George nervously drummed his fingers on the desk. He was torn. On the one hand, he’d known this lawsuit ought to settle the moment Brad Givens retained him. The facts were weak, the law was unsettled, and Brad could make real money in partnership with the defendants, if they could stop shouting at each other.
But Brad was both rich and litigious. He liked his attorneys aggressive and bulldog stubborn. George had to act like a gladiator, or get fired. There was also a risk that seeking settlement now would project weakness to George’s opponents. He had a tough reputation and wanted to keep it that way. Finally, this case was worth a lot of money, but only if George worked the file; settle too soon, and his billable hours would suffer.
Litigation attorneys face a paradox. On one hand, they know that over 90% of their cases will settle, and that early settlement is generally better for their clients than the expense, risk, and pain of trial. But as George’s quandary shows, pushing for early settlement can negatively impact their reputations, their client’s opinion of them, and their bottom line. Further, in today’s deadline-driven litigation environment, finding time to properly address settlement may prove difficult when every minute seems absorbed by the demands of trial preparation.
One trend that can address these problems is the appointment of separate settlement counsel to work in conjunction with litigation attorneys. In April 2011, mediator Forrest “Woody” Mosten predicted that by 2030, settlement counsel would be the rule rather than the exception, and that law firms that failed to offer such services would be at a competitive disadvantage.1
By dividing advocacy and settlement functions, the settlement counsel model can eliminate the conflicts of interest exemplified above – the litigator’s financial and reputational interests would not tempt delay in settlement. There would also be no perception of weakness as a result of settlement efforts, since settlement counsel must by definition make them. Though the idea seems somewhat alien to litigators who believe that they can negotiate on behalf of their clients, it is not without precedent. In the Collaborative Law model popular in family law, the parties focus exclusively on settlement, with counsel agreeing to withdraw from representation if negotiations fail, leaving litigation to other attorneys. Further, in the British Commonwealth, settlement and other non-litigation functions are handled by solicitors, who oversee litigation specialists known as barristers.2
There are two models of the settlement counsel process. In the first, settlement is the initial stage, with counsel thoroughly exploring the possibilities, stepping back in favor of traditional litigators only when it becomes clear that resolution is not forthcoming. This model has the advantage of economy as there is no need to pay two lawyers at the same time. However, it ignores the reality that the litigation process generates incentives to settle – cost, inconvenience, invasion of privacy, anxiety, and so on. Cases often settle just as some significant stage in the case is reached, whether it is a motion for summary judgment, depositions, or trial. To limit settlement efforts to the pre-litigation phase misses many settlement opportunities. A compromise is less likely early than after a certain amount of mutual pain has been inflicted.
In the second model of the process, settlement efforts and litigation move forward simultaneously. Settlement counsel and her litigation counterpart must work closely together. A reasonable settlement falls somewhere between the “worst alternative to a negotiated agreement” (WATNA) and the “best alternative to a negotiated agreement,” or BATNA. The WATNA can be many things – unemployment, bankruptcy, litigation, loss of a business, or foreclosure – but the BATNA is most often a “home run” in litigation. Knowing what has happened, what is planned, and what is likely to occur in court helps settlement counsel evaluate settlement alternatives, highlight risks, make persuasive proposals, and decide on appropriate timing. So having settlement counsel who has some litigation experience is highly desirable.
But settlement counsel isn’t just second to a litigator. He or she is an advocate for settlement. Litigation is naturally antagonistic and competitive. Aggression is expected, even prized in trial attorneys. At times, counsel develop antipathy toward one another. Such feelings could be a bar to settlement.3 Pretrial posturing, rather than reasonable negotiation, is the order of the day.
Trial counsel will naturally see trial as the favored resolution. It’s what they know and what they do best –they will of course be confident of success. In fact, psychological studies have shown both that lawyers in general over-predict their chances of winning at trial, and that they evaluate available evidence to support their perspective.4
What this means is that trial counsel will often lobby for going to trial and discount the need for settlement. In contrast, settlement counsel will look at the same facts and see reasons and opportunities to settle a case, and advocate for that outcome. By having diverse opinions in the room, clients with separate settlement counsel reach decisions that take the full range of evidence and alternatives into account. Working with the feedback of others improves the quality of our present and future decisions.5
In addition to understanding litigation and advocating for settlement, ideal settlement counsel is an ADR process expert. She is a sophisticated practitioner of negotiation, and knows, for example, that the pace and size of concessions can send important unspoken messages about how far the offering party is willing to go (a slow series of very small concessions generally signals the offeror is nearly at his final position). She negotiates mindfully, intentionally, as attentive to her surroundings as a professional poker player looking for the twitches or “tells” that signal her opponent is bluffing. She actively searches for opportunities to create value for all, knowing that mutual benefit is the best incentive to settle.
As Don Philbin points out, ADR is no longer a one-size-fits-all proposition.6 Beyond the big three — negotiation, arbitration and mediation — there are less prevalent but still useful techniques like early neutral evaluation, mini-trials, med-arb, and arb-med. Each process has its benefits, drawbacks, and costs. Each can be customized to fit the needs of the parties for cost, speed, self-determination, and so on. Competent settlement counsel can explain these alternatives and advise on their use.
The main drawback of settlement counsel is the cost of a second professional. But this cost is only realized if the strategy is totally ineffective – if the case settles no more advantageously with separate counsel than without. To the extent that settlement counsel shortens the litigation process, increases recovery for plaintiffs (or decreases recovery for defendants), helps design a better resolution process, or even creates value, this cost is offset. So it seems likely that the use of settlement counsel is appropriate in more cases than it first appears, and should be considered routinely by those facing litigation.
by Scott Van Soye
1 Mosten, F. S. The Future of Collaborative Practice: A Vision for 2030, 49 FAMILY COURT REVIEW 282, 286 (2011).
2 Coyne, W. F. The Case for Settlement Counsel, 14 OHIO ST. J. ON DISP. RESOL. 367, 367 (1999).
3 Herr. D. F., Annotated Manual for Complex Litigation, section 13:13 (updated May 2011).
4 Richard Birke and Craig Fox, Psychological Principles in Negotiating Civil Settlements, 4 HARV. NEG. L. R. 1 (1999).
5 Klein, G. and Kahneman, D, Strategic decisions: When can you trust your gut? MCKINSEY QUARTERLY (2010).
6 Philbin, D. Litigators Needed to Advise Transaction Lawyers on Litigation Prenups 56 THE ADVOCATES (TEXAS) 36, 47 (2011).
By Scott Van SoyeRead More
Nineteen twenty-five was a watershed year in the history of American arbitration. That was the year that Congress passed the Federal Arbitration Act, codifying an express policy in favor of arbitration. Among other things, Congress intended passage of the FAA to counter years of judicial distrust and hostility to arbitration.  Proponents of arbitration cited its speed, lower cost, efficiency and finality. There was little or no discovery or motion practice, and very narrow appellate review. 
That was then. Now, as Professor Tom Stipanowich points out, arbitration often has become “judicialized” with extensive – and expensive – discovery, arbitral law and motion, statutory due process requirements, and even attempts at engrafting appellate review onto the process. Stipanowich goes so far as to call judicialized arbitration “the new litigation.”  The negative aspects of litigation, such as cost, time, and an adversarial atmosphere, conjoin with the drawbacks to arbitration: lack of review,  uncertainty flowing from the absence of precedent,  and the possibility an arbitrator will ignore a winning legal position to do what’s “fair.”  This creates a kind of arbitral Frankenstein’s monster including the worst of both worlds. It’s not surprising that lawyers’ opinions of arbitration have worsened, with some corporate attorneys indicating that litigation is now preferable to arbitration. 
And yet, the use of arbitration by sophisticated business disputants does not seem to have suffered greatly. The latest available Fullbright & Jaworski litigation trends study (2011) showed an increase in the proportion of U.S. companies favoring arbitration over litigation from 34% in 2010 to 40% in 2011. 
Why is judicialized arbitration still so much in use? There are four main reasons:
1. First, despite a decrease in the cost and time advantages of arbitration over litigation, what evidence there is suggests that arbitration is still three to five times faster than litigation, and is also less costly. Exactly how much faster or cheaper depends on the characteristics of each proceeding. 
2. Second, most arbitration advocates are litigation attorneys in a new forum. By using trial experts to arbitrate, clients nearly ensure that arbitration will look and feel more like litigation. Counsel are doing what feels natural – discovery, motion practice, evidentiary technicalities and so on. Since it’s so familiar, there’s no reason to avoid judicialized arbitration. 
3. Unlike litigation, arbitration is generally not a matter of public record. Confidentiality is easier to maintain. 
4. Fourth, because arbitration is primarily a creature of contract, it permits the parties to tailor the process, fitting it to their needs. Professor Stipanowich calls the opportunity for choice the greatest advantage of arbitration over litigation. 
But just as users of judicialized arbitration minimize the recognized arbitral advantages of speed and low cost, ADR consumers are squandering the flexibility inherent in contractual arbitration by using familiar boilerplate provisions without regard to their usefulness or practicality. As discussed below, by clinging to the familiar, cumbersome patterns of litigation like tourists refusing to learn even a few words of a foreign language, arbitration users and their counsel waste resources and risk poor results. Here are a few tips to improve your outcome.
1. Know what you’re agreeing to.
It may seem odd, but parties (and their counsel) often agree to arbitration provisions without knowing exactly what they mean. Not knowing quite what they want from arbitration, they use a boilerplate clause that refers to certain rules, but don’t review the rules before agreeing to them. Of course, counsel know the rules of litigation – they use them daily.
But the whole point of contractual arbitration is to customize the conflict resolution experience to fit the parties’ needs. The court picks the judge, and generally the code sets the rules. But who will pick the arbitrator, and by what means? Sometimes it’s the ADR provider’s administrator, sometimes it’s the parties, sometimes her identity is laid out pre-dispute. Will there be more than one neutral on the panel? Must the neutral(s) have particular expertise? Must there be a written arbitral award? What, if any, discovery is contemplated? What motion practice is allowed? Are there appeals?
All of these questions and more are addressed in a comprehensive set of rules, and the major ADR providers have their rules (sometimes different sets for different case types) posted online. It may make sense to use “off the shelf” arbitration provisions where the transaction costs of agreeing upon and drafting individualized ones exceed the benefits – as, for example where the incidence of arbitration is expected to be low, and the risk associated with losing is small. Even then, knowing what those provisions are in the associated rules is critical, because certain rules might seriously interfere with overall goals of speed, economy, finality, and so on.
2. Plan thoughtfully
Where arbitration is expected to be more frequent or the stakes are higher, it is worthwhile to tailor arbitration clauses and their related rules to the specific situation. This can only be done effectively if the practicalities and goals of the client are kept firmly in mind. Ask yourself these questions before you begin drafting:
A. Does one size fit all?
Even if arbitration under a certain set of rules is right for some of your disputes, a different process might be better for other disputes. For example consumer disputes might best be left to the small claims court, while franchisee disagreements could first be mediated in an effort to preserve the relationship and then sent to arbitration. Supplier disputes might be document intensive, which means that more liberal discovery rules are desireable. Try to make a list of all of the different types of disputes you may encounter. Which should be categorically excluded from arbitration, if any? Which are different enough to require their own rules?
Employment arbitrations are a special case, because the courts have determined that statutory employee rights require certain protections: 1) a neutral arbitrator, (2) limitations on the costs of arbitration to employees, (3) adequate discovery, (4) no limit on remedies, (5) a written decision  The point is that not every case is the same. It may make sense to exclude some cases from arbitration altogether; others will need separate rules.
B. How much discovery is needed?
Seventy percent of the average litigation budget is spent on discovery or related motions. (14] How much is needed in the type of dispute you are considering? How complete are the records you keep or have easy access to? Does your opponent likely have information you cannot win without? Do you wish to set up a mechanism for the exchange of those document to be relied upon at hearing?
C. How will the arbitrator be chosen?
Although statutes controlling arbitration permit the court to appoint an arbitrator if the parties do not agree or the agreement does not indicate a method, it is usual to choose an arbitrator without court assistance. An agreement should indicate the method of choice – by agreement of the parties and/or by the provider’s administrator are common. If the matter is a technical one, the choice could be made from a relevant trade group, though it seems more logical to choose a professional arbitrator and appoint an expert to assist the neutral.
D. How much law and motion is allowed?
In “classic” arbitration there was no law and motion at all. To the extent there is discovery allowed, one should expect argument and or briefing akin to motions to compel. Are motions about pleadings or dispositive motions also necessary? How complex are the issues? How closely is the arbitrator required to follow the law of the forum?
E. What remedies are permitted?
Are there particular remedies, such as punitive damages or class action treatment, that should be limited in the arbitration contract? Should damages be capped, or a high-low (baseball arbitration) format be chosen? Should provisional or equitable remedies be allowed? 
This is not meant to be an exhaustive list of matters to consider when drafting arbitration clauses. No doubt many more will suggest themselves to the reader or his or her attorney. The point is that arbitration can fulfill its promise as a speedy and economical alternative to litigation if both client and counsel will make the effort to plan ahead and choose wisely.
REFERENCES: Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24, 111 S.Ct. 1647, 1651 (U.S.N.C.,1991).  Krsul, T., Limits on Enforcement of Arbitral Subpoenas 57 DISP. RES. JOURN. 30, 31; (Jan.2003); Levi, S. D., Arbitration in Outsourcing Agreements 981 PLI/Pat 577, 580 (2009); 9 USC secs 10-12.  See Stipanowich, T. J., Arbitration: The “New Litigation” 2010 U. ILL. L. REV. 1 (2010).  In general, attempts to build appellate review in to the arbitration process have been unsuccessful. See Sussman, E., Why Arbitrate? The Benefits and Savings (2011) 1899 PLI/CORP 257 at fn. 12, noting that the US Supreme Court interprets the FAA to forbid contractually expanded court review and that private appellate programs are rarely used. However, the California Supreme Court has upheld (on state law grounds) enforcement of contracts providing for judicial review of arbitral decisions. See Cable Connection Inc. v. DirecTV Inc. (2008) 44 Cal.4th 1334. Also, private appellate review of arbital awards by other arbitrators is not unheard of, though the expense and complexity limits its use to larger cases (Stipanowich, T. J., Arbitration and Choice: Taking Charge of the “New Litigation” (Symposium Keynote Presentation), 7 DEPAUL BUS. & COMM. L. J. 383 (2009), at 448.  Kaplinsky, A. THE USE OF PRE-DISPUTE ARBITRATION AGREEMENTS IN CONSUMER CONTRACTS 1946 PLI/Corp 201, 209 (2012)  Id.  Stipanowich, von Kann & Rothman, 590 PLI/739 REAL “PROTOCOLS FOR EXPEDITIOUS, COST-EFFECTIVE COMMERCIAL ARBITRATION: KEY ACTION STEPS FOR BUSINESS USERS, COUNSEL, ARBITRATORS & ARBITRATION PROVIDER INSTITUTIONS.” (2011) at 759.  Fullbright and Jaworski, 8th Annual Litigation Trends Report. See http://www.fulbright.com/index.cfm?fuseaction=news.detail&article_id=9902&site_id=286 (downloaded 6/16/2012).  Sussman, n. 4 at 261-263.  Sussman, n. 4 at 264; See also Stipanowich, n. 4, at 448.  Stipanowich, n. 3, at 4.  Stipanowich, n. 4, at 410; Stipanowich, n. 3, at 50-51.  Ontiveros v. DHL Express (USA), Inc. (2008) 164 Cal.App.4th 494.  Martin, John D., Striking the right balance to control litigation spend, In-House Defense Quarterly 08/2009. See http://www.nelsonmullins.com/DocumentDepot/StrikingtheRightBalancetoControlLitigationSpend.pdf (visited 6/22/12).  Under California law, provisional and equitable remedies are a matter decided by the court, even if the matter is being arbitrated. See C.C.P., 1281.8.
by Scott van SoyeRead More
Whew! It was the end of the second day. Matt Mediator was tired, but pleased. The partners had finally decided what to do with their automobile dealership – Able would manage things, and get a salary on top of his share of the profit. Baker would get a $50,000 cash payment and his share of the profit as it accrued. He only had to meet Able once a month at the dealership and stay available by phone. Other than that, he was going to fish all day every day, or so he said.
Baker’s lawyer Carson (a frequent source of business) glanced briefly at his counterpart Dolan, then looked at Matt expectantly: “You wrote the MOU, Matt. We want you to draft the mediation settlement agreement,” he said.
Neutrals like Matt Mediator are sometimes asked to draft settlement agreements. After all, without the written settlement agreement, the settlement could be moot. While not true everywhere, in some jurisdictions an oral contract reached during mediation will not support enforcement of a mediated outcome, because the related communications are privileged and therefore inadmissible for purposes of enforcement.[i]
Indeed, taken literally, some state ADR statutes (like Texas’) provide that even disclosure of the writtensettlement document is prohibited after mediation, meaning that it can never be used to show the existence, terms, or breach of the settlement.[ii]
- Should Matt draft the agreement?
“Just say no.”
- Increased risk of testimony. Ideally, mediators should not draft settlement agreements at all. There is an increased risk that they will later be called as witnesses, despite statutory protections. For example, in Olam v. Congress Mortgage 68 F.Supp.2d 1110 (1999), the District Court (while admitting that California law applied) disregarded confidentiality and a mediator’s statutory incompetence to testify, compelling testimony from the participants about the defense of duress. The Court (Brazil, J.) held that despite the absolute language of the law, justice required the incompetent and privileged testimony of the mediator and other participants.
The point is that occasionally, despite expectations, mediators will be pulled into litigation about the mediation. If a mediator becomes a draftsman, the focus may shift from the deal to the drafting.
- Unlicensed Practice of Law A non-attorney mediator who drafts a settlement document runs a risk of engaging in the unlicensed practice of law, or UPL. Drafting a legal document – a settlement agreement – is the practice of law, impermissible for a non-lawyer or a lawyer inactive or unlicensed in the jurisdiction.[iii] If a mediator simply captures the parties’ expressed intent in a document, there is no practice of law. If he or she goes beyond that, however, there is such practice.
- Finally, suppose Matt is licensed in the relevant jurisdiction. Aside from any likelihood that he will be called as a witness, should he draft the agreement?
Probably not. A mediator owes all clients neutrality. That’s basic.
Also basic is that an attorney owes a client loyalty, competency and zealous advocacy. To owe those duties to two clients with conflicting interests is a problem, just as it’s a problem to be usefully neutral for them.
For example, suppose Matt realizes that there are different ways to structure the $50,000 – one beneficial to Able and the other to Baker. With duties to both, which method does he pick? Either way, he breaches. And a waiver still leaves the intolerable conflict: His ‘remedy’ is to withdraw from both representations and give no information to either former client.[iv]
Having done so, it is difficult to see how he can continue as a neutral in this case. He is faced with two unhappy former clients, each of whom know that he is keeping secrets financially beneficial to them. The trust, sense of fairness and belief in the mediator’s neutrality that are the foundation of the process are gone.
Mediation is about parties choosing their own destinies. Legal drafting, on the other hand is about counsel making strategic choices in a client’s interests, and making sure that all protections are in place.
It is one thing to produce a memorandum of understanding – a secretarial exercise of collating deal points. It is another to draft a careful, thorough settlement agreement using legal analysis.
Because the tasks are so diverse, it is strongly recommended that the careful neutral refuse any request to draft a settlement.
[i] ‘Oral’ here simply means verbal. The elaborate verbal-recording ritual in Cal. Evid. Code 1118 is excluded.
[ii] See Tex. Civ Code 154.053 and 154.073. Practically, the Texas bench has refused to take this position, which, if taken, would mean that Texas mediation settlements were illusory because they could never be enforced.
[iv] Edelman, Michael ‘Flatt v. Superior Court of Sonoma County: Attorney Withdrawal from Concurrent Respresentations”;35 Santa Clara L. Rev. 1379 (1994-1995)
By Scot Van SoyeRead More
“[Our General Counsel] is the only guy at IBM with an unlimited budget… and he always exceeds it.”
“Of course, general counsel recognize that all businesses, including law firms, must make a profit but, given the pressures they currently face, getting “the most bang for the buck” is an imperative.”
Which of the quotes above reflects your experience in the General Counsel’s office, or as an outside corporate lawyer? The first quote comes from IBM CEO Frank T. Cary, during the economic boom of the early 1980s. The second observation is taken from a 2013 report on corporate client expectations. Times have changed. Chances are excellent that if you’re in corporate practice today, you’re feeling substantial pressure to cut costs and increase process controls.
Adding value is today’s top priority
Modern corporate clients won’t accept reduced service in the name of economy. While 78.5% of responding General Counsel report receiving a fee reduction from their outside counsel, less than 10% of them chose firms based on the lowest cost. Corporate counsel are looking for more than just discounts. They want value for their legal spend. According to professional services marketing strategist Michael B. Rynowecer, of BTI Consulting Group:
“Delivering value overtook cost control as corporate counsel’s most important goal in 2013. In 2014, more CLOs have joined the march. Fully 41% of corporate counsel look to add more value to their business in 2014; up from 32% in 2013.”
BTI’s data indicates that more than twice as many Chief Legal Officers (41%) made “adding value” their top priority as focused on cost control (18%).
What does what does it mean to add value?
As Mr. Rynowecer points out, adding value means more than just doing one’s job well. That is simply giving expected value: “Doing what you were hired to do is not value-added to clients. CLOs are thinking about getting products to market faster, anticipating regulatory hurdles, improving IP protection and getting deals done faster with improved diligence. You add value when you help your client achieve these objectives.”
The insistence on added value mirrors the expanded role of the modern CLO. He or she was once treated as a legal technician and little else. No longer. Today’s successful CLO is a fully integrated part of the management effort. Martin Collins, General Counsel to Silicon Valley’s Novellus, Inc., explained a CEO’s perspective this way:
“I don’t need someone to tell me what the laws are. I need a wartime consigliore. I’m in a competitive business. I’m trying to hire people. You are not helping me. If you are just repeating the law as it’s written down by outside counsel, you are not doing your job.”
Traditionally, the General Counsel was reactive, solving existing legal problems. Today’s CLO is proactive, sitting in at the beginning of product development and planning meetings. As Mr. Collins puts it:
“[T]he total amount of calories it’s going to take you and I to solve this problem, if you don’t bring me in the beginning, is going to be greater than the total amount of calories it’s going to take me to solve it [if you do]. I’ll still have to solve it after we have it.”
As always, General Counsel advises on legal issues. But the successful CLO also weighs in on business matters, contract administration, risk management, dispute prevention and resolution, and even security. General Counsel was once viewed as a “deal killer” who said “you can’t” more often than “you can.” The effective CLO now focuses on finding ways to get deals done, on legally and commercially acceptable terms.
The budget-conscious General Counsel
The transformation of the General Counsel from legal technician to business advisor accompanied another significant shift. Traditionally, the legal budget was sacrosanct. But economic pressure has forced CLOs to do more with less, and led to greater scrutiny of spending.
Much more work is being brought in-house, and budgets for outside counsel are being slashed. Sprint-Nextel CLO Charlie Wunsch, for example, uses outside counsel only for their special expertise or for temporary spikes in staffing needs.
Mr. Wunsch routinely seeks discounts and alternate fee arrangements (“AFAs”) from outside counsel, refusing to work with firms that don’t offer them. He is hardly alone in this. The ACC/Serengeti Managing Outside Counsel Survey reveals that 62.1% of corporate counsel use some form of AFA to achieve the dual goals of predictability and control.
Value-Added Service, Cost Control, and the Role of ADR
The use of, alternative dispute resolution mechanisms like mediation, arbitration and deal facilitation has become a regular feature of most General Counsel’s cost-control efforts. As Brian Rauer, General Counsel to the New York Metro Better Business Bureau, put it in an in interview with the editors of The Metropolitan Corporate Counsel:
“Forward-thinking in-house counsel are … avoiding unnecessary conflict escalation. The potential financial benefits are self-evident, while additional benefits may accrue down the road… a well-designed and trusted dispute resolution program may significantly decrease the perceived – and actual – need for litigation. You may realize strengthened business relationships coupled with an enhanced reputation.”
The additional benefits of ADR – decreased conflict, trust, an enhanced reputation and strengthened business relationships – contribute directly to value-added service, by getting deals done faster and with less friction.
Crafting the AFA
The appropriateness of a given legal fee structure depends on the surrounding circumstances and economic incentives. AFAs are “alternative” to hourly billing. Ironically, hourly billing was originally “alternative” to the once-standard (but unpredictable) practice of lawyers determining the fee at the close of a case. Business clients wanted some metric to determine value, and chose time spent.
Each billing method has obvious pluses and minuses:
Hourly billing rewards thoroughness, but incentivizes sloth, unnecessary work, overstaffing, climbing rates, and straightforward fraud. It discourages settlement.
Discounted rates can save money, and are welcomed by General Counsel. But they can also intensify the negative temptations of hourly billing, since more hours will need to be spent to generate the same billings.
Flat fees are predictable and incentivize a quick resolution, but if they are set too low, they discourage work. Also, they require a thorough knowledge of the scope of the task to set properly. Asymmetric information can be a big disadvantage in negotiating them.
But repetitive tasks – where the effort needed is known, or is at least predictable within a narrow range, should be done on a flat fee, according to David G. Melman, Chief Legal Officer at First Rehabilitation Life Insurance Company of America. They might as well be. Repeat clients would naturally balk at a wide variation in fees for a familiar service.
Contingencies motivate counsel to work efficiently, share risk, and promote settlement, but discourage counsel from taking marginal cases, cost clients a healthy chunk of an eventual recovery and interfere with needed cash flow.
AFA’s are here to stay. CLOs responding to the Altman Weil survey report that they saved an average of 23.9% by using AFA’s in 2013, and they are unlikely to forgo those savings. Savvy corporate counsel will therefore plan for them in each case, well before they have to be negotiated. What are the client’s goals? What fee structure best incentivizes the proper service of those goals? How can counsel best achieve those goals while obtaining a reasonable economic return?
Often, the answer will lie in some creative combination of billing methods, such as a minimum fee plus flat fees for completion of various projects, coupled with bonuses for faster resolution and/or better-than-expected outcomes. Ideally, an AFA will:
- Be predictable, to allow budgeting.
- Reward service, success and efficiency.
- Share risk.
- Be responsive to the parties’ needs.
- Be negotiated on a case by case basis.
Finally, Tara Martin, deputy general counsel for Travelex The Americas Inc., firmly believes that ‘AFAs will only succeed when… both the company and the law firm are satisfied with the overall bill.”
Alternative Fee Arrangements in Corporate ADR.
The latest broad academic research on corporate use of ADR reaffirms that corporate counsel continue to lead, with almost 70% expecting to use ADR either before, after, or in place of litigation.
Over 98% of corporate counsel report using mediation, and over 85% report using arbitration. The primary motivations for using them are to save time and money. These goals are logical for cost-conscious CLOs who want to add value by closing deals quickly.
Although they will generally spend much less time on a corporate client’s case than outside counsel, ADR neutrals usually bill hourly, and their rates rival or exceed those of experienced lawyers – which most of them are. It makes sense for neutrals pursuing corporate business to build something like AFAs. This is beginning to happen.
For example, the American Arbitration Association recently offered fixed fees ($850) for low-value two-party commercial mediations lasting less than a day. The hearing would be expedited. In addition to the hearing, the mediator will engage in a pre-hearing telephone conference and review written submissions.
It remains to be seen whether the AAAs new one-size-fits-all initiative will work. Participants are being asked to accept reduced service, because it is cheap. The program does not seem to add value. And underpaid mediators have insufficient incentive to pursue settlement. The best way for them to maximize their return would be to quit at the first sign of resistance, declaring an impasse. If that happens, the fee paid becomes a pure cost.
The Agency for Dispute Resolution’s Streamline Settle also uses a flat fee AFA, but is substantially different in that:
- It is intended to clear a bundle of previously dormant cases, freeing up money and resources. It thus adds value.
- It is tailored for each client, meaning that the incentives are calibrated to the necessary effort.
- Any case not settled is not counted as part the bundle agreed upon. The fixed fee is both predictable and guaranteed.
In an era of increasingly complex legal issues and convoluted disputes, the modern CLO must accept nothing less than excellence, which means “value added.” Getting excellent performance, whether from outside counsel or from dispute resolution specialists, means using AFAs –carefully crafted economic incentives that meet everyone’s needs and give all a chance to thrive.
By Scott Van SoyeRead More
Mediation is the resolution of disputes with the non-binding assistance of neutral third parties. Its primary principle is self-determination — control of the outcome by the disputants, in contrast to other-controlled decision processes like litigation. What form a neutral’s assistance should take is the subject of fierce debate among practitioners.
“Facilitative” mediators see themselves as process experts. They allow the parties to reach their own agreement by enabling communications, promoting mutual understanding, focusing the parties on their interests, and seeking creative solutions to shared problems. This type of mediator refuses to weigh the merits, predicts outcomes, assign values, or propose solutions. They call these activities “evaluative,” and suggest that they are more appropriate to a judge or jury than to a neutral. (See Love, Lela P. “The Top Ten Reasons Why Mediators Should Not Evaluate.” Fla. St. UL Rev. 24 (1996) 937, at 938-939).
Facilitative mediation is focused on how to solve problems, whereas evaluative mediation focuses on what will happen if the problem is not solved – what kind of witnesses the parties will make, what a judge may do with .a particular issue, how high or low a verdict is likely to be, and so on. It highlights the risks of not settling – what the Harvard Program on Negotiation calls the BATNA, or Best Alternative to a Negotiated Agreement. (See Fisher & Ury, Getting to Yes: Negotiating Agreement without Giving In, at 104 (Houghton-Mifflin, Boston; 1981)).
An evaluative mediator helps the parties weigh alternatives in light of predicted results. The value an evaluative mediator increases with the accuracy of their predictions. The facilitative mediator’s value rests not on an uncertain prediction of future events, but on improving communication now. The participants in facilitative mediation are able to draw immediate conclusions about the effectiveness of the mediator.
While all types of mediation leave the ultimate decision regarding settlement to the disputants, they otherwise differ widely in the role of the party. In evaluative mediation, it is possible for settlement to be reached without the mediator interacting with a disputant. After spending time with the mediator, lawyers talk to clients and/or one another. Having eventually obtained client consent to particular terms, lawyers and mediators then finalize the terms of the agreement, which is then executed. The clients spend the entire time in separate rooms, and have little or no contact with the mediator. While this scenario is somewhat extreme, it is entirely possible in an evaluative setting.
In a facilitative setting, however, party non-participation is impossible. The facilitative process depends on the active and continuous communication of the parties. Some mediators minimize the lawyers’ role, and even argue that attorneys’ competitive and rights-based spirit that interferes with settlement. (Sternlight, Jean R. “Lawyers’ Representation of Clients in Mediation: Using Economics and Psychology to Structure Advocacy in a Non-adversarial Setting.” Ohio St. J. on Disp. Resol. 14 (1998): 269). Below are some successful techniques that emphasize self-determination and increase the chance of success.
a. Emphasize self-determination
The facilitative mediation process requires active communication. Some of the parties may not be used to this. They may be passive and quiet, used to letting their lawyer (or someone else) do all the talking. To be successful in the facilitative process, they need to begin communicating as soon as possible, and continue throughout the mediation. Although most mediators tell the parties they are in control of the process, the facilitative mediator especially needs to stress this, and emphasize the need for the parties to communicate freely if the process is to succeed. The parties’ self-determination must begin at the very beginning. Although the mediator may have some idea of the disputed issues from the convening process, the parties should be required to state the issues to be decided-, set the agenda, and adapt ground rules. Emphasizing self-determination will increase parties’ feelings of fairness, which in turn increase the likelihood of compliance with any agreement
But the facilitative process can increase strength and self-esteem:
“Facilitation by mediators emphasizes the principals’ abilities to do their own critical evaluation and creative problem- solving. While this may not be the best approach for every person in every problem that is mediated, mediation truly offers a distinctive opportunity for parties to exercise responsibility over their own disputes and their own lives. This is an important social value that other dispute resolution processes generally do not promote.”
Of course, if the process chosen by the parties is clearly unworkable, it is up to the mediator (as process expert) to intervene, as little as possible but as much as needed. (See Lande, John. “Toward more sophisticated mediation theory.” J. Disp. Resol. (2000): 321.at 325).
b. De-emphasize adversarial behavior
Because participants in mediation are by definition in conflict, participants and their attorneys frequently exhibit adversarial behavior – threats of litigation, personal attacks, demonizing the opposing party, attacking others’ suggestions and so on. Likewise, attorneys advocating in mediation often treat it like a court hearing, in which there is a winner and loser. A competitive mindset makes settlement more difficult. Accordingly, a facilitative mediator must emphasize that mediation is not a win / lose process. Advocates and parties also need to be reminded that the process is ideally cooperative.
c. Communicate steadily and creatively
As the center of the mediation process, parties must stay at the bargaining table and keep talking. If a proposal is unacceptable, it must be rejected calmly. Blame and accusations must be re-framed by the neutral as insecurities, and ‘detoxified.’ “Suspicious” caucusing in private should be minimized in favor of uncritical, face-to-face searches for mutual benefit. The parties should be continuously challenged to “expand the pie.” If communication stops, the process will fail.
d. Weaken cognitive biases — expose irrationality and promote information exchange
Cognitive biases are mental stereotypes we use to help us in complex decision-making. They sometimes lead to serious and predictable errors in judgment. Unfortunately, a number of cognitive biases make competitive behavior more natural than cooperation:
Reactive devaluation creates suspicion of proposals simply because their source is an enemy.
Fundamental attribution error assigns malice where there is negligemce and intent where there is none.
Confirmation bias is the tendency to overvalue information confirming a favored position. Overconfidence is the belief that our predictions are much more accurate than they are. The Illusion of control is our mistaken belief that we can influence uncontrollable events. (See Yudkowsky, Eliezer (2008), “Cognitive biases potentially affecting judgment of global risks”, in Bostrom, Nick; Ćirković, Milan M., Global catastrophic risks, Oxford University Press, pp. 91-129).
Taken together, these biases make us trust others less and expect that we will prevail in any conflict with them. This, in turn reduces our belief in their communication, and makes further disputing appear more attractive. The cure for these biases is objective information. (PSYCHOLOGICAL PRINCIPLES IN NEGOTIATING CIVIL SETTLEMENTS, Spring 1999 4 Harv. Neg. L. R. 1, 11-12, 48-50). A successful process should encourage the free exchange of data. Disclosure settles far more cases than secrecy, because people are driven to seek explanations. Their negative cognitive biases will lead them to assume the worst of opponents, unless the facts are there to replace assumptions. The effective mediator challenges assumptions. For example, does the source of a suggestion really determine its merit? (‘Would you feel differently if I had made the proposal?”) What basis is there for the assumption of malice (“Couldn’t it have been an accident?) Challenging biases reduces their effect, making the unconscious irrationality conscious.
e. Change opening statements
Many mediators refuse to allow party opening statements in mediation, reasoning that because (like opening statements at trial) they usually concern a recap of what an opponent has done wrong and what will be “proven,” opening statements usually increase party aggressiveness without increasing the likelihood of settlement. John Blankenship remarks that such statements “are a waste time at best and inflammatory worst.”
However, Blankenship also notes some party dis-satisfaction with the elimination of opening statements, because they “did not get a chance to tell their side of the story”- though in all probability, their lawyer would have told it for them. (Blankenship, J. T., “The Vitality of the Opening Statement in Mediation: A Jumping-Off Point to Consider the Process of Mediation.” (2009) <http://www.blankenshiplawoffice.com> (last visited 01/15/2014)).
One possible response to this concern is to have the client give the opening statement, as a summary of what happened and of why the party came to mediation — what they hope to achieve. This early recitation of goals will point the way to settlement, especially if there is overlap.
f. Changing the Role of the Client and Lawyer to Draw out Communication
Communication by a party, and the resulting establishment of understanding, is the essence of facilitative mediation. But many people are uncomfortable speaking in a formal environment, even before a small group, and gladly concede such tasks to their lawyers. With the clients (not the law) the focus of the process, any attempt by counsel to commandeer the process must be quashed.
To promote communication from a party, the mediator may to have work with the attorney to change their ordinary role, for example discussing possible cognitive biases that can affect a client’s judgment, or drawing distinctions between litigation and the facilitative process. In a facilitative mediation, an attorney is not an exclusive spokesperson. The litigator’s tendency to minimize client participation and discount emotion will reduce the likelihood of settlement.
But a good lawyer, like a good mediator, can also be a source of creative settlement options born of experience. They can also be a guardian against unexpected consequences of a given settlement. And counsel will be less impacted by cognitive biases. (For a discussion of counsel’s proper role in mediation, see Sternlight, Jean R., “Lawyers’ Representation of Clients in Mediation: Using Economists and Psychology to Structure Advocacy in a Non-Adversarial Setting” (1999). Scholarly Works. Paper 269. <http://scholars.law.unlv.edu/facpub/269>.)
g. Focus on needs and goals, not dollars
Litigation attorneys naturally focus on the largest monetary recovery is the most successful outcome – after all, money is the only thing that juries can award, and judges’ authority to order nonmonetary relief is strictly limited. And when money is the only medium of exchange, the question becomes inherently competitive: “how much of your money can I get?” Also, lawyers focus on rules, and discount the importance of emotions, because courts are worried about what is “relevant,” or what the rules are – not about the best results. But since the parties are in charge in mediation, the outcome can be more flexible. Parties in facilitative mediation must focus on meeting the needs that drove them to conflict if they are to reach resolution.
Fisher and Ury call these driving forces are “interests.” They call negotiation demands “positions” to emphasize that what we ask for is usually not really what we are seeking, but a changeable strategy of demand and concession intended to obtain the real goal. (Fisher and Ury. pp. 22-23) Positions (at least to start) are what parties won’t do; it is interests that define the conflict and point to solutions.
h. Ask questions to uncover interests
Sometimes parties are so focused on the position that they can’t verbalize the underlying goals. Asking questions is the mediator’s best way to expose interests, like this:
- “What really matters to you here?”
- “What would you do with the money if you got it?”
- “What would you do with the resources devoted to this dispute if you weren’t in it?”
- “Assume you can have any relief but money. What would you want?”
- “How do you feel about your relationship with X?”
- “How could it be restored?”
- “What if X apologized?”
By exploring potential positive futures, the important issues can be uncovered.
Evaluation has its place. But it is governed by risk and fear of the unknown. Facilitation focuses on the abilities of the parties, allowing them to express their needs and goals, and trusting them to work together and communicate, to discovery the ideal solution.
By Scott Van SoyeRead More
Anyone who has ever worked as corporate counsel knows it ain’t easy.
Corporate counsel has to deal with lawsuits, human resources, risk management, internal politics, and an ever-changing landscape of compliance landmines. To make matters worse, the higher-ups do what they want, when they want… and then they come to tell you about it just in time for you to deal with the fallout you could have prevented — if they had just consulted you first!
Employees don’t always get along. They lie and they sue. They are victims of corporate downsizing and of circumstances. But they also have amazing talent and potential that can push your company ahead of the competition. The trick is knowing how to capitalize on talent while eliminating, or at least minimizing, the risk of conflict.
One lawyer recently told me she wished she had a magic wand. She would make her company’s problems disappear. She felt ineffective, overworked and frustrated. Conflict was her life, and the way she managed conflict wasn’t effective.
While I would have loved to have been able to provide that magic wand, alas, I am not Harry Potter. However, as a mediator, I have developed some helpful insights over the years.
Below are 7 early intervention techniques I gave to that lawyer in place of her “magic wand.” Perhaps they can help your company avoid conflict too:
Risk management must be a top priority.
“By failing to prepare, you are preparing to fail.” — Benjamin Franklin
Risk management is defined as “the identification, analysis, assessment and control of, avoidance, minimization, or elimination of unacceptable risks.”
The goal of risk management is to identify potential conflicts before they develop.
The challenge is to fully identify as many risks as possible and convince your company to invest in their prevention. Hiring a dedicated risk manager is one option. This person should be educated in risk management and ideally have some real-world experience in your industry. Successful risk management requires company investment in proper training and empowerment of its risk manager. “Empowerment” means allowing risk managers to delve deeply into the company’s management techniques, business practices and culture. A risk manager must fully explore potential risks, engage in effective analysis, mitigation and planning, and develop a risk response plan.
Corporate attorneys often act as risk managers. Many corporate attorneys don’t realize that risk management is actually 100% of their job. Let’s identify some of the proactive ways in-house counsel can manage risk.
First, risks must be identified. This involves information gathering about the company’s biggest areas of concern and includes examining past actions that exposed the company to risk.
What went wrong?
A corporate attorney must look at all aspects of the business in risk assessment. This includes everything from corporate culture and hiring practices, to accounts receivable policies and marketing. Information gathering involves interaction with every level of company management and staff — from the board of directors down to the night janitors. Examine every possible scenario for risk. Look particularly hard at high-risk employees (minimum wage part-timers, for example) and in unique areas of concern (like trademark or patent protection/litigation).
Once you have gathered all of this information, develop and initiate methods of risk prevention. If risk prevention is ineffective, the company must invest in the management of risk impact. This often requires a delicate balancing between legal limitations, the company’s needs, and the rights of employees. Effective risk prevention and risk impact management can be achieved with an open corporate culture; but more competitive, closed cultures can also succeed if top management understands the dangers of failing to prepare.
Remember the benefits of brainstorming. Ask questions like, “what are the top one-hundred most likely lawsuits?” or “what might happen if…” or “when an employee feels harassed, he or she can…” If you’re not able to answer a question developed during brainstorming, you have identified an area that needs work. Use this information to develop an action plan for each contingency. Know the company’s risk tolerance for each potential risk. Be prepared to act.
As you take these steps, you will come to realize how vulnerable your company is to risk. Your risk–assessment efforts will lead to faster resolution, increased company productivity, and decreased legal spend.
Get to know your staff by checking in with them early and often.
“Knowing is half the battle.” – G.I. Joe
If knowing is half the battle, what is the other half? Simply put, the other half is people. After all, conflict does not develop in a vacuum.
One of the biggest mistakes companies make is failing to connect with their staff at all levels. Employees want to feel valued, important and necessary. A company that ignores the human element is setting itself up for conflict.
Require regular check-ins from a high-level manager during the first few days, weeks and months of employment. Clear and early communication about culture and values, as well as frequent check-ins from multiple sources, are vital to long-term employee satisfaction. In fact, studies show that events in the first hours of an employee’s new job can strongly predict turnover six to twelve months later.
Listen to what you hear.
“When people talk, listen completely. Most people never listen.” – Ernest Hemingway
Have you seen Undercover Boss on CBS? C-level executives go “undercover” inside their own companies, often posing as new employees who need training. During their time incognito, CEOs gain valuable insight into their employees, their customers and their company.
While it’s not practical for every officer or corporate lawyer to go “undercover,” the lesson is valuable. Dropping in unannounced and taking time to visit informally with staff goes a long way in building company morale. Moreover, you will be amazed at what you hear. Employees are more open with their managers if they interact on the employees’ “turf.” Often, someone will disclose a rumor about someone else. It might be that Larry touches people inappropriately, that Sam is interviewing at a competing firm, or that Dawn drinks on the job.
“It is much smarter to fire someone in advance before they create a problem than firing them after the problem has occurred,” says Steve Smith, former managing partner of Greenberg, Glusker, Fields, Claman and Machtinger, LLP. Smith recommends investigating rumors on an informal level so the company can take a proactive approach to risk management and prevention. Rumors are an early warning system, and will clue the company into potential problems that can be stopped before they become actionable.
Ask whether employees are embedded in their jobs.
“Keep away from people who belittle your ambitions. Small people always do that, but the really great can make you feel that you, too, can become great.” — Mark Twain
Being ‘embedded’ in a job is a fairly new concept. It examines whether an employee fits a position well, has links and rich relationships with others who depend on them within the company, and whether they would have to give up valued perks like money, benefits, leadership opportunities, skill development, or personal contacts if they left their job.
Providing mentors who can identify growth opportunities is one way to increase “embedded” employees. Other methods include encouraging employee creativity, shared decision making, staff feedback and employee satisfaction. Provide needed support in a way that furthers the corporate mission and promotes the corporate culture. Provide a quality work environment, be people-proud and committed, and most of all, allow employees to have fun. People who enjoy their jobs are less likely to leave and less likely to sue.
Don’t underestimate the concept of embedding. People who feel valued, proud and committed usually don’t sue unless they have a really good reason. Which brings us to…
Recognize your own mistakes.
“Eventually, we all have to accept full and total responsibility for our actions, everything we have done, and have not done.” — Hubert Selby, Jr., Requiem for a Dream
Sometimes bad things happen to good people. And sometimes good intentions result in bad things.
No company (and no individual) is perfect. If a mistake was made, recognize it. Don’t fight for the sake of fighting. Sometimes admitting fault generates enough goodwill to resolve the conflict early and at less cost. On the other hand, know when to fight an unfair and unfounded accusation. After all, sometimes a company must “draw a line in the sand.”
Establish a “bad news first” culture.
“Bad news isn’t wine. It doesn’t improve with age” – Colin Powell
A prominent bank chairman recently told me that the best management decision he ever made was to tell the president of the bank that he wanted to hear bad news right away. This did three things: 1.) it established that clear and open communication was expected and important; 2.) it established a culture that dealt with problems rather than blame; and 3.) it allowed the company ample time to mitigate or prepare for conflict.
People are always happy to deliver good news immediately, but bad news tends to sit, until someone eventually has to deal with it. People are afraid that the company is going to “kill the messenger,” so bad news tends to come as a total surprise, resulting in crisis.
Once bad news hits, problem-solving, not blame, should be the company’s highest priority. Blame won’t fix the problem. Bad news should be disclosed immediately up the chain of command to the highest authority. If bad news is disclosed early, the company can mitigate damage, saving time and money.
Provide for conflict resolution.
“You don’t drown by falling in the water; you drown by staying there.” – Edwin Louis Cole
Conflict is an everyday fact of life. Company politics, employee issues, and customer dissatisfaction are all potential sources for high-risk conflict. Companies that have risk management plans in place often use early conflict prevention and resolution methods, as well as conflict resolution for cases that have escalated into litigation.
The benefits of mediating during litigation cannot be understated and are well known. However, many companies fail to use mediation as early intervention in conflict. A skilled, professional mediator can help parties in conflict come to resolution and preserve their relationship. Given the opportunity for resolution, employees, business partners and customers may avail themselves of it rather than initiating a lawsuit.
A mediator can confidentially listen to a person’s complaints with an empathetic ear and without judgment. Often, a person just wants to be heard. Importantly, a mediator can help communicate complaints to the parties in a way that makes sense, whether the opposing party is a high-school educated night manager or the CEO. Once this occurs, a good mediator can bridge the gap between a person’s “wants” to their “needs” and “interests,” narrowing down the true issues, which may be legal, personal or financial.
A company should look into any aggrieved party’s complaints – even if the company truly believes they are unfounded. Letting the aggrieved party know that the company is taking the complaints seriously will generate goodwill that is useful in reaching resolution.
In the end, find a way to address an aggrieved party’s complaints. It is especially important in early intervention mediation to not be dismissive. A company can give a little in such situations, yet get a lot in return. This is the power of a positive “no.” Mediators are skilled at such tasks, and can be used for any type of problem a risk manager can conceive.
Problems, problems everywhere? Just wave your new magic wand… early intervention and risk management.
By Scott Van SoyeRead More