Mediators Risk Prison with "Fairness Declarations"
March 2009
It is apparently customary in class
actions for some courts to invite a declaration from the mediator as to the
fairness of a proposed settlement, and for some mediators to submit one if
all counsel agree. Some mediators state that "the reality of the
marketplace" dictates that, if a mediator balks, it is likely she will no
longer be requested to serve on these remunerative cases.
by Jeff
Kichaven and Jay McCauley*
Professional Mediation
& Arbitration
Fairness declarations are irrelevant. Lawyers should never request them,
mediators should never provide them, and, most importantly, courts should
never invite them and should always strike them from consideration.
Kullar
v. Foot Locker, 168 Cal. App. 4th 116 (2008), minimizes the
mediator's role in the class action settlement approval process, but fails
to take the final step and prohibit Fairness Declarations:
(No) case
suggests that the court may determine the adequacy of a class action
settlement without independently satisfying itself that the consideration
being received for the release of the class members' claims is reasonable in
light of the strengths and weaknesses of the claims and the risks of the
particular litigation. The court undoubtedly should give considerable weight
to the competency and integrity of counsel and the involvement of a neutral
mediator in assuring itself that a settlement agreement represents an arm's
length transaction entered without self-dealing or other potential
misconduct.… (I)n the final analysis it is the court that bears the
responsibility to ensure that the recovery represents a reasonable
compromise, given the magnitude and apparent merit of the claims being
released, discounted by the risks and expenses of attempting to establish
and collect on those claims by pursuing the litigation.
Slip Op. at 13.
The emphasis on the court's independent duty—rather than reliance on the
involvement on a mediator—is consistent with accepted federal practice. As
the Manual for Complex Litigation 4th, Section 21.644, states:
Reviewing a proposed class settlement for fairness, reasonableness, and
adequacy is a time-consuming and demanding task, but it is essential and
must be done by the judge. Typically, the parties and their attorneys will
be primarily interested in upholding the settlement and may present
information in a way that supports their position.
The mediator's opinions
are thus irrelevant because all of the mediator's information was presented
to her by those same parties and their attorneys. Judge William Alsup got it
right when he denied approval of a preliminary class settlement in
Kakani v.
Oracle Corp., Case No. C 06-06493 WHA (N.D. Cal., June 19,
2007):
It is also no answer to say that a private mediator helped frame
the proposal. Such a mediator is paid to help the immediate parties reach a
deal. Mediators do not adjudicate the merits. They are masters in the art of
what is negotiable. It matters little to the mediator whether a deal is
collusive as long as a deal is reached. Such a mediator has no fiduciary
duty to anyone, much less those not at the table. Plaintiffs' counsel has
the fiduciary duty. It cannot be delegated to a private mediator.
Slip Op.
at 16.
Judge Alsup's insistence on going beyond information provided by
"the immediate parties" is appropriate. Class actions are generally settled
on a "claims-made" basis, and involve one amount for the plaintiff class and
another amount for the plaintiffs' attorney fees and costs. The amount for
the class is subject to a "reversion" clause, which provides that unclaimed
funds remain with the defendant. The amount for the plaintiffs' attorneys,
by contrast, is accompanied by a "clear sailing" clause, which provides that
the defense will not object to the fee request.
The combination of a
reversion clause and a clear sailing clause should put the judge on special
notice to do what he should do anyway—Give special scrutiny to the
percentage taken by the attorneys, and not pretend that the nominal
settlement amount equals the amounts that will actually be paid to class
members. The "fairness" determination takes wisdom, not just arithmetic, and
certainly not the declaration of someone paid by the lawyers who negotiated
the deal.
Illustration
Let's consider a specific example—the
highly publicized wage-and-hour class action against the
Orange County
Register brought by its newspaper carriers. The multimillion
dollar settlement of this case was front-page news in the
Los Angeles Daily
Journal on November 25, 2008. Significantly, plaintiffs' counsel
Daniel Callahan confirmed that he neither asked for nor received a Fairness
Declaration from the mediator in that case. So much for the "reality of the
marketplace" that Fairness Declarations are essential if a mediator wants to
get high-end work.
And, there was good reason for the mediator not to give
a Fairness Declaration in the Register's case.
The Daily Journal reported that plaintiffs' counsel will receive $12 million in
fees and $2 million in costs. That looks a lot different if the total
settlement is worth $42 million, as the plaintiffs' press release stated,
than it does if the settlement is worth "not more than $22 million," as
stated in the press release issued by the defense.
Maybe the settlement is
fair at either valuation, maybe it isn't. But the resolution of these "fairness" questions is up to the trial judge, not the mediator, who knows
only the wildly different numbers which "the immediate parties" told him.
To determine "fairness," a judge gives absent class members—whose interests
would be adversely affected by an unfair deal—notice and an opportunity to
object. Without this due process, the mediator is inherently unable to opine
that either the mediation process or its result was "fair." If the mediator
had provided a Fairness Declaration, he would just be stretching to allow
his good name to beard a deal for his clients that requires due process for
potential objectors and a judge's independent scrutiny. It's senseless.
If
the practice is just naïve, and courts could just strike these Fairness
Declarations, why the urgent tone of this article? Because at worst, the
practice is not just naïve, it could easily become corrupt. When a mediator
sells willingness to try to sway a judge, rather than mediation skill, the
risk of corruption is too big to ignore.
Corruption in the signing of
class action Fairness Declarations has landed other men in prison. The
February
28, 2008, press release from the U.S. Department of Justice
confirms that Bill Lerach's expert witness, John Torkelson, was convicted
for perjured testimony regarding "the appropriate value of settlements" in
class actions.
The press release states, in essence, that Mr. Torkelson
was paid off. Think it can't happen to mediators? Think again. In
Nelson v.
American Apparel, B205937, October 28, 2008 (ordered not
published), the California Court of Appeal condemned a proposed arbitration
as a "deceptive procedure" which would have raised "considerations of
illegality, injustice and fraud." There were questions raised as to whether
a prominent neutral had gone along with the ruse. Luckily, the neutral "refused to consummate" the plan. (Slip Op. at 12, 13.) But the effort to
enroll the neutral through the payment of a fee was clear.
Sadly, Foot
Locker did not prohibit Fairness Declarations altogether, leaving the door
to potential corruption open. Rogue lawyers continue to have the incentive
to pay mediators the big bucks and promise future business if only the
mediators will testify as desired.
There is also a risk that the
relationship between mediators and judges can become corrupt. Foot Locker
leaves a trial court free to consider a mediator's "qualifications" (Slip
Op. at p. 18) when deciding whether to approve a class action settlement.
Which mediator's "qualifications" will a judge most respect? The one with
the most skill? Maybe. But there's also the judge's old college frat
brother; the judge who used to sit in the courtroom down the hall; the man
with political juice who helped get the judge appointed; the contributor to
the judge's election campaign; or any other so-called mediator to whom the
judge may owe a favor, or to whom the judge may have helped steer this piece
of business in the first place.
Justice Miriam Vogel warned against this
type of corruption long ago in McMillan v. Superior Court, ordered not published, 57 Cal. Rptr. 2d 674 (1996), when she cautioned
judges not to rubberstamp the work of discovery referees whom they have the
power to appoint. The same concerns apply to the relationship between judges
and mediators whose qualifications they may tout to litigants.
Conclusion
There's only one way to avoid these financial siren songs, the ones
that landed John Torkelson in prison. We need to lash ourselves to the mast
of ethics and stuff our ears with the cotton of common sense. As a
community, we should decide that mediators' Fairness Declarations are
unethical, and abandon the practice.
*Jay
McCauley is a mediator with Professional
Mediation and Arbitration in Los Angeles, and is also an arbitrator with the
American Arbitration Association.
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