Permission Plus: Reaching the Pareto Optimal Guideline for Contingency Fees in Mediation


V. Best Practice: Combine Percentage of Settlement Ban with Permission Plus



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V. Best Practice: Combine Percentage of Settlement Ban with Permission Plus
Creating standards for contingency fee mediation is analogous to the mediation process itself both require thinking “outside of the box.” The Black’s Dictionary definition of contingency fee as “compensation to be a percentage of the amount recovered” is apt when applied to personal injury actions, but that narrow definition is not useful with respect to mediation.94 The conventional definition of contingency fee is not ethical in mediation because it creates mediator bias towards a certain form of settlement, thus adulterating mediator impartiality. However, other forms of contingency fee mediation, such as percentage of cost saving and percentage of value created and success fees outlined by Scott Peppet, are ethical, and placing a categorical ban on all forms of contingency fee mediation is a violation of the Federal Trade Commission mandate to ensure that professional organizations are not placing unreasonable restraints on trade. Furthermore, mediation is a process wherein party self-determination is highly valued. Buying into that principal, how can organizations then regulate how parties choose to remunerate their mediator?

The Model Standards are correct in following the modern trend towards a more flexible approach allowing contingency fee mediation. However, the Standards falter by not providing explicit guidelines for the use of contingency fee mediation. The guidelines need to insure disclosure and consent, which are both crucial in the quest for party self-determination. Drawing from the CPR Standards, the literature, and other state and organizational guidelines, the Model Standards should do three things. First, the Model Standards should include a comment that places a categorical ban on the percentage of settlement contingency fee structure, which would not be an unreasonable restraint on trade because that form has a direct adverse affect on mediator impartiality. Second, the Model Standards should adopt the language of permission plus from the CPR Rules that outlines the precondition of explicit disclosure to parties with respect to how the fee structure may affect the process. Finally, add language that incorporates explicit party consent to the requirement. Explicit disclosure and consent are essential to insure party self-determination.



Practitioners who use a contingency fee structure have been absent from the discussion. Such practitioners who use contingency fee mediation of any form should step out of the shadows and join the debate. Knowing how contingency fees play out in practice is essential in realizing the pareto optimal guideline for contingency fees in mediation.


1 See Scott Peppet, Contractarian Economics and Mediation Ethics: The Case for Customizing Neutrality Through Contingency Fee Mediation, 82 Tex. L. Rev. 227, 239 (2003) (stating that most mediation regulatory bodies “have categorically rejected” contingency fee mediation).

2 The Model Standards for Mediators is a collaboration of the American Arbitration Association, American Bar Association Section of Dispute Resolution and the Association for Conflict Resolution. The most recent draft is from December 2004 and can be found at http://moritzlaw.osu.edu/dr/msoc/index.html (last visited Apr. 25, 2005).

3 See Peppet, supra note 1, at 252 (summing up the argument against contingency fee mediation as creating bias and undermining neutrality); see also Andrew K. Niebler, Getting the Most Out of Mediation: Towards a Theory of Optimal Compensation for Mediators, 4 Harv. Negot. L. Rev. 167, 179 (1999) (arguing that “efficiency may compromise the mediation process” and that “[b]y giving the mediator monetary incentives to produce an outcome, the parties sacrifice much of the self-determination that is characteristic of mediation.”).

4 See Peppet, supra note 1, at 270-76 (explaining different forms of contingency fee mediation and arguing that not all forms create mediator bias and that allowing parties say in the fee structure bolsters party autonomy); see also discussion infra Part II.


5 Id.

6 Id.

7 The author realizes that contingency fee mediation may not be appropriate in all practice areas such as in family matters. However, because the Model Standards were drafted as a basic framework for all practice areas the author did not think it was appropriate to add case specific restraints; see Reporter’s Notes, Guiding Principle B, at http://moritzlaw.osu.edu/dr/msoc/index.html (last modified Jan. 17, 2005) [hereinafter Reporter’s Notes] (“recognizing that mediation practice in selected contexts may require additional standards in order to insure process integrity.”).

8 See Peppet, supra note 1; see also discussion infra Part II.

9 American Arbitration Association, at http://www.adr.org/ (last visited Apr. 28, 2005).

10 American Bar Association, at http://www.abanet.org/dispute/home.html (last visited Apr 28, 2005).

11 Association for Conflict Resolution, at http://www.acrnet.org/ (last visited Apr. 28, 2005).

12 1994 Original Standards, at http://moritzlaw.osu.edu/dr/msoc/index.html (last visited Apr. 9, 2005) [hereinafter 1994 Standards].

13 See Reporter's Notes, supra note 6, at 2.

14 See id. at 1 (citing examples of the growth of mediation: (1) Florida alone reports of over 100,000 cases mediated there a year, (2) more than 2200 statutory provisions and court rules govern mediation nationwide, (3) the development of the Uniform Mediation Act).

15See id. at 2 (naming the representatives of the Joint Committee to include: Eric P. Tuchmann and John H Wilkinson from the AAA, R. Wayne Thorpe and Susan M. Yates from the ABA Section of Dispute Resolution, Sharon B. Press and Terrence T. Wheeler from ACR and Joseph B. Stulberg as the reporter).

16 See id. at 1.

17 Id.

18 Id. at 5.

19 Model Standards - Mediators - Final Draft, at http://moritzlaw.osu.edu/dr/msoc/index.html (last modified December 29, 2004) [hereinafter 2004 Draft]; see also Comparison Document 1994 v. 2004 versions, at http://moritzlaw.osu.edu/dr/msoc/index.html (last visited Apr. 9, 2005).

20 1994 Standards, supra note 11, at VIII.

21 2004 Draft, supra note 18, at VIII.

22 Telephone Interview with Sharon Press, Director, Dispute Resolution Center of Florida and Joint Committee Member (Mar. 7, 2005 ).

23 See 2 Harv. Negotiation L. Rev. 87 (1997).

24 See Reporter’s Notes, supra note 6.

25 See id. at 19.

26 Telephone Interview with Eric Tuchmann, General Counsel, American Arbitration Association and Joint Committee member representing the AAA (Mar. 28, 2005).

27 Complaint, paragraph six, at http://www.ftc.gov/os/caselist/0110242.htm (last modified Jan. 17, 2003) [hereinafter FTC Complaint].

28 Id. at paragraph seven.

29 Analysis of Proposed Consent Order to Aid Public Comment, 1, at http://www.ftc.gov/os/caselist/0110242.htm (last visited Apr. 9, 2005) [hereinafter Analysis of Consent Order].

30 See National Academy of Arbitrators Settles Charges That it Restrained Competition by Restricting Advertising, Solicitation (2002), at http://www.ftc.gov/os/caselist/0110242.htm (last modified December 3, 2002) [hereinafter NAA Article].

31 Id.

32 Analysis of Consent Order, supra note 28, at 1-2.

33 15 U.S.C. § 45 (2005).

34 See Decision and Order, at http://www.ftc.gov/os/caselist/0110242.htm (last modified Jan. 13, 2005) [hereinafter Order].

35 Id. at II.B; see also NAA Article, supra note 29 (explaining what the NAA consent order entails).

36 See 2004 Draft, supra note 18, at VIII (stating: “A mediator shall not charge fees in a manner that impairs a mediator’s impartiality. While a mediator may accept unequal fee payments form the parties, a mediator should not use fee arrangements that adversely impact the mediator’s ability to conduct a mediation in an impartial manner.”) (emphasis added).

37 See Peppet, supra note 1, at 231 (“authors have rarely discussed it [contingency fee] in mediation literature.”). Peppet cites to two articles which discuss the fee structure in mediation. The first, Andrew K. Niebler, Getting the Most Out of Mediation: Towards a Theory of Optimal Compensation for Mediators, 4 Harv. Negot. L. Rev. 167 (1999) (arguing against the use of any form of contingency fee in mediation). The second is a “short comment” by Roger Fisher, Why Not Contingency Fee Mediation? 2 Negot. J. 11 (1986) (arguing for the use of contingency fee mediation during the early market for mediation services). Peppet, supra note 1, at footnote fifteen.

38 Peppet, supra note 1, at 239.

39 “Expanding the pie” is a phrase commonly used in negotiation and mediation literature. It is an analogy to moving away from seeing the dispute as zero-sum. For an explaination on how a negotiator can “invent options for mutual gain” see Roger Fisher & William Ury, Getting to Yes 56-80 (1991).

40 See id. at 239-41.

41 See id. at 272 (biasing interest created by percentage of settlement model “clearly rules out percentage-of-settlement fees.”).

42 See id. at 272.

43 Id. at 258; But see Carrie Menkel-Meadow, Ethics in Alternative Dispute Resolution: New Issues, No Answers from the Adversary Conception of Lawyers’ Responsibilities, 38 S. Tex. L. Rev. 407 (1997). Menkel-Meadow highlights that:

Although contingency fees are permissible in some forms of adversarial practice (generally prohibited in criminal cases and divorce), some have suggested that contingent fees should be absolutely prohibited in ADR practice. To the extent that mediators have an “interest” in settling a dispute, settlement, rather than what is fair or just, may become the mediator’s goal and parties may not be fully apprised of the consequences of their conclusions, and “consent” to settle may not be real. Such prohibitions on contingency fees have been proposed in ADR, though it is well known that some mediators take a percentage of the settlement, either as a straight fee or as a “bonus” if settlement is achieved. Id. at 446.



44But c.f. Neibler, supra note 3, at 171 (describing what he refers to as “process risk” as causing “either the mediator or the parties to shorten the mediation and lose a substantial portion of the process benefits” and “outcome risk” where the mediator “cause[s] the parties to lose much of the outcome benefit of mediating their dispute”). Niebler argues that “the whole notion of sharing outcome risk with the mediator is offensive to the promise of self-determination that mediation offers to the parties.” Id. at 172.

45 Peppet, supra note 1, at 270 (describing his view that mediators’ three core bargaining functions are “discovering whether settlement is possible . . . optimizing settlement, and . . . helping to manage psychological, emotional, and relational barriers to settlement.”). Id. at 262.

46 Id. at 297.

47 Id. at 271 (“This bias makes informed consent by the parties critical. Only if we trust that the parties understand the tradeoffs they are making in using the success fees should we be comfortable with the settlement and process biases it creates.”).

48 See id. at 265 (discussing explicit consent-seeking and constructive consent-seeking).

49 See Jacqueline M. Nolan-Haley, Informed Consent in Mediation: A Guiding Principle for Truly Educated Decision Making, 74 Notre Dame L. Rev. 775 (1999) (arguing for the continuation of party informed consent throughout the mediation process).

50 See Peppet, supra note 1, at 269, 277-79.

51 Id. at 269.

52 Id.

53 See id. at 269.

54 See id. (saying that he favors consent-seeking but believes that explicit consent is unlikely in the contingency fee context).

55 Nolan-Haley, supra note 45, at 778.

56 See infra Part IV.

5753 The starting point for the research in this section was Scott Peppets article, Contractarian Economics and Mediation Ethics: The Case for Customizing Neutrality Through Contingent Fee Mediation, 82 Tex. L. Rev. 227 (2003). The next group of standards were found in the Hawaii’s reporter notes which link to rules that ban contingency mediation. The third step in researching this sections was to look at links to state mediation associations and national mediation organizations listed on the mediate.com web cite, at http://www.mediate.com/organizations (mediate.com is a popular web resource for ADR which averages 6,738 hits per day (http://www.mediate.com/visits/) (last visited Apr. 28, 2005)). The final step was to look at state court ADR programs which were researched through The National Center for State Courts web cite, at http://www.ncsconline.org/WC/Publications/KIS_ADRMedStateLinksPub.pdf (an informational web cite created by The National Center for Sate Courts (NCSC). NCSC was created in 1971 and “since that time has played a key role in the development of court administration worldwide” to find out more about NCSC visit them on the web at http://www.ncsconline.org/ (last visited Apr. 28, 2005)). The web cites linked to mediate.com and NCSC with ethical standards for mediators posted on them were utilized in this paper. A full review of all standards is beyond the scope of this paper.

58 See Peppet, supra note 1, at 241 (“One need not look far to find evidence of the dominant approach to CFM [contingency fee mediation] . . . highlighting the general tendency towards its prohibition.”). Only four out of the twenty-four researched standards in this paper allow for, or are silent on the matter of contingency fees in mediation.

59 Association of Attorney-Mediators (AAM) Ethical Guidelines for Mediators, at http://www.attorney-mediators.org/ethics.html (last visited Apr. 28, 2005). The applicable standard states:

As early as practical, and before the mediation session begins, a mediator should explain all fees and other expenses to be charged for the mediation. A mediator should not charge a contingent fee or a fee based upon the outcome of the mediation. In appropriate cases, a mediator should perform mediation services at a reduced fee or without compensation.



“AAM is a nonprofit trade association of qualified, independent attorney-mediators. Members of AAM must meet qualifications and ethical standards which meet or exceed state or Federal requirements for mediators. AAM's 300 plus members have collectively mediated in excess of 130,000 cases.” AAM, at http://www.attorney-mediators.org/index.html. (last visited Apr. 28, 2005).

60 American Bar Association Section of Family Law (ABA Section of Family Law), at http://www.mediate.com/articles/abafamstdsD.cfm#std5 (last revised July 1997). “The Mission of the American Bar Association Section of Family Law is to Serve as the National Leader in the Field of Marital and Family Law.” ABA Section of Family Law, at http://www.abanet.org/family/home.html (last visited Apr. 28, 2005).

57 Proposed Standards of Practice for Lawyers Who Conduct Divorce and Family Mediation, at http://www.mediate.com/articles/afmstds.cfm (last visited Apr. 25, 2005). In 2001 AFM merged with two other organizations, the Conflict Resolution Education Network and the Society for Professionals in Dispute Resolution to become ACR. Although AFM no longer exists many of its members form ACR’s Family Section. AFM, at www.acresolution.org (last visited Apr. 25, 2005). AFCC was founded in 1963 and now “AFCC has grown to an international association of more than 20 countries and an interdisciplinary membership of more than 2,300 members representing more than a dozen professions.” AFCC, at http://www.afccnet.org/about/history.asp (last visited Apr. 29, 2005).

6158 See Sharon Press, Symposium: Institutionalization: Savior or Saboteur of Mediation? 24 Fla. St. U.L. Rev. 903, 905 (1997) (“Florida entered the ADR movement in the mid-1970s.” “ In 1987 . . . the Florida Legislature adopted one of the nation’s most comprehensive court-connected . . . mediation and arbitration statutes.”). Id at 907. ADD CA!!!!

62


63 Florida Rules for Certified and Court Appointed Mediators, available at http://www.flcourts.org/gen_public/adr/certrules.shtml (last visited Apr. 25, 2005) (stating in Rule 10.380  Fees and Expenses that: “Contingency Fees Prohibited.  A mediator shall not charge a contingent fee or base a fee on the outcome of the process.”).

64 Standards of Practice for California Mediators, California Dispute Resolution Council (CDRC), at http://www.sbcadre.org/neutrals/ethicsmed.htm (last visited Apr. 25, 2005) (Stating in standard six that: “A Mediator shall not charge a fee contingent upon the outcome of the mediation.”); see also CDRC, at http://www.cdrc.net/pg37.cfm (last visited Apr. 28, 2005) (posting that the CDRC has been in existence since 1994 and works to promote, connect, and have a “seat at the table” in ADR efforts across California).

65 Alabama Code of Ethics for Mediators, at http://alabamaadr.org/flashSite/Standards/al_code_ethics.html. (last visited Apr. 28, 2005) (providing that the code was adopted by Order of the Supreme Court of Alabama, December 14, 1995 and effective on March 1, 1996, including amendments received through June 1, 1997. The standard states: “A mediator shall not charge or accept a contingent fee or base a fee in any manner on the outcome of the mediation process.”).

66 Arkansas Alternative Dispute Resolution Commission Requirements for the Conduct of Mediation and Mediators, at http://courts.state.ar.us/pdf/0516_conduct.pdf (last visited Apr. 28, 2005) (providing that the standards were adopted Apr. 13, 2001. Standard eight states: “A mediator shall not charge or accept a contingent fee or base a fee in any manner on the outcome of the mediation process.”).

67 Georgia Ethical Standards for Mediators, at http://www.godr.org/adrrules.html#APPENDIX%20C (last visited Apr. 28, 2005) (informing that the standards were adopted June 1994. The relevant portion states: “Fees may never be contingent upon a specific result. It is imperative that the mediator have no ‘stake’ in the outcome.”).

68 Idaho Mediation Association Standards of Practice for Idaho Mediators, at http://www.idahomediation.org/STANDARDS%20OF%20PRACTICE.pdf (last visited Apr. 28, 2005) (posting the relevant standards which states: “Mediation is not based on contingency fees or percentages of the outcome of the settlement.”).

69 The Mediation Council of Illinois Standards of Practice for Mediators, at http://www.mediationcouncilofillinois.org/standardspractice.htm (last visited Apr. 28, 2005) (providing the relevant language: “A mediator shall not charge a contingency fee or base the fee in any manner on the outcome of the mediation process.”).

70North Carolina Dispute Resolution Commission State Mediation Standards of Practice (1996) at, http://www.nccourts.org/Courts/CRS/Councils/DRC/Documents/standardsofconduct.pdf (last visited Apr. 25, 2005) (stating: “A mediator shall not charge a contingent fee or a fee based on the outcome of the mediation.”).

7167 Pennsylvania Council of Mediators Ethics and Standards of Conduct (November 6, 1998), at http://www. pamediation.org/ethics.html (last revised November 6, 1998) (providing the relevant language in standard twelve that states: “A mediator shall not charge a contingent fee or a fee based upon the outcome of the mediation.”).

72 Texas Association of Mediators, at http://www.txmediator.org/standards.htm (last visited Apr. 28, 2005) (stating: “It is inappropriate for a mediator to charge contingent fees or to base fees on the outcome of mediation.”); see also The State Bar of Texas Alternative Dispute Resolution Section, at http://www.txmediator.org/ethics.htm (last visited Apr. 28, 2005) (promulgating mediator ethical standards the relevant section of which states: “A mediator should not charge a contingent fee or a fee based upon the outcome of the mediation.”).

73 The Virginia Rules of Professional Conduct, at http://www.courts.state.va.us/drs/upl/professional_conduct.html (last visited Apr. 26, 2005) (stating that rules were adopted by the Supreme Court of Virginia on January 25, 1999, to become effective January 1, 2000. Rule 2.10 provides: “A lawyer who serves as a third party neutral shall not charge a fee contingent on the outcome of the resolution process.”).

74 Alaska Dispute Settlement Association Standards of Practice, at http://www.adsa.ws/content/view/20/0/ (last visited Apr., 25, 2005).

75 Colorado Council of Mediators, Mediators Revised Code of Professional Conduct, at http://www.coloradomediation.org/codeofconduct.htm (last visited Apr. 28, 2005).

76 Kansas Ethical Standards for Mediators, at http://www.kscourts.org/ctruls/adrruls.htm (last visited Apr. 28, 2005).

77 Maryland Standards of Conduct for Mediators, Arbitrators and Other ADR Practitioners, at http://www.courts.state.md.us/macro/standardsfinal.pdf (last visited Apr. 28, 2005).

78 The South Carolina Court-Annexed ADR Rules, at http://www.scbar.org/pdf/ADR/draftADRrules.pdf (last visited Apr. 28, 2005) (stating that South Carolina is in the process of revising its standards and the web cite indicates that it is going to review and consider the proposed changes to the 1994 Model Standards).

79 Washington Mediation, at http://www.washingtonmediation.org/ethics.htm (last visited Apr. 25, 2005) (adopting the 1994 Model Standards).

80 CPR-Georgetown is a collaboration between the CPR Institute for Dispute Resolution and the Georgetown University Law Center; See CPR, at http://www.cpradr.org (last visited Apr. 28, 2005) [hereinafter CPR-Georgetown] (describing CPR as a “membership-based, nonprofit alliance of global corporations, law firms, scholars, and public institutions dedicated to the principles of conflict prevention and solution through alternative dispute resolutions.”); see also University of Georgetown, at http://www.law.georgetown.edu/ (last visited Apr. 28, 2005); see US News World Report, at http://www.usnews.com/usnews/edu/grad/rankings/law/brief/lawrank_brief.php (last visited Apr. 28, 2005) (listing Georgetown University as the fourteenth top law school in the nation).

81 Hawaii Mediation Guidelines, at http://www.courts.state.hi.us/page_server/Services/AlternativeDispute/Selecting/Standards/6116C559F4F9F384EBC44B6E10.html (last visited Apr. 26, 2005) [hereinafter Hawaii Guidelines].

82 Oregon State Mediation Standards of Practice, at http://www.mediate.com/oma/pg4.cfm (last visited Apr. 28, 2005) [hereinafter Oregon Standards].

83 European Code of Conduct for Mediators, at http://europa.eu.int/comm/justice_home/ejn/adr/adr_ec_code_conduct_en.pdf (last visited Apr. 29, 2005) [hereinafter European Code]; see also Information on the European Union, at http://userpage.chemie.fu-berlin.de/adressen/eu.html (last visited Apr. 29, 2005) (informing that: “The European Union (EU) is a union of twenty-five independent states based on the European Communities and founded to enhance political, economic and social co-operation. Formerly known as European Community (EC) or European Economic Community (EEC) . . [member states include] Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden United Kingdom of Great Britain and Northern Ireland. . . Cyprus (Greek part), the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia.”).

84 CPR-Georgetown, supra note 76, at Rule 4.5.5 (emphasis added). Rule 4.5.5 states:

(a) Before or within a reasonable time after being retained as a third-party neutral, a lawyer shall communicate to the parties, in writing, the basis or rate and allocation of the fee for service, unless the lawyer-neutral is serving in a no-fee or pro bono capacity.

(b) A lawyer-neutral who withdraws from a case shall return any unearned fee to the parties.

(c) A lawyer-neutral who charges a fee tied to the timing or fact of settlement or other specific resolution of the matter shall explain to the parties that such an arrangement gives the neutral a direct financial interest in settlement that may conflict with the parties’ possible interest in terminating the proceedings without reaching settlement. The neutral shall consider whether such a fee arrangement creates an appearance or actuality of partiality, inconsistent with the requirements of this Model Rule 4.5.3.



85 See Peppet, supra note 1, at 271; see also discussion infra Part II.

86Hawaii Guidelines, supra note 77, at preamble.

87 Id.at IV.

88 Id.; see also Telephone Interview with Peter Adler, Ph.D., President, The Keystone Center, Director, The Keystone’s Center for Science and Public Policy and Director of the Center for Alternative Dispute Resolution, Supreme Court of Hawaii while the standards were being drafted (Apr. 29, 2005) (saying that at the time these standards were drafted the concerns were, that mediators would tilt their procedure to ensure settlement, and that parties would abuse the fee structure by reaching final resolution outside of mediation so as to avoid payment. But, in rethinking the concerns he sees no problem with contingency fee mediation so long as the mediator takes appropriate measures of informing parties about the potential impact of the fee structure on the mediation. He sees Hawaii’s standards as “archaic” and thinks that more recently revised standards should allow for contingency fees in mediation).

89Hawaii Guidelines, supra note 77, at IV.

90 Id.

91 Oregon Standards, supra note 78, at VII.

92 Id. at February 25, 2004 Committee Recommendation; see also E-mail from Cynthia Moore, Executive Director, Oregon Mediation Association (Apr. 26, 2005, 12:27 EST) (on file with author) (stating that although not posted as of April 26, 2005, the new version since revised from the February 25, 2004 recommendation has put the ban on contingency fee back in place. “The new version says that mediators shall not charge fees that are contingent on the substantive outcome of the mediation.”).

93 European Code, supra note 79, at 3.4.

94 Black’s Law Dictionary 614 (6th ed. 1990).



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