solver. Granted, a serious discussion about dispute resolution skills does not often include references to onions, but a recognition of the irritants that often cloud a litigator's perspective can help you develop a conscious strategy to avoid them.

*Adapted from "The Secret to Cutting Onions Without Crying" cited in Wikipedia, "Onions".

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The Critical Path recently reported on a study showing lawyer overconfidence as a barrier to the efficient resolution of disputes. This post will focus on a different study and a recent case that illustrate another barrier to conflict resolution: parties who view disputes as warfare and litigation as a battlefield.

Researchers have found that men in war simulations often overestimated their chances of winning, making them more likely to attack and behave aggressively, resulting in unnecessary losses that could have been prevented with a more balanced approach. In a recent "unpublished " opinion of the California Court of Appeal, a case in which the defendants engaged in "scorched earth tactics," according to the court,  overly aggressive conduct resulted in unnecessary losses for the defense. Click here to read the case. (Note: California Rules of Court prohibit courts and parties from citing or relying on opinions not certified for publication, except as specified by rule 8.1115.) 

The plaintiff in the case was a flight attendant on a corporate jet. She was fired and sued her former employer, two corporate officers, and the pilot. At one point in the litigation, the case could have settled for between $200,000 and $400,000. One of the defendants told his lawyers that he was not interested in settling the case, but rather in destroying the former employee and her lawyer at whatever the cost. As a result, his lawyers engaged in an aggressive litigation strategy described by the court as follows:

The ensuing pace and vitriol of this litigation is suggested by the circumstance that no less than five summary judgment motions were filed, two of them by Medvig. Unsurprisingly, the discovery process was reduced to warfare that was as intense as it was costly.

Costly indeed. With bills of $150,000 to $200,000 per month, the inevitable happened. First, the case did settle, with the defendants paying the former employee not $200,000 or even $400,000, but rather $675,000. And a second dispute erupted between defendants and their lawyers over legal fees, so the law firm withdrew from the case and sued for more than $1,000,000, having only been paid $200,000 for the work of its lawyers. An arbitrator awarded the law firm $938,457 for the unpaid fees, $327,000 for attorney fees incurred to collect the fees, costs of $152,105, plus 10% interest.

The law firm then filed a petition with the trial court to confirm the arbitration award against the defendants. Ultimately, the trial court entered judgment for $1,551,215. The defendants appealed, lost, and the court of appeal awarded costs of appeal to the law firm for an unspecified amount. 

Moral of the Story

To paraphrase a 1970's catchphrase, "Stuff happens." So do disputes. They happen in life, and in business. How we respond to them is our choice. Is there an alternative to the "destroy the opposition at whatever cost" approach to litigation? Of course there is. One of my favorite Japanese proverbs describes an approach that is both economical and wise: "Even a piece of paper has two sides". 

You can spend a lot of money hammering the opposition with discovery to beat them into submission or use it as a precise instrument to figure out what's on the other side of your own story. This will enable you to evaluate the case, analyze the risk of going to trial, and engage in meaningful settlement negotiations. In addition to a factual inquiry, you may want to consider the emotional elements that may be driving the litigation. For example:

• What are the conditions and circumstances of the other side?
• What is the financial condition of the other side?
• What business or personal pressures is the other side facing?
• What would my interests be if I were on the other side?

When we try to see things from the other side's perspective, we can more clearly focus on the strengths and weaknesses of our side of the story. Anger is replaced by wisdom. Fewer mistakes are made. Economical resolutions are reached. On the other hand, when the focus is on destroying an opponent, our judgment becomes slanted; we look at the dispute solely through the narrow lens of our own experiences filtered by our own prejudices.

In the case cited above, decisions based on anger and retribution thwarted a $400,000 settlement and left the defendants with a bitter 1.8 million dollar pill to swallow. I hope their experience is good medicine for us all.

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Barriers to conflict resolution are many, and much has been written about them. In Insightful or Wishful: Lawyer’s Ability to Predict Case Outcomes, a legal studies research paper for the new law school at the University of California at Irvine, noted American psychologist Elizabeth Loftus addresses another barrier to settlement that we lawyers are loath to admit: overconfidence. Indeed, the “saber rattling” of mediation colloquy can sound like the dramatic dialogue out of a Star Wars movie:

Luke: Soon I’ll be dead and you with me. Translated: We’re spending a boatload of money litigating this case but you will run out of money before we do.

The Emperor: [laughing] Perhaps you refer to the eminent attack of your rebel fleet? Yes, I assure you, we are quite safe from your friends here. Translated: Perhaps you refer to your army of expensive expert witnesses. They are no threat to us. I assure you we are prepared to destroy their testimony.

Luke: Your overconfidence is your weakness. Translated: Your overconfidence is your weakness.

The Emperor: Your faith in your friends is yours. Translated: Don’t count on the jury to bail you out of this one.

But lawyers are supposed to be confident, right? Yes, but there is a difference between having confidence and the courage of your convictions and overconfidence and the consequences of poor judgment. In an amusing analogy, Professor Loftus compares and contrasts lawyers and weather forecasters.

First, meteorologists cannot in any way influence the outcome of their predictions. Nothing they do can make it rain. Lawyers, on the other hand, can behave in ways that influence the case outcome. Because they have this opportunity, they may overestimate their own capacity and neglect the importance of factors beyond their control. Second, lawyers have a much keener interest in the goals of their predictions than do meteorologists. Because of this, lawyers might be susceptible to over optimism and wishful thinking.

The central focus of Professor Loftus’ study is the degree of accuracy in lawyers’ forecasts of case outcomes. To read the entire research paper click here. (PDF)  Meanwhile, the following quotes provide a glimpse of her insightful observations :

In summary, whether lawyers can accurately predict the outcome of a case has practical consequences in at least three areas: (a) the lawyer’s professional reputation and financial success; (b) the satisfaction of the client; and (c) the justice environment as a whole. Litigation is risky, time consuming, and expensive.

The consequences of judgmental errors by lawyers can be costly for lawyers and their clients, as well as an unnecessary burden on an already overloaded justice system. Ultimately, a lawyer’s repute is based on successful calculations of case outcome. A lawyer who advises clients to pursue litigation without delivering a successful outcome will not have clients for long. Likewise, a client will be most satisfied with a lawyer who is accurate and realistic when detailing the potential outcomes of the case. At the end of the day, it is the accurate predictions of the lawyer that enable the justice system to function smoothly without the load of cases that were not appropriately vetted by the lawyers.

A lawyer who cannot accurately predict the outcome of a case or who does not thoroughly and efficiently appreciate the litigation risks may ignore alternatives to trial and advise the client to reject reasonable settlement offers. A lawyer who underestimates potential outcomes may advise the client to accept an unreasonably lower amount in settlement than is warranted.

Another factor that might affect the realism of lawyers’ assessments of future goals is perception of control. The extent to which an individual believes he or she can take steps to increase the likelihood of a desirable outcome has been shown to bias confidence estimates in those outcomes. When an event is perceived to be controllable, overconfidence is likely. This bias is linked to what Langer (1975) called an illusion of control, defined as “an expectancy of a personal success probability inappropriately higher than the objective probability would warrant”.

Lawyers frequently made substantial judgmental errors, showing a proclivity to over optimism. The most biased estimates were expressed with very high initial confidence: In these instances, lawyers were extremely overconfident. These findings are consistent with a large body of literature documenting overconfidence in a range of judgments.

With regard to gender, we replicated results obtained by Malsch (1990) that female lawyers were better calibrated than their male colleagues. Male practitioners were more overconfident than female practitioners. These findings are in line with gender differences observed in research on metacognition.

One implication of the present findings is that lawyer performance can be improved by implementing case management strategies that take into account the potential overconfidence biases of the litigators.Case consultations with legal peers can take place informally. For example, in many legal firms, regular meetings are held where cases are periodically reviewed so that the partners can manage the caseload efficiently and ethically. These meetings provide ideal opportunities to obtain objective opinions from other legal professionals in the form of third-party feedback about the strengths and weaknesses of a case and the likelihood that the stated goals can be achieved.

This study shows that lawyers can be too confident. When lawyers do not fully assess the risks or acknowledge certain aspects of the case that may be beyond their control, over-(and under) valuations can happen, making settlement impossible. Objectivity requires lawyers to walk a fine line, some would call it a high wire balancing act, between zealous advocacy and wise counsel. Indeed, wisdom is the safety net that keeps litigators from crashing to the earth.

May the Force be with you.

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Parties hungering for their day in court must digest the potential repercussions of the carrot and stick procedures enacted by their respective legislatures to encourage the pre-trial settlement of disputes. Federal Court Rule 68 provides that a plaintiff whose judgment is less than defendant’s statutory settlement offer may be required to pay defendant’s costs, including deposition costs, filing fees, and other costs incurred after the offer expires. In certain cases, Rule 68 can also be used to cut off plaintiff’s claims for attorney fees incurred after the settlement offer.  Some state courts rules, such as California’s Code of Civil Procedure section 998 and Texas’s Rule 167, add to the list of recoverable costs, attorney fees and expert witness fees in cases where the terms of the statutory settlement offer were more favorable that the final judgment. 

It has been suggested that the correct usage of the carrot and stick idiom is actually “carrot on a stick,” referring to the hapless donkey tricked into pulling a cart by the lure of a carrot dangling from a stick. But studies have shown that rewards alone have little impact on cooperation among human beings, although punishment alone can be motivational.  But when rewards and punishment are combined the effect on cooperation is dramatic, suggesting that the more realistic image of the donkey and the cart would have the driver holding the stick attached to a carrot in one hand and a prodding stick in the other. Similarly, in civil trial courts, the benefits of compromise alone may not be enough to induce parties to negotiate in good faith, but when combined with the threat of having to pay the other side's costs, litigants are generally sufficiently motivated to settle their lawsuits.

In California, for example, a party may serve a written offer to compromise prior to trial, and if the offer is rejected and the opponent does not receive an award at trial greater than the offer, then the party that rejects the pre-trial offer may be ordered to pay the offeror's costs. This gives the parties strong financial incentives to make reasonable settlement offers and burdensome disincentives to discourage the rejection of them.

Unfortunately, some litigants do not even consider the possibility of paying the other side's costs when considering the settlement value of their cases, or, in some states where attorney and expert witness fees can be awarded, they make the mistake of only evaluating general litigation costs such as filings fees, the cost of deposition transcripts, and service of process fees.  When a statutory pre-trial offer is made, the trial lawyer must understand that the offer has created a floor that must be exceeded in order to collect his costs and avoid having to pay his opponent’s litigation costs.

The possibility of a statutory offer of settlement can induce parties to participate cooperatively during a mediation session. In preparation for mediation, counsel will usually calculate the settlement value of a case by analyzing the likelihood of success at trial both as to liability and damages. The damage estimate will then be discounted by some percentage to reflect the possibility that the trial will not proceed according to plan. If, however, counsel must also consider whether the damage award will exceed the amount of a "statutory offer," then the analysis becomes more complicated and the stakes at mediation increase.

For example, suppose plaintiff's counsel believes his case is worth $1,000,000 in damages, but for purposes of settlement discussions considers $800,000 as a reasonable amount for settlement. Without the carrot and stick of a statutory pre-trial offer, plaintiff's counsel need only worry about the other side's costs if no money is awarded at trial. Being extremely confident, counsel considers the likelihood of a jury awarding nothing to be zero. Therefore, counsel concludes $800,000 is the minimum amount that should be accepted at mediation.

On the other hand, suppose counsel's preparation includes an analysis of the other side's costs and what would have to be achieved at trial to avoid having to pay them, and then he fully explains the ramifications of statutory offers to his client.prior to the mediation. Now he will be better prepared to evaluate the risks of trial should the other side's best offer be less than he expected, say $500,000. As a result, plaintiff's counsel will be in stronger negotiating position and better able to meet the needs of his client, knowing the likely floor that he must exceed at trial in order to prevent his client from having to pay defendant's costs which, for a million dollar case, could be hundreds of thousands of dollars..Given this risk, plaintiff's counsel will be more willing to come off the original  $800,000 target number during mediation.

The possibility of paying the other side's costs, especially if they include attorney and expert fees, is a powerful incentive to negotiate in the utmost good faith. As demonstrated above, the cost-shifting feature of statutes such as Federal Rule 68 and California Code of Civil Procedure section 998 can be a carrot to entice reasonable settlement offers and a big stick to discourage rejection of settlement offers. Use this tool to your advantage at mediation. You will increase your negotiating leverage while demonstrating that you are a wise steward of your client's litigation dollars.

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Veteran Utah trial lawyer Harold G. Christensen recently published Samurai Lawyer, a pithy book that provides excellent counsel to trial lawyers based upon “The Samurai Way” of living (and dying, I might add). However, given the fact that more than ninety percent of civil cases settle before trial, it is negotiation skills, not trial skills, that are most often called upon by litigators, and yet relatively little attention is given to them 

 In Japan, samurai were warrior servants who embodied the law of bushido, a Japanese word formed from two other words: bukyo, meaning “The Warrior’s Creed,” and shido which means, “The Way of Gentlemen”. Litigators who adopt these principles to enhance their negotiating skills will resolve their clients’ disputes more effectively and will become more than courtroom warriors; they will be valued as wise and trusted counselors at law.

                                                           I. VISION

A successful negotiator has outstanding vision; he sees both the strengths and weaknesses of his case. He has the capacity to look beyond the narrow focus of advocacy and peer into the broad spectrum of possible outcomes through the eyes of the judge or the jury. He meticulously evaluates the law and facts advocated by his opponent, knowing, as did the samurai, that “You must understand the conditions on the opposite shore to comprehend your side of the river.” This perspective minimizes negotiating mistakes, which, studies have shown, occur more frequently with plaintiffs, but that when defendants do make them, they are really big mistakes resulting in awards much higher than plaintiff’s last pre-trial settlement offer.

                                                           II. PREPARATION

Samurai negotiators know “When you’re thirsty it’s too late to start thinking about digging a well,” so they prepare for the negotiations in every detail. Foundational questions include:

• What do I want to accomplish through the negotiation?
•  What outcomes would not be acceptable?
• Why would these outcomes not be acceptable?
• What are the terms that I must have vs. terms I would like to have?

In their seminal work, Getting to Yes,” Fisher and Ury suggested that negotiators prepare by determining their BATNA, their best alternative to a negotiated agreement. In other words, the client would rather  go to trial than accept an amount lower than the bottom number in her settlement range, if she is the plaintiff, or if she is the defendant, she would prefer going to trial rather than pay more than the highest number in her settlement range. In order to establish their BATNA, successful negotiators determine in advance the point at which the risks of trial outweigh the concessions their client must make to settle the case.

Trial risks can be effectively evaluated through decision tree analysis, in which the key events of the litigation through trial are projected, and an estimate of the probability for success or failure of these events is assigned. A decision tree visually depicts this process in as much detail as may be desired. A more complex decision tree may include the chances of success of potentially dispositive motions, such as summary judgment, or the impact of rulings on certain key evidence. If, on the other hand, the evaluation is limited to liability and damages, the basic question is what are the chances of prevailing on the issue of liability? If liability can be established, what is the range of damages likely to be awarded? The outcome will provide a range for settlement purposes.

                                                            III. Benevolence

“A wise man hears one and hears ten,” so goes the Japanese proverb. Litigators are not known for their benevolence in the courtroom; however, it is an important characteristic for negotiators, who must look beyond economics to see if there are additional motivating factors on the other side of the table. Successful negotiators consider the following:

• What are the conditions and circumstances of the other side?
• What is the financial condition of the other side?
• What business or personal pressures is the other side facing?
• What would my interests be if I were on the other side?

In addition, such things as the titles and responsibilities of the other side’s negotiating team, and their respective ages, length of employment, and relevant experience should be considered. But it does not stop there; successful negotiators also take into consideration the age, health, and financial condition of their clients, including the impact of the litigation on work and family, for successful negotiators understand that, win or lose, trials exact a price beyond money from all of its participants.

                                                             IV. WISDOM

Often, litigants negotiating a dispute will fall into the “You go first” trap. They want the other side to make the first offer and this often leads to frustration, mistrust, and, ultimately, an unsuccessful negotiation. Wise negotiators understand, “Knowledge without wisdom is a load of books on the back of an ass.” They recognize the psychological affects of anchoring and framing, concepts that inure to the benefit of the party who is willing to make the initial move during negotiations. Anchoring occurs when one of the parties makes the first reasonable settlement offer, one that suggests that the target figure is within reasonable range of the likely outcome if the case were to proceed to trial. Studies have shown that the party making the first reasonable offer will likely succeed in the negotiation as the other side must respond to the range that has been set.

Framing is a concept that gives the wise negotiator additional advantages by providing persuasive context to the negotiations. It can cause the other party to focus on features within a desired construct while disregarding other aspects arising from the disputed event. For example, in the realm of politics, we see national leaders framing the debate over health care. While one side has attempted to frame the debate by focusing on the importance of extending health care for everyone, the other side seems to have taken control of the debate by framing the issue as the nationalizing of health care for the benefit of a small group of uninsured people at great cost to the majority of Americans who are content with the status quo. As a result, the party in power has been put on the defensive and has been forced to react within the framework established by the “loyal opposition.” For the litigated case, framing is most effective during the initial phase of negotiations, either during pre-settlement correspondence, in mediation or settlement briefs or during a joint mediation session prior to caucusing. Thoughtfully done, framing can influence the subsequent behavior of both sides: for the “framer” it provides a pattern for organizing and shaping persuasive arguments, while placing on the other side the onus of responding within the desired framework.

                                                            V. HONESTY

Litigators may enlist many strategies during settlement negotiations: anchoring, framing, indifference, aggression, to name a few; but the samurai negotiator understands that honesty and integrity are perhaps the two most powerful tools available to him. He recognizes the truth of the Japanese proverb, which states, “Darkness reigns at the foot of the lighthouse.” Honesty can provide the light that engenders trust; trust will beget understanding; and understanding most often results in the resolution of a dispute, not because either side concedes it is wrong, but because of enlightened self-interest. Honesty also protects the negotiator who may be tempted to blur the line between “puffing” and deceit during negotiations. “ Indeed, cases from twenty-eight states hold that '[a]n attorney can be liable to a non client, even an adversary in litigation, for fraud or deceit.' " Shafer v. Berger Kahn, et.al. (2003) 107 Cal. App. 4^th 54. 

                                                            VI. LOYALTY

Hojo Shigetoki was a samurai warrior of the Kamakura period of the 13^th Century. His writings influenced generations of samurai who followed him. He said this about loyalty: “When one is serving officially or in the master's court, he should not think of a hundred or a thousand people, but should consider only the importance of the master.” Of course attorneys have the highest ethical obligations to their clients. Occasionally, however, clients may call into question the motivation of their attorneys during negotiations. In a recent case that cast into question the breadth of the mediation privilege in California, a client sued his lawyer for malpractice on the basis that the attorney forced him to settle the case. Cassell v. Superior Court, Cal App 4^th 2009/B215215. The samurai negotiator always places the interests of his client ahead of all other considerations.

                                                            VII. COURAGE

Some trial lawyers feel that settlement negotiations are for the faint of heart. Samurai negotiators understand this mentality. In fact they know there are certain cases that must go to trial, and they prepare for that possibility. But they also know that most of the time, lawsuits are resolved through negotiations, so they prepare themselves and their clients accordingly. This takes professional courage. Clients focused on justice do not always appreciate being told that a judge or jury may not agree with them. At the risk of offending or even losing their clients, samurai negotiators fully inform their clients of the realities of the case: that the costs of litigation may outweigh the upside potential of the damage award, that the judge may limit critical evidence, that the jury may not believe the expert witnesses, or any number of things that make ceding control of a case to a tribunal of strangers a very risky proposition. This leads samurai negotiators to engage in settlement negotiations prior to trial as forcefully and effectively as they would prosecute a trial, for they know, as the samurai knew, that “A good sword is the one left in its scabbard.”

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