By Ann Cook

The company is having a good year. Revenue is up, market share is rising, and the financial outlook is strong. The General Counsel receives a call from a well-respected lawyer at a prestigious firm known for aggressively pursuing claims. The lawyer lays out a series of allegations that the company fraudulently entered into a contract with a co-manufacturer and then failed to deliver, causing hundreds of millions of dollars in damages. The allegations include actions purportedly taken and statements made by very senior members of the company, including several C-Suite executives. The General Counsel’s first response is that the claims are without merit, but suspects that the facts will show a more nuanced case and that there will be challenges to overcome. Even if the case ultimately lacks merit, the General Counsel sees that the matter is going to require financial and other resources to investigate and defend and will upset and distract leadership at a time when the company could capitalize on market momentum. To top it all off, the relationship with this co-manufacturer is a big part of the company’s future outlook and it is a relationship that would be difficult to replace. The General Counsel has a lot to consider in deciding if and when to mediate.

When to mediate a dispute is one of the most strategic and consequential decisions for the General Counsel. They must take a holistic view of the case and advise on whether, in their opinion, it is in the best interest of the company to settle the matter rather than go to war. Early mediation is sometimes not considered at the start of a lawsuit for fear of signaling a weak case or intolerance for the tough road of litigation. Some of this initial resistance to mediation, however, could give way to benefits that could pay off later in the case or for the business in other ways. This article outlines the authors’ points of view on when early mediation can be a powerful weapon in the General Counsel’s arsenal.

Benefits and drawbacks of early mediation
Truth be told, there is little downside to early mediation–particularly when weighed against the upside possibility of a settlement that resolves the matter and reignites the parties’ business relationship. In assessing whether early mediation is right for the matter, we tackle some of the common reasons why someone might resist early mediation:

MISNOMER #1: There are too many unsettled issues; we are not ready to settle. Mediation is a dialogue not a day. It is also not an all-or-nothing proposition. A skilled mediator will start the dialogue with the parties before any in-person or virtual mediation session and will continue to pursue a settlement if the mediation session does not resolve the matter. In complex commercial matters, it is often difficult to resolve all the issues in a single 8- or 10-hour session, but mediation can narrow discovery and focus the matter on key aspects of the grievance. A skilled mediator will start trying to resolve any issues that are capable of resolution to help narrow the litigation and focus the parties on their most critical points. Starting the mediation dialogue early enables a mediator to work alongside the parties and understand all the complexities of the matter. It is also not necessary to have all the facts gathered before mediation. Complex matters can sometimes take years for all the facts to bubble up in discovery. Many mediations happen before discovery ends and not all facts are germane to settlement value. While all the facts may not be known, the one certainty is that without settlement, costs will continue to increase.

MISNOMER #2: We do not want to appear weak by signaling that we want to settle. This is where the role of the General Counsel differs from that of outside counsel. Outside counsel are ethically bound to be zealous advocates for their clients. This translates into presenting the strongest case most powerfully and avoiding anything that might signal weaknesses. While a General Counsel has the same strong ethical commitment, the role is broader and considers the business and the best interests of the company. Often, this includes considerations beyond the purview of the outside lawyers. While not wanting to signal weakness is an understandable and common position, it is also easily overcome by skilled in-house lawyers who understand that any litigation is a drain on the bottom line.

MISNOMER #3: Why would we settle? We have a strong case. Assuming this is true, and perhaps it is, it is all the more reason to engage in early settlement talks. Mediation has two significant benefits where one’s case is strong. First, you can test whether your case is as strong as you think it is. Mediators are neutrals and may be willing to assess the strengths and weaknesses of your case. If this is what you are hoping to achieve, choosing the right mediator is important. You want a mediator willing to be evaluative and not only a facilitator of settlement. Second, when you have a very strong case, litigation is a frustrating waste of resources. But remember that only your side may know and appreciate how strong your case is. Sharing that information through a confidential mediation process might educate the other side on the strengths and weaknesses of your case and theirs and give both parties a sense of how difficult the matter will be to litigate.

MISNOMER #4: We are too far apart so settlement is not possible. As noted above, mediation is a dialogue. The start of this dialogue may be looking into the right moment to hold a mediation session. Sometimes the mediation process begins by having the mediator conduct diligence on whether now is the right time to hold a mediation session. If not, what are the points of inflection for the parties. Parties in litigation can be bullish on their case and will want to present strong positions, but in a confidential mediation, a party may be more candid with a mediator and divulge where and when there might be an opportunity for compromise. Further, and to use a colloquialism, the parties have to start somewhere. If the parties were close in the bid and ask, they might not need a mediator at all. Thus it is common for parties to be far apart at the start of the dialogue but then move throughout the process to get to a range where settlement happens or at least becomes possible.

MISNOMER #5: We have to litigate to protect the company. To a company, the strength of the brand is critical. Litigation has at least the potential to hurt a brand. Offsetting this concern are strong statements from a company that the lawsuit lacks merit, and that the company will mount a strong defense. The General Counsel should evaluate the likelihood of the media following the lawsuit and how statements about the matter might impact other initiatives such as recruiting, new product launches, public offerings, mergers, and marketing events. In addition, the Company will need to evaluate the use of its capital to fund litigation over other interests.

When to mediate? What should the General Counsel consider in deciding if early mediation is the right move?
One of the first reactions to learning that there is a threat of litigation is to ask, “What are the facts?” The General Counsel leads this effort, making sure that the company is complying with document preservation requirements while also gathering witness perspectives and analyzing the law. Within a short amount of time, the General Counsel will have identified key witnesses and key documents, will have a sense of opposing counsel and the relevant jurisdiction, and may already understand the key legal issues that will need to be resolved during the lawsuit. Enough information will be gathered at this early stage to allow the General Counsel to evaluate the overall risk of the lawsuit. The General Counsel faces the first of several inflection points in the lawsuit where he or she can evaluate the possibility of settlement.

A settlement is a business decision guided by this risk assessment. While the full list of risks that should be evaluated will depend on the company and the industry, the General Counsel can start by considering the parties, the lawyer, the jurisdiction, the facts, and the law. The General Counsel is in a unique position to evaluate these items dispassionately from the perspective of the business.

The parties. Seminal to the risk assessment is knowing if the company is, or could potentially be, facing a class of plaintiffs. In our hypothetical, it is not a class action, but it is nonetheless a significant action because the plaintiff is an important business relationship and a large contributor to the company’s successful future. Saving the relationship has significant value to the company and opens the door to creative settlement possibilities. For example, when the relationship between litigants is strong, business incentives could become a significant part of settlement terms and often at a significant discount to the party offering the incentive and an outsized value to the recipient. As the litigation continues, parties will become entrenched in positions and the relationship is almost certain to deteriorate. Where the company is facing a class action, additional considerations must be considered, including the risk of additional lawsuits, brand damage, and the value of the settlement to the class, among others.

The General Counsel should also consider his/her client here. Will this matter be a distraction for leadership and burn resources that are needed elsewhere? It is also helpful for the General Counsel to understand how key witnesses will perform in deposition or at an eventual hearing or trial. If the company has a great story, but no one can competently and convincingly tell it, the value of the matter may change.

The lawyers. The tone of the relationship between the lawyers will have a significant impact on the overall matter. Will the lawyers behave in a reasonable manner? Will they be courteous and professional? It is easy to see how reasonable lawyers could help mitigate the negative aspects of litigation. There is a time for zealous advocacy, but mediation works best when the lawyers can see past arguments to reasonable, practical positions. Highlighting the behaviors of litigants helps enable the mediator to structure the interactions to maximize the negotiation. 

Some lawyers develop a career by pursuing a particular type of claim or industry. In deciding whether early mediation might be beneficial, the General Counsel will need to consider whether the opposing lawyer or party is a “repeat player” who, if financed, will return in a continuous stream of lawsuits against the company. In that scenario, it might be necessary to engage in litigation for at least some amount of time. Any company facing a repeat litigant will be wary of appearing as a pushover to easy settlement.

The jurisdiction. There are a few key questions about the jurisdiction that are helpful to the mediation question. First, will this matter be in state or federal court? What is the speed of case resolution in the court? Will this be a jury trial, a bench trial or is there an argument that the matter should be in arbitration? One important early question for the General Counsel’s consideration is the attitude of the court and jurisdiction to discovery during the pendency of a motion to dismiss. Certainly, if the PSLRA applies and discovery is stayed, there might be an opportunity to narrow the case or seek dismissal before attempting mediation. However, where the PSLRA does not apply and research suggests that the court is not likely to stay discovery if a motion to dismiss is filed, mediation becomes a more attractive option.

The facts. Perhaps it is an obvious point that where the facts are against the company, the risk of a negative outcome at trial is greater. And, in the end, the General Counsel may know that the company is not going to let matters get to a trial. But how should a General Counsel signal a willingness to settle the matter during this early phase of litigation without signaling weakness and pushing up the settlement amount? As noted above, a settlement is a business decision. Thus, a call from the General Counsel to the opposing party’s General Counsel, or even between business executives, can strike the right tone that a settlement discussion is welcome before the litigation gets started. The General Counsel should also confirm whether the contract in question contains a requirement or option to have pre-litigation mediation and, if so, invoke that clause. See above for a discussion of considerations where the party believes the case is strong and would succeed at trial.

The law. Whether a case is susceptible to a motion to dismiss or summary judgment is key to evaluating the value of a case and the benefit of early mediation. But even where there is a chance of obtaining an early dismissal, the General Counsel should evaluate the risk of creating a precedent that will negatively impact future cases. It is also helpful to lay out key inflection points for the General Counsel to evaluate settlement again, such as after a decision on a motion to dismiss, before or after class certification, or after a key witness is deposed.

One factor that a General Counsel might consider at this stage is the cost of mediation. However, this factor should be quickly dismissed in favor of other benefits. Indeed, the benefits of early mediation are many and the cost will pale in comparison to the cost of litigation. Even where the matter cannot be resolved at this early stage the information learned about one’s case and the positions of opposing parties make mediation well worth exploring.

How to make the most out of early mediation
If the time is right to mediate the matter, there are several steps that a company can take to better ensure that the most is achieved from the process.

• Engage with the mediator early. Because mediation is a dialogue, the mediator will want to understand as much about your position as possible, including all the considerations not contained in a shared mediation statement. It is important to share these considerations candidly with the mediator.
• Draft a term sheet. This is a great way to crystallize the issues and gain a consensus as to what a reasonable settlement might look like. A pre-mediation term sheet is even more important where one side is seeking a form of injunctive relief that may require input from the business or experts. Where term sheets are shared with opposing parties it highlights where there may be agreement.
• Understand the full litigation budget. Outside counsel should be able to budget the case through trial and any appeals. The General Counsel should also include the internal cost of the matter including any document or technology costs and the distraction of business professionals from their work.
• Come to the mediation with real authority to settle. Engaging in mediation without a true intention to settle will not help the relationship between the parties. That said, the amount a party might be willing to pay or might be willing to accept at this stage of the litigation is often influenced by how much it would cost to defend the matter. If the decisionmaker does not attend the mediation session, they should at least be accessible to advise on a possible settlement.
• If you are seeking damages, have a reasoned basis supporting the calculation. This article is targeted at General Counsels and their considerations, but this applies equally to any party seeking damages in litigation. Unless it is a baseball mediation where each side submits a number or position and the mediator adopts one or the other, the mediation will kick off a negotiation. The more the damages calculation is grounded in actual costs and harm, the easier it will be for the opponent to understand the value of the matter. If there is a misunderstanding or error in the calculation, it is better to know that before the experts get to work.

CONCLUSION
Whether the time is right for mediation requires some thoughtful analysis by the parties. The benefits are many and exist even where an overall settlement may not yet be achievable. The potential cost savings from narrowing a case or advancing one’s understanding of the strengths of their positions will likely overshadow the cost of mediation. In addition, a mediator who has the opportunity to work alongside the parties will be that much more prepared to act quickly when the opportunities for compromise present. The General Counsel would be serving his or her client well by exploring this option sooner in their litigation and even by including a mediator in the analysis.