“Tom, we’ve got mediation in 10 days. What are the chances you can get this one wrapped up? My CEO is on me about the $250,000 in defense costs and the lack of progress he thinks we’ve made. When I try and tell him about the additional $150,000 it will cost for trial and the $75,000 for a likely appeal, his eyes start to roll back into his head. He won’t even hear that we’ve got a real chance of getting hit by the jury. Tell me there’s some hope your team can get us out of this without one or both of us losing our jobs!”
Tom is in a tough spot. The client has a significant investment in the case and wants the matter to go away. Tom and his team believe a likely verdict at trial is in the $1.5 million range, but it could be double that. Plaintiff’s counsel is even more optimistic about his chances.
Everyone acknowledges there is some chance for a defense verdict. If Tom understands some of the basic psychological phenomena that influence the negotiating parties, he will maximize his chances of success.
As a start, studies show that an individual’s satisfaction with a court proceeding, arbitration or mediation depend on whether that person perceives the process as “fair.” Parties are more willing to enter into a settlement, and to comply with its terms, if they credit the process as a fair one.
Reaching a negotiated result, and then abiding by the agreed-to terms, therefore, may hinge on the parties’ belief that the mediation has been fairly conducted.
When evaluating “fairness,” most people ask themselves whether they had a voice in the process. Surprisingly, the actual result is of secondary importance. What people want is the ability to have substantive input into the ultimate decision.
In selecting a mediator, and in considering how the mediation will proceed, Tom needs to think about how the parties will be heard so that they feel their input counts. Picking the right mediator to foster this environment is critical.
The best mediators have the ability to listen to the parties and mirror back their comments in a non-judgmental fashion, while simultaneously reframing those comments so that they lead to potential solutions.
Keeping in mind the importance of fairness, the mediator must also be able to “level the playing field” without being perceived as favoring one side or the other.
This nuanced approach to dispute management is an art form. Not every mediator is right for every set of disputants. Tom will need to carefully consider the involved players and choose a mediator who can best assure that both sides see the process as “fair” such that they are more likely to reach an agreement and stick with it.
How Tom and his client representative comport themselves at mediation can also influence the other side’s perception of fairness. Whether and how Tom’s client addresses the other side if given the chance to do so is something that requires planning.
If Tom’s client has the ability to frame the other side’s position fairly and to respond to that position on its merits, the other side is more likely to conclude that its input is having an impact on the outcome — factors Tom needs to consider.
Having set the stage (at least in his mind) for a fair exchange of the parties’ positions, Tom needs also to consider that both sides likely are overconfident about their chances of success at trial. That overconfidence is a prime impediment to successful resolution.
In general, the parties’ overconfidence is attributable to two factors. First, as every trial lawyer knows, people tend to credit those facts that reinforce their preconceptions and reject (or at least be skeptical of) those facts that are at odds with their mindset.
Second, the vast majority of people think that they are better than average. Surveys, for instance, show that 80 percent of professional drivers think they are better than average. That means that the lawyers and clients gathered for mediation likely think they will do a better job at their role in the eventual trial than anyone else in the room. (And, of course, the mediator thinks he’s better, too, but a little overconfidence might actually be helpful in that role.)
Thus, the negotiating parties think they are more in control of the outcome than is objectively the case.
Getting the parties to think objectively about their chances at trial is no mean feat. While Tom’s clear, succinct recitation of his client’s case and his perceptions of the weaknesses in his opponents may be helpful, unwinding both parties’ overconfidence will depend heavily on the skill of the mediator in taking the case apart and pointing out the risks.
Timing here is critical because most parties’ overconfidence tends to persist if the weaknesses are pointed out too far in advance of the day of reckoning. The closer one comes to trial, the more acutely one focuses on the reality of the problems with one’s case.
Of course, the closer the parties are to trial, the more that has been spent, and thus parties’ bias and investment in the case only deepen.
Another psychological phenomenon Tom needs to anticipate before his client makes an offer, and as they respond to the plaintiff’s demand, is the way people process risk.
All other things being equal, people fear losing what they have more than they value winning what they do not. Looked at from the opposite perspective, they are more willing to gamble on the prospect of a lesser loss tomorrow if it means avoiding a certain loss today.
According to this behavioral truism, the plaintiff is more eager to have a sum certain today than he would be to gamble on a higher award after trial.
By contrast, Tom’s client is more likely to want to gamble on an uncertain future loss than to lock in a certain cost today.
Tom can favorably manipulate such behavior in two ways. First, when he outlines potential settlement positions for his client’s CEO, Tom should try to quantify the proposal in the language of gain.
For example, if the likely anticipated verdict is $1.5 million, and it will cost another $150,000 to litigate the case through an appeal, a $1 million settlement means a more than half-a-million-dollar gain for the company (at least as compared to not settling).
Second, Tom knows that once the plaintiff has a settlement offer in hand representing a net gain, the plaintiff will have a tougher time saying no to resolution than the defendant will have taking the case to trial.
Used prudently, Tom can make a last and final demand at a lower number than a pure and perfect risk analysis would dictate.
Another powerful psychological phenomenon that almost everyone knows, but that, again, Tom will have to think about carefully, is the “reciprocity effect.”
The reciprocity effect is exactly why the back and forth of mediation often produces a settlement. If the other side gives you something in the form of a concession, you are hard-wired to give something back by making a similar concession.
The reciprocity effect can just as easily derail the negotiation when one side or the other gives a concession that goes unmet by what the giver perceives as a reciprocal response.
Tom needs to think carefully about that when he tells the mediator something like, “We’ll move up to x, but only if the plaintiff would move to y,” instead of responding in a way that disappoints the other side’s expectation of reciprocity. It is also a way to get things moving (i.e., “Listen, we came up to x, but plaintiff’s response was only y. That’s plainly unfair and they need to do better in the next round. So here’s our new offer. It’s not much better, but we need to get the plaintiff to be fair in response to our concession.”).
Likewise, rather than get the other side upset, any departure from reciprocity ought to be provided with a well-thought- out explanation.
Another influential factor is called reactive devaluation. That is a fancy label for the fact that when the other side offers us something, we are likely to think the something offered is not worth having.
Consider, for instance, the party that comes to the mediation anticipating a settlement of $20,000. The defendant extends an offer of $20,000. Would the plaintiff be comfortable accepting $20,000 and going home?
Not a chance, and not just because it is human nature to see what else you can get. In fact, the amount the party determined would fully satisfy its expectations prior to mediation begins to look like a mistake. The plaintiff in our hypothetical begins to believe that the defendant knows something she does not and that her expectations coming into the mediation were set too low.
To avoid that reaction it can be helpful to have the demand or offer come from a third party, such as the mediator, especially as the parties’ negotiating positions narrow. When it’s the mediator’s proposal, the parties are less likely to stalemate as both view the other side’s concession with suspicion.
With all these moving parts, nothing is certain, but Tom will maximize his chances of success if he considers the psyches involved.
Scott Harris, a director in the Litigation Department of McLane, Graf, Raulerson & Middleton, Professional Association can be reached at 628-1459 or [email protected] The McLane Law Firm is the largest full-service law firm in the state of New Hampshire, with offices in Concord, Manchester and Portsmouth as well as Woburn, Massachusetts.