An important technique in any mediator’s toolkit is the mediator’s proposal. Typically used as a measure of last resort to avoid litigation after all other options for compromise have been exhausted, a mediator’s proposal recommends a dollar number (and perhaps other terms) to settle the dispute, and fixes a deadline for each side to confidentially respond to the proposal with either an unqualified acceptance or a rejection. There is no negotiating. If both sides accept, the mediator announces a settlement. But if one or both sides reject the proposal, the mediator does not reveal either side’s response, but instead simply advises the parties that there is no settlement. This ensures that a party that rejected doesn’t know whether the other side said “Yes” (which might prejudice the accepting side in future negotiations since its adversary would know the number at which it was willing to compromise).
Since the whole point of a mediator’s proposal is to resolve the dispute if both sides accept, it is obviously critical to make sure that any settlement resulting from a mediator’s proposal is binding and enforceable so neither side can back out if they change their mind. Sounds simple, but it isn’t. Just ask Sony, the plaintiff in an antitrust action that appeared settled as a result of a mediator’s proposal. See In re TFT-LCD (Flat Panel) Antitrust Litig., No. C 12-02214 SI, 2013 WL 6326707 (N.D. Cal. Dec. 3, 2013), rev’d, 835 F.3d 1155 (9th Cir. 2016).
In TFT, a Taiwanese company in the business of manufacturing and selling Liquid Crystal Display (LCD) products, HannStar, pled guilty to conspiring to fix the prices of LCD’s. Sony had purchased many LCD products from HannStar and entered into a tolling agreement with HannStar while it investigated the damages it suffered as a result of the conspiracy. Sony and HannStar ultimately agreed to mediate their dispute. Initially, negotiations did not go well, and Sony threatened to sue HannStar if no agreement was reached before March 28, 2012.
On March 25, 2012, with Sony’s deadline looming, the mediator (Professor Eric Green) sent an email stating that he had been authorized to make a mediator’s proposal, and suggesting that the matter be settled for “$4.1 million, to be paid on March 30, 2012, subject to the execution of an appropriate Settlement Agreement, MOU, or Agreement in Principle.” Here are the email exchanges that followed.
Professor Green: “I ask that each of you inform me privately and confidentially by close of business (5:00 pm PDT) Tuesday, March 27, 2012 whether you “ACCEPT” or “REJECT” the Mediator’s Proposal. These double-blind responses will be kept confidential by me so that if one side accepts the Mediator’s Proposal but the other side does not, the side not accepting the Mediator’s Proposal will never know what the other side responded. This protects both the parties from being leveraged. Of course, if both sides accept the Mediator’s Proposal, I will inform you immediately that the matter is settled.”
The next day Professor Green emailed both parties: “I would like to remind you that it is in the nature of a Mediator’s Proposal that your response can only be ‘ACCEPT’ or ‘REJECT.’ No negotiation is permitted.” Both counsel responded “Understood.”
On March 27, 2012, HannStar’s counsel wrote to Professor Green: “Pursuant to your emails of March 25th and 26th, HannStar authorizes acceptance by HannStar of the Mediator’s Proposal for settlement as set forth in your March 25th email to Sony counsel and me. If the proposal is accepted by Sony, would also appreciate a brief call with you about a couple of logistical matters arising out of the enunciated proposal.”
That same day, Sony’s counsel wrote to Professor Green: “Thanks much for your efforts. Sony accepts.”
After Sony accepted, Professor Green wrote to both counsel: “I am pleased to be able to inform you that I have received written confirmation from each of you that both Sony and HannStar have accepted the Mediator’s Proposal pursuant to my email of March 25. This case is now settled subject to agreement on terms and conditions in a written settlement document.”
On March 29, 2012, Sony sued other companies involved in the price fixing conspiracy, but did not name HannStar. HannStar, however, later refused to pay the amount contained in the mediator’s proposal. Jilted, Sony filed a separate action against HannStar, alleging federal and state antitrust claims and a state law breach of contract claim for reneging on the settlement Sony thought they had agreed upon.
After concluding its antitrust cases against other defendants, Sony dismissed its antitrust claims against HannStar, but continued to litigate its state law breach of contract claim. It eventually moved for summary judgment, arguing that the emails between the parties and Professor Green formed a binding contract. The motion, however, begged the question: was the mediator’s proposal admissible evidence?
Since the only remaining claim in the case was the state law claim for breach of contract, the court looked to California state law. Readers will recall from one of our prior posts that Section 1119 of the California Evidence Code renders any statement or writing made during the course of a mediation inadmissible in any subsequent civil proceeding. Section 1123(b) of the California Evidence Code, however, provides an exception for settlement agreements reached through mediation stating that they are “enforceable or binding or words to that effect.”
Did the mediator’s proposal satisfy that definition? Sony argued that the e-mail exchanges expressed that the mediator’s proposal was enforceable or binding within the meaning of the statute based on Professor Green’s statement that “[t]his case is now settled subject to agreement on terms and conditions in a written settlement document.” But the court disagreed, holding that while the language Sony cited might have formed a common law contract, Section 1123(b) further required a direct statement that the settlement was enforceable or binding, or words to that effect. Such a direct statement was absent from the emails. As a result, the mediator’s proposal did not fall within the statutory exception and was inadmissible under Section 1119. Reluctantly, the court denied Sony’s motion for summary judgment.
Undaunted, Sony appealed, and the Ninth Circuit reversed. See In re TFT-LCD (Flat Panel) Antitrust Litig., 835 F.3d 1155 (9th Cir. 2016). Observing that Sony’s action originally asserted both federal and state claims, and that the mediation sought to settle both the federal and state claims, the Ninth Circuit held that federal common law (not the California Evidence Code) governed the question of mediation privilege, and admissibility of the mediator’s proposal. The district court docket indicates that, after remand, the parties settled the case.
What’s the takeaway? In hindsight, the language in the mediator’s proposal in TFT could have been more artful. First, considering the potential applicability of California law, the mediator should have confirmed the parties’ understanding that, if accepted by both sides, the mediator’s proposal was binding and enforceable, regardless of whether or not the parties subsequently executed a more formal settlement agreement.
At the same time, it probably wasn’t a good idea to write that the settlement was “subject to the execution of an appropriate Settlement Agreement, MOU, or Agreement in Principle.” The words “subject to” suggest that, absent a formal settlement agreement, MOU or Agreement in Principle, the settlement embodied in the mediator’s proposal was not binding. And it’s often the failure to agree on formal documentation of a tersely worded deal reached at the conclusion of a mediation that trips parties up (as the mediation resolving the dispute over the founding of Facebook showed).
Instead, the mediator should have used language along the lines of that used in the mediation resolving the dispute over the founding of Facebook: “the parties agree that they may execute more formal documents but these terms are binding and this document may be submitted into evidence to enforce this agreement.” The Ninth Circuit held that such language left no doubt that the parties meant to bind themselves to the deal reached at the conclusion of the mediation, even though it was understood that other material (i.e., important but not absolutely necessary) aspects of the deal would be papered later.
P.S. for a further look at whether, when and how mediator proposals should be used, we recommend the excellent article by Stephen A. Hochman.