Effective settlement: Knowledge, timing and preparation

It comes as no surprise to legal professionals--lawyers, judges and ADR neutrals alike--that most civil litigation resolves without trial. Procedural and dispositive motions resolve a small fraction of more than 500,000 civil cases filed annually in California. The vast majority of the remaining civil cases resolve through settlement. The high rates of pretrial settlement--by most estimates exceeding 95%--are accounted for by various factors, among them congested court calendars, the high cost of civil litigation (especially attorneys' fees), the litigants' desire for certainty of outcome, litigation fatigue and others. These civil litigation realities largely underlay the explosive growth of the ADR industry over the past four decades, as well as judiciary's embrace of resolution of civil litigation through ADR as legitimate ends to be pursued through our public systems of justice, and not mere sideshows to the adjudication process. Remarkably, for all of the emphasis on resolving cases through settlement or mediation, not enough thought has been given as to what makes for an effective settlement conference or mediation.

A simple truism--often lost among the discussion of various settlement techniques and styles, and the impact of psychological factors and personality on the settlement and mediation processes--is that many judges, mediators and attorneys ignore or do not give due weight to the simple basics of the settlement process that are  drivers of success irrespective of particular technique utilized, or the psychological or personal dynamics involved in a specific case. Among these are timing, giving due consideration to the potential range of possible settlement outcomes, case knowledge and basic preparation. These factors--or better stated, these drivers of success in the settlement context--all are interrelated and should be considered before the settlement conference or mediation takes place. All are critical to effective dispute resolution.

Considering the range of outcomes

The settlement process has a distinct bias in favor of money, i.e., the payment of a sum from one party to the other in order to resolve litigation. And understandably so. The court system has, as one of its primary objectives, the monetization of disputes and injuries. All things considered, courts are very good at this task. However, allowing the bias towards monetary resolution of disputes to carry over into the settlement process without consideration of a range of outcomes limits the potential for resolving litigation through the settlement processes.

A frequently overlooked benefit of the settlement process is that through settlement, the parties may be able to obtain relief not obtainable if the case were resolved by way of court judgment. Examples of these could include preserving a business, professional or familial relationship, rewriting a contract or lease to resolve a problematic or disputed term, or allowing for installment payments where liability is clear but ability to pay is an issue--all of which may be desirable or even a preferred outcome to a (possibly uncollectable) money judgment. There are many other examples, but the point here is simple: The parties, the attorneys and the judge or ADR professional each should approach a settlement conference or mediation with due consideration of the range of possible settlement outcomes.

Many times, the parties have not considered or have refused to consider non-monetary equitable relief as a solution to what appears to be, for all intents and purposes, a monetary problem, or an economically driven dispute. In these situations, proposing non-monetary or equitable relief as a supplement to or in place of money only becomes possible as the settlement process unfolds if the mediator or judicial officer has given forethought and considered these remedies and prepared the path for introduction of non-monetary or equitable relief as alternatives to the reluctant litigant or attorney. This same principle may also work in reverse as when a party who is primarily seeking nonmonetary relief--take a business dissolution or corporate governance dispute for example--is introduced to the idea of accepting money and disassociation in lieu of the specific relief sought--a corporate or partnership buy-out for example.

The point here is not to stress a particular medium of exchange for use during the settlement and mediation processes, but rather to emphasize that, before a mediator or settlement judge can pull a metaphorical rabbit out of the hat to settle a case, he or she must have considered the possibility that the hat could contain a rabbit, and have at least considered or conceptualized different approaches that involve different forms of relief that may not have been considered by the parties.

Give due consideration to timing

Attributed to various authors, from Shakespeare to Apple CEO John Scully, the idiom "timing is everything" applies in equal force to both the settlement and the mediation processes. One of the major shortcomings of the court settlement process is rigidity, both as to scheduling and as to frequency of effort. Out of necessity, courts often schedule settlement conferences by rote, based on the court's calendar. It is not uncommon for a local rule or local judicial practice to require mandatory settlement conferences to be set at a specific time tied to the trial date, typically three to four weeks or so prior to the trial. Some judges go so far as to set a mandatory settlement conference immediately at the first case management or trial-setting conference. When it comes to settlement conferences and mediation, adherence to a schedule that is not tethered to the particular facts of a case is problematic because it does not take into account "resolution readiness," one of the crucial factors that bears heavily on the success or failure of a mediation or settlement conference.

Resolution readiness is descriptive of a state of being in a civil dispute where the attorneys have client buy-in and a sufficient understanding of the facts and law underlying a dispute such that the parties can engage in meaningful, productive settlement discussions with the mediator or settlement judge. Resolution readiness does not occur on a fixed scheduled based on the court's scheduling requirements, nor is it necessarily tied to the trial date. Having sufficient knowledge about one's case--including the underlying facts, the applicable law, insurance and/or insurance coverage issues, and client buy-in and/or control--all are factors to be included in the resolution readiness calculus. To a considerable extent, resolution readiness is a timing issue that governs when a settlement conference or mediation may be held with maximum effect. Lawyers must always ask themselves the critical question: Is this case ready for settlement, and if not, what facts, evidence or other information must be developed or acquired before settlement can be attempted in earnest? 

Knowing your cases

The use of the plural above is not accidental or a typo. In the context of settlement or mediation, an effective settlement strategy requires knowledge of two cases: yours and theirs. If one were to choose the single most common reason a settlement conference or mediation fails, the hands down winner would be one or both parties not knowing their own case.  A close second is counsel not knowing enough about the opposing party's case to allow for productive settlement or mediation discussions.

It should be painfully obvious that attempting to mediate or settle a case before the parties have exchanged enough information to have a grasp on the issues--whether formally (through discovery) or informally through some other means--is a recipe for failure. Most attorneys, and virtually all judges and mediators, intuitively know this. Not so obvious is the necessity for utilizing case knowledge--discovery products and other sources of information--to formulate a cohesive theory of the case as of the date the mediation or settlement conference. Too frequently, after the extensive case analysis that precedes the initial filing of pleadings, effort wanes as stasis sets in during the middle stages of litigation, after the initial discovery takes place. Or worse, a theory of recovery or defense formed during the early stages of a case becomes dogma through which the case is viewed even as additional facts and knowledge about the case come to the fore. Or a settlement conference or mediation is scheduled before critical percipient witnesses and expert witnesses necessary to evaluate the case have been deposed. At its core, these are all timing issues.

Ideally, a settlement conference or mediation should not be scheduled until the parties know enough about the facts of their respective cases and have exchanged information so discussions may proceed on the basis of a commonly accepted (or disputed) state of facts. Before any settlement conference or mediation takes place, counsel must take stock of what is known about their and their opponent's case and should ascertain whether the facts of the case are sufficiently well developed to have a reasonable chance of resolving the case. This process of self-reflection should include some discussion with opposing counsel about the strengths and weaknesses of each other's cases so as to allow the mediator or settlement judge not to waste precious time having to figure out where the parties agree and disagree before tackling the substantive issues that, if resolved, will settle the case.

Knowledge of one's case involves more than just a mastery of the foundational facts underlying a claim or defense. At some level in all active litigation, the law--statutes, case authority and regulations--really does matter. It goes without saying that knowledge of the law and the legal theories underpinning a case can and do impact the ultimate result that can be obtained through the settlement and mediation processes. A neutral mediator or settlement judge can only do so much acting as a go-between unless, minimally, each party has a basic knowledge of the law underlying the dispute before the neutral. While a sophisticated knowledge of the law is nice, it is not essential. Having command of the basics is. Knowing and understanding the elements necessary to prove a claim or affirmative defense, the burden of proof applying to a particular claim--the preponderance or clear and convincing evidence standards-- and who bears the burden of persuasion as to a particular claim or defense are essential, and counsel's knowledge of these and other basic legal issues should not wait until the trial brief and motions in limine are  being written, or jury instructions are being compiled. Knowledge of these and other legal issues, such as what evidence may possibly be excluded under the hearsay or other rules of evidence, all contribute to how the mediator or settlement judge and opposing parties will value a case. In this writer's view and experience as a trial judge, rarely do attorneys lack understanding of the legal underpinnings of a case, or just flat out get the law wrong by the time a case goes to trial. Regrettably, the same level of knowledge and facility with the law does not always achieve at the earlier stages of a litigation, such as a settlement conference or mediation.

Preparing the case for settlement

Preparing a case for settlement is different from preparing a case for trial. Roughly speaking, the value of a case for settlement purposes is a function of many things. The variables include the strength of the underlying facts, what law applies and how the law will apply to the facts, the plaintiff's need for money, the defendant's ability to pay, the presence or absence of insurance, and whether there are medical, attorneys' or other liens on the case, among others. Notably, from the short list of variables just recited above, just two are relevant in the trial context, the strength of the facts, and how and what law will be applied. The presence of lien on a case, the presence or absence of insurance, the plaintiff's need for money and the defendant's financial condition (absent a punitive damage finding) all are irrelevant and are precluded by statute or case law from being considered at the trial. Not so in the case of a settlement conference or mediation.

In almost all cases, the presence or absence of insurance will be a driving force during a mediation or settlement conference. The policy limits, coverage and exclusions, and coverage disputes all bear on the amount of money that may be available to satisfy a claim. Basic preparation for settlement requires both sides to have an understanding of the defendant's insurance status--whether the defendant is insured or not--and if the defendant is insured, the amount available for settling the claim. Though not required, it never hurts to bring the policy to a settlement conference or mediation, together with any other documents that may bear on the insured's status. Both counsel should also be prepared to have a frank discussion with the mediator or settlement judge about insurance issues that may impact settlement, or the mediator's ability to settle the case.

Liens against a case--medical, attorneys' fees and workers compensation--can also have an outsized effect on settlement. At a minimum, in a personal injury case, the plaintiff's counsel should know the amount of any medical lien that may be asserted against any recovery by settlement or judgment, and ideally the potential for compromising, i.e., reducing, any liens. This may require that discussion be had with individual lienholders or with medical lien management companies or lien resolution companies before a settlement conference or mediation. A common term in settlement agreements for personal injury cases is the requirement for the plaintiff to pay all liens or indemnify the defendant for any unpaid liens. The takeaway here for plaintiff's lawyers is, know the sum of the liens against the case as well as the prospect of reducing or compromising the liens before a settlement conference or mediation is commenced. This not only allows the plaintiff's counsel to make a realistic estimate of the net recovery for the client but also guards against an offer from a carrier that, although reasonable at first glance, is clearly a low-ball offer when liens are included in the settlement calculus. Some types of medical liens--Medicaid and Medicare liens for example--may be subject to equitable reduction by the court,  Arkansas Dept. of Health and Human Services v. Ahlborn (2006)  547 U.S. 268, while recovery against other types of medical liens may be limited by statute, (Civil Code § 3045.4 (limiting hospital liens to "so much thereof as can be satisfied out of 50% of the moneys due under any final judgment, compromise, or settlement agreement.").

Finally, a third issue often looms when a defendant is uninsured or underinsured, i.e., the insurance policy limits are clearly not sufficient to cover the plaintiff's claim.  In these cases, the defendant's financial condition is paramount. Most plaintiffs' attorneys have no desire to be in the collections business, chasing a judgment debtor, nee the defendant, where the end result will be nothing to show for their efforts. These same plaintiffs' attorneys are often more than willing to accept a reduction in the settlement amount or to accept terms such as payment over time if it means the defendant will stay in business and have an income stream to satisfy a settlement, as opposed to the other option--obtaining an uncollectable judgment. In cases where the defendant's financial condition and ability to pay a judgment is at stake, preparation for a settlement conference means the defendant's counsel having the forethought to discuss the client's financial condition with the client before the settlement conference, and to have information readily available or obtainable when the settlement conference or mediation takes place. This may also involve having given thought to what form of protective order would be appropriate before any financial information is released.

In all cases, flexibility, timing, case knowledge and preparation can and do impact the prospects for a successful settlement conference or mediation. These factors can hold as much sway over the outcome of a settlement conference or mediation as do the personalities involved, the mediation technique utilized by the ADR neutral, psychological factors, and even the initial bargaining positions of the parties. Counsel and ADR neutrals: take note!