“[M]ediation provides a vital alternative to litigation;” its benefits “include its cost-effectiveness, speed, and adaptability.” [1] But despite these benefits, many litigants only turn to mediation to resolve their disputes after filing a lawsuit rather than before. Litigants who fail to consider whether pre-suit mediation may work for them may be missing out on a valuable opportunity to settle their cases efficiently and privately. This article explores the pros and cons of attempting to resolve disputes through mediation before litigation is commenced, and provides some pointers on how to make a pre-suit mediation successful.
The reasons parties do not use mediation as a tool to avoid litigation in the first place are varied. Before a lawsuit is filed, there is no outside arbiter — i.e., a judge — creating the necessary circumstances that lead third parties to turn to mediators to avoid trial. In many jurisdictions, local rules require parties to engage in mediation prior to bringing a matter to trial. In other jurisdictions, while mediation is not required, it is encouraged. Those same types of rules do not apply before a lawsuit is filed.
Other factors, such as a fear that an early willingness to mediate may convey weakness to an opponent, or a belief that formal discovery will strengthen a case, may also contribute to delaying mediation until after the lawsuit is filed. In some cases, a plaintiff may think that a well-publicized lawsuit will increase the ultimate recovery or will punish a defendant. A defendant might not want to pro-actively raise pre-suit mediation for fear it conveys weakness and will increase the amount that the defendant may ultimately be required to pay. There’s also the hope that the dispute will quietly disappear if the defendant ignores his adversary. In some cases, one party may desire to “teach the other side” a lesson or to exact revenge.
There are many benefits to settling early, the most obvious of which is saving money. Absent an agreement or statute that shifts attorneys’ fees and other litigation costs to the losing party, under the American Rule each side almost always absorbs its own legal expenses. Even when the lawyer is handling the case on a contingency basis, most contingency fee agreements increase the lawyer’s percentage recovery after a case is filed or significant pre-trial activity occurs.
But beyond monetary expense, the cost of litigation that is often unknown, and can be even more harmful than paying lawyers, is the reputational damage that can occur as a result of allegations made in a complaint that is a public document, or as a result of negative publicity that occurs during the litigation process. Statements about the case made by the media, while not always accurate, can be so damning that they can destroy a business or cause great harm. Further, publicity can lead to copycat lawsuits if the publicity surrounding the case makes others aware of a circumstances that might have negatively impacted them as well.
In addition to the monetary costs, litigation takes time, involves a lot of preparation hours on the part of the litigants, and often diverts the attention of the litigants or their employees away from their jobs. Responding to discovery requests and preparing for hearings consume many hours of persons whose role in the litigation is critical. The length of time that a typical lawsuit can take (often three to four years) can also add expense and weaken each side’s ability to prove their case inasmuch as evidence may become stale, memories fade or witnesses may no longer be available, making the case harder to try. And while the court system grinds to a resolution, a plaintiff is left without a recovery or a solution to the problem that drove the filing of the lawsuit in the first instance.
Given its obvious benefits, one wonders why pre-suit mediation is not more common. One reason may be a perceived lack of knowledge. Both sides may think they do not know enough about the other sides’ claims or defenses or may believe that formal discovery will improve their position. One strategy to avoid the “knowledge” barrier to an early resolution is to provide a defendant with a complaint or a strong demand letter, laying out all of the claims and the supporting facts, and inviting a settlement demand or mediation. Because understanding the merits and demerits of one’s position is key to a client’s willingness to settle, an open and candid exchange of information in this pre-suit process will be key to reaching a settlement.
After being retained to represent a party to a dispute, the attorney often will investigate the basis for the claims prior to drafting a complaint. In order to understand the factual history of the circumstances leading to the offense, the plaintiff’s counsel requests much of the information that will be reviewed during the discovery process, should the matter be litigated. By investigating the situation early and as a precursor to mediation, the parties will be better able to negotiate a resolution of the grievances.
Litigants may be concerned that if they are candid before filing suit, it may come back to harm them during the litigation if the mediation is not successful. A well-drafted mediation agreement that is broader than Rule 408 of the Federal Rules of Evidence (or its state law equivalents) can protect the confidentiality of any ensuing discussions. Courts recognize that mediation requires confidentiality to promote the candor critical to its success. [2] Thus, concerns over the sharing of information and positions can be alleviated through well-drafted mediation confidentiality agreements.
Using a mediator before filing suit also significantly improves the likelihood that the parties will resolve their dispute without litigation. Why not simply negotiate without a mediator? Parties often negotiate with one another prior to filing suit, but negotiations may be fraught with animosity, distrust and an unwillingness to see the other party’s point of view. A mediator can be instrumental in breaking the logjam that often occurs during negotiation sessions.
Mediators, as neutral parties, can act as an effective buffer between the parties and can often calm nerves and be a sounding board for each party to air their grievances against the other. Many times, parties want a neutral party to hear them out, especially if nerves are still raw. Parties often need someone to hear them and play devil’s advocate before entertaining the idea of giving something up in order to resolve the dispute.
Engaging mediators to resolve anticipated disputes has been used in many large bankruptcy cases with much success. For example, in the Puerto Rico, Purdue and Boy Scouts’ cases, among others, mediators were appointed by the court soon after the cases were filed, to resolve stated as well as anticipated disputes that were almost certain to result in litigation among different constituents and to allow for a more efficient and less contentious chapter 11 plan process. The mediation process was designed to avoid litigation by ensuring that the interests of various constituents were protected and listened to and, in most instances, proved to be successful in resolving claims and avoiding costly and time-consuming trials.
Seasoned mediators instill trust in the parties and are adept at reading the parties’ spoken and unspoken views. Unlike attorneys, a strong neutral can be completely candid with each party about the strengths and weaknesses of their case, and not appear weak or fearful of taking the case to trial. He or she can impress upon the parties (not only the attorneys for the parties) the true cost of litigating the matter and whether it is worth the cost, even if the ultimate result is favorable. Often, the views of the mediator will carry great weight with the parties, especially if he or she has been able to establish a level of trust among the litigants as to his or her neutrality and role in attempting to resolve the matter.
Because of its many benefits, every potential litigant and her counsel should carefully consider the pros and cons of participating in mediation before litigation. Attempting a pre-suit mediation may be in your client’s best interests if they have any concerns about (1) funding the case, (2) the merits or strengths of their claims or defenses, (3) the burden of proof and whether they can meet their burden in court, (4) what the litigation could cost them in terms of reputation and/or business disruption even if they prevail, (5) the uncertainty involved in litigation and (6) the possible difficulty in collecting any judgment ultimately obtained.
[1] Fields-D’Arpino v. Rest. Assocs. Inc., 39 F. Supp. 2d 412, 417 (S.D.N.Y. 1999). About the authors: Claudia Springer is a principal at Novo Advisors, a boutique turnaround and restructuring firm which she joined in 2021. She leads Novo’s mediation practice and also works on restructuring projects with other members of the firm. Prior to joining Novo, she practiced restructuring and bankruptcy law for more than 40 years, primarily at two firms, most recently at Reed Smith and prior to that Duane Morris. Claudia has been lauded as one of America’s leading insolvency and corporate restructuring attorneys by Chambers USA every year since its initial publication in 2003. She was one of the youngest inductees in the American College of Bankruptcy, served on its board for two terms and currently heads up a committee. In addition, she has been recognized as one of the nation’s top restructuring and bankruptcy lawyers by America’s Best Lawyers and America’s Best Business Lawyers, and she is a Pennsylvania Super Lawyer. Catherine Steege is a partner at Jenner & Block and serves as co-chair of the Transactional Department and co-chair of the Bankruptcy Practice and Bankruptcy Litigation Practice. She is one of the nation’s leading bankruptcy attorneys, and has been recognized in Chambers USA since 2008 as a leading lawyer in bankruptcy and restructuring law. In 2014, she was selected by Law360 as one of 10 “Bankruptcy MVPs.” Best Lawyers has recognized her in bankruptcy and creditor/debtor rights law and litigation bankruptcy. She argued in the U.S. Supreme Court for the petitioner in Wellness International Network v. Sharif and was counsel for the petitioner in Law v. Siegel and for the respondent in City of Chicago v. Fulton. She is a Fellow of the American College of Bankruptcy and a member of the National Bankruptcy Conference. She chairs Jenner’s Finance Committee and serves on its Policy Committee.
[2] See Lake Utopia Paper Ltd. V. Connelly Containers Inc., 608 F.2d 928, 930 (2d Cir. 1979); Bradley v. Fontaine Trailer Co. Inc., No. 3:06cv62 (WWE), 2007 WL 2028115, at *5 (D. Conn. July 10, 2007); Uniform Mediation Act, 7A U.L.A. 94 (Prefatory Note). For this reason, courts will enforce mediation confidentiality agreements that are broader than Rule 408 of the Federal Rules of Evidence. See Facebook Inc. v. Pac. Nw. Software Inc., 640 F.3d 1034, 1041 (9th Cir. 2011); Gymnastics v. Ace Am. Ins. Co., 19-50012, Dkt. 354, at 9 (Bankr. S.D. Ind. March 23, 2020) (collecting cases). Put another way, Rule 408 (or a comparable state rule) is a floor for confidentiality, but if the parties agree to stricter limitations, those agreements will be enforced.