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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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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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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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 should not be the product of a cookie cutter operation. They must be carefully crafted to fit the laws and facts of the case. Considerable thought should be given to the scope of the release language in the agreement. We are again reminded of these fundamental principles by the unfortunate result in a California Court of Appeals case called Leung v. Verdugo Hills Hospital, a case in which the appellate court apologetically reached its conclusion while asking the California Supreme Court to reconsider a common law rule regarding releases that led to a very harsh result. 

The facts of the case are very sad: an infant suffered irreversible brain damage when his "bilirubin" reached toxic levels. In the medical malpractice action against the pediatrician and hospital, the parents of the child settled with the doctor for $1 million, the limits of his malpractice insurance, in exchange for a release of liabiity.  The trial court ruled that the settlement did not meet the standard of good faith under California Code of Civil Procedure sections 877 and 877.6, because it was grossly disproportianate to the doctor's potential exposure in the case. Nevertheless, the parents and doctor decided to go through with the settlement.

The case was tried to a jury, which found both the hospital and the doctor negligent, and awarded damages of $78,000 for past medicals, $250,000 for noneconomic damages, $82 million for future medicals, and $13 million for loss of future earnings. Apportioning fault, the jury found the hospital was 40% negligent, the doctor 55% negligent, and the parents 5% negligent. The trial court entered judgment which declared the hospital was jointly and serverally liable for 95% of all economic damages and severally liable for its 40% share of noneconomic damages.

The hospital appealed, claiming that the release and settlement agreement with the doctor acted as a release of the hospital's joint and several liabilty for economic damages. The hospital argued that in cases where there is a single injury:

Under the common law release rule, a release for consideration of one tortfeasor operates as a release of the joint and several liability of the other joint tortfeasors.

The Court of Appeals agreed and reversed the judgment of the trial court as to the hospital's joint and several liabilty for the economic damages. The judgment was affirmed insofar as it imposed several liability on the hospital for $250,000. Unless the California Supreme Court grants review of the case and decides to change the common law rule that led to this unintended outcome, the settlement and release agreement with the doctor wiped out $95 million, money that the jury felt was necessary to care for the future medical and finanicial needs of the child.

Lessons Learned

1. The Court noted that plaintiff could have avoided the result had the settlement agreement contained a covenant not to sue agreement rather than a release of liabilty. That way there would not have been a release of all who were potentially jointly and severally liable, only a promise that the party paying the money would not be subject to future collection efforts.

2. Plaintiffs must be very cautious about the scope of the release. Be sure you are releasing only those rights you intend to let go.

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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 California Supreme Court has reaffirmed confidentiality as a core principle in the mediation of disputes in California. The plaintiff in  Cassell v. Superior Court sued his former lawyers, Wasserman Comden, for legal malpractice arising from a mediated settlement, and he wanted to use information from the mediation session to prove his case. (More about that case later.) A more high profile case has the 9th Circuit Court of Appeals currently wrestling with mediation confidentiality in the Facebook litigation where the Winklevoss twins have appealed to the 9th Circuit Court to get out of a settlement that reportedly gave them $20 million in cash plus 1.25 million shares of Facebook stock (estimated to be currently worth $150 million). An interesting side note is the Winklevoss twins also had a dispute with their lawyers, Quinn Emanuel, arising out the mediation that lead to that settlement with Facebook, the settlement they are now trying to get out of. (Click here to read the Supreme Court of New York's opinion about the $13 million dollar attorney fee dispute.)

Public policy favors the pre-trial settlement of disputes, and mediation is considered by many to be  the most effective alternative dispute resolution procedure. To encourage parties to openly discuss their disputes without fear of having their communications turned on them at trial,  the California legislature enacted confidentiality laws to keep mediation information private. When people try to get out of a settlement agreement by claiming  fraud, economic duress, or some other legal theory to rescind a contract, and they attempt to use confidential information from a mediation, the courts are reluctant to consider such information. For example, during oral argument in the Winklevoss' appeal to the 9th Circuit, the judges expressed concern about  letting them use information obtained in their mediation with Facebook. Check out this YouTube video of the oral arguments by two exceptional attorneys before three outstanding jurists.  

Unlike the the Facebook litigation where one party is attempting to use confidential mediation information against the other party to the lawsuit, the new California Supreme Court case of Cassell v. Superior Court presents a situation where the client is suing his lawyer for malpractice based upon the words and conduct of his lawyer during the mediation. In essence, the client argued that the lawyer used undue influence, pressure, and fraud to induce him to settle the lawsuit for an amount that was less than they had agreed upon in their planning meeting before the mediation.

Prior to the trial of the malpractice lawsuit, the defendant lawyers asked the court to exclude any evidence of their words and actions related to the mediation based on the confidentiality laws. The trial court agreed that such communications were confidential, even in malpractice actions filed by clients against their lawyers. The client appealed the case and the Court of Appeal reversed, reasoning that the confidentiality provisions of the Evidence Code applied to disputes between parties to a lawsuit but such protections should not be extended to disputes between clients and their lawyers. The California Supreme Court disagreed, saying that the applicable statutes mean what they say: all communications related to a mediation are confidential. 

Instead, such attorney-client communications, like other communications, were confidential, and therefore were neither discoverable nor admissible-even for proving a claim of legal malpractice-insofar as they were "for the purpose of, in the course of, or pursuant to a mediation...."

Lessons Learned and Some Practical Applications

• Mediations really are confidential.
• Mediations are not mandatory; they can end at any time or be continued to another date. If you are too tired to proceed, take a break. One of the complaints of the plaintiff in the Cassell case was that the settlement happened after 14 hours of mediation; he was tired and felt pressure from his lawyers to settle the case.
• Mediations, like trials, can terminate a lawsuit; therefore preparation is essential, and it is the key to success in mediation. Lawyers must be prepared to clearly present the law and facts of the case; just as importantly, they must ready their clients for the mediation experience.
• It is good to set a settlement value before the mediation but you should remain flexible during mediation in case you learn something new or gain a different perspective during mediation. The plaintiff in the Cassell case based his malpractice action in part on the fact that the case settled for less than he and his lawyers had agreed upon before the mediation. That is not unusual. A good mediator can help parties see cases from a fresh perspective which may alter the reasonable settlement value of the case. Better to get that perspective from a mediator than from a juror in an interview after an expensive trial that may bring you less than you expected.
• The Winklevoss twins argued that the term sheet that memorialized the settlement deal did not contain the essential elements of an enforceable contract. If you had a chance to look at the YouTube video of the oral argument before the 9th Circuit Court of Appeal, you saw Chief Judge Kozinski and the Winklevoss' lawyer debating the sufficiency of the term sheet as an enforceable settlement contract. Judge Kozinski noted that the term sheet included the number of shares, the amount of cash-"everything you would want in a contract." Nevertheless, in the lessons learned category, it is important to remember that a settlement agreement is a contract and must meet the minimum requirements to be enforceable.

One final note, a humorous one( to me, anyway),  from the oral argument in the Facebook litigation. Senior Judge J. Clifford Wallace asked how the brilliant, Harvard-educated Winklevoss twins, who were being advised by high-powered lawyers and their father who is a business expert, could have been tricked into settling their lawsuit.

"Isn't it a little difficult to say...that they were taken advantage of?" Judge Wallace asked them.

The Winkevoss' lawyer responded that it was true his clients " were not behind the barn door when brains were passed out." But, he said, "The same is true with Facebook."

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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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Appellate court opinions provide more than intrinsic precedential value; they are also useful reads in a “best practices” kind of way. Sometimes the lesson derived from them is “what not to do,” as illustrated in two recent cases from the California Court of Appeals.

The first case is one of those “I did not expect that to happen” kinds of cases. In S.J. Amoroso Construction v. Knecht (click here to read the unpublished opinion), the prime contractor took a default judgment in excess of $200,000 against its window subcontractor which was a corporate entity. After taking the debtor examination of the sole shareholder, the prime contractor sued the owner individually, seeking to pierce the corporate veil or amend the judgment to add the owner. The trial court refused to pierce the corporate veil, found the tort claims were barred by the statute of limitations, and, to add insult to injury, awarded the defendant $70,000 in attorney fees, and the California Court of Appeals affirmed. As a result, after the contractor incurred untold attorney fees and costs, a $200,000 uncollectible default judgment turned into a $70,000 obligation that the plaintiff contractor must pay to the defendant owner.

It appears from the case that the contractor had not anticipated the risk of having to pay the owner’s attorney fees if things did not turn out as planned. The contractor reasoned that since the contract was between two corporations (which meant that the owner was not a party to the contract in his individual capacity) the owner could not be awarded attorney fees based on that contract. The Court of Appeal disagreed, noting that California Civil Code section 1717 makes the right to an award of attorney fees a reciprocal benefit to the prevailing party “whether he or she is the party specified in the contract or not…”

Attorney fees were also an issue in another one of those “I’ve got a sick feeling” cases. In Silver v. Pacific American Fish Company (click here to read opinion), a cross complaint arising from a purchase agreement and related employment contract was filed. The cross-defendant responded by asserting lack of standing and judicial estoppel based on the cross-complainant’s prior bankruptcy proceeding. The trial court ruled in the cross-defendant’s favor, and an appeal was filed from the adverse judgment. The court of appeal rejected the grounds for appeal on various substantive and procedural points. This portion of the opinion is required reading because it reinforces the caution trial attorneys must take in prosecuting cases while preserving issues for appeal.

In the published portion of the opinion, the court held the cross-complainant’s notice of appeal from the post judgment order awarding the cross-defendant attorney fees was untimely, and that his notice of appeal from the judgment did not encompass the separately appealable post judgment order awarding attorney fees. Therefore, the court held that it did not have jurisdiction over the challenge to the order awarding attorney fees. The court of appeal explained:

The notice was filed after Pacific had filed its attorney fees motion, but well before any hearing or ruling on that motion. Thus, at the time Silver purported to appeal the order on Pacific’s motion, there had been no indication of the trial court’s intended ruling on that motion. The trial court’s oral pronouncement of a ruling did not occur until March

26, 2009, over a month after the filing of Silver’s notice of appeal. A notice of appeal filed after rendition of a judgment or statement of intended ruling but before entry of judgment may be treated as timely...But here, Silver filed his notice of appeal before the statement of intended decision. Thus, the notice as it relates to the trial court’s subsequent ruling on Pacific’s attorney fees motion is untimely under the holding in First American Title Co. v. Mirzaian (2003) 108 Cal.App.4th 956, 960 [notice of appeal filed before announcement of trial court’sintended ruling is untimely and cannot be treated as a premature but timely notice].

These cases caught my eye, not because the opinions were so profound or far-reaching but because they illustrate the precarious, unpredictable path of litigation. Successful lawyers understand these challenges and have the wisdom and experience to know which cases should be settled, which cases must be tried, and which cases should not be filed at all. Lawyers with these kinds of skills are more than great litigators; they are also trusted counselors at law. 

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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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I like Abraham Lincoln’s adage about preparation: “If I had eight hours to chop down a tree, I'd spend six hours sharpening my ax.” This post is about sharpening our negotiating axes through a pattern of preparation that includes rigorous legal analysis. My friend and fellow mediator, Don Philbin of San Antonio, Texas wrote one of the finest articles I have read on the subject entitled, “Prepare for Mediation: A Multidisciplinary Approach to Negotiation Preparation." You can read his article by clicking here. (PDF) It will surely sharpen your negotiation skills and help you efficiently resolve many difficult disputes. Here is a summary of Don's article:

1. Rigorous Legal Analysis Forms the Basis Negotiation Preparation.

 [Preparation] is the be-all of good trial work. . . . Everything else, felicity of expression, improvisational brilliance, is a satellite around the sun. Thorough preparation is that sun.         -Louis Nizer

In reviewing the essentials of the rigorous legal analyses that lie at the base of any economic analysis, New York litigator Louis Solomon concludes that “the importance of intelligent, critical, analytical, yet realistic case evaluation cannot be overstated.” Solomon notes that case evaluations should begin early and be updated consistently, including at certain regular intervals.The goal is assessing risk, not achieving perfection. In a recent article, he condenses the evaluation process into five key steps:

identify potential issues;

evaluate issue relationships and overall case bearing;

evaluate the risk or probability of each outcome (fact and law intensive);

evaluate possible upside and downside exposure; and

identify the indirect and collateral issues from the client’s perspective.

2. Decision Tree Analysis Helps Develop and Test Scenarios

In decision tree analysis, you establish the key events of the litigation through trial. You then estimate the probability for success of the key events and the dollar values of the potential final outcomes. 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. On the other hand, a basic decision tree may only depict liability and damage issues.
 
When evaluating liability and damages, you start with the basic question: what is the chance of prevailing on the issue of liability? If liability can be established, what is the amount that will be awarded for damages? The outcome will provide a range for settlement purposes

The process itself is as valuable as the result because it structures our analysis and focuses our attention on the component parts of the problem. In considering the range of outcomes and their probabilities, the parties not only come to a more realistic view of their options, they are able to communicate those scenarios in a common vernacular.

You can read my post on decision trees entiled, Dispute Resolution, Decision Trees, and Albert Einstein by clicking here.

3. Anchoring

As we move from dispute analysis to negotiation planning, we are often faced with the decision to either make the first offer or await one from the other side. That decision turns on a number of variables. One commentator argues that anchoring “describes the process by which the human mind does virtually all of its inferential work.” Anchors function much like our “gut” reactions to the value of an object or lawsuit – the “thin slice” our subconscious sends our conscious mind to evaluate. The more relevant information our analytical mind has, the less we are swayed by an unreasonable anchor. Mistaken or misguided anchors can increase the odds of impasse and have other unintended consequences.

4. Preparation Provides a Framework for Options

Litigants must make choices [about the claims] or turn them over to others for a binding decision. Unwilling to drain every swamp looking for evidence, they are often faced with making decisions with less than perfect information. The challenge then is to make the best decision with the information they do have or budget an appropriate amount based upon the developed choices. Economic analysis helps narrow the field from the legally possible to the economically viable

Outstanding trial lawyers spent considerable time and effort honing their skills to be effective courtroom advocates. But since most cases settle before a verdict is reached, it is equally important to develop effective negotiation advocacy skills. I hope you will spend some time with Don's article to help you sharpen your ax.

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