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A Different Approach to Conducting Med-Arb In Complex Commercial Litigation Matters

By Robert L. EbeMarch 17, 2011 | Print

Med-Arb Design, Mediation Result

The issue: Taking on arbitration after mediating.

The analysis: The neutral describes how a manufacturer and a sales rep built a hybrid ADR process after their contract went sour.

The punchline: They were so ready to arbitrate that, after mediation, they didn’t need it.

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 CONFLICT

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.

THE PROCESSES

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, 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 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.

* * *

—Robert L. Ebe

The author is a partner in Nixon Peabody LLP’s Commercial Litigation practice group in San Francisco.

Full article, including analysis of early neutral evaluation, the agreement and the ADR setup and key Med-Arb resources is available to subscribers online.

Also in Alternatives, for insight into the use of same-neutral med-arb with a backup neutral for arbitration decisions in a high-profile 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.)

 

 

 

 

 

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