Note: This article was previously published in Alternatives, Vol. 29, No. 3 in March 2011.
There is much literature commenting on the varying modes, pros, cons, sins, and successes of med-arb. It’s a controversial alternative dispute resolution hybrid under which, generally, the same neutral first mediates and then, if not successful, arbitrates to a binding decision.
Last year, this author was engaged as the neutral in a med-arb variant not commonly mentioned in that literature. After concluding the process, the parties’ general counsel suggested that the experience might be worth an article.
In the case, the parties, who had been engaged in a complex commercial litigation, agreed to retain a neutral to do an in-depth, written case evaluation. They hoped to use the evaluation as a tool for motivating and facilitating private settlement talks. They also agreed from the outset that, failing any such private efforts, the neutral would go on to conduct a mediation, and if that was not successful, he was empowered to make a binding decision in a “baseball,” or “last-offer,” arbitration.
This ADR hybrid added to the normal mediation process an initial step of having the neutral be highly evaluative before beginning to mediate, contrary to usual mediation practice. And though early neutral evaluation can lead to mediation by the same mediator, the parties also agreed, if necessary, to a final arbitrated decision by that person as well.
This eval-med-arb structure avoided, for the reasons discussed below, many of the criticisms commonly attributed to “pure” med-arb. It ensured an expedited and efficient final resolution to a vexing litigation.
This month’s Part 1 first describes the nature of the dispute. Second, background is provided about the nature of more typical med-arb ADR. Next, the author explains the parties’ agreement, and how the process unfolded.
In Part 2 of this article next month, observations about this experience will be shared that may be helpful in future cases.
The author was approached jointly by the general counsel of two large corporations, subsidiaries of which had been locked in no-holds-barred, emotional court litigation. One company, a manufacturer, held a patent on an invention of a valuable technology that it had attempted to expand into a new industry.
One step in that expansion plan was to contract for the other company, which is experienced in that industry, to be the manufacturer’s sales representative in a key geographic area. The patent was to expire soon, however, and the sales rep felt the manufacturer had taken the market for granted in its distribution practices. The sales rep planned to enter the market on its own, selling essentially the same product that was being manufactured and distributed in other countries, produced by a company based in Asia.
The sales rep hired a disgruntled top sales executive away from the manufacturer, and a few months later, after finalizing its deal with the foreign supply source, voluntarily terminated the sales representation agreement. Soon after, the sales rep announced its entry into the market with what the manufacturer believed was its product, and which its former executive was now selling.
The manufacturer didn’t pay the sales rep commissions on certain products sold before termination. It also responded in the marketplace, and filed suit against the sales rep and the ex-employee. The manufacturer’s trademark dilution and infringement accusations were dismissed, and its claims of falsely advertising designations of new product origin were shelved.
The manufacturer’s principal claims were for trade secret misappropriation and breach of the parties’ contract. It alleged breach by competing during the contract’s term, using strategic plans and marketing materials that were on the ex-employee’s laptop when he left the manufacturer, and using secret information the manufacturer embedded in one of its critical computer programs that the sales representative company had obtained through other means. The manufacturer’s claims also included tortious interference, unfair competition, conversion, and breach of fiduciary duty (by the ex-employee).The sales rep denied all of this. It claimed that it had returned to the manufacturer all confidential or proprietary information, it had not used any of it, and the contract did not prohibit post-term competition. The sales rep eventually filed a counterclaim for commissions due.
It also alleged trade libel for false information the manufacturer allegedly spread in the market about the sales rep, such as patent infringement accusations not pled, and other tortious interference with the sales rep’s customers during its launch.
As the litigation proceeded, each party also accused the other of destroying evidence, claiming entitlement for this wrong to punitive and other damages, preclusion orders, and, at a minimum, adverse inferences.
By the time med-arb began to be considered, outside attorneys’ fees approached the damages that the parties’ experts were projecting. Distrust and emotion were at a peak. The business people of each subsidiary and their outside counsel were relying on each other, and all were convinced to a fault that they were right and would prevail. Relations between the opposing outside counsel were not good.
Trial was not far off, though expensive discovery remained, not to mention summary judgment motions. One court-ordered mediation/ settlement conference had failed, neither side being willing to make offers within a negotiable range. The sophisticated general counsel on both sides who were paying the bills knew little more about the merits than what they were being told, and wanted the process to be under reasoned control.
Then the economy collapsed.
Mediation and arbitration are familiar processes, though each is very different, requiring neutrals to employ different skills. Mediation is a nonbinding attempt to bring parties to a mutually agreed settlement. Mediators cannot order anything. They generally have no power except their skills.
Mediators are commonly taught to avoid expressing evaluative opinions, if at all, until late in the process. Otherwise, so the teaching goes, the mediator will lose rapport with parties who receive unfavorable evaluations, and the opportunity to achieve a settlement will have narrowed or be lost. Mediation communications are privileged from use in proceedings such as arbitration. Mediators often separate the parties into private “caucuses,” where the mediators receive information that is not necessarily admissible or even germane to the dispute, but is at least of interest, and which often is kept confidential from the other party.
These principles are generally fundamental to mediation.
Arbitration, by contrast, is an adjudication, albeit less formal than in court, where strict rules of evidence apply. It takes place before one or more neutrals empowered to reach a binding decision after a hearing with sworn witnesses. There are no ex parte communications. The process may not be confidential. Though arbitrators are generally constrained from communicating about the arbitration, the parties are not, absent agreement. Carrie Menkel-Meadow, “Ethics Issues in Arbitration and Related Dispute Resolution Processes: What’s Happening and What’s Not,” 56 Univ. of Miami L. Rev. 949, 962 (2002) (arbitrations confidential only if parties so agree or rules provide).
Med-arb is a controversial hybrid. First the parties mediate. Then, if they are not successful, they arbitrate. In its “pure” form, the same neutral conducts the entire process.
Proponents like many attributes of med-arb, including flexibility; efficiency by saving time and money; additional incentive to settle from so-called “mediation with muscle” and to participate in mediation sincerely and in good faith, and, of course, finality.
Med-arb has its critics, too. Mediators receive confidential ex parte communications in caucus that may include information which is largely unrelated to the dispute; often inadmissible even if arguably relevant; and potentially embellished significantly since it is unsworn, and about which the other side may not even learn, let alone have a chance to rebut or cross-examine.
Those things could “improperly influence” a deciding arbitrator, and the neutral should not consider them. But that is what med-arb assumes will happen. See, e.g., “Drafting Dispute Resolution Clauses” booklet (American Arbitration Association July 2004), at 38.
Such “due process” and confidentiality concerns underlie much of the criticism of med-arb. In the accompanying resources box on page 72, see Blankenship, at 35-38; Bartel, at 685-688; Peter, at 91-99, and Sussman. See also “East Meets West: An International Dialogue on Mediation and Med-Arb in the United States and China,” 9 Pepp. Disp. Resol. L.J. 379, 401-02 (2009) (joint conference between the Beijing Arbitration Commission and the Straus Institute for Dispute Resolution).
Moreover, critics have said, med-arb may have a “chilling effect” on parties who know the mediator may become the arbitrator. That will cause them to be less open during mediation about weaknesses of their case so they don’t hurt their chances if the outcome ultimately is arbitrated. This, critics argue, inhibits discussion and reduces the viability of the mediation process. Kathleen Scanlon, Mediator’s Deskbook, at 76 ¶4.8, at 88 ¶ 4.10.5 (CPR Institute); see also in the resources box Flake at 6; Blankenship at 36-37; and Sussman at 71.
There are other criticisms, too. Some regard the “mediation with muscle” aspect of med-arb—in that the mediator decides if mediation fails—as negatively coercive instead of positively incentivizing. Some have also suggested the med-arb process might be manipulated by a party forcing the transition to arbitration from mediation by refusing to cooperate or negotiate. See in the resources box Blankenship at 37, citing Bartels at 683 (acknowledging that same concern exists in normal mediation, and greater disincentive should exist in med-arb).
For example, the “Drafting Dispute Resolution Clauses” booklet published by the American Arbitration Association states that, “except in unusual circumstances,” a procedure using the same person as mediator and arbitrator “is not recommended.” Similarly, the Mediation Procedure of the CPR Institute, which publishes Alternatives, provides that, unless the parties (and mediator) agree otherwise, a mediator shall not also serve as an arbitrator. § 3(k) (available at http://www.cpradr.org).[See also ABA Model Standards of Conduct for Mediators (available at http://www.abanet.org/dispute/documents/model_standards_conduct_april2007.pdf), providing that a mediator shall not undertake additional dispute resolution role in the same matter without the consent of all parties, Std. VI(8); see V(A, B & D) (parties may agree to disclosure of otherwise confidential information; mediators meeting privately may not disclose information obtained, without consent; and parties may make their own rules and vary expectations of mediation confidentiality); Uniform Mediation Act Sections 5(a), 6(a) & 7(a)(2) (mediation privileges against disclosure may be waived by all parties) (available at www.law.upenn.edu/bll/archives/ulc/mediat/2003finaldraft.pdf); CPR-Georgetown Commission on Ethics and Standards in ADR, Model Rule for the Lawyer as Third-Party Neutral, Rule 4.5.2(a) (neutral shall discuss and maintain confidentiality unless all parties agree to disclosure or use) (available at www.cpradr.org/Resources/ADRTools/ADRRulesEthicsCodes.aspx); and the AAA/ABA Code of Ethics for Arbitrators, Canon III(A) (parties’ agreement may establish manner and content of communications between arbitrator and parties, which arbitrator should follow notwithstanding contrary provisions in subparts B & C re ex parte communications), and Canon IV(F) (arbitrator should not participate in settlement discussions or act as a mediator unless requested to do so by all parties) (available at www.abanet.org/dispute/commercial_disputes.pdf).]
CPR’s Mediation Procedure Commentary expresses doubt, even where parties do agree, to using the same neutral where he or she has received significant confidential information that otherwise would not be in evidence at an arbitration. Thus, the CPR Institute says it is not desirable for parties to agree before the mediation that the mediator will become an arbitrator if the mediation is not successful.
CPR’s Mediator’s Deskbook suggests, alternatively, an “opt-out” variation. It suggests that the parties initially agree to med-arb by the same neutral, but either party may opt out of its initial decision to use the same neutral for arbitration after the mediation has concluded. In that event, of course, the ADR process is delayed until the parties select an arbitrator, who will have to climb the learning curve that the mediator has already scaled.
Another variation is for the parties to agree there will be no caucuses in the med-arb mediation phase, thus limiting the ex parte aspects of the due process concerns discussed above. Still another approach suggested in the CPR Mediator’s Deskbook is what it calls “mediation against the box,” sometimes also referred to as arb-med: A full arbitration hearing occurs first, but the final decision is sealed while the parties attempt to settle with the arbitrator/ mediator’s assistance. If they fail, the award is unsealed and becomes binding.
All of these variations apparently are intended to mitigate some of the problems perceived with the “pure” med-arb process in which the same neutral handles both phases.
EARLY NEUTRAL EVALUATION
Another process has proven successful in business disputes. The AAA and other ADR providers also offer early neutral evaluation, as do some courts.
For example, the Northern California federal district court offers parties early, nonbinding neutral evaluation, or “ENE” (ADR L.R., 5-1), as one of its mandatory ADR options, in addition to nonbinding arbitration, mediation or judicial settlement conferences. See, Carrie Menkel-Meadow, supra, at 955 (citing N.D. Calif. as a court with a “great deal of experience” with ADR).
Generally the parties submit and exchange confidential, written case statements, including discussion of key liability and damage issues, key evidence (copies are which are attached), discovery, and issues whose early resolution would be helpful. See, e.g., N.D. Calif. ADR L.R., 5-8; AAA ENE Procedure ENE-4. The process is confidential. N.D. ADR L.R. 5-8(b) & 12; AAA ENE Proc. ENE-7. The parties make presentations at an informal evaluation session, but there is no formal examination of witnesses, and no recording.
The California federal court requires the evaluator, among other things, to help the parties assess the relative strengths and weaknesses of their contentions and evidence; estimate where feasible the likelihood of liability and the dollar range of damages; devise a plan to obtain discovery necessary for meaningful settlement discussions, and assess litigation costs.
The AAA procedures provide for a written evaluation to be rendered, and for a verbal presentation on request of a party. The Northern District rules contemplate that the evaluator will prepare a written evaluation, and that it will be presented orally on demand of a party, but leave to the evaluator’s discretion actually providing a copy of the written evaluation to the parties.
Both the AAA and the Northern District contemplate the possibility that the parties will continue to use the evaluator as mediator, if all parties agree. The Northern District precludes ex parte communications with such an evaluator, including private caucuses to discuss settlement, until after the evaluator has at least committed his or her evaluation to a writing, if not provided a copy of it, and all parties have agreed to such communications.
Neither of these two programs mentions ENE in the context of arbitrating—not surprising in the California Northern District, since its ADR programs are court-mandated and nonbinding. The Northern District provides that all parties may stipulate to disclosure of confidential ENE information for use in a subsequent confidential ADR or settlement proceeding.
THE AGREEMENT, AND THE ADR SETUP
With these processes in the background, we can return to the litigation discussed earlier. The general counsel reached out to each other independently and decided at a minimum, in an effort to rein in seemingly runaway litigation in the faltering economy, to hire an ENE neutral. They hoped it would cause business people on each side, including their own, to look at the case more objectively. The move, they expected, would set the stage for possibly negotiating a settlement.
The parties agreed that each side would submit, as if in an arbitration—i.e., marked for identification, indexed and provided in three-ringed binders—written briefs; pleadings; key documents marked as exhibits; deposition excerpts; copies of key authorities; pertinent court rulings and hearing transcripts; expert reports, even if just drafts; and any other materials on which they both agreed. The volumes of these materials were capped.
The parties agreed to travel to the neutral’s location, bringing top business people, outside counsel and the general counsel, for a live session to which a full day would be devoted for presentations. Afterward, the neutral was to provide a written evaluation, consistent with the California Northern District federal court procedure, assessing contentions and evidence, explaining his reasoning, and estimating where feasible liability and range of damages.
The general counsel also agreed initially that everyone would meet after the session at one of their U.S. headquarters to discuss with the neutral his evaluation. In addition, they agreed that the neutral would, at their option, also mediate the dispute at the headquarters locale of the other party, if the parties could not, on their own, settle after reading and vetting the written evaluation.
Thus far, this is relatively consistent with the customary ENE and mediation processes described above.
It seemed clear in this process, however, that the general counsel during their discussions remained concerned that their clients’ business people might not be able to reach a consensual agreement despite these efforts. The parties agreed to take things one step further—that is, to med-arb, vesting the evaluator/mediator with power to decide in an arbitration if mediation failed.
They initially considered an opt-in alternative, where both parties would have to agree after unsuccessful mediation to proceed with the neutral to arbitration. But that could have put them back on course into litigation, absent mutual agreement. Nor did they want the opt-out mechanism, discussed above, which could have had the same result.
Instead, but in constraint of potential consequences of an arbitration stage, they agreed that any “arbitration” phase would be limited to the neutral choosing between the final settlement offer made by each side during the mediation, and rejected by the other side—so-called last-offer baseball arbitration.
The general counsel also agreed that, if a mediation occurred, it would not be attended by outside counsel. Instead, at that juncture, they would take ownership of the settlement process with their CEOs.
The abbreviated “arb” stage of this ADR hybrid made particular sense in the context of the evaluation piece of the process. In more conventional med-arb, a full-blown evidentiary arbitration hearing generally occurs after a failed mediation. That second arbitration phase can be a significant cost, one that parties, particularly those who have been litigating for years, as here, want to avoid if possible.
The earlier ENE process provided a better opportunity to submit and argue the merits of their case than would occur in a mediation, albeit not so much as in a complete arbitration hearing. Thus the prospective arbitrator, who was an evaluator from the outset, had the chance to learn the case early—well before the transition to being a mediator, and then, finally, the arbitrator.
To be sure, the evaluation did not take into account a complete presentation of each party’s case. Sworn witnesses, evidence on all issues, cross-examination, and a decision normally would have occurred in the due process of a normal arbitration, as well as in the hybrid arb-med process mentioned above. (Again, in an arb-med, the decision in a first-phase arbitration is sealed while the second-phase mediation is conducted.)
Instead, consistent with the California Northern District federal court’s ENE rules, the parties’ agreement called for the evaluation to assess strengths and weaknesses of positions and evidence, and estimate likely results and any damages.
That evaluation included identifying additional questions that the neutral thought remained unanswered. The parties therefore agreed—during the live session—to give each other additional time to make reply submissions for this purpose, all before the evaluation was written and the mediation occurred. The meeting scheduled to vet the evaluation could also provide further opportunity to tell their story.
Therefore, due process adequate for the parties’ purposes would educate the neutral whom they had chosen. The scheme was intended to be sufficient for him to decide fairly between the two choices that they would leave him if their clients could not reach a mediated solution.
After this agreement was reached, submissions were made. A full-day live session occurred. Outside counsel made extensive, trial-type presentations—more argument than opening—and knowledgeable executives talked, though not under oath.
Acting as the neutral, this author asked many questions. The general counsel largely listened, learning significantly about a case they had each known little about before now. They began to arm themselves for substantive responsibility at any mediation that might occur later without outside counsel.
To the author’s surprise—and chagrin—neither side had exchanged with the other their submissions before coming to the live session. Thus, the planned presentations were not nearly as responsive they might have been. While the parties’ agreement contemplated such exchanges and responses, it did not expressly require exchange. It seemed that, in the haste to make submissions, neither side’s counsel apparently considered whether to exchange them as well as submit them to the neutral. As a result, the parties agreed to additional, limited post-session submissions replying both generally and on particular issues identified during the session.
Afterward, the author wrote a nearly 40-page evaluation of both sides’ claims.
The parties decided not to have the meeting on which they initially agreed for discussing the evaluation. Providing for the meeting was a good idea: It allowed for potential additional due process that could have been valuable. As things turned out, however, the general counsel appeared to believe that, after reviewing the evaluation with their clients, another live meeting simply to advocate and argue more—without the possibility of a negotiation and a decision to motivate the clients at such a gathering—was not cost effective under the circumstances.
Instead, the general counsel decided to proceed directly to the mediation, the date and locale of which was set in the initial agreement.
The general counsel and party CEOs attended without outside counsel. The general counsel, relying on the mediation evaluation observations as the starting point, and on assistance of outside counsel and the business people, made initial presentations on the merits in joint session as in a normal mediation, addressing to some extent questions raised in the evaluation. There were also separate caucuses.
At the end of the day, the author did not have to make a decision. The parties reached their own settlement.
Key Med-Arb Resources
The basics of med-arb have been well vetted in conflict resolution journals. Here are some significant articles that were helpful in sorting through the effects of the case described in the accompanying article:
Edna Sussman, “Developing an Effective Med-Arb/Arb-Med Process,” N.Y. Dispute Resolution Lawyer, Vol. 2, No. 1 (Spring 2009); James J. Vlasic, “Med-Arb– Can You Afford the Risk?” The ADR Newsletter, Vol. 15, No. 1 (Jan. 2008)(Michigan State Bar ADR Section)(available at www.bodmanllp.com/publications/articles/ADR_Newsletter_1-08.pdf); Yolanda Vorys, “The Best of Both Worlds: The Use of Med-Arb for Resolving Will Disputes,” 22 Ohio State J. on Dispute Resolution 871 (2007); John T. Blankenship, “Developing Your ADR Attitude: Med-Arb, a Template for Adaptive ADR,” 42 Tenn. Bar J. 28 (Nov. 2006); Claude Thomson, “Med-Arb: A Fresh Look” (2005) (available at www.claudethomson.com/docs/Med-Arb_A_Fresh_Look.pdf); James T. Peter, “Med- Arb in International Arbitration,” 8 Am. Rev. Int’l Arb. 83 (1997); Sherry Landry, “Med-Arb: Mediation with a Bite and an Effective ADR Model,” 63 Def. Couns. J. 263 (1996); Barry C. Bartel, “Med-Arb as a Distinct Method of Dispute Resolution: History, Analysis, and Potential,” 27 Willamette L. Rev. 661 (1991); R. Flake, “The Med/Arb Process: A View From the Neutral’s Perspective,” ADR Currents (June 1988) (available at www.cbylaw.com/filebin/files/flake/rpf-medarbprocess.pdf); Karen Henry, “Med-Arb: An Alternative to Interest Arbitration in the Resolution of Contract Negotiation Disputes,” 3 J. on Dispute Resolution 385 (1988).
Los Angeles entertainment lawyer Gerald F. Phillips has written extensively on the subject in this newsletter and elsewhere. His articles include “Same-Neutral Med- Arb: What Does the Future Hold?” 60 Dispute Resolution Journal No. 2, 24 (ABA May 2005) (available at http://www.allbusiness.com/legal/mediation/1014899-1.html); “It’s More Than Just ‘Med-Arb’: The Case for ‘Transitional Arbitration’”, 23 Alternatives 9 (Oct. 2005); “Back to Med-Arb: Survey Indicates Process Concerns are Decreasing,” 26 Alternatives 73 (April 2008); “The Survey Says: Practitioners Cautiously Move Toward Accepting Same-Neutral Med-Arb, But Party Sophistication is Mandatory,” 26 Alternatives 101 (May 2008).
Also in Alternatives, for insight into the use of same-neutral med-arb with a backup neutral for arbitration decisions in a highprofile case, see “The AIG-Greenberg Neutral on his Settlement Role—Mediation? Or Arbitration? Answer: It’s Both:” 28 Alternatives 8 (January 2010). (Access to all Alternatives articles is available through www.cpradr.org and from publisher John Wiley & Sons at http://onlinelibrary.wiley.com.)
—Robert L. Ebe