Pre-litigation mediation is gaining popularity to avoid confidentiality limitations in settlement agreements

In California, approximately 97% of civil cases filed are settled short of trial. While it is widely accepted that an overwhelming majority of litigated cases will be resolved through mediation, there is a growing trend in California of mediating disputes after the parties have engaged counsel but prior to the filing of a legal claim. This article explores why, even for the most capable and zealous advocate, it is usually worth giving pre-litigation mediation serious consideration.

A huge driver for this trend is in the context of employment cases where pre-litigation mediation provides a mechanism to potentially avoid the California legislature’s curbing of confidentiality and non-disparagement provisions in settlement agreements. Beginning in 2017, in response to the Harvey Weinstein scandal, California lawmakers enacted a series of legislation intended to hold powerful individuals accountable for acts of sexual harassment and aggression in the workplace. On Jan. 1, 2017, §1002(a)(i) of the California Code of Civil Procedure was enacted, precluding parties in a civil action from including a confidentiality provision as a part of a settlement if the cause of action would be prosecutable as a felony sexual offence. In 2018, California passed SB 820 or “The STAND Act” as it is also known, prohibiting the use of confidentiality provisions in settlement agreements to the extent they prevent the disclosure of factual information relating to claims of sexual assault, sexual harassment, or harassment or discrimination based on sex. In October 2021, SB 331 was signed into law. Also known as the “Silenced No More Act,” SB 331 built upon the STAND Act, by broadening the list of claims subject to non-disclosure prohibition to FEHA based workplace harassment, discrimination and retaliation claims based on any protected characteristic (currently, 18 protected characteristics: race, religious creed, color, national origin, ancestry, physical disability, mental disability, medical condition, genetic information, marital status, sex, gender, gender identity, gender expression, age, sexual orientation, reproductive health decision-making, and military and veteran status).

Despite the well-meaning intent behind these laws aimed at promoting transparency and accountability in the workplace and preventing wrong-doers from being able to conceal their illegal acts from public scrutiny, they do have practical downsides:

• Most significantly, in depriving a wrongdoer of the capacity to keep the illegal acts confidential, the legislation also deprives a victim of the economic value of a promise of confidentiality/non-disparagement. The economic value of reputation, goodwill and other intangible assets can be substantial. In a settlement after a legal claim has been filed, this option to agree to confidentiality is taken out of the victim’s hands in favor of the broader public policy argument. Sometimes – for example where the underlying acts are particularly heinous and with a deep-pocket defendant - this can amount to an inherently inequitable outcome for the individual who actually suffered from the egregious conduct and will likely be denied the opportunity of a speedy and meaningful financial settlement.

• If a wrongdoer knows that his or her deeds will inevitably be publicized, there may well be more of an inclination to challenge the allegations, to be seen to make efforts to clear his or her name or even just to hold a family together. This will inevitably drag out the claim, causing unnecessary expense and putting the victim through the stress and humiliation of publicly recanting events he or she would no doubt prefer to put behind them, not to mention the pressure of intense scrutiny and cross examination and the inherent possibility for victim-shaming.

• The alleged victim may not welcome the transparency and publicity that these legal provisions seek to achieve. The legislation does provide a mechanism whereby at the victim’s request, a settlement agreement can be drafted in a manner that shields his or her identity, but obviously once the dispute itself has been made public and with certain factual detail not protected by confidentiality, any attempted shielding is potentially imperfect. The legislation may actually have the effect of presenting an impediment to individuals bringing worthy claims and leave predators in the workplace potentially hurting other employees and creating exposure for employers who may not be aware of the conduct.

The prevalent view amongst practitioners in this area is that if a settlement can be reached before a conflict rises to the level of a legal “claim,” then parties could agree to confidentiality and non-disparagement clauses in negotiated agreements without violating the law. It follows that if a dispute can be successfully mediated after a perceived conflict arises, but before it crystalizes into a legal claim being filed, then both the would-be plaintiff and the would-be defendant could benefit and the chances of achieving a settlement could be significantly enhanced. This window of opportunity is narrow – it is likely that at the point where a FEHA “right to sue” letter is requested the opportunity to keep crucial settlement details confidential is eliminated. Since mediation is an informal process that can be initiated at any time without the pre-condition of obtaining a FEHA right to sue letter, it seems that, until the law is changed or further clarified by case law, pre-litigation mediation represents a unique opportunity to preserve the confidentiality of all aspects of a mediated settlement, even where harassment, discrimination and retaliation claims are involved.

However, the argument in favor of pre-litigation mediation does not begin and end with the issue of maintaining confidentiality in employment cases. Bearing in mind that all civil cases will find themselves in mediation at some point in the litigation continuum, there are substantial advantages to pre-litigation mediation in a broader range of civil cases. Where appropriate (discussed in more detail below), pre-litigation mediation should be given serious consideration, for inter alia the following reasons:

Avoids harmful escalation: At the point a complaint is filed and a dispute between parties escalates to active litigation with a “plaintiff” and a “defendant,” the two sides are no longer looking to find a mutually acceptable solution to a common problem. They become true opponents and develop an adversarial mindset. The sub-conscious bias of the litigant kicks in and people entrench themselves in their own positions and are less open to considering the positions of the other party. Because litigation takes place in a public forum the fight between the parties will, by definition, become public and there is no “half-way” version of litigating a case. There will obviously be many opportunities to mediate over the life of a lawsuit, but all of these efforts are likely to be encumbered by the litigation backdrop. As noted above, the overwhelming majority of cases will eventually settle, but this adversarial bent makes settlement more challenging.

Gives the mediator more tools: Mediations in litigated cases become less about traditional “dispute resolution” and the seeking of “creative solutions” per se and more about reaching an economic deal. Settlements discussions usually become exclusively about money – because money is the standard by which justice is measured in a litigated civil case. Pain and suffering, emotional distress, harm from having been subjected to punitive conduct et cetera are assessed and reduced by a judge and jury into dollars and cents. The exposure to financial loss and the potential for financial gain is how risk is assessed in the litigated civil case and thus in mediating cases in the shadow of ongoing litigation. This may limit a mediator’s ability to use many of the more creative tools of traditional conflict resolution that could maximize the parties’ outcomes. One of the areas a trained mediator can really add value lies in identifying undeclared non-economic interests that might make settlement more feasible. While it would be naïve to suggest that many cases could have been resolved pre-litigation with a bare apology, post-litigation, that apology loses any currency whatsoever. In fact, the concept of an apology in a litigated case will fly openly in the face of the “no admission of liability” language that most defense counsel will insist upon. Had the same claim been mediated in a pre-litigation mediation, it is possible that a verbal apology would have had some value - perhaps as a stepping-stone to a comprehensive settlement discussion. In fact, the mediator of a litigated case will rarely have the opportunity to push for a non-economic interest as part of a settlement and will typically find that attempts to convince the parties of “win-win” solutions that involve non-economic intangibles are likely to fall on stony ground.

Relationship preservation: In many cases, preservation of an ongoing relationship or potential for a future relationship is important. In these cases, the filing of a lawsuit with the concomitant assumption of an adversarial disposition can pose a serious threat to a relationship that might otherwise have been salvaged. This includes not only familial relationships or friendships but also broader relationships such as employer/employee relationships, business relationships, and community relationships. Despite an area of disagreement these relationships can potentially be preserved, or even strengthened, in a pre-litigation mediation where the parties work together to find a mutually acceptable solution. It is harder to overcome the hurdle that somebody sued you publicly in a court of law. My personal experience of with these dynamics is in the context of the entertainment industry, where relationships are the cornerstone of the entire business and litigation is truly a last resort even where the sums of money involved, and often the bad behavior involved, can be extreme. While the entertainment industry with its often mercurial personalities is pretty much the poster child for the value of pre-litigation mediation, it is a business strategy that many industries can benefit from. It is often a costly mistake to look at one conflict out of the context of a larger relationship as a whole, no matter how justified the umbrage. Often, having the always difficult, sometimes emotional conversations between the parties can not only resolve the immediate conflict, but that the airing of underlying issues and the sense of collaboration in working to overcome the conflict can actually strengthen relationships. In a world where acceptable norms for interpersonal conduct seem in a constant state of flux, disputes centered on grey areas have become much more prevalent, and pre-litigation mediation is a powerful tool to help the parties resolve these disputes in a way that allows the parties to continue to work together, do business together, and thrive in the same communities together. Pre-litigation mediation can be particularly effective if suggested and paid for by a potential defendant, because it communicates accountability and a desire to make things right, which is can be a needle-mover in most negotiations.

Financial efficiency vs litigation/arbitration: It is not a groundbreaking statement to say that mediation is substantially less expensive than litigation, but over the years even arbitration has morphed into a process that mirrors much of the motion practice and discovery, and correspondingly the cost of, full-blown litigation. It is therefore important to remember that even if a contract mandates arbitration for dispute resolution, mediation is a consensual process that the parties can agree to participate in regardless of any contractual provision. Because mediation does not guarantee the disposition of a case, some decision-makers consider mediating prior to mandatory arbitration to be an additional layer of cost with no guaranteed outcome. But it is rare for parties to a mediation to derive no value whatsoever from it even if there is no final settlement. In getting a third party’s (mediator’s) perspective, participants to mediation are likely to learn something about their presentation of their client’s case, or details about the other party’s position that might prompt a re-evaluation or be helpful if the case proceeds to arbitration. Where mediation has any chance of settling a case, it seems like a false economy to dismiss an opportunity to mediate as an unnecessary cost layer.

Control: Once the parties file a lawsuit, they put control of their claim in someone else’s hands. Aside from the obvious possibility of a judge and jury deciding the outcome of the dispute (which is not a concern for the majority of cases which are settled pre-trial) there are more practical concerns with ceding control – namely, that the pace of the lawsuit will be determined by someone else’s calendar and open to manipulation by both sides. “Justice” will likely be delayed at least a year and more likely 2-3 years. With civil litigation, the longer the life of the case, the more risk, because both sides are investing heavily in an environment of uncertainty. Until discovery is cut off, plaintiff or defendant can be one unfortunate text message or email away from a total re-evaluation of the value of their case. Pre-litigation mediation keeps control with the parties and, if successful, also has the public service benefit of not further crowding the court’s already crowded docket.

Suitability of pre-litigation mediation: Every case has to be weighed independently. As a starting point, one should look to situations where liability can be established without extensive discovery: a discrimination, harassment or retaliation claim with obviously bad facts; many wage and hour cases; a sexual battery allegation with credible, third party witnesses; a rear-ender personal injury claim; a leaking roof in a new home construction case; an allegation of copyright infringement case where the substantial similarity of an infringing work to an original copyrighted work is obvious on its face and no fair use factors apply. Pre-litigation mediation should also be strongly considered in any circumstance in which keeping the details of the dispute and settlement confidential are valuable – obviously harassment, discrimination and FEHA-based retaliation claims for the reasons discussed above - but other types of sensitive claims that might do damage to the brand, goodwill or reputation that can be settled before details are exposed in a publicly-filed lawsuit. The types of cases that often arise in the entertainment industry are good examples of this. Many are employment claims, but also contract claims, intellectual property claims, claims for idea theft and the like, and defamation. With the fame (and/or notoriety) of the parties involved there are compelling business interests in keeping industry disputes confidential (one only has to look to the Johnny Depp/Amber Heard debacle). The parties can choose to mediate after a lawsuit is filed, but with TMZ reporters monitoring every courthouse filing, the very best chance for confidentiality is through pre-litigation mediation.

Of course, the effectiveness of pre-litigation mediations assumes that a reasonable settlement value can also be established for these types of case without extensive discovery or expert testimony - and that may not be possible. There is a world of difference between the rear-ender that causes only soft tissue damage and one where the spine is implicated, or the premises liability case involving a fractured ankle and one where complications such as Complex Regional Pain Syndrome have developed from that fractured ankle . In situations where insurance is being relied upon it may be difficult to convince an insurer of the benefits of pre- litigation mediation even though those benefits are equally applicable. In litigated cases it is atypical for the insurer of a PI claim arising from an accident to approve the payment of a claim of any substance – let alone pay for a mediation, without at least a couple of depositions having been taken, but there are exceptions. Much will depend on the strength of the case and the nature and extent of the injuries being alleged.

While not all cases will be suitable candidates for pre-litigation mediation, the recent trend towards it suggests that more and more lawyers are at least pausing to weigh the possibility. In these days of half-day mediations and with the convenience of Zoom, the risk/reward seems worthwhile.