Cost-shifting in mediation after Berkeley Cement ruling

A California jurist once wisely observed, "All too often attorney fees become the tail that wags the dog in litigation." Deane Gardenhome Assn. v. Dentkas, 13 Cal. App. 4th 1394, 1399 (1993). Mediators know that attorney fees can be a source of leverage in mediation, because the risk of a losing party's exposure to payment of his opponent's fees may motivate a party to settle. "Depend upon it, sir," said Samuel Johnson, "when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully."

But what about the risk of exposure to cost-shifting of costs arising in a mediation? This is a matter to which attorneys and their clients may have devoted less attention. After all, now we are talking about costs, rather than attorney fees, and the costs of mediation are neither expressly listed as routine recoverable costs, nor expressly disallowed as routine recoverable costs in the Code of Civil Procedure. Yet mediation costs can be substantial. The mediation costs include the fees of the mediator, and mediators are often charging the rates that attorneys charge. At the summit are mediators such as retired District Judge Layn Phillips, practically in a class of his own. In 2017, in the General Motors LLC Ignition Switch Litigation in the Southern District of New York, Phillips' "Newport Beach Flat Fee Per Day Rate" was listed as $35,000 -- less than his New York Flat Fee Per Day of $48,000. The December 2018 rates listed for Orange County Neutrals by ADR Services Inc., varied from $525 per hour to $1,375 per hour for retired jurists, and $450 per hour to $1,125 per hour for attorney neutrals. And Orange County fees are often a tad lower than Los Angeles County fees (though Phillips happens to be located in Orange County).

Mediation costs include the mediator's fees, as well as the mediation service's administrative costs. The mediator's fees might also include travel time and expenses, depending on circumstances. Also, litigants can have multiple mediation sessions on the road to settlement. And because it is a fact of California litigation today that somewhere upwards of 97 percent of cases will resolve short of a full-blown trial, mediation is more important than ever before. California Code of Civil Procedure Section 1033.5 provides the hook for shifting mediation costs on to the losing party in a case where mediation is unsuccessful, the case goes to trial, and there is a prevailing party. Subdivision (a) lists items that are specifically allowable, and subdivision (b) lists items that are prohibited as costs. Mediation costs are not to be found under either subdivision.

However, Section 1033.5(c) invests the court with discretion. Subpart (c)(3) provides: "Allowable costs shall be reasonably necessary to the conduct of the litigation rather than merely convenient or beneficial to its preparation." And subpart (c)(4) provides: "Items not mentioned in this section and items assessed upon application may be allowed or denied in the court's discretion." So the point at issue for purposes of recovering discretionary costs is whether a mediation is "reasonably necessary to the conduct of the litigation."

Presented with an issue of first impression, the court in Gibson v. Bobroff, 49 Cal. App. 4th 1202 (1996), addressed: "[M]ay a trial court in its discretion award successful litigants their share of the cost of unsuccessful court-ordered, but privately conducted mediation?" And the court held, "when an unsuccessful mediation has been court-ordered, reasonably necessary expenses incident thereto may, in the sound discretion of the trial court, be awarded after trial to a prevailing party." Id. at 1209. However, the court expressly did "not decide whether a party prevailing after a trial which is preceded by unsuccessful voluntary mediation would be entitled to such costs." Id. at 1212 n.7. The issue reserved may have been more important than the issue decided, because court-ordered mediation applied to small cases, and the court often bore the costs of court-ordered mediation, whereas voluntary private mediation could be much more expensive.

Admittedly, there was some static interference with the ruling in Gibson v. Bobroff. For one thing, the case was first ordered to arbitration, and the Code of Civil Procedure expressly prohibited mediation once the court ordered the parties to attend a judicial arbitration hearing. "We cannot explain," wrote a perplexed Justice Michael Phelan, "why the parties were ordered to mediate this case." Also, the trial court had relied on both Section 1033.5 and on a Section 998 offer to justify cost-shifting, and so did the Court of Appeal, though Section 998 may have been superfluous, or maybe it provided more of a reason for the court to exercise its discretion in favor of cost-shifting. Finally, the court mentioned more than once that the court-ordered mediation, which could not exactly be explained, had not been voluntary, yet left undecided whether the cloudy court-ordered nature of the mediation made a difference.

In 2019, the California Court of Appeal certified for partial publication an opinion, also addressing an issue of first impression, holding and concluding, in the publishable part: "[M]ediation fees incurred for mediation that was not ordered by the court are not categorically nonrecoverable as 'not reasonably necessary to the conduct of litigation.' The question whether mediation fees should be awarded as costs in a particular matter must be determined based on the facts and circumstances of the particular action." Berkeley Cement, Inc. v. Regents of the University of California, 2019 DJDAR 163 (Cal. App. 5th Dist., Jan. 7, 2019).

This case arose out of a dispute between Berkeley Cement, Inc. and the Regents of the University of California over the construction of a building on the Merced campus. Berkeley lost the dispute, and mediation costs were shifted in favor of the university: "The mediation fee award included $7,500 (University's one-half of the $15,000 mediator's fee) for a mediation that was canceled by Berkeley shortly before it was scheduled to take place, because Berkeley claimed it had discovered new evidence. The mediator could not fill the time slot with a replacement, and the fee became nonrefundable." Perhaps the cancellation of the mediation by Berkeley colored the trial judge's discretionary award of costs? In any case, it was worth a footnote in the Court of Appeal decision.

Berkeley Cement blurs the lines between voluntary and court-ordered mediation by pointing out that the court-ordered decision to send a case to mediation "must be made by the court after consideration of the expressed views of the parties on the amenability of the case to mediation" (Cal. Rules of Court, rule 3.891(a)(1), (b)), and even after a case is sent to mediation "the mediator must inform the parties that participation in mediation is completely voluntary, refrain from coercing a party to continue its participation in the mediation and respect the right of each party to decide the extent of its participation or withdraw from the mediation." Quoting Jeld-Wen, Inc. v. Superior Court, 146 Cal. App. 4th 536, 541 (2007). So if the input of the parties is part of court-ordered mediation, and the mediator must remind the parties that the process is voluntary, and the court can shift mediation costs in court-ordered mediation, costs can, within the discretion of the court, and based on the facts and circumstances, be shifted in a voluntary mediation. That is what Berkeley Cement holds.

If a bright line had been drawn between voluntary and court-ordered mediation, it would be easier to apply a rule allowing the court to shift costs "reasonably necessary to the conduct of litigation." It may be harder to apply the rule in the case of voluntary mediation where the parties are not compelled to mediate. However, we predict that Berkeley Cement will make it easier to claim mediation costs by a party prevailing at trial after an unsuccessful mediation, and that parties may spill more ink briefing whether a mediation was "reasonably necessary to the conduct of litigation."

What should the mediator tell the parties about cost-shifting, especially if a party is unrepresented? As JAMS Mediators Ethics Guidelines state, "A mediator should ensure that the parties understand that the mediator's role is that of neutral intermediary, not that of representative of or advocate for any party. A mediator should not offer legal advice to a party. If a mediator offers an evaluation of a party's position or of the likely outcome in court or arbitration, or offers a recommendation with regard to settlement, the mediator should ensure that the parties understand that the mediator is not acting as an attorney for any party and is not providing legal advice." The Civil Mediation Program Guidelines for Orange County Superior Court remind mediators that they must: "Inform all participants that during the mediation, he or she will not represent any participant as a lawyer or perform professional services in any capacity other than as an impartial mediator (CRC 3.857(d))."

However, the mediator can certainly educate a party or counsel if that will be helpful to move the matter toward resolution. And an awareness that the costs of mediation may ultimately fall upon an unsuccessful party may just provide one further incentive for settlement to the party who wishes to avoid that risk.

It is worth mentioning that the mediator's costs, and administration costs, could be recovered, even by an unrepresented party. In this respect, costs are unlike attorney fees, because the unrepresented party cannot recover attorney fees. Trope v. Katz, 11 Cal. 4th 274 (1995). Consequently, both represented and unrepresented parties are potentially exposed to the risk of an award that cost-shifts mediation fees.

Perhaps the best rule for the mediator to follow is to consider the facts and circumstances, and educate a party or counsel about the risk of cost-shifting if that seems reasonably necessary (or useful) for resolving the mediation -- similar to the rule the court applied for deciding to shift the cost of the mediation fee in Berkeley Cement. Of course, what is said to educate a party in mediation can stay in mediation.