By Seth Aronson and Niki Mendoza
I. Mediation Strategy Tips From Former Securities Litigators
In the litigation context, attorneys inevitably see the other side as the opponent who they want to out-smart and out-strategize to obtain a win in the litigation. In the mediation context, by contrast, it’s helpful to think of the other side not as an opponent, but rather as a counterparty, or dance partner, with whom you are trying to jointly achieve a mutually satisfactory resolution. Afterall, resolution through mediation is a voluntary agreement to settle; there is no “winner” or “loser” in mediation. It, therefore, is important to shift mindset from the “Secretary of War” litigation mode, to a “Secretary of State” mediation mode. To do this, it’s helpful to understand what is going on in the mind of your counterparty/partner. With that goal in mind, we share below some thoughts on the differing viewpoints, perspectives, and driving factors leading up to, during, and after mediations. These are taken, both from our own experiences as practicing attorneys-turned-mediators, and from speaking with other attorneys and experienced mediators. Although this article focuses primarily on securities class actions and derivative cases due to our professional backgrounds, much of it is equally applicable to other areas of the law and the mediation context in general.
II. The Plaintiffs’ Perspective
What motivates securities class action plaintiffs to mediate? If it’s not court-ordered, or at least court encouraged, plaintiffs may seek mediation for at least two reasons: (i) the amount at issue is too large to leave to the uncertainties of further litigation; and (ii) resolution through settlement is the only realistic way to obtain any recovery in the near term. Indeed, the overwhelming majority of cases, and certainly of securities class actions, settle rather than proceed through verdict and appeal. The stakes are too high for both sides to leave the complex issues to jurors, whose only common qualification often is that they obtained a driver’s license. And this concept of recovering in the near term only through settlement extends to plaintiffs’ counsel as well. Unlike defense counsel who get paid for their thousands of hours of work and millions of dollars of expenses regardless of outcome, plaintiffs’ counsel who are working on a contingency basis get paid for their work only if they obtain a recovery. The most likely way to recover in the near term – rather than playing out a trial, verdict, and inevitable appeal, and a complex and potentially contentious claims process – for both the plaintiffs and their counsel, is to attempt to reach an acceptable resolution through mediation.
A. Getting to Mediation
At some point during the litigation, the securities plaintiff contemplates mediation. How does mediation get initiated? It’s often in the context of a conversation-in-a-court-hallway, or a calling-about-another-case, or if nothing else, in connection with a required joint CMC statement, that the possibility of mediating is raised by either side. (This later leads to a party saying to the mediators, “I don’t remember who first mentioned mediation.”) Once the parties agree that they’re both interested in mediating, they then reach agreement on a time, place, and mediator. It’s not uncommon for the people handling the logistics of setting up the mediation to be different from the litigators who are acting as day-to-day adversaries.
B. Plaintiffs’ Preparation for Mediation
Contrary to many defense counsel’s perceptions, plaintiffs’ counsel have clients too. And those clients also must be consulted about the mediation. Plaintiffs’ counsel might conduct and share with the client a mediation analysis. It mentions the potential upside if the litigation is taken through further steps and into trial, and details the risks associated with the particular case. Plaintiffs’ counsel might look back at a memo that was written, usually by a different attorney in the firm, for the client when the firm was contemplating seeking lead plaintiff appointment.
Remember, in securities class action and derivative cases, typically (but not without exception), the case isn’t initiated by a plaintiff calling up plaintiffs’ counsel saying “I want to sue these guys for securities fraud.” Rather, the plaintiffs’ firm may have a professional relationship with the sophisticated institutional investor, possibly through past representation or portfolio monitoring. When it’s learned that a particular client or potential client is a member of a putative class on behalf of which a case may be or has been brought, plaintiffs’ counsel will explain to the client the benefits of teaming up and pursuing lead plaintiff (and lead counsel) appointment. This is not always an easy task, as serving as a lead plaintiff requires time and distraction away from the primary purposes of the lead plaintiff.
After explaining the risks/rewards of going forward with the litigation or settling for the right price, plaintiffs’ counsel may make a recommendation to the client as to the amount of a potential settlement to consider in the event an agreement can be reached with the defense. Since most often lead plaintiff clients do not attend mediations (although certainly we welcome their participation and have seen the benefits from such), that recommended number, if agreed to by the lead plaintiff, may serve as a loose “bottom line” authority number on the plaintiffs’ side during the mediation.
One sidenote here with respect to plaintiffs in derivative cases, which relates to the point above about coming to mediation with the mindset of trying to reach a common goal of settlement, rather than being averse to one another. When there is more than one plaintiffs’ counsel and more than one derivative case that is being mediated in attempts to reach a global resolution, the plaintiffs’ counsel should recognize that for purposes of negotiating with the defense, all derivative plaintiffs’ counsel are on the same “side,” i.e., they all purport to represent the interests of the company. When derivative plaintiffs’ counsel spend more time trying to convince the mediator that their derivative claims are different or stronger than the other derivative plaintiffs’ claims, it is counterproductive to actually reaching a resolution with the defense. Surely those issues, which implicate attorneys’ fees among other things, will be addressed at some point, but not necessarily during the limited time before the mediator. Ideally the various derivative plaintiffs’ counsel will reach some arrangement among themselves in advance of the mediation that allows them to efficiently and effectively negotiate on a unified basis.
Regardless of whether it’s a derivative case, securities class action, or other type of litigation, in advance of the mediation, all plaintiffs’ counsel may have a pre-mediation call with the mediator. Topics discussed include what led up to the mediation and whether there have been any prior negotiations or even signals between the parties. Plaintiffs’ counsel might share with the mediator on a mediator’s eyes only basis additional materials or confidential positions that they believe the mediator should know, or they might give the mediator a heads-up that certain impediments to settlement exist. It’s uncommon to have any type of strict condition to mediation set in advance of securities mediations, but in the event either side has stated or perceived any such condition, those conditions will be discussed during a pre-mediation call. While we do not in any way advocate a precondition to mediating, and we certainly see the benefit to getting everybody under the same roof to discuss potential resolution, we try to avoid having a huge disconnect, where everyone leaves a bit dissatisfied, saying “if we had only known X, we would not have mediated.”
Also in connection with pre-mediation preparation, the mediator might request proposed term sheets from each side, and encourage their exchange in advance. Most securities plaintiffs’ firms have a sort of term sheet template, so this process is not burdensome. But if the specific case warrants some rare terms sought by the plaintiffs, those terms should be included in plaintiffs’ proposed term sheet. Getting any unusual terms out in the open in advance allows the parties and mediator to spend the mediation day itself primarily focusing on a search for the right number.
C. Mediation Day
In a typical securities class action or derivative action mediation, the plaintiffs make a mediation demand either before or at the mediation. Plaintiffs are sometimes encouraged by defendants to make a demand in advance, to give the defense side, including insurers, an opportunity to discuss the demand and be prepared to consider a response. The decision by plaintiffs whether to make a pre-mediation demand is sometimes impacted by factors such as: (i) whether there would be additional benefit from talking through certain specific issues with the mediator before making a demand, including, for example, if there are co-lead plaintiffs and co-lead plaintiffs’ counsel; and (ii) whether there is a concern that the mediation may be cancelled if the demand is too over-inflated. The mediator is not heavily involved in the plaintiffs’ formulation of their opening demand. The mediator is not typically consulted about the pros and cons of a particular demand, and will find that the first number is not as telling as the numbers down the road. Plaintiffs might be reluctant to get into a realistic zone until they get a sense that the defense is “serious.” Of course, what is “serious” is subjective. Both sides must be patient and understand that a negotiating process takes time. Plaintiffs, in particular, might proceed cautiously when they are suspicious that the defense is seeking discovery as to price (what the case could settle for) or discovery as to case strategy (what is the best evidence plaintiffs have complied), rather than being there with a seriousness of purpose to settle the case.
Throughout the mediation day, plaintiffs will likely have a lengthy, in-depth merits-based separate caucus session with the mediator. The discussion will likely address the obtained or expected evidence, the law, the proceedings to date, the anticipated outcomes of future stages of the litigation, and the judge. In short, the merits matter. In a traditional securities mediation, negotiations about the term sheet and the number may be interwoven throughout the day with those continuing merits discussions. Sophisticated counsel in the securities world tend to come to mediation very prepared and familiar with the allegations and discovery that has been obtained, while plaintiffs’ counsel understand that they are likely at a disadvantage informationally as compared to the defense. However, since they have previously discussed and obtained authority from their lead plaintiff client, they can often turn around the numerical negotiations relatively quickly as compared to the defendants and their carriers.
D. Post-Mediation
Plaintiffs typically come to mediation hoping to come away with an acceptable settlement, and when that doesn’t happen, they may be disappointed. But as most securities class action counsel know, reaching a settlement on the first mediation day is the exception rather than the rule. Barring any hard-stop time, the mediator will continue the numerical negotiations during the mediation day for as long as the parties are willing and able. But most often there becomes apparent some type of impediment to reaching resolution that day, whether that’s a limitation on authority or willingness to proceed by either side, or some other procedural impediment. As that impediment or impasse looms throughout the day, plaintiffs may discuss with the mediator what the next steps would be following the mediation day. It’s common to have follow up discussions with each party or both parties and the mediator for days, weeks, months, and even years after the designated mediation day. Sometimes the parties simply need to continue through the next stage in litigation, with hopes that the next stage will materially impact the settlement valuation by either or both sides. In addition, after any mediation that doesn’t promptly result in a settlement, both sides are likely to revisit internally what is their appetite for settlement versus the risk of proceeding with further litigation.
III. Defense Perspective
Hundreds of securities class actions are filed in federal courts annually. Add to that securities class actions filed in state courts (e.g., Section 11 cases) and shareholder derivative actions. Yet you can count on one hand the number of securities class actions or derivative actions that actually go to trial in any given year. Securities class actions subject to the PSLRA have built-in time delays. The PSLRA mandates that the lead plaintiff appointment by the court shall be considered 90 days after the early notice to class members is published (20 days after the complaint is filed) but in practice lead plaintiff determinations can take several months, especially if contested. Thus, defendants will not know who their opposition is until several months into the case. Once lead plaintiff and lead plaintiff counsel are appointed, the parties work on the motion to dismiss briefing schedule. A typical briefing schedule on a motion to dismiss is generous to both sides. After all is said and done, it can take 10-12 months, or more, from the filing of the initial complaint to a ruling on the (first) motion to dismiss. And, of course, discovery is stayed until the last motion to dismiss is denied. Experienced defense counsel use this time not only to file their opening brief and reply, but to engage in fact development and defense strategy. Counsel work with the client to gather and review key documents, interview relevant witnesses and conduct legal research. Defense counsel also use this formal discovery hiatus to work with economics consultants to get a preliminary assessment of the potential damages exposure and possible loss causation defenses. Thus, before any mediation is discussed or scheduled, securities defense counsel should have a decent handle on the strengths and challenges of the case and the potential exposure.
A. Getting to Mediation
A common first inflection point for a potential settlement is the court ruling on the motion to dismiss. If the motion to dismiss is granted with leave to amend there will be another round of briefing. The ruling on the motion could lead to additional factual development. If dismissal is granted without leave to amend, defense counsel puts pencils down and addresses any appeal months down the road. If the motion to dismiss is denied, the defense team gears up for the discovery phase.
The denial of the motion to dismiss signals that the fences are down, and the case will proceed to an expensive discovery phase, followed by expert reports and depositions. As defense counsel prepares its discovery strategy and plan, the subject of settlement is invariably discussed with the client. But this is usually not the first time in the case that the subject of settlement is discussed; the initial disclosures required by most courts include a section on alternative dispute resolution, which forces plaintiff and defense counsel to choose their preferred method such as a magistrate judge to conduct a settlement conference or use of a third party neutral to conduct a mediation. Thus, by the time the case proceeds toward discovery the litigants have an understanding of the preferred alternative dispute resolution vehicle. Experienced securities litigators usually select the third-party neutral mediation option.
The motion to dismiss ruling is not the only time to plan for mediation. Some parties mediate while the motion to dismiss is pending but not yet heard or ruled upon. Plaintiffs who survive the motion to dismiss may want to take discovery to develop their case and strengthen it for a subsequent mediation. Insurance carriers will desire a developed factual record before participating in mediation. Some securities litigants will wait for expert discovery, especially expert reports and depositions on damages, before mediating. A looming trial date will often motivate both sides to mediate.
And once defense counsel and the client determine it is appropriate to consider mediation, the client’s directors and officers insurers are notified, and their views are solicited. None of this will come as a surprise: if defense counsel doesn’t reach out to the carriers, they can expect a call from the carriers or the insurance broker. More often than not, the collective decision is to explore the mediation option.
The insurance carriers will focus on the erosion of the insurance and ask for an estimate of the total fees and expenses through trial. Don’t wait until mediation day to have your all-in fee estimate in the carriers’ hands.
Mediation is so common in securities and derivative actions that plaintiffs and defendants and their insurers come to expect it. And, therefore, it is not viewed as a sign of weakness to be the first party to ask the other side whether they should consider mediation. Seasoned securities lawyers come to expect mediation, and it usually doesn’t make a difference who made the first inquiry.
B. Defense Preparation for Mediation
Preparing for mediation requires an early identification of your client’s goal. Is the goal to settle at the mediation? Has plaintiff’s counsel sent early signals that its monetary expectations far exceed what you believe to be within the range of a reasonable amount such that mediation day is an attempt to close the gap as much as possible? Do you have little or no insight into plaintiff’s expectations such that the mediation is an attempt to learn more? Some experienced securities litigators will have pre-mediation discussions that lead to an agreed upon range for negotiation at the mediation.
Draft your mediation briefs with the client goals in mind. Avoid the temptation to reargue your motion to dismiss. If the judge ruled against you, the mediator cannot grant your motion.
The audience for your mediation briefs is the mediator and plaintiff and plaintiff’s counsel, not your judge. Your brief should focus on the strength of your case on the merits, i.e., how you will win on summary judgment or trial. What are your key legal defenses? Will plaintiff have difficulty proving scienter? Who are your key witnesses, and do they have any credibility issues? Does plaintiff have colorful emails by your client that require context and explanation? Effective mediation briefs strike the proper balance between advocacy and candor as to the challenges in your case.
The mediation brief should include a discussion of the trial judge. What is your judge’s track record in securities cases? And their affirmance or reversal record in the appellate court? You should consider including any rulings and hearing transcripts that provide insight into the judge.
The mediation brief should discuss the available insurance. What is the insurance tower and who are the primary and excess carriers? What are the limits of each layer? Is there more than one tower in play, e.g., multiple years? How much insurance money has been spent and what is the ongoing burn rate? Are there insurance coverage issues that might affect the available insurance?
The defense mediation brief should include a discussion of the damages analysis. Plaintiffs and defendants in securities cases typically start miles apart in their initial damages positions. No surprise here. But the outer boundaries of competing damages claims can provide a starting point for discussion.
C. Mediation Day
A threshold strategic decision for the defense is: Who should attend the mediation in person? Those who attend in person send a message as to the relative importance of the case and the commitment to settle. There is no one-size-fits-all, and counsel should give significant attention to the defense attendance list. Virtual attendance should be considered for those decision makers who are unable to attend.
Deciding which insurance carriers, if any, should attend is also a strategic decision. If a realistic settlement will not exhaust the entire insurance tower, a decision should be made as to which excess layers should attend.
Finally, the mediation day should adhere to the three C’s: Confidentiality; Candor; and Commitment to settle.
D. Post-Mediation
A few years ago, approximately 90% of cases settled in one day of mediation. Today, that percentage has flipped: approximately 10% of cases settle in one day. If the case doesn’t settle on mediation day, most parties attempt to close the gap. Follow up telephone calls and zoom sessions are commonplace. And although the case might not settle on mediation day, the parties should have greater insight into the other side’s position and what it might take to close the gap.
IV. Conclusion
Mediation is a critical component of securities class action and derivative litigation. When resulting in a settlement, mediation leads to a positive result for both plaintiffs (who otherwise would not receive a recovery, if any, for years to come), and for the defense (who otherwise will continue to burn through insurance and risk a substantial verdict down the road). Securities litigation settlements can be a win-win for all parties. Even when mediation does not result in a settlement, it can be a valuable tool for each side to assess the choice between the risk of proceeding with further litigation as compared to what settlement could have been achieved. But mediation is not an easy process, and one in which both sides must adjust their mindset to focus on achieving an agreed-upon resolution rather than a obtaining a “winning” result.
