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August 08, 2013 Articles

Can Sanctions Be Applied for Bad Faith in Court-Ordered Mediation?

By Charles F. Forer

Editor's note: This article describes a hypothetical situation.

Bob has had it with adversaries who act in bad faith in court-ordered mediation and get away with it. Last week, Bob and his client went to a court-ordered mediation session. Bob's client, the plaintiff in a commercial dispute, sought seven-figure damages arising out of the defendant's "shocking" and "illconsidered" breach of contract. (Bob's words.) Bob had counseled his client, before the mediation, that "you have to compromise; that is what mediation is all about." However, Bob assured his client, "There is no good reason why we shouldn't be able to settle this case for at least $1 million."

The mediation was a disaster. The other side refused to make any settlement offer in response to what Bob touted was a strong case of liability. The session ended after a few hours. Bob spent the rest of the day answering his client's questions: "Why did I waste my time to attend this session? Why do I have to pay you for this wasteful exercise?"

Always tenacious, Bob wanted to teach the other side a lesson. "In my view," Bob's motion for sanctions for defendant's purported failure to mediate in good faith argued, "there could hardly be a clearer case of a breach of contract leading directly to substantial and continuing damages. Defendant's unenlightened corporate policy of 'we never pay' imposes unnecessary burdens on the resources of this court, and grossly violates both letter and spirit of this court's ADR plan." (See Acquisto v. Manitowoc Fsg Operations, 2012 U.S. Dist. LEXIS 144055, *8 (W.D.N.Y. Aug. 1, 2012).)

Ten days later - before defendant's response was due - the court decided the sanctions motion: "What 'imposes unnecessary burdens on the resources of this court' is the filing of a motion having absolutely no chance of success. It is beyond dispute that although courts may require parties to participate in mediation, they lack the power to sanction a party for refusing to make a settlement offer." Motion denied. (Bob's client's response: "Why do I have to pay you for this wasteful exercise?")

Did the court err? Did Bob? Did Bob's client?

A court can require a party to appear at a mediation session, but the court cannot force a party to settle or even to make a settlement offer. The corollary to this rule: A party is within its rights to do what the defendant in Bob's case did - adopt a "no-pay" position.

Some cases have professed a hands-off attitude toward mediation conduct, concluding that the parties need only comply with a minimal standard to avoid sanctions.

Courts have not developed any clear standards for evaluating good faith in court-ordered mediation. Nevertheless, courts have interpreted good faith narrowly to require compliance with orders to attend mediation, provide pre-mediation memoranda, and, in some cases, such as In re A. T. Reynolds & Sons, 452 B.R. 374, 381 (S.D.N.Y. 2012), produce organizational representatives with sufficient settlement authority.

However, do not conclude -as Bob did after he lost his motion for sanctions -that the court will let a party get away with virtually anything in a court-ordered mediation. Courts have not hesitated, sometimes sua sponte, to sanction a party that did not abide by certain fundamental courtesies that went beyond filing the required documents and showing up with the proper representatives, as in O'Donnell v. Pennsylvania Department of Corrections, 2011 U.S. Dist. LEXIS 11438, *18 (M.D. Pa. Feb. 4, 2011) (quoting Taberer v. Armstrong World Industries, 954 F.2d 888, 892 n.3 (3d Cir. 1992)):

"While [it has been] suggested that, as a matter of law, the court is powerless to sanction parties for actions relating to settlement and mediation conferences, plainly under Rule 16 this is not correct. Quite the contrary, it is well settled that Rule 16 'is the usual vehicle for imposing coercive or punitive sanctions in these circumstances."'

The boundaries and principles may not be uniform from court to court. Nevertheless, here are 1O "rules" that, when broken, have led to sanctions. These rules are so important that Bob has taped them to his office wall.

1. Tell the court and opposing counsel of logistical and substantive obstacles to settlement. Let them know that settlement is unlikely because, for instance, the parties have not completed discovery. (See, e.g., Karahuta v. Boardwalk Regency, 2007 U.S. Dist. LEXIS 72510, *4 (E.D. Pa. Sept. 27, 2007) ("By taking the initiative and advising the court and defense counsel of these issues, the plaintiffs' counsel enabled the parties to make fully-informed decisions regarding whether to proceed with the conference in advance of the conference itself. Thus, the actions of plaintiffs' counsel, while perhaps tardy, allowed all parties to avoid some of the principal evils condemned by the courts in this setting.").)

2. Provide the mediator with required mediation statements. On time. (See, e.g., Nick v. Morgan's Foods, 270 F.3d 590, 596 (8th Cir. 2001) ("The district court judge acted well within his discretion by imposing a monetary fine payable to the clerk of the district court as a sanction for failing to prepare the required memorandum.").)

3. Bring a decision-maker who has full settlement authority. In Karahuta, the court ruled, "Without contacting the court, the defendants sent the same representative with the same limited authority. By their actions, defendants wasted the limited time, financial resources and energies of the court and plaintiff."

4. Do not file a dispositive motion on the eve of the mediation that will harden settlement positions. In Fisher v. SmithKline Beecham, 2008 U.S. Dist. LEXIS 76207, *21 (W.D.N.Y. Sept. 29, 2008), for example, the court ruled, "Prior knowledge of defendant's intention to file for summary judgment based on the statute of limitations defense would have provided a basis for either defendant or plaintiffs to opt out of mediation that was likely to be unsuccessful given defendant's position revealed for the first time at the mediation."

5. If your client is taking a no-pay position, let everyone know -well before the mediation. (See, e.g., Zalisko v. MTA New York City Transit, 2010 U.S. Dist. LEXIS 81843, *1 (S.D.N.Y. Aug. 12 2010) ("Had [defendant] told me it had considered the case and was unequivocally at a 'no pay' position, I would have canceled the conference.").)

6. Let the court know if you or your client will not attend the mediation. In Lucas Automotive Engineering v. Bridgestone/Firestone, 275 F.3d 762, 769 (9th Cir. 2001), for example, "Lucas Automotive claims that [Lucas Automotive President Stanley] Lucas missed the [mediation] session because he was suffering from an incapacitating headache, and that his failure to appear was not intentional. However, inasmuch as Lucas did not notify the parties beforehand of his nonappearance, the district court's imposition of sanctions pursuant to Fed. R. Civ. P. 16 and the local rules for the Central District of California was appropriate."

7. Tell the other side, before the mediation, if your client's insurance carrier has not authorized coverage. (See, e.g., Francis v. Women's Obstetrics & Gynecology Group, 144 F.R.D. 646, 649 (W.D.N.Y. 1992) ("If coverage was truly an issue, plaintiffs' counsel, ... the mediator, and the court should have been notified before the day of the conference so that the matter could have been rescheduled without inconveniencing and causing expense to both the mediator and plaintiffs.").)

8. Bring your client to the mediation. In Turner v. Young, 205 F.R.D. 592, 595 (D. Kan. 2002), the court ruled, "Regardless of whether parties are attending a settlement conference or a private mediation session, attendance by a party representative with settlement authority ... is mandatory." Why? "The purpose behind requiring the attendance of a person with full settlement authority is that the parties' view of the case may be altered during the face-to-face conference," as ruled in Nelson v. Murphy, 2012 U.S. Dist. LEXIS 163660, *3 (E.D. Cal. Nov. 15, 2012).

9. Do not jerk the other side around. (See, e.g., HSBC Bank USA v. McKenna, 952 N.Y.S. 2d 746, 766 (Sup. Ct. 2012) ("The court finds sufficient support in the record for [the] determination that [lender] failed to 'negotiate in good faith' with respect to [borrower's] second proposed short sale in failing to promptly approve the sale, in unnecessarily prolonging and delaying the review and approval process, and in obtaining successive appraisals that became the basis for increased demands, all without any showing that its conduct was likely to yield a higher net return through a delayed foreclosure sale.").)

10. Do not be a potted plant at the mediation session. For example, in Texas Department of Transportation v. Pirtle, 977 S.W.2d 657, 658 (Tex. App. 1998), the court ruled, "Instead of filing a written objection, the department attended the mediation but refused to participate.... We find that it is not an abuse of discretion for a trial court to assess costs when a party does not file a written objection to a court's order to mediate, but nevertheless refuses to mediate in good faith."

Reprinted with permission from the March 12, 2013 edition of the The Legal Intelligencer (c) 2013 ALM Media Properties, LLC. All rights reserved.

Keywords: ADR, litigation, sanctions, bad faith, mediation