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BAD SETTLEMENTS: Mistakes, Miscues and Other Tragedies in the Land of Settlement and Mediation

Jed S. Freeman, Esq., Carpenter Technology CorporationG. Thompson Bell, III, Esq., Stevens & LeeE. Thomas Henefer, Esq., Stevens & Lee

April 23, 2013

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Overview• Some Mediation Basics – And Strategy Concerns

• The Psychology of Settlement – Why Mistakes Happen And How We Might Avoid Them

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Some Mediation Basics

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Old School Settlement Approaches

(And why they often fail to deliver the best results)

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“What we’ve got here is failure to communicate …”(Captain, Road Prison 36, Cool Hand Luke)

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Old School Approaches: Direct Negotiations Between the Attorneys• The “problem” of advocacy

• Not all attorneys can think objectively about the strengths of the other side’s position or the weaknesses of their own

• Tendency to embrace that which supports our views while rejecting that which calls our views into question

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Old School Approaches: Direct Negotiations Between the Attorneys• The “problem” of advocacy

• Litigation often breeds a certain level of skepticism in what one advocate hears from another

• Many times we “devalue” offers that the other side views as meaningful concessions

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Old School Approaches: Direct Negotiations Between the Attorneys• Alignment of interests?

• To embrace (or even acknowledge) what opposing counsel says may require your advocate to undermine earlier advice she may have given on a particular legal or factual issue

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Old School Approaches: Direct Negotiations Between the Attorneys• Whisper down the lane?

• When you convey a particularly strong and effective argument to your opponent, you have to count on him to (a) actually communicate it to his client and (b) explain and communicate the issue in a way that is compelling

• Hard for some lawyers to do when the issue is contrary to the arguments they have carefully prepared for the case

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Old School Approaches: Direct Negotiations Between the Attorneys• Does it help to have the clients participate?

• Clients may be hampered by the same sort of advocacy issues that their counsel have

• Sometimes, it is worse if the issues are emotional or personal for the client

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Courthouse Steps Settlements: Too Little, Too Late?

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Courthouse Steps Settlements: Too Little, Too Late?• In the typical case, how are your interests served by

waiting until the very last minute?

• Increased costs?

• No margin for error (more opportunity to make bad choices)

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Courthouse Steps Settlements: Too Little, Too Late?• Prospects for settlement may be diminished

• Sunken costs “invested” in litigation can be a deterrent to late settlements

• Emotional response to protracted litigation (i.e., drawing harder lines than before) can interfere with willingness to compromise

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Courthouse Steps Settlements: Too Little, Too Late?

Shouldn’t sophisticated parties ordinarilydo a better job at early assessment?

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Mediation: A better option?

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Some Mediation Basics• A structured settlement discussion• Purpose is to resolve problem rather than assign blame or

decide who is right and who is wrong• Not binding on the parties• Mediator doesn’t “decide” anything – allowing the parties

to chart their own course• An opportunity to address issues that might not be

resolved in litigation• Confidential

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Some Mediation Basics• Often starts with a joint opening session

• Outline your position• But keep it conciliatory

• Then moves to private caucuses with the mediator• Need to assess what you want the mediator to share

with the other side• Usually, more transparency by the parties increases

the odds for success

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Some Advantages to Mediation• The mediator can “talk past” opposing counsel and talk

directly to your opponent

• Explain the case to your opponent in a way opposing counsel may not have

• Explain how their interests are advanced by a resolution

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Some Advantages to Mediation• Hear from an experienced lawyer whose perspective is

not “tainted” by advocacy

• Insights from the perspective of an independent third parties

• A mediator can also shed light on how someone who is not as knowledgeable about the case (like a judge, juror or arbitrator) might view the issues

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Make the Mediator Your Friend• Mediator is an advocate for settlement (the good ones

hate to fail)

• Let the mediator know you are prepared to help him or her settle the case

• Signal early that you are willing to take reasonable steps to get to a resolution – but not unreasonable steps

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Help the Mediator Help You• Frame the issue so your offers or demands can be

explained – to your opponent - in a logical way

• Arm the mediator with observations about the other side

• Why their case is weak

• Why they should be anxious to settle

• How their problems will be solved by a particular proposal

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Approach To Mediation

No More War

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Approach To Mediation• Put the litigation mind set away

• Doesn’t mean the realities of litigation (costs etc.) and probable outcomes (financial, bad precedent, etc.) are not germane

• But mediation is not a forum to prove who was right and who was wrong

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Approach To Mediation• Think like a problem solver – your problems and your

opponent’s problems

• What are your problems?

• Purely financial concerns?

• Business concerns or objectives?

• Relationship issues with opponent or others?

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Approach To Mediation• What problems can you solve for your opponent?

• Resolution is a two way street – absent an acceptable resolution of your opponent’s problems you won’t settle

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Approach To Mediation• Look for problems that can be solved as the mediation

evolves – even as other problems persist

• Build momentum and progress towards settlement

• Make it harder to walk away without a resolution because the parties have to give up gains they made along the way

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Approach To Mediation

“You can’t handle the truth ….” (or can you?)

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Approach To Mediation: Listening• Mediator may have insights into weaknesses in your

position that you haven’t been able to identify on your own

• You are paying a mediator, in part, for his or her assessment of your position -- so don’t ignore it

• You need these insights to properly evaluate your litigation risk and the relative merits of settlement proposals your opponent may make

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Approach To Mediation: Listening

• Mediator may have insights into you opponent’s position that you cannot discover on your own

• It is not enough to simply “know” what their position is …

• You need to understand their position -- either to rebut it or identify the problems you can solve for them

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Approach To Mediation: Listening

• Mediations can be very fluid

• Have a plan going in – but be flexible enough to adjust as circumstances warrant

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Key Issues for In-House Counsel• Working with the business clients

• Educating them about process

• Educating them about litigation risk

• Engaging them on finding possible solutions

• Securing their “in-person” participation if possible• Much better than simply consulting with them by phone during

the mediation

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Key Issues for In-House Counsel

• Lining up and confirming authority

• Necessary for determining strategy – even if the decision maker attends the mediation

• Clear communication of goals and authority to all members of the team

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Key Issues for In-House Counsel

• Coordinating with Outside counsel

• What roles will each play (good cop / bad cop, etc.)

• Who will handle joint opening session (if there is one)

• Who will engage the mediator

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Key Issues for In-House Counsel

• Strategize about creative solutions

• In-house counsel is better positioned to assess whether there are non-monetary approaches to settlement

• Expand an existing relationship in some way?

• Re-invigorate a dormant relationship?

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The Psychology of Deals

• Why We Make Bad Decisions and How to Avoid Them

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“90% of the game is half mental”

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A Pattern of Mistakes• Empirical studies of settlement versus litigation outcomes

confirm that mistakes are often made in rejecting settlements

• E.g., Let’s Not Make a Deal: An Empirical Study of Decision Making in Unsuccessful Settlement Negotiations (Kiser, Asher and McShane 2008)

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A Pattern of Mistakes• An evolving body of research in Behavioral Economics

suggests that many common mistakes in settlement have their root in well-known psychological biases and responses

• E.g., Thinking Fast and Slow, (Kahneman 2011)

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A Pattern of Mistakes• 61% of Plaintiffs who walk away from a settlement offer

either lose at trial or receive a verdict for less than was offered in settlement

• On average, non-settling Plaintiffs get $43,100 less than they were offered in settlement

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A Pattern of Mistakes• By contrast, only 24% of Defendants who walk away from

a settlement demand lose at trial with a verdict in excess of the settlement demand

• But Defendants’ settlement mistakes were far more costly

• On average, the variance was ≥ $ 1 Million

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Biases and Perception

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Biases That Influence Rational Decision-makingFundamental attribution error

• An almost impulsive response to litigation which attributes evil motivations to our opponent

• We don’t look for motivations based on the facts; instead, we ascribe the motivations first which then impact how we view the facts

• Skews how we see fundamental case facts

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Biases That Influence Rational Decision-makingFundamental attribution error

• We wrongly assume we understand the other side’s motivations – and then fail to explore them

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Biases That Influence Rational Decision-makingSelective Perception and Memory

• We see what we have been preconditioned to believe we will see

• Facts that don’t fit our narrative cause “cognitive dissonance” (i.e., the discomfort of trying to hold two conflicting beliefs)

• So we discard the inconsistent facts

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Biases That Influence Rational Decision-makingSelective Perception and Memory• For example, our view of what a candidate for political

office says is often shaped by whether we like or dislike the candidate or her party

• In litigation, we weigh too heavily the facts that support our desired outcome -- and discount too strongly inconsistent facts

• Leads to “my case is special” mentality

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Biases That Influence Rational Decision-makingSelective Perception and Memory

• Our memory is both inaccurate and subject to the same problems of perception

• We reconstruct historical events in a way that is consistent with how they “should have” occurred

• Perception trumps accuracy…

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Biases That Influence Rational Decision-makingSelf-serving biases

• Our propensity to overvalue our own worth – even to the point of mathematical impossibility

• Scientific surveys have found:

• Spouses invariably conclude that they perform more than 50% of household chores

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Biases That Influence Rational Decision-making

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Biases That Influence Rational Decision-makingIf our biases are right:

• We are all above average …

- and -

• The sum of our combined contributions to any task always exceeds 100% …

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Biases That Influence Rational Decision-making• In litigation, self-serving biases cause us to evaluate the

facts in ways that consistently advance our own interests

• In scientific studies, law school students consistently interpret the exact same evidence more favorably to the party they were assigned to represent

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Biases That Influence Rational Decision-makingReactive devaluation

• We value proposals based on the source

• We don’t trust our opponent and therefore devalue their proposals

• So, proposals that may have been intended as good faith proposals may be interpreted as evidence of bad faith

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Biases That Influence Rational Decision-making

Overconfidence

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Biases That Influence Rational Decision-makingOverconfidence

• Our past successes are always based on our own actions

• Our past failures are always explained by extrinsic circumstances

• We can (and will) always present our cases better than others - and win where they would lose

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Biases That Influence Rational Decision-makingOverconfidence

• There is no correlation between degree of confidence and accuracy of decision-making

• Our confidence often rises when we have less information rather than more

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Biases That Influence Rational Decision-making

Anchors

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Biases That Influence Rational Decision-makingAnchors

• Psychological tendency to latch onto a number

• And then evaluate circumstances and alternatives relative to that number

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Biases That Influence Rational Decision-making• House for sale: $750,000

• How much would you offer?

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Biases That Influence Rational Decision-making• House for sale: $350,000

• How much would you offer?

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Biases That Influence Rational Decision-makingAnchors

• Scientific analysis suggests that anchoring can have a powerful outcome on negotiation outcomes

• Succinctly, a higher opening price typically results in a higher final price

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Biases That Influence Rational Decision-making

Gains and Losses

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Biases That Influence Rational Decision-makingGains and losses are perceived differently

• We value losses more highly than we value gains

• We’ll take more risk to avoid a loss than to obtain an equivalent gain

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Biases That Influence Rational Decision-makingEndowment effect • An object we possess is worth more to us than what we

would spend to acquire it

• In one study, a group of people were asked to negotiate over the sale of a coffee mug and had to secretly estimate its value:• Assigned sellers: $7.12• Assigned buyers: $2.87• Assigned observers: $3.12

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Biases That Influence Rational Decision-makingImpact of gains and losses

• Plaintiffs start too high (adverse to losing the perceived value of their case)

• Defendants to start too low (adverse to the “loss” of assets they posses)

• Underscores “conventional wisdom” that settlement proposals have to be enough to make it painful to reject

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Avoiding The Pitfalls

How We Might Do Better

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Avoiding The Pitfalls• Seek independent views

• Be proactive• Do it often

• Avoid emotions and rely on facts• If we are evaluating our own case, forget about the

other side’s motivations• If we are evaluating settlement (i.e., problem solving) be

open to other views of the opponent’s motivations

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Avoiding The Pitfalls• Be wary of impulses

• Many biases are impulsive or intuitive and occur without our knowing it

• Challenge intuitive thinking with analytical thinking

• Think like an outsider• How would an outsider evaluate your actions?

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Avoiding The Pitfalls• Be wary of anchors

• Unreasonable or purely arbitrary anchors can harm the settlement process and diminish prospects for success

• Consider not responding to an unreasonable demand or offer that creates an unreasonable anchor

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Avoiding The Pitfalls• Consider going first – and setting your own anchor

• Challenge the conventional wisdom behind the “I’m not going to bid against myself” mentality

• If you set an anchor that has a reasonable basis and is defensible, your outcome may be better

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Avoiding The Pitfalls• Be wary of your own aversion to loss

• Make the other side deal with aversion to loss by making it painful for them to walk away

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Questions?

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Thank You!