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Bench & Bar of Minnesota is the official publication of the Minnesota State Bar Association.

Let’s Make a Deal: Contingency-Fee Mediation & Overburdened Courts

The standing prohibition on contingency-fee mediation conflicts with the courts’ interest in encouraging greater use of alternative dispute resolution. Such conflict may be unnecessary where contingency fees are structured to preserve mediator neutrality and hinge on the value of successful mediation to both parties.

Imagine you are a plaintiff injured in a minor car accident. You would like to seek justice against the other driver, so you consult a lawyer about suing. She tells you that you have a very winnable damage claim for your broken arm, and she explains the litigation process you will undergo in order to win it. You are an accountant by trade, so your eyes begin to glaze over as she explains discovery while you do mental calculations about the cost of pursuing the claim versus the ultimate damages you might receive in court. You stand to gain only a few thousand dollars. How much is this lawyer and this “discovery” going to cost anyway? Besides, your biggest complaint is that other driver never said he was sorry. No court judgment can rectify that. You think to yourself: “There must be a better way. A cheaper way.”

Now imagine you are a judge. Your docket is full and has been that way for months. If you see one more garden-variety, low-cost, car-accident case cross your desk on its way to trial today, it might just be enough to make you snap at your wife, growl at your dog, and drink three too many highballs when you get home tonight. Then it happens. The previously mentioned accountant’s broken-arm file makes its way to the top of your pile. You do not have time for this. You ask yourself: “Why aren’t these people settling this themselves? We offer alternative dispute resolution services. Why didn’t they mediate this? I have a big murder trial at 1 o’clock I need to worry about.”

Courts, Contingency Fees, & ADR

Mention the words “contingency fee” in mediation circles and you will likely receive disapproving frowns or, at best, dismissive gestures from listeners. By almost all accounts, contingency fees are verboten in conventional alternative dispute resolution (ADR) processes.1 Simply put, it is against the rules in almost every jurisdiction for a mediator to charge a fee based on the outcome of the mediation.2 The policy reason for this, generally speaking, is the compromising effect a contingency-fee arrangement would have on a mediator’s neutrality.3 Now consider the general effort by legal practitioners to unburden the crowded court system. It is no secret that courts are overwhelmed with business, sometimes to the point where case management and advocacy lose their effectiveness in administering justice. Ethics rules and judicial opinions often cite the need to minimize litigation and unclog the courts as the rationale for various standards and rulings. To this end, the American legal system has slowly encouraged more ADR processes to help lighten its caseload, particularly in the last 20 years. In 1993, the American Bar Association (ABA) established the Dispute Resolution Section.4 By 1995, more than two-thirds of the federal courts had authorized one or more forms of ADR, the most common of which is mediation.5

Still, courts are just as congested as ever. Mediation efforts are rising —either through voluntary participation by the disputing parties or via court order—but it has not kept pace with the ever-increasing litigation burdens on the judicial system.

Two distinct jurisprudential policies—the ban on contingency-fee mediation on the one hand and the ADR effort to unburden the courts on the other—compete against each other and thereby contribute to overworking the court system. Would a relaxation of the contingency-fee ban in mediation perhaps help alleviate the burdens on the courts by providing incentives for disputants to solve their problems away from the courtroom?

Contingency-Fee Policy

Contingency fees, in general, carry a certain amount of baggage in the legal community.6 Outcome-based compensation for lawyers is acceptable, but it is closely regulated by Rule 1.5 of the ABA Model Rules of Professional Conduct to prevent abuse and is banned outright in certain circumstances, such as domestic and criminal disputes.7 Still, contingency fees are viewed as legitimate contractual means for attorneys to procure compensation, mainly because they serve two productive functions. One, they motivate lawyers to advocate zealously for their clients and, two, they provide a cost-optimizing option for the clients. If they do not win the case, the client does not have to pay the attorney. Thus, contingency fees in conventional civil litigation provide a win-win situation for both client and attorney: The lawyer can maximize her profit through effort while the client minimizes her exposure to out-of-pocket litigation costs. Indeed, some of the most accomplished lawyers work exclusively on a contingent-fee basis.

Unlike litigation, contingency-fee mediation (CFM) is not a widely disputed—nor much discussed—issue.8 Minnesota, like most states, has adopted the immutable rule against contingency-fee arrangements in ADR.9 The advisory comments for Minnesota’s fees rule10 provide no explanation for the contingency-fee ban, and national commentary on the subject provides little more guidance. The Model Standards of Conduct for Mediators, upon which most states’ CFM ban is based, does not directly address contingency compensation in its fees section.11 John Feerick, chair of the committee that drafted the Model Standards, explains that the comments to the rule specifically discourage contingent fee arrangements due to the potential for abuses that can diminish confidence in the process. This … serves to dispel any incentive for a mediator to coerce settlements between the parties. Under a contingent-fee arrangement, a mediator has a self-interest which may compete with the need to avoid conflicts of interest.12

Protected by this unassailable mandate to avoid conflicts of interest—essentially, for “mediator neutrality”—this rule has seemingly encountered little resistance in the ADR community.13

Unpacking Mediator Neutrality

To understand why this may be a misguided and overlooked policy, particularly as it pertains to overcrowded courts, it is necessary to dissect the sacred cow of mediator neutrality to some extent. Commentator Scott Peppet has written an in-depth exploration of CFM and analysis of mediator neutrality,14 and it would be unhelpful to diminish his authoritative essay by rehashing the entire argument here. But a few of his key points lend credence to the notion that the general CFM prohibition is not a fully developed and supportable strategy.

Three Varieties of CFM

Not all contingent fees are created equal, which is important in considering their application to mediation. A contingent fee in the litigation context usually means the attorney-agent takes a percentage of her client-principal’s settlement or judgment award. While that paradigm is also possible with CFM—i.e., the mediator-agent takes a percentage of the settlement—Peppet rightfully expands CFM into three additional categories.15 The first category is the “success fee,” where the mediator’s fee is contingent on the parties reaching settlement via mediation. The second category is the “percentage-of-cost-savings” fee, where the mediator collects a percentage of the savings to the parties achieved through mediation settlement, estimated by comparison to potential litigation costs. The third is the “percentage-of-value-created” fee, which pays the mediator a percentage of the “new pie” created through mediation that otherwise would not have come into being through litigation.16 All three of these fee mechanisms are outcome-based so that, if the parties fail to reach settlement, the mediator does not get paid the contingent fee.17

The same is true of the classic “percentage-of-settlement” contingency fee, but Peppet dismisses this option as improper for mediation because it necessarily creates mediator bias in favor of one party over the other, namely the plaintiff seeking a settlement award.18 He maintains the other three options do not create this bias, however, because they avoid undermining the aspects of neutrality considered critical to successful mediation.19 Peppet argues that “in some instances a mediator can be self-interested … in the outcome—without sacrificing impartiality.”20 Even further, it can be said mediators are already self-interested in a successful outcome, whether through reputational concerns about success rates, intrinsic pride in their work, or other personal motivations. Few would say these self-interests diminish the mediation process.

CFM & Neutrality

The mantra of mediation ethics is “party self-determination.”21 This is why mediator neutrality is considered so essential to the process. Without complete neutrality, the disputants lose their decision-making autonomy as the mediator shapes the process to serve her self-interest, whatever that may be.22 In the case of a CFM arrangement such as a success fee, the mediator’s self-interest in getting paid invariably centers on achieving settlement. But Peppet contends that a mediator’s striving for settlement does not necessarily tread upon the parties’ self-determination, and in fact may help align the mediator’s self-interest with their own interests.23

In validating CFM, Peppet splits the classic concept of neutrality into two distinct elements, impartiality and self-disinterest,24 and distinguishes the latter from the former in terms of its importance in mediation. While impartiality inarguably remains the sine qua non of the process, the value of self-disinterest diminishes if the mediator’s self-interest lies solely in settlement. “Although the success fee creates a settlement bias,” Peppet says, “it does not necessarily make the mediator partial to one side or the other. Instead, it makes the mediator partial toward settlement—something that the parties have explicitly stated is in their joint interest.”25 This beneficial alignment of interests becomes even more probable than if the mediator gets paid regardless of the outcome.

Arguably, every pair of disputants who enters mediation voluntarily is seeking settlement. Even those compelled into mediation by the courts seek resolution over sustaining a dispute—whether it comes through settlement or judgment is usually irrelevant as long as the process remains fair. Consider the hypothetical posed in the introduction about the broken-armed accountant, for example. His underlying psychological and emotional interests in procuring an apology and maybe an admission of fault may not surface through purely negotiated settlement nor, undeniably, through litigation. Hence, while he may not realize it, settlement is likely the best route to the resolution he seeks. A mediator trained to break through negotiation barriers by rooting out the accountant’s underlying interests in order to reach a settlement—especially a mediator who is financially motivated to do so by a success fee—will only help the accountant reach a satisfactory resolution. Their goals are the same.

The same can be said about the accountant’s opponent, who likely prefers offering an apology to protracted litigation—even though he likely does not know that this simple solution is an option. In this case and in countless other conceivable scenarios, the mediator’s self-interest in reaching a settlement bolsters the mediation process, rather than compromises it, because her interests align with those of her clients. In this way, it is no different than a lawyer working on a contingency-fee basis who wants to win as badly as her client does. The only difference is the goal: For the lawyer and her client, the goal is the highest award possible; for the mediator and her clients, the goal is a resolution to the dispute. Because the success fee is not tied to any settlement amount, this universal goal is strictly related to the act of settlement itself.
A few jurisdictions have realized this and have recently taken strides toward permitting CFM.26 In 2004, while maintaining an official “discouragement” position on the practice, the Oregon Mediation Association removed the categorical ban on CFM.27 In 1999, the Hawaii Mediation Guidelines also shifted from an immutable ban into a discouragement stance and offered standards for minimizing potential conflicts associated with CFM.28 By far the most comprehensive endorsement of CFM came from Georgetown University and the CPR Institute for Dispute Resolution when it promulgated its Model Rules for the Lawyer as Third-Party Neutral (CPR Model Rules) in 2002.29 The relevant commentary section addressing contingency fees states:
While controversial, contingent fee or bonus compensation schemes are sometimes used to provide incentives in ADR or to reward the achievement of an effective settlement. Section (c) does not prohibit such fee arrangements … but requires the neutral to explain what the effects of such an arrangement may be, including conflicts of interest.”30

Why Courts Encourage Mediation

Properly deployed mediation, whether contingent-fee based or not, should be a particularly attractive alternative for most courts. Statistically, only 5 to 6 percent of civil cases filed in federal court make it to trial31 and that is by design. Courts encourage settlement; they must because the prospect of trying every case is simply infeasible. “Life is short, and trials are long.”32 Yet, even with an official policy encouraging settlement and a 95 percent success rate of pretrial dispute resolution, the dockets are still overloaded. Paraphrasing the former director of the Federal Judicial Center, Judge William Schwartzer, U.S. Magistrate Judge Robert Murrian opined in 1995 that “we are being given an opportunity to think about the fundamental question: ‘What are the courts for’? We cannot think about ADR without also thinking about the role of the courts and judges and the values we associate with the justice system.”33

A 2002 study conducted in Colorado’s 10th Judicial District comparing case-management systems that used or did not use mediation provided empirical proof of the benefit of the process to the courts.34 Using statistical indicators of court resources consumed by domestic-dispute cases in both a control group and a mediation group, the study showed persuasively that voluntary mediation reduced the workload on the court.35 Commentator Nancy Thoennes concluded:

Mediation is quite effective at producing settlements. Approximately 39 percent of all parents who mediated in the 10th [Judicial District] produced a full agreement on all of the issues in dispute. Another 55 percent produced partial agreements. In other words, 94 percent of the parties made progress or resolved their problem in mediation.

… The early use of mediation is associated with fewer motions being filed. It also results in cases requiring less time to be scheduled for hearings. The mediation group was more likely than the control group to present stipulations to the court on child-related issues, thus reducing the demands placed on judges. Mediation cases had fewer continuances relative to comparison group cases and fewer continuances due to a motion by one of the parents. This suggests that mediation produces a smoother, more timely flow of cases, with a reduction in unexpected delays and interruptions.

Finally, there is evidence that mediation cases experience less relitigation. Two years post-decree, the mediation cases were twice as likely to have stayed out of court than cases in the comparison group.36

Judge Murrian concurred that “mediation is simply a better way of resolving disputes than treating settlements as a desirable byproduct of litigation. … Rather than replacing trials, mediation will often replace last-minute settlements in cases that would ultimately settle anyway. But mediated settlements come about with less cost in money spent and in human capital spent.”37

CFM Benefits for the Courts

All of the literature about CFM considers its value in terms of the mediation process itself. Save a smattering of references like the CPR Model Rules’ note about CFM’s capacity to “provide incentives,”38 nothing addresses the practice in terms of its potential impact on the judicial process. Therein lies the disconnection between the ban on CFM and the law’s push for more ADR. Once the value of mediation in alleviating court crowding is established, it is but a small step to recognize that adding incentives to encourage the process is better public policy than hindering it. By way of incentive, I propose a relaxation on the CFM ban.

Legitimate CFM would encourage mediation in two ways and both of them directly correlate to the policy reasons, outlined above, for accommodating contingent fees in litigation. One, CFM motivates mediators to advocate zealously for their clients who, in this case, are both the plaintiff and defendant. Two, and most importantly, it provides a cost-optimizing option for the clients. The question to ask is whether a potential litigant, faced with the option of voluntary mediation, would choose a process he knows he will pay for regardless of its outcome or one which costs him only if the process is successful. It is a binary, simple choice, but an effective incentive. The three CFM models recommended by Prof. Peppet would effectively broaden cost-saving options for potential litigants and, I would argue, motivate litigants to choose mediation when they otherwise might not have.

Of course, certain drawbacks to CFM must not be overlooked, such as the problem of unscrupulous parties with no real interest in resolution using it as a free discovery tool. But such issues presumably can be addressed through thoughtful regulation of the practice and enforcement, just as they are in contingency-fee litigation.

Conclusion

The broad policy ban on CFM is at odds with the judicial system’s effort to integrate ADR into its repertoire in order to alleviate burdens on the courts. Permitting CFM would provide more cost-saving options to potential litigants and would subsequently provide more incentive for them to choose mediation over litigation, thus helping to unburden the courts. This benefit outweighs many concerns surrounding CFM and so-called mediator “neutrality” to the point where outright prohibition of CFM seems insupportable. Lifting the ban and facilitating more mediation would undoubtedly please beleaguered judges everywhere, like the one mentioned in the introduction, as well as disputants and even many attorneys.

 

Notes

Jeffrey D. Schroeder of Minneapolis is a third-year law student at William Mitchell College of Law. He was the recipient of the CALI Award for Excellence in the spring 2010 Alternative Dispute Resolution course taught by adjunct professor Linda Mealey-Lohmann. Additionally, Mr. Schroeder is a fellow in the Marshall-Brennan Constitutional Literacy Project, where he was selected to teach constitutional law to St. Paul-area high-school students in the fall of 2010. He can be reached via email at jeffrey.schroeder@wmitchell.edu.

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