On Tuesday, June 18, 2019, a group of nine California counties and cities announced that they and PG&E had accepted a mediator’s proposal of $415 million to resolve their claims against PG&E arising out of the 2017 North Bay fires. The money will be paid pursuant to the confirmed Chapter 11 plan of reorganization in PG&E’s Chapter 11 bankruptcy case. PG&E had filed for Chapter 11 bankruptcy on January 14, 2019, in response to financial challenges arising out of a series of catastrophic wildfires that occurred in Northern California in 2017 and 2018, which were blamed in part on electrical equipment owned and operated by PG&E.
We have previously written about mediator proposals, explaining that (in a nutshell) they constitute a last ditch, “take-it-or-leave-it” recommendation by the mediator to settle a dispute at a particular dollar amount (with non-monetary terms possibly included as well). Absent acceptance of the proposal by both parties, litigation resumes.
The use of a mediator’s proposal to resolve such a high profile dispute as PG&E’s liability to municipalities for wildfire damage provides a suitable opportunity for a more detailed look at mediator proposal best practices.
One of the more informative and well-written articles on the subject (PDF) is by long-time mediator Stephen A. Hochman (under whom I received advanced commercial mediation training). Hochman identifies several best practices concerning when and how to present mediator proposals.
First, Hochman argues that a mediator’s proposal should only be used as a last resort after the mediator has wielded “every other possible impasse breaking technique.” In part, this is because, to make an effective mediator’s proposal that is likely to be accepted by both sides and thus end the dispute, a mediator needs to get a good sense of how each party perceives the merits of the case, and then form his own objective opinion concerning the likely outcome of the litigation alternative. For instance, in a personal injury case involving a plaintiff seeking $1 million, the mediator cannot simply propose to “split the baby” if the plaintiff’s case has substantial weaknesses that make the likelihood of success in litigation less than 10% (which would make the case worth less than $100,000, after considering the costs the plaintiff would need to incur to take the case all the way to trial).
Second, many (if not most) disputes are not exclusively about money. For example, there might be disagreement about the scope of injunctive relief, or remedies for breach of any settlement. In such cases, Hochman recommends resolving the non-monetary issues first, and leaving the dollar amount for last. This approach builds momentum towards resolution, which makes it easier to resolve the dollar amount when the time comes to discuss it. Having already invested significant time and effort into resolving non-monetary issues, the parties will work hard to find a number they can both live with rather than let the mediation fail solely over a dollar amount.
Third, before making a mediator proposal, a mediator should make sure she has earned the faith of both sides in her impartiality. That is, based on the mediator’s handling of the negotiations, both parties should feel that the number proposed by the mediator is not intended to favor either side, but instead represents her best professional judgment — based on an objective evaluation of the merits — as to a settlement amount “that is better for both parties than the litigation alternative.”
Fourth, as previously discussed, if one side accepts the mediator’s proposal, but the other side rejects, the mediator may not disclose the acceptance in order to avoid prejudicing the position of the accepting party in subsequent negotiations. Therefore, before fixing the deadline for each party to respond, a mediator should first ask each party how long they expect it will take to make a decision concerning the proposal (without disclosing what that decision will be), and fix a deadline that would allow both parties to respond at the same time. This technique avoids a situation where one party has decided to accept, but the other party needs more time to think about it, and the mediator would like to devote more time to helping the latter party work through its issues. In that situation, fixing a premature deadline might enable the unsure party to perceive that the mediator is only working with them because their adversary has already said yes.
Here is the exact language that Hochman uses to address this issue with the parties (excerpted from a sample mediator proposal supplied by Hochman):
In order to give both sides ample time to make a rational business decision, I am requesting each of you to let me know when your client has reached a decision, without telling me at that time what that decision is. Once I hear that both sides have made a decision, I will then ask each of you to simultaneously send me a confidential email in which you indicate your client’s decision, which must be either an unconditional “yes” or “no.” The reason that I do not want to know the answer from either side prior to knowing the answer from the other side is to give me an opportunity to do some additional risk analysis with one side without that side believing that I would not be doing that risk analysis if the other side had not previously said “yes.”