Friday, March 26, 2010

Quantifying Uncertainty

One of the things that mediators sometimes do is to try to get parties to think about lawsuits as a series of probabilistic outcomes, i.e., what are the chances the case will get dismissed before trial, that the plaintiff will prevail before a jury, that there will be an appeal, that the defendant will file bankruptcy, etc.  Parties often need to make a conceptual leap before they can even begin thinking about their dispute in those terms, however.  A lawsuit does not start out as a game of chance.  It starts out as a story in which one or both  parties injured or betrayed the other, and both parties seek vindication and compensation for their respective grievances.  Clients approach a problem by telling a story and asking who is right and who is wrong, not by trying to examine the costs and risks of resolving their conflict by various means. 

Only after the parties accept the possibility that they assume some risk in presenting their story to the court, can you start talking about valuing the case in more mathematical terms.  So here I want to repeat some comments I made in another forum (started by John DeGroote) about the value of decision tree analysis in litigation. I think decision trees can be a useful tool in litigation and in mediation. Especially for people who like to try to quantify everything (and I admit to being one of those people). But there are two kinds of uncertainty that decision trees can never fully resolve. One is the "garbage in, garbage out" kind of uncertainty. When a lawyer says he has a 60% chance of prevailing on a claim, all that represents is a seat of the pants feeling about the case. That is not to say that the lawyer's assessment is wrong--it could be based on years of experience and some pretty good hunches about what juries might do with a case. But it is also not a very firm number to start with. And when you start with a very unscientific probability number as a basis for calculating the value of a case, you are conveying a degree of certainty about the ultimate value that is probably not warranted. Add in the uncertainties about things like appeals over issues that have not even materialized yet, and you are dealing with a whole lot of uncertainty.

The second kind of uncertainty you cannot eliminate is the uncertainty of predicting how people will deal with the choice between the mathematical probabilities of the decision tree analysis and the concrete offer on the table. So if you tell the plaintiff that they have the choice between the defendant's $50,000 offer and a 30% chance of scoring a million dollar verdict at trial (or you tell the defendant that they can either pay the plaintiff $500,000 or face a 30% chance that the plaintiff will get a million dollar judgment), you would think that taking your chances at trial would be the obviously better option in both cases, but a lot of people will take the inadequate offer rather than risk getting nothing (or pay the unreasonable demand even if they are very unlikely to lose at trial).  Notice in the above examples that we could be talking about the exact same case, only with different settlement offers.  And notice how that illustrates the wide variation in what a fair settlement might look like in that case.  (This analysis of course still works in cases where the plaintiff has a very high probability of prevailing.  The settlement price might just have to be somewhat higher to make the scenario plausible.)

Whether people choose to settle or not will often depend on how much they like to gamble and a lot of other psychological factors that cannot be very easily quantified. Remember how Monty Hall used to offer people the choice between something like $500 in an envelope or a one in three chance of winning a new car? A surprising number of people chose the envelope. Another example: What do you do when the weather report says there will be a 20% chance of rain tomorrow? Do you continue planning your picnic, or cancel it? Some people might keep planning an outdoor activity even if the weatherman says the chance of rain is 80%, but others will cancel if they see the smallest cloud in the sky.

Bottom line is that doing a decision tree exercise can be very useful, but mainly to demonstrate to people just how much uncertainty remains in front of them if they want to continue to litigate, and perhaps as a means of making people comfortable with the fairness of the settlement offer. That kind of analysis can't really give a precise indication of what a case is "worth," but it might help people decide if they want to settle or not.

(photo from

Friday, March 19, 2010

Settlement Agreement Enforceability

Parties to a mediation that results in settlement should have a clear understanding of whether their settlement agreement is enforceable.  Oral agreements generally will not suffice, and scrawled out term sheets also may not qualify as settlement agreements if they do not include language indicating that they are binding.  (For more information on the legal requirements for enforceability in California, check out this post on Vickie Pynchon's blog.  The requirements for enforceability vary greatly from jurisdiction to jurisdiction.  Obviously it behooves people to be aware of them.)

Is it worth the trouble to make sure that nobody goes home until the parties have set down in detailed, comprehensive, unambiguous, enforceable form, exactly what they have agreed to, so as to avoid future misunderstandings later?  I am of two minds on this issue, so I generally leave this decision to the parties, but I will try to advise them on the consequences of various approaches to documenting (or not documenting) any agreement reached at a mediation session.  On the one hand, it often saves time to put the full agreement down on paper while it is fresh in people's minds.  The alternative may be weeks of wrangling over the minor details of a settlement. It is also generally considered advisable to get wavering parties to commit clearly at the time of the mediation at least to the main terms of the settlement, in binding and enforceable form, so as to dissuade them from even thinking about trying to back out later from a deal that really serves everyone's best interests.  On the other hand, while parties may have reached an agreement in principle at the mediation, they may genuinely need more time to consider all the details, and all the bells and whistles they want included in a final settlement agreement, before they finally commit to it.  They also may genuinely need time to reflect on whether, in the cold light of the following morning, after recovering from the stress of the mediation session, they still want to do the deal in the first place.

What happens when people sign an incomplete or ambiguous document at the mediation, and then later think of some point they want included or thought was included?  The possibility of more conflict, of course.  That is the source of the burgeoning case law on the enforceability of various kinds of agreements made in the course of settlement negotiations.  What those cases reveal is that the parties have not fully embraced the state of enlightenment that mediators try to teach them.   Instead of resolving disputes by negotiation and agreement, instead of attempting to satisfy all parties' interests to the extent possible, instead of trying to reach reconciliation and peace, the parties find themselves back in the old-fashioned framework of trying to take advantage of the other side's weaknesses, trying to win and make the other side lose, trying to persuade the decision-maker of the merits of one position and the flaws of the other; in short, of all the characteristics of litigated conflict that the mediation process was supposed to leave behind. 

If parties end up back in court in a dispute over the terms of their supposed agreement, or over whether they even made an agreement, most likely one of the parties later had buyer's remorse over the agreement and really didn't want to settle on those terms, or the parties never really reached an agreement at all at the mediation. More broadly speaking, I would say that anytime the parties find themselves arguing to a judge about what happened in a mediation, the mediation has failed.  It has failed in the sense that mediation failed to teach the parties a better way to resolve their disagreements.  To avoid that result, the solution is not so much making sure that the document signed at the mediation is airtight, but should be taking the time to make sure that everyone is comfortable with what they have agreed to before they sign anything.  The mediator should also strive to coach the parties on how to resolve future disputes diplomatically instead of litigiously.  Otherwise parties may return to using the courts to enforce a deal that somebody else thinks was unfair, or they may try to escape from obligations that they never really wanted to agree to, or they may just feel unhappy about being pressured to settle. Any of those results can give the whole mediation process a bad name.

(photo from

Wednesday, March 10, 2010

Why Sue First?

As mediation has become more of an accepted and even required step in many lawsuits, expectations and practices of parties involved in litigation seem to have shifted somewhat.  We see a lot of lawsuits filed with the expectation that the filing will eventually lead to a formal settlement conference or a court-appointed or private mediation.  Parties sometimes postpone doing expensive discovery or filing expensive summary judgment motions, with the hope of resolving the case at a mediation conference.

If that is the expectation, why even bother with filing the complaint?  Of course filing a complaint serves important purposes like framing the issues, announcing the seriousness of the filer's intentions, tolling the statute of limitations, and perhaps other purposes.  But if the case is likely to be resolved in a mediation anyway, more parties might consider calling a mediator first, instead of waiting until the initial status conference for the judge to send the case to mediation.  Sending demand letters and attempting to initiate various forms of creative dispute resolution has always been part of my law practice, but as mediation becomes more prevalent, and as I incorporate more settlement techniques in litigation, I now question, in almost every case, whether filing a complaint is the best first step toward solving the client's problem.  Is it possible to short-circuit this step altogether in more cases?

Before dispensing with them, let's consider the usefulness of all those early steps, and their costs.  Filing an initial pleading in court requires a filing fee.  It involves some research, or at least a visit to the form files. It takes time to organize and write up the factual allegations, and consider the appropriate causes of action.  So the preparation of a complaint at least has the benefit of forcing the plaintiff to organize his or her grievances in a coherent format, and to formulate appropriate legal theories of recovery.  On the other hand, that organizational work can be done without turning it into a formal complaint.  Moreover, filing a complaint invites a demurrer or motion to dismiss, or at the very least requires the opposing party to prepare an answer.  People generally react negatively to being served with a summons, so initiating a lawsuit often causes resistance to resolving the dispute in a more peaceful manner.  So there is the potential for motion practice over pleading issues, and even the possibility of appeals.  That is followed by the preparation, or at least consideration of initial discovery demands.  There is also the possibility of requests for injunctive relief, or writs of attachment, the recording of a lis pendens, or other provisional remedies.  In short, a whole lot of attorney time may be required, some of which may be extremely helpful and productive, but much of which may actually be counter-productive to the goal of resolving the dispute.  After months of punches and counter-punches, the parties may be sent back to where they should have started, to a meeting to discuss the possible resolution of the case.  Perhaps some parties need to be reminded of the costs and potentially wastefulness of a lot of pre-trial procedure, as an incentive to consider settlement, but  sophisticated clients should not need such a reminder.

Does sending the other side an invitation to mediate, instead of a complaint, convey weakness?  Perhaps some people would interpret it that way, but again, more sophisticated parties should not.  They might reject the invitation, if they doubt whether or not the complainant is serious about pursuing the matter, but they  generally appreciate the opportunity at least to consider whether the case can be resolved informally.

There are also a lot of disputes that cause some trouble to bring within the court system, but still cry out for resolution.  For example, I saw a post on the IP ADR Blog, by Mary Zachar, which is partly what got me thinking about this post, pointing out that foreign authors have limited recourse in U.S. courts unless they register their copyrights in the United States.  Of course, registration is generally a pre-requisite for domestic copyright owners as well, as recently discussed in my law firm blog.  But mediation before filing avoids those time-consuming and sometimes expensive steps.  By saving the copyright holder the costs of filing in the Copyright Office, as well as the costs of filing in federal court, the alleged infringer might save itself a substantial amount on the cost of settling the dispute as well, since those items, as well as associated attorney fees, can be removed from the copyright owner's initial demand.

Finally, there are a lot of disputes that should not even be framed as lawsuits, if that can be avoided.  I heard a lecture last year by Doug Noll, on the mediation of non-litigated disputes.  He has had some success with businesses and families facing difficult internal conflicts, in conducting mediation sessions among the involved parties, in order to avoid a will contest, or a wrongful termination lawsuit, or a potential corporate dissolution suit, down the line. In such situations, all parties probably prefer to avoid litigation, but the internal conflict has been allowed to fester for some time, and its lack of resolution may be causing serious problems.  Litigation should probably be the last resort for parties in those circumstances, and should probably not be the first suggestion for resolving many other types of conflicts either.  Non-litigious means of dispute resolution should come more readily to mind. 

(Photo of one of my old haunts, the New York County Courthouse, by wallyg)

Monday, March 8, 2010

The Costs of Negotiation

Even though I have lived in California for 20 years, I still find the habits of California drivers a bit strange.  This morning I once again marveled at how much trouble drivers here have merging into a single lane when one lane is blocked due to construction or some other activity.  Instead of just automatically doing an alternate merge into the single lane, a whole series of elaborate games seems to be required.  The cars in the unblocked lane try to close the gap to prevent the blocked cars from changing lanes, and the cars in the blocked lane often feel the need to engage in a lot of hand signals and gestures in order to continue on their way, or they just sit and wait until all the traffic has passed.  Something similar happens when we have to empty out a crowded parking structure, which takes forever when the roads are congested.  A lot of drivers feel the need to ask for permission to enter the road instead of just nudging their way out of the structure and into the moving traffic.  As a former New Yorker, where we tend to go first and ask questions later, I find these slowdowns maddening. 

These traffic interactions seem like a good metaphor for the costs of negotiation.  I am reminded that we are not always better off if we must get into a whole give-and-take with the other party every time we find ourselves in conflict.  Lots of conflicts would be resolved more efficiently if we all just followed some clear and simple rules.  For example, when two cars arrive at an intersection at the same time, just yield to the car on the right.  You don't need to go through a whole series of waving and gesturing motions with the other driver to decide who should proceed first.  Just as when you go to the supermarket, you're probably happy that you don't have to haggle over the price of every item.

Negotiations also introduce an element of perceived unfairness into the system.  When the pushiest person gets to the head of the line, or the loudest negotiator gets a better deal on a car, that understandably bothers people.  Even though we are told "caveat emptor," most of us would probably prefer to live in a world where sellers treated us fairly and equally, rather than one in which each buyer must look out for herself or himself.  This discomfort with the unfairness, as well as the time-consuming nature of negotiations, may make mediation a mysterious and even unpleasant process for many participants.  Many people who become embroiled in a dispute just want that dispute resolved fairly and efficiently.  They might accept mediation because they are told that the court system is too costly and painful and unpredictable.  But they don't necessarily buy into the do-it-yourself nature of the negotiating process either.  They might not think compromise will lead to a just solution; they might not enjoy the negotiation process all that much; or they might be afraid that the other side will take advantage of them in a negotiation.  Perhaps it is good to remember that negotiation is not always a painless or comfortable process for many participants. 

(Google image of intersection in Romania from Mycee.  This picture should serve as a warning that gridlock can occur when you rely on people to negotiate their own way out of conflict.  This picture also demonstrates that a four way conflict is a lot more difficult to resolve than a conflict between only two sides.  Of course many people would say that what this intersection really needs is a traffic cop.  That would be the mediator.  But maybe a traffic light would work just as well. Or better yet, turn the intersection into a circle and people might have an easier time negotiating their way around it on their own.)