ABA Section of Business Law
Business Law Today
May/June 1999
Aggressive ADR?
Yes: It’s all part of supercharged litigation.
By JOHN LEO WAGNER
Wagner is director of the Alternative Dispute Resolution Center at Irell & Manella LLP, in Newport Beach, Calif.
My father was a bomber pilot in World War II. He flew B-24 Liberators over Germany. I remember him describing his reaction when the Germans first introduced jet fighter aircraft into that theatre toward the end of the war. He saw a silver streak, then a bomber disintegrate before his eyes. American warplanes were essentially helpless against this new weapon. (Luckily, it came too late in the war to help Hitler.)
Aggressive ADR is the equivalent of Germany’s jet fighter. It is a somewhat revolutionary concept that makes litigation faster and gives a well-trained "pilot" significant advantages in combat. It consists of aggressive new ADR techniques that, when coupled with zealous trial advocacy, supercharges a law firm’s effectiveness in reaching the client’s goals.
To appreciate the advantage of this approach, it is necessary to understand the limitations inherent in our traditional approach to business litigation. Consider the following example:
The case had been well tried, as it should have been after seven years in litigation. It was an antitrust case and the plaintiff had won — big time. The matter had been appealed and reversed. Now it was back in the district court, awaiting a new trial on damage issues. In the interim, life and business had gone on. During the struggle, both businesses had been weakened. One had teetered on the verge of bankruptcy while the other had become the target of a hostile takeover. Each had narrowly survived their respective crises, but each had come through those difficulties financially diminished. Now the damages proof would have to be re-discovered — and at great cost.
The mediator was told that the parties were "many, many millions of dollars apart" and that any settlement effort would be in vain. The lawyers, with a little gentle judicial persuasion, had finally agreed that they at least "needed to go through the motions" of a settlement attempt, even though they knew it would be fruitless. There had been no serious attempt to settle the case previously, as they had always been "too far apart."
The settlement effort lasted less than a day. The lawyers did their opening bit. When the theatrics were over, the mediator met confidentially with each battle-weary client. The ground rules for these meetings were unequivocal. The parties knew that the mediator would keep their comments in confidence and would not communicate at all with the trial judge. As a result, the clients willingly confided their actual settlement goals. There was a $5,000 overlap in what they were willing to give and take. The neutral made the obvious suggestion, and the case was resolved. The parties shook hands and began planning their next deal as they walked out the door. Much, it might be added, to each lawyer’s astonishment.
As a judicial officer, I was deeply troubled by the fact that the system had allowed seven years to elapse before a good solution was found. The case was resolved only because the court finally insisted that a serious mediation take place. It was appalling to think that absent this happenstance, the case could have continued indefinitely.
As this case demonstrates, such insistence on the part of the court happens too infrequently, too sporadically and too long after the time ripens for mediation to be truly useful to business litigants. Busy judges do not focus such measures on a case until it becomes a problem for the court. By then, the early settlement windows may have closed and considerable damage to the parties may have already occurred.
Ironically, the executives involved in this example had each realized the importance of this litigation to their respective businesses and had hired top-notch legal firms. But they did not do so in a way that effectively furthered their business interests. Their lawyers were excellent at their craft, but they were charged with winning the case, not with obtaining a result that made business sense. As they zealously safeguarded the litigation posture of their respective clients, they essentially ignored their urgent business needs.
Were these clients well served? I suggest they were not. The ultimate result indicates that they would have each been better off if the advocacy plied on their behalf had included an ADR strategy.
Look at what happens when aggressive ADR is employed from the start, instead of waiting for court intervention:
The publicly traded client corporation sold gambling machines that arguably came within certain regulatory exemptions. The configuration of these machines had been blessed by the appropriate regulatory agency. The Department of Justice, locked in a turf battle with the agency, disagreed with the agency’s interpretation of the law.
On New Years’ Eve day, government agents unexpectedly raided the company headquarters along with the businesses of three of its major customers. Armed with search warrants, they seized business and accounting records. They also constructively seized the machines that were the lifeblood of the customers’ businesses, plastering them with governmental stickers that forbade their continued operation and threatened criminal prosecution should that admonition be disobeyed.
Although no criminal charges were forthcoming, a civil forfeiture action was filed shortly thereafter. It was clear that the government was determined to stop this sort of gambling operation, even if it meant driving the company (and its customers) out of business.
Vigorous litigation options were immediately exercised. Declaratory judgment actions and requests for injunctive relief were filed locally and in Washington. A Bivins action alleging violation of the clients and customers’ civil rights was prepared and threatened.
At the same time, the company agreed to include an ADR specialist on its defense team. This lawyer would be designated as its settlement counsel and be charged with the task of generating settlement opportunities. Once designated, the settlement lawyer took the unusual step of requesting that the court order an immediate mediation. Before that request was even addressed by the court, the settlement lawyer contacted the U.S. attorney and told him that it was his job to reach a settlement and that the company wanted to have a better understanding of his position. The government was advised that a request for mediation had been made and the advantages of pursuing settlement talks in that context were discussed.
As a result, the request for mediation was not opposed. The mediation was quickly scheduled and resulted in an interim settlement agreement. The agreement permitted the customers to continue their operations pending resolution of the legal issues, yet it gave the U.S. attorney an expedited procedure designed to get the legal issues before the court quickly. In a matter of months (not years), a favorable summary judgment was obtained for the company.
The client company’s business may not have survived without the relief provided by the interim settlement agreement. Although zealous advocacy by the litigation team technically won the day, it would have been a hollow victory without the results produced by the early and aggressive use of ADR.
Here, ADR served the government’s interests, too. Although the legal determination ultimately went against it, litigation costs were minimized and the legitimate legal question that had been presented by the case was resolved quickly and fairly. Concrete guidance with regard to future enforcement action was obtained. The U.S. attorney avoided the awkward political consequences that would have occurred had he destroyed several businesses in enforcing an erroneous interpretation of the law.
For such supercharged advocacy to take place, the client must be able to realistically assess the impact of the lawsuit on its business goals and the law firm must be capable of supplementing its trial preparation effort with creative ADR initiatives. This combination allows the client to capitalize on early settlement opportunities.
Both of these elements can cut against natural tendencies. When clients are incensed, outraged or angry, settlement is not even on their radar scope. With an emotional client, redoubled efforts appear justified and practically mandated by the client’s expectations. The law firm maximizes its hourly billings with a clear conscience and generally resists "premature" settlement, so long as the client seems emotionally unprepared to compromise.
Standing incentives that reward the firm for speedy and favorable settlements will naturally counteract these counter-productive tendencies and should be more frequently included in law firm retainer agreements.
As a practical matter, the law firm must have three things in order to fully exploit settlement potential:
- incentive — a way to get paid for good results derived from ADR efforts,
- ingress — a means to get the opposing side to participate in ADR processes without projecting weakness, and
- insight — the people who understand ADR processes and how to provide effective ADR representation.
Today, most law firms lack all three.
Like Hitler’s jet aircraft, retainer agreements incorporating ADR incentives are still too new and too few to make a telling impact. Nevertheless, they are the key to getting good, quick, results. Such arrangements are developing and have tremendous case-management potential. If ADR incentives live up to their promise, they will be as common in tomorrow’s litigation as jet planes are in today’s aviation.
That would be good for business. Years on the bench never hardened me to the wasteful scenarios that seemed to play out over and over again. The incentives created by leveraged hourly billing created monster cases that persistently evaded settlement.
An example of this occurred when a city water district threatened to shut off the sole water supply for hundreds, perhaps thousands of homes. Urban sprawl had encroached on the territory of the rural water district, which was wholly dependent on the city district for its water supply. A routine contract dispute had turned into a bitter feud. All the decision makers were elected officials. It had become political and personal.
The court assigned one of its best mediators from its court-annexed program to conduct the mediation. He worked late into the night, but failed. The lawyers were so obstreperous and obstructive that the clients — both clients — noticed. The court received a call, where the parties jointly asked for a second neutral to conduct another mediation — without their lawyers being present. With some trepidation, the request was granted. They met and a settlement was reached. It was documented with the aid of settlement counsel, specially hired for that purpose alone.
This use of settlement counsel departed from what I envision as the norm. The appointment of settlement counsel at the 11th hour in response to the overtly obstructive behavior of lead trial counsel could have been easily avoided by a more reasonable approach. As clients become more savvy, they are apt to resort to such tactics more often if we do not find a way to honor their business priorities. Here, the use of settlement counsel from the outset would have avoided the problem.
Law firms and astute business clients can work together and return rationality to business litigation. Structuring retention agreements so as to reward good, quick results instead of prolonged litigation can do this. Such arrangements work to the obvious benefit of the client, but in truth, the law firm stands to gain, too.
Experienced trial lawyers — the kind that can command instant client confidence in their ability to try the big case — are a relatively scarce commodity. They attract the business that keeps the firm’s litigators busy. It is to the firm’s advantage to maximize the number of cases that such lawyers can handle, without burning them out. Aggressive ADR does this by accelerating disposition of marginal and ripe cases, and by identifying at an earlier stage those that must proceed to trial. The net sum is a more controlled and predictable caseload. Senior trial counsel will be more comfortable taking on more cases once they have a better feel for which cases will settle and the timing of those settlements.
Fee arrangements with incentives were once commonly used. Before the dawn of the billable hour, annual fixed-price retainers encouraged prompt case disposition. Back in the ’80s, the lawyer was often given a piece of the action and put on the board. From such a position, the lawyer had the proper incentive to maximize the business’s potential and reduce its risk. Professional liability concerns have minimized that practice these days, but there are many other ways to achieve the same result. It has been suggested, for example, that lawyers be paid a bonus or contingent fee if a case settles early. The form of incentive is limited only by the extent of one’s creativity, but the need for such incentives is unmistakable.
That is because too many litigators assume that when a case comes in the door, it has to be pursued full-tilt through the litigation and trial processes. For the client to avoid this, law firms must have sufficient incentive to regularly review the effect the litigation is having on the client’s paramount business goals, and be motivated to seize early settlement opportunities. If the fee arrangement provides financial rewards for prolonging the case, human nature assures that that’s precisely what will happen.
The following example is more telling than most, but not atypical:
The case had gone through 23 years of litigation, five appeals to the Tenth Circuit Court of Appeals and three appeals to the U.S. Supreme Court before it ended up in my conference room. It was set to be tried again in 90 days. Having been drawn into the classic black hole of litigation, it seemed destined to drift about interminably.
Each side had lawyers on the team responsible for trial. There were lawyers on each team responsible for discovery. There were lawyers on each team responsible for briefing. But even in this mega-dollar case, there were no lawyers on either team responsible for settlement. All steadfastly avoided any effort to obtain the result truly desired and needed by the remaining clients (or more accurately their estates, as most of the plaintiffs and a number of the defendants had died during the long pendency of this case).
There had been some previous settlement efforts, including a mandatory settlement conference conducted by the trial judge himself. Predictably, nothing was accomplished. Everybody postured their little hearts out and put on a good show for the judge and their respective clients. They happily departed from the settlement conference further apart than ever.
But now, years later and about 20 years too late, it was time to try again. In the interim, the modern mediation process had evolved, and this time the trial judge was out of the picture. Still, the effort would have crashed and burned but for some rather remarkable ADR lawyering by a fellow out of New York. He was a newcomer, who had been retained at the eleventh hour to represent the primary defendant who was finally ready to zap the case out of its lethargy and get it resolved. He had no trial or trial preparation responsibilities. His job was to settle the case and the other side knew it. His client was credited with good faith just by his being there. He did his job. The trial team did their job. And the client got the needed result — the case settled.
Why had he not been brought on board earlier?
Mountainous egos and the prevailing fear of "showing weakness" often preclude effective settlement negotiations. Conventional wisdom has held that if you initiate settlement talks with opposing counsel, it will be taken as a sign of weakness. Nobody wants to do this, because they want to negotiate from a position of strength.
This legal lore has been handed down from partner to associate from time immemorial. I had personally embraced this particular tenet of the faith when my first boss conveyed it to me back when I was a tadpole associate. By 1979, he had had 40 years of solid courtroom experience. Everything else he ever taught me turned out to be true. But he was wrong about this.
This is not to say that the concept is unpopular. A roomful of CEOs was interviewed in connection with the Civil Justice Reform Act of 1990. When asked about settlement processes, they were enthusiastic. When asked about the problems with settlement processes, they responded: "Our biggest problem with ADR is getting the other side to participate." "We like private mediation, but it is such a hassle and so time consuming to get the other side to agree, and often they never do." "When we suggest mediation, it hurts our settlement posture, because the other side immediately perceives weakness."
Another sophisticated group employed by a major broadcasting company expressed similar sentiments. In discussing this issue during an ADR training seminar, they all had the same inquiry: "How can I get my case into ADR without showing weakness to the other side?"
There is a way to conquer the inherent obstacles presented by these traditional attitudes about settlement. If a law firm or corporate law department consistently assigns settlement counsel to deserving cases (generally defined as all those to which a trial team, as opposed to an individual lawyer is assigned), the hurdle disappears. Settlement counsel, by definition, are charged with settling the case. That is their job. It is no sign of weakness when they are merely trying to do their job.
Once a business or law firm has developed a reputation for routinely assigning settlement counsel in significant cases, they have strategically positioned themselves in a way that provides an almost unfair advantage over those who do not follow this practice. Whereas they will be able to move in and out of the settlement arena at will, the hapless opponent is trapped by the conventional wisdom and can broach settlement only at the cost of appearing weak.
In order to gain the full benefit, a client should select settlement counsel with the same care used to select trial counsel. It is not an easy role to fill. To be effective, such a lawyer must carry tremendous personal credibility without an overarching ego. It will be necessary to use that credibility in a powerful, persuasive and tactful manner. There are fine lines to walk. One’s balance is often challenged by the considerable emotional content that resides with the client, with the opponent party and with the trial advocates for both sides.
It is not a job to be assigned to the new associate. In addition to native credibility, settlement counsel must also have an exquisite knowledge of ADR procedures and methods. A highly qualified settlement advocate should have significant experience as a trial lawyer, as a judge and as a neutral.
As the development of cooperation and mutual respect between trial and settlement counsel is important, experience "in the pits" of litigation is a plus. When assigned early in a case, the settlement advocate needs to work closely with trial counsel. Being part of the team is necessary both to obtain the information necessary to be effective in negotiations and to temper the trial advocate’s natural tendency toward combativeness. It is often desirable, although not absolutely necessary, to have the role of settlement counsel filled by a senior lawyer in the trial advocate’s own firm — that way he or she will automatically be internally known and respected. This is also less threatening, as they share the same goal of satisfying the client with the firm’s overall performance.
Similarly, the mantle of "former judge" will carry weight with the opposition, with the court and with many neutrals. People are more willing to believe that a former judge will be more reasoned and reasonable than a lawyer without those credentials. Many people imbue those with former judicial service with a presumption of integrity that they do not afford to others.
Finally, having experience as a neutral is essential if one is to expertly guide the client through sophisticated ADR processes. It helps to have been there in order to recognize sticking points and problems. Just like being a judge changes your approach to litigation (you learn the real and often deleterious effect of all those zealous tactics you were once so proud of), being an experienced neutral changes the way you advocate in a settlement environment. You know what works and what doesn’t.
If the problems that our civil justice system presents for business are ever to be effectively addressed, it will be by business people and their lawyers. We can take responsibility for the processes we use and we can modify them to suit our purposes. By incorporating aggressive ADR practices with zealous advocacy, the system can be made infinitely more responsive to business needs.
