Tag: settlement

What Is Bad Faith In A Mediation?

bad faith authority to settle mediation

In Holly v. UPS Supple Chain Solutions, Inc., 2015 WL 4776904 (W.D.Ken. 2015), the parties agreed to mediate a case before a federal magistrate. The court’s Settlement Conference Order stated that “each party must attend through a person who is fully authorized to approve a settlement and has the power to change the party’s settlement posture during the court of the conference.” The court awarded attorneys’ fees to the plaintiff as a sanction for defendant’s bad faith at the ensuing settlement conference because the defendant failed to send an appropriately empowered representative.

Defendant’s representative stated that she had met with a team of people before the mediation and that they determined a maximum value for plaintiff’s claim. She further stated that she had full authority to settle for that maximum value and even had some “wiggle” room to go above it. The court ruled that it was fine to set a value on a case, and also fine to have a settlement amount in mind, but sending a representative who effectively lacked authority to exceed a pre-determined settlement amount violated the requirement to send someone “fully authorized.” The policy concern underlying this is that mediations sometimes change a party’s view of the value of a case, but if the representative is not authorized to go above a pre-determined amount, there is no chance of changing that party’s assessment.

This issue does not arise in private mediations unless the parties agree to a requirement to send someone with full authority. However, most courts have requirements similar to the one at issue here. One Northern District of Illinois Magistrate, for example, requires someone with full settlement authority, defined as “the authority to negotiate and agree to a binding settlement agreement at any level up to the settlement demand of the opposing party.” Parties should therefore be aware that in a mediation under a court’s auspices they should send someone with at least theoretically unlimited authority, even if that person does not intend to go above a certain amount.


Court Inquires Into Materials Exchanged During Mediation For Class Action Settlement Approval

ABA American Bar Association, Section of Litigation, Alternative Dispute ResolutionThis article was also published by the American Bar Association’s Section of Litigation, Alternative Dispute Resolution Committee.

Confidential mediation statementsIn Ogbuehi v. Comcast of California/Colorado/Florida/Oregon, 2014 WL 4961109 (E.D.Cal. Oct. 2, 2014), the Court was asked to grant preliminary approval of a class action settlement reached through mediation before class certification. Preliminary approval of a class action settlement requires only that the court determine whether the proposed settlement is within a range of possible approval. Final approval — particularly before a class is formally certified — requires a more rigorous review and a determination as to whether the settlement is fair, reasonable, and adequate.

The Court granted the requested preliminary approval, but noted that it had reservations on whether it would grant final approval of the settlement. In order to make the required fairness determination, which included examining the settlement process for evidence of collusion or other conflicts of interest, the Court ruled that the parties would have to submit “more detailed evidence concerning the mediation and negotiation of the proposed settlement agreements.” The Court stated that it would need to “understand the nature of the negotiations” before making its final determination. Of particular concern were certain estimates of potential liability that were disclosed and discussed during the mediation. The Court therefore ordered the parties to submit “information exchanged during their private mediation including, but not limited to, mediations statements and any relevant communications during the parties’ negotiations.” Recognizing that such materials might be confidential, the Court permitted the parties to request that confidential materials be reviewed in camera.

Federal Law Governs The Mediation Privilege In Federal Court Even When State Claims Are Involved

ABA American Bar Association, Section of Litigation, Alternative Dispute ResolutionThis article was also published by the American Bar Association’s Section of Litigation, Alternative Dispute Resolution Committee.

9th circuitMany states have statutes that create a privilege for mediation communications. There is no parallel federal statute, and federal courts have declined to create a federal common law privilege for mediation communications. Consequently, it is fairly well settled that cases in federal court that involve solely federal law claims do not apply a mediation communication privilege (unless provided for by local court rule), and that federal court diversity cases that involve solely state law claims will apply a state law mediation privilege.

It is more difficult, however, to determine what law controls the mediation privilege in a federal court case involving both federal and state law claims. This issue arose in Wilcox v. Arpaio, 2014 WL 2442531 (9th Cir. 2014), a federal court case involving both federal and state law claims that appeared to have settled in mediation. A dispute arose over whether a binding settlement had actually been reached. The Ninth Circuit held that state law governed whether a settlement had been reached for both the state and federal claims. A question then arose as to whether evidence from the mediation was admissible to determine if a settlement had been reached. The Ninth Circuit ruled that where a case involves both federal and state law claims, and the same evidence will be received on both claims, a federal court is not bound by state evidentiary rules.  Thus, the Court ruled that it need not apply the applicable state statutory mediation privilege.

It is not certain, however, that other courts will reach the same result.  Once the case settled, one could argue that the only remaining claim was a state law contract claim to enforce the settlement agreement.  The Court ruled that it was not bound by state privilege law because there were both federal and state law claims involved, but it is not clear that any federal claim remained once the dispute had been reduced to whether an enforceable settlement had been reached.  If a court were to conclude that all that remained was a state contract claim, the state mediation privilege would seem to apply.

Failure To Nail Down Scope Of Release Negates A Mediated Settlement

It is critical to nail down the scope of the contemplated release before concluding a mediation. Case in point: In Kaiser v. Trace, Inc., 2014 WL 1745419 (D.Idaho 2014), the parties reached an oral settlement of an employment discrimination case in a mediation, but did not write anything up. A follow-up email memorializing the terms of the settlement said only that “Defendant will prepare a standard release between the parties.” The draft settlement agreement submitted by the defendant to plaintiff contained three clauses in the release that the plaintiff would not agree to:

  1. plaintiff was barred directing prospective employers to the defendant for information,
  2. if defendant had to sue to enforce the agreement plaintiff would be responsible for defendant’s fees, and finally,
  3. plaintiff released the defendant, but defendant did not release the plaintiff.

Of particular concern to the plaintiff, not surprisingly, was the lack of a mutual release.

The court noted that, while the parties had agreed after the mediation that a settlement had been reached, given the differences on what should be in the release, the requisite meeting of the minds to create a binding settlement was lacking. Even if the above-mentioned clauses were part of Defendant’s “standard release,” which is what the parties agreed to, it was clear that Plaintiff did not intend to agree to such terms. Absent a true meeting of the minds, no settlement agreement had been reached.

While the lack of clarity in the terms of the released unraveled this settlement, the parties do not need to draft a complete release at the conclusion of a mediation. A simple sentence such as “the parties shall draft a full mutual release” will usually suffice. Additionally, any potentially contentious terms such as a fee provision or a confidentiality clause need to be spelled out during the mediation, because if they are not, the whole settlement may be in jeopardy.

Are there consequences to turning down an offer in mediation?

ABA American Bar Association, Section of Litigation, Alternative Dispute ResolutionThis article was also published by the American Bar Association’s Section of Litigation, Alternative Dispute Resolution Committee.

Turn down mediation offerIn Fogh v. Los Angeles Film Schools, 2012 WL 6604709 (Cal.App. 2012), the plaintiff won a $13,972 judgment plus a statutory fee award of $96,800. On appeal, the defendant argued that the plaintiff should not get any fees incurred after counsel turned down a settlement offer of $20,600 made during a mediation. The defendant made the equitable argument that fees expended after turning this offer down were not reasonable because the ultimate award was for a lower amount than the settlement offer.

The trial court rejected defendant’s argument, and the appellate court affirmed, on two grounds: (1) all discussions that occurred during the mediation were privileged, so the settlement offer could not be considered for any purpose, and (2) it was reasonable for plaintiff to have turned down the settlement offer because the defendant had failed to provide any documentation supporting the amount of the offer. The court also noted that California had an offer of judgment procedure (similar to Federal Rule 68), but that the defendant had not used that procedure.

While one can see a defendant’s frustration with paying a substantial fee award when a plaintiff has turned down a settlement offer in excess of the ultimate judgment, had the court come out the other way, a chilling effect on mediation would be the likely effect. Counsel dependent upon a statutory fee award would have to think twice about entering into a mediation if there could be consequences on the ability to recover fees incurred after that date. Parties will generally agree to mediation only if the process is viewed as voluntary and with no downside other than the minimal time and expense of the mediation itself.

Mediator’s Reports

Mediator's ReportsThere are an increasing number of reported cases in which the parties end up fighting about what occurred in a mediation. These disputes include whether a settlement was reached, what the terms of the settlement were, and whether one party acted in bad faith. It is logical in such situations to turn to the neutral mediator for a report on the relevant facts. In Illinois, however, the Uniform Mediation Act (710 ILCS 35/7) prohibits a mediator from providing a report on anything other than certain specified subjects, principally whether the mediation occurred or has terminated, whether a settlement was reached, and attendance. The mediator is not allowed to report on the content of the mediation. Although a report beyond these boundaries would likely be permitted if agreed to by all parties, in a contested situation, the mediator is severely restricted from providing a report on what took place.

An example of the impact of this on litigation is the recent case of Knowles v. Community Loans of America, Inc., 2012 WL 5868622 (S.D. Ala. 2012), where a trial court dismissed a claim because of a failure of the plaintiff to negotiate in good faith in a court-ordered mediation. The dismissal was based in part on a mediator’s report that described the plaintiff’s failure to provide requested information on several occasions. The appellate court found the dismissal an abuse of discretion for several reasons, one of which was that the court could not, under the Uniform Mediation Act, consider this kind of report from a mediator.

Note that this ruling is specifically based on the Uniform Mediation Act, which has been adopted in Illinois and about 10 other states. In addition, in an adopting state such as Illinois, there is an interesting question as to whether the Uniform Mediation Act applies in federal litigation. This would seem to turn on whether the statute was considered procedural or substantive under the Erie v. Tompkins doctrine.