Monday, November 28, 2011

Truth and Settlement

(Wikimedia Commons)
Judge Jed Rakoff of the Southern District of New York today rejected a proposed consent judgment and  $285 million settlement of an SEC enforcement action against Citigroup. The SEC alleged that Citigroup had defrauded investors in a fund comprised of toxic assets, but was willing to accept a monetary settlement and injunction without requiring Citigroup to admit the truth of these allegations. In this case, the court disapproved this longstanding practice, in its words, "hallowed by history, but not by reason." The court's opinion determined that
the proposed Consent Judgment is neither fair, nor reasonable, nor adequate, nor in the public interest. Most fundamentally, this is because it does not provide the Court with a sufficient evidentiary basis to know whether the requested relief is justified under any of these standards. Purely private parties can settle a case without ever agreeing on the facts, for all that is required is that a plaintiff dismiss his complaint. But when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt, the court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance.
In my practice both as an advocate, and as a mediator, I always find it somewhat disconcerting when a judge takes it upon himself to impose a result on the parties that neither side sought or wants, in this case forcing both parties to assume the extraordinary costs and risks of trial in a case that both sides would prefer to settle. At the same time, I do understand that the court must consider the interests of the public as well as the parties. Evidently, this has been deemed one of those cases where the public is entitled to a public accounting of Citigroup's conduct. This decision could therefore be justified as a means of educating the public about the complexities of these financial transactions, as well as satisfying the public's need for the cathartic experience of seeing banking officials called publicly to account for their actions.

On the other hand, the court may simply be questioning the amount of the monetary settlement in relation to the scale of the investors' losses, and Citigroup's profits. From the perspective of a mediator, I prefer to assume the parties to a negotiated agreement are in the best position to assess the strengths and weaknesses of their case, and that such an agreement is generally going to represent a fair approximation of the costs and risks to both sides of going to trial. To assume otherwise, as Judge Rakoff does, amounts to second-guessing the careful calculations of what are most likely, in such a high profile case, some very competent attorneys.

Mainly I have to question the assumption, repeated several times in the court's opinion, that a public trial is going to allow the public to know "the truth," as well as the assumption that knowing "the truth," if indeed truth is ascertainable at trial, is a more important value to the public than peace. Many factors at trial can impede the discovery of "the truth." What if, for example, a crucial witness for either side presents a poor appearance? Or an especially strong appearance? What if a crucial witness disappears? What about the contradictory comments that always show up in the voluminous documentation involved in a case like this one? There may be other important considerations that militate against pressing forward with a full-blown trial, even in a case as important to the public as this one. Think, for example, of potentially millions in costs and legal fees each side must now incur. Would it be more productive for Citigroup to avoid those costs? Does the government have other more pressing priorities to devote its scarce enforcement resources? Then there are the delays inherent in insisting on a full-blown trial. Is finding out "the truth" worth the wait until next summer's trial? Not to mention potentially years of appeals after that.

Even when a case settles for a much different amount than an outside observer expects or thinks should be justified, nobody--not even the judge--should assume that the parties have miscalculated the value of the case. Instead, it makes more sense to assume that the parties are each aware of factors that could cause their case to blow up. Maybe we think this particular case should be worth a billion dollars, not a paltry $285 million. But suppose the parties know of potential defenses that might allow the defendants to walk away scot free. Given that risk, a $285 million verdict could represent a much better result for the government, and the public, than at least some of the possible outcomes at trial. (See this Wall Street Journal piece quoting the SEC's own assessment of some of these costs and risks.)

It is because these kinds of weaknesses and uncertainties are present in every case, that parties are generally encouraged to settle for a sum that attempts to weigh the likelihoods of a whole range of possible outcomes at trial. If the parties make a reasonable effort to negotiate a resolution, I as a mediator am reluctant to question their result, because I am often not privy to the parties' knowledge of all of the strengths and weaknesses of their case.

And it is because a whole range of outcomes is possible at trial that I also have to question whether a trial can be assumed to allow "the truth" to emerge, as Judge Rakoff assumes. Certainly, a public trial will allow the public to make its own assessment of a mountain of possibly conflicting facts and competing versions of the truth. But we have also seen plenty of very public trials where most of the public's assessment of "the truth" turns out to be directly contrary to the jury verdict. In those cases, what trials prove to the public is that they are exactly the opposite of a method for finding "the truth." When this particular trial is over, my guess is that the public will still be arguing over the meaning of "the truth" of this matter.

Monday, November 21, 2011


Numbers are endlessly fascinating. Sometimes numbers take on mystical significance. Often numbers can mislead us. The number 99, for example, seems to be an order of magnitude less than 100, while a number like 22 seems almost equivalent to its neighbor 23 (even though the difference between the two smaller numbers is proportionately almost five times larger).  Ones and twos sound smaller than sevens and eights, meaning that a number like 31 can sound smaller than a number like 28. In negotiations, people place so much significance on the magic properties of numbers that they can declare victory if they obtain a slightly larger value than they expected, and feel defeated if they settle for a tiny bit less (or vice versa for the defendant).

People rely on the properties of our base 10 system, and our ability to picture certain values, to set up artificial boundaries--"I won't take a penny less than $100,000," or " I'll pay anything in the $40,000's, but won't go into the $50,000's."  Those numbers make sense to us, but imagine how those values would look if we translated them into computer language (base 2): Instead of saying $100,000 is my bottom line, which somehow appears logical, I would be saying that I won't go below 11000011010100000, which sounds completely arbitrary and absurd.

We also use numbers to measure the distance each side has traveled toward the other side's position. Parties in negotiations say things like "They only came up $10,000, but I showed good faith by dropping $50,000 from my opening demand." Is that meaningful? That might depend on how reasonable your opening demand was.

Numbers can also allow us to represent parties' negotiating positions in a pictorial fashion. We can depict their opening bids as the goal posts on an imaginary football field, for example, and tell them they get to kick the ball toward their goal, but then the other team is going to run it back somewhat. (That way they understand that if they do well in the negotiations, they might end up on the other side's 30 yard line, but if the other side is more powerful, they might end up on their own 30.) Or we can draw graphs representing the probability of various outcomes at trial (the curve drawn by the defendants generally bulges up on the left, close to a zero verdict, while the plaintiff will usually draw a curve skewed way to the right, representing the high probability of a million dollar verdict). We can draw a zig-zag pattern tracing the parties' offers and demands. We can also draw partially overlapping circles to represent possible areas of overlap in the parties' predictions or positions, or potential settlement ranges. (I also like bar graphs and pie charts, but unfortunately don't find much use for them in mediation.)

In mediation, after we spend a while talking about facts and issues and problems, we sometimes end up spending a lot of time talking about numbers. Especially when the dispute is difficult to resolve, for whatever reason, the discussion of numbers can also become protracted. This discussion can serve as a shorthand for expressing the strong feelings the parties still have not resolved. One side doesn't want to move down from their eight: that's because they feel strongly about their position or interests. Or they feel insulted by the other side's three. Why, I might ask, when someone is offering you money, do you feel insulted? You don't have to accept it. What does that number represent for you that makes you want to head for the door?

During the negotiation end game, when the numbers get reasonably close to each other, there may be no material difference between the parties' positions. Yet even when both sides already know they are probably going to settle, and cannot explain why one side's number makes any more sense than the other's, it can still be difficult to bridge that last remaining gap. Why? Maybe because there's still a final reluctance to let go of the dispute. Or maybe because whichever side can make the other side blink last will feel like they "won." People sometimes care about doing well in the negotiation as much as they care about resolving the dispute.

I remember one of my former New York law partners telling me about a big Wall Street player he used to run into on the train platform from their Westchester suburb. Once he asked the guy, "Why do you do it? What motivates you to keep going to work, when you have already put away enough to retire and live however and wherever you want?" The player answered that it was all a game to him at that point. He enjoyed the game, and money was how you keep score. We care about numbers because that's how we keep score. People aren't content just to say they achieved peace, and feel much better now that they have eliminated a troublesome dispute from their lives. Even if that is how they feel, they still have to answer the inevitable question: How much? (How much did you get? Or how much did you have to pay?) We need to quantify the result. Maybe we learned how to do that way back when the teachers first started handing out our test scores. Or when we argued about the results of baseball or basketball games.

I handled a mediation recently in which the defendant asked me at one point, why do you keep trying to get me to pay more? As if my request showed that I doubted the soundness of his calculations, or the strength of his arguments. I had to explain that that was my job: to use all the tools the other side was giving me, and all my persuasive powers, to get him to pay more. But I also assured him that when I went to talk to the other side, I would use all the tools he was giving me, and all my powers, to persuade the other side to take less. Then I told him it was all the same to me whether he paid 5 or 6 or 7 (put whatever suffix you want on these made-up numbers).  Any of those numbers to me seemed better than the alternative of spending a lot of money on nasty litigation. A light seemed to go on when this guy realized that it didn't matter to me what number the case settled at. And another light popped on in my head as I realized that that particular case was about to settle. Because now this guy wasn't so invested in his particular boundary line either. He just had to decide the simple question of whether he wanted to resolve the dispute or not. (It settled very close to 6.)

Thursday, November 10, 2011

Mediate / Collaborate

As a new feature this year, the SCMA fall conference sponsored two institutes the afternoon before the traditional Saturday conference. The one I attended was on the interaction between collaborative law and mediation. I probably have no business writing a blog post on collaborative law, because I know very little about it, but in the course of acting as devil's advocate and class trouble-maker at the institute, I did learn a few things. One is that collaborative law is becoming more widely accepted in divorce proceedings. Another is a little bit about how it works, most notably that all professionals must operate under what is called a participation agreement that requires them to disqualify themselves if the matter goes to court. That gives everyone involved a powerful incentive to work towards an agreement, while diminishing the participants' ability to threaten a lawsuit if the negotiations fail.

The presenters of this program, mediators Woody Mosten and a group assembled by Diana Martinez, talked about how mediation and collaborative law interact, and the similarities in values between mediation and collaboration. They also explained how other professionals, such as therapists or counselors or accountants can be employed in a collaborative setting to put together divorce and custody agreements.

I had to admit that the whole idea made me a bit uncomfortable, but that is probably because I am so used to working in the business litigation context, whether as a trial attorney or as a mediator, and I have less experience with family law. To me, it feels more comfortable to have the attorneys playing their traditional roles as zealous advocates for each side. Indeed, one of the benefits of mediation is that it frees attorneys to continue to play the role of fierce advocates for their clients, which clients generally appreciate, rather than putting the attorneys in the position of having to remind their clients of the weaknesses of their positions. The mediator can then assume the role of pointing out the strengths of the other side's position, and the costs and risks of litigation.

On the other hand, as collaborative law was explained to me, it didn't seem all that radically different from the way I have come to practice litigation, a style that tries to avoid acrimonious and counter-productive fights along the way to resolving a dispute, saving the zealous advocacy for when it becomes important to arguing the client's substantive position in court. And when I act as a mediator, the thrust of my efforts is often to help the attorneys for the warring parties, and the parties themselves, work together to solve their common problem (the dispute), rather than work at cross-purposes to try to allow one side to prevail over the other. Collaborative lawyers remain advocates for their client's positions, just like traditional attorneys, but do so in a more cooperative and a less adversarial manner. The difference between collaborative lawyers and those traditional litigators who have also learned to avoid unnecessary acrimony is that the traditional litigator retains the option of taking the case to trial, while the collaborative lawyer must drop out if that is the route the parties choose to take.

What I haven't seen yet is what a mediation would be like with collaborative rather than traditional litigation attorneys. But now I'm curious to try it.

More resources:
International Academy of Collaborative Professionals
Los Angeles Collaborative Family Law Association 
Mosten Mediation
West Coast Mediation 

(photo from Divorce Tips Site)

Sunday, November 6, 2011

Imagining the Future

Congratulations to my fellow SCMA board member, and new president Barbara Brown, for pulling off a very successful SCMA fall conference at Pepperdine this weekend!

Forrest (Woody) Mosten led a presentation yesterday called Mediation in the Year 2030, imagining what the world of ADR might look like 20 years from now. Apparently, in the courthouse of the future, there will be 10 mediation rooms for every traditional courtroom. All judges and staff will be trained in mediation. Mediators will be credentialed, and highly skilled. Clerks will be helpful and friendly, seeing themselves as consumer representatives. Many disputes will not even enter the courthouse. Mediators will be the first point of contact in resolving many disputes, and will assemble the necessary team of professionals appropriate to address each conflict. The values of mediation will pervade business and government, indeed all of society. We will have a Department of Peace, in addition to the Department of Defense. All in all, a very encouraging and hopeful picture for those of us interested in expanding the role of mediation.

This vision, which might seem a bit utopian, is actually only an extrapolation of current trends in ADR, and is not too different from ideas others, including myself, have advanced for the dispute resolution systems of the future. I asked the judges on the panel I moderated later in the day whether they agreed with this vision of the future, and while a bit skeptical of all the specifics, they agreed that ADR has an expanding future.

The talk that was really eye-opening for me, however, was one by Colin Rule, who has been building an online dispute resolution system for eBay and Pay Pal, that now handles many thousands of transactions. (He now heads his own online dispute resolution company.) Because the amount in controversy in these disputes is small--often less than $100--and because they involve buyers and sellers in different jurisdictions, often on opposite sides of the world, they are completely beyond the capacity of any "earth-bound" judicial system to administer, and they are also of no interest to lawyers. These disputes can only be resolved in the virtual world. The system that Rule and others have developed demonstrates that by allowing needed communication between the parties to occur, the vast majority of these disputes can be resolved satisfactorily by negotiated agreement. One thing that seems to make such a system work, without any need for courts, or agreed-upon rules, or enforcement mechanisms, indeed without any of the trappings we traditionally think are needed for a legal system to operate, is that eBay has built powerful incentives into its system to encourage sellers to worry about preserving their online reputations. In this age of social networking, online reviews, and other kinds of easily-accessible public information about all of us, everyone now has to be concerned about protecting their reputations. That should create opportunities to use these same kinds of incentives to build dispute resolution systems of much broader application.

What struck me was not so much the online aspect of this new dispute resolution system--the high techiness of it all--but the possibility it demonstrates for creating a new alternative dispute resolution community in a globalized economy that is beyond the control of any nation, and that has no need for police officers, or authority figures wearing robes, or jails, or courthouses, or law books. Such a system of conflict resolution might work for many kinds of disputes, because it is based on forces that might be just as powerful as the powers of the traditional justice system: our common desire to get along with one another, our shared humanity, our wish to avoid the strife of conflict, and our self-interest in preserving our reputations as decent and fair people. I don't think that such a system is going to replace the courthouse anytime soon, but it is still amazing to watch how fast it is growing.

(Still from Back to the Future: not destroying the courthouse, but giving it a necessary jolt)