By Jennifer Gibbs and Amanda Rodriguez

Law360 (January 25, 2021, 12:40 PM EST )

Jennifer Gibbs

Amanda Rodriguez

Mediation is quickly becoming an even more important form of adjudication as courts have been significantly impacted by the COVID-19 pandemic.

With the second surge in reported cases, courts across the nation have been forced to further postpone jury trials until at least March or April. Thus, mediation will be a more attractive option for parties looking to quickly resolve disputes and for courts to address overflowing dockets.[1]

With this rise in mediation comes the increased risk that participants will engage in dishonest behavior to obtain a favorable resolution. The latitude to craft a narrative without meaningful checks on the truth creates opportunities for lies to infiltrate the mediation process.

The generally accepted rule that statements made in the context of mediation are protected only contributes to these incentives to stretch the truth.

However, counsel should be aware that they do not have carte blanche to create a fabricated storyline without consequence. Although lying in mediation may be a common practice, it can be considered a breach of ethical rules, landing the lawyer, and perhaps the mediator, in hot water.

Rule 401

Despite the prevalence of mediation in the current dispute resolution landscape, the ethical rules surrounding mediation are somewhat unclear. In April 2006, the American Bar Association formally extended Model Rule 4.1 to mediations.[2]

Model Rule 4.1 provides that an attorney shall not knowingly make a "false statement of material fact or law" to another or fail to disclose a material fact when disclosure is necessary to avoid assisting in the completion of a crime or fraud.

This extension by the ABA made it clear that lawyers must uphold ethical rules when participating in mediation, but it did not provide clear guidelines for what is — and more importantly, what is not — acceptable behavior in mediation.

Significantly, the ABA gives little guidance as to what qualifies as a "material fact." Instead, whether a statement constitutes a material fact depends on the circumstances.[3]

Thus, it is important for the mediating lawyer to consider factors like past relationships with the parties, the sophistication of the parties, the phrasing of the statement, and the plausibility of statements forwarded in mediation.[4]

For example, in the personal injury case of Statewide Grievance Committee v. Gillis, a Connecticut state court found in 2004 that a lawyer did not violate ethical rules in failing to disclose the client's prior accident history in settlement negotiations because he provided enough information to the insurance adjusters to put them on notice to make further inquiries.[5]

It is widely accepted, however, that puffery and opinions are not considered statements of material fact in the mediation context.[6] While a certain level of puffery is expected in mediation, lawyers must be careful not to mislead or allow a mediator to forward to the other side an incorrect statement that could be deemed material, or the lawyer could face allegations of ethical violations.[7]

Further, if lawyer-mediators engage in unethical behavior, they may also face consequences for ethical violations.[8] The ABA Model Standards of Conduct for Mediators Standard VI explicitly states that a mediator "shall not knowingly misrepresent any material fact or circumstance in the course of a mediation."

Critics have charged that this rule is as vague as Model Rule 4.1, which results in the need for mediators to take similar care to ensure that they do not convey material misrepresentations to parties.[9]

Settlement Privilege and Confidentiality in Mediation

Where communications made in the mediation context are to remain confidential, lawyers may be tempted to advance false statements to reach a favorable agreement for their client.

Federal Rule of Evidence 408 provides that evidence of conduct or statements made in compromise negotiations are not admissible, but this evidence can be admitted for other purposes, such as to prove bias or prejudice.[10] Some courts have recognized a so-called settlement privilege by expanding the scope of Rule 408.[11]

The U.S. Court of Appeals for the Sixth Circuit, for example, held in a 2003 opinion in Goodyear Tire & Rubber Co. v. Chiles Power Supply Inc. that public policy supported a settlement privilege because it fosters more effective negotiations, as parties do not have to fear disclosure of their discussions to third parties.[12]

Despite this move toward settlement privilege, it is important to note that not all jurisdictions have accepted such an all-encompassing rule of confidentiality. For example, in Alclair White v. Chevron Phillips Chemical Co. LP, evidence related to lewd comments and questionable gestures toward opposing counsel in a mediation were the subject of post-mediation complaints brought last year against an attorney.[13]

When these actions were memorialized in subsequent court documents, questions were raised as to whether this conduct was cloaked in confidentially. Ultimately, the judge hearing the complaints, U.S. District Judge Lee Rosenthal of the U.S. District Court for the Southern District of Texas, did not punish the attorney, but his actions were the basis of numerous articles.[14]

Lawyers involved in settlement negotiations must pay particular attention not only to ethical guidelines but also to whether the procedural and evidentiary rules of the jurisdiction would find certain statements made during negotiations to be protected.

Additionally, every state has enacted some rule or statute to protect mediation communications from disclosure. These state-based rules have led to different levels of protection applicable to mediation.

For example, California courts have held that there may be no discovery or introduction of any evidence of communications between a client and his or her attorney before or after mediation, even in a malpractice case.[15]

New Jersey courts have also found that state laws provide broad privilege for mediation communications, but this privilege is not absolute as there are recognized exceptions to the privilege, such as waiver and a signed-writing exception for the settlement agreement.[16]

On the other hand, Oregon courts have found that mediation communications are only privileged when a mediator is involved such that other communications may be introduced by a client who wishes to waive attorney-client privilege.[17]

While these varying rules and regulations are aimed at fostering settlement via mediation by increasing confidentiality, they also require a lawyer to pay particular attention to the types of statements they make while mediating to avoid potential ethical violations.

Outside of these jurisdictional rules, mediating parties should also pay close attention to what types of confidentiality provisions their alternative dispute resolution provider may require.[18] Similarly, a party may be bound to the terms of a confidentiality agreement entered into with the opposing party.[19]

For example, in Facebook v. Pacific Northwest Software Inc.,[20] the parties signed a short-term sheet at the close of mediation containing a confidentiality provision. In the subsequent dispute regarding whether the settlement had been procured by fraud, the U.S. Court of Appeals for the Ninth Circuit in 2011 held that the term was enforceable and barred the defendants from introducing any evidence of what was said during mediation.

Misrepresentation or Puffery?

Lawyers may find it useful to look to court decisions to determine what types of statements may fall into the puffery category and what may cross an ethical line.

For example, although seemingly obvious, courts have found that lying about, or failing to mention, the death of a client while in settlement negotiations is a clear violation of ethical rules.[21]

In addition, consider Siegel v. Williams, an early 2000s malpractice case against a lawyer in Indiana state court. There, the defendant lawyer, who was the attorney of record in his own case, told opposing counsel that he would settle for a specific amount and claimed that he lost his money in a recent divorce and would have to declare bankruptcy if the plaintiffs were awarded anything above that amount.[22]

Based on this representation, the plaintiffs settled for this amount.[23] A couple of years later, the attorney claimed that he could have paid a judgment far above that amount, which led the Indiana Court of Appeals to find that he engaged in constructive fraud, and an additional $100,000 in damages awarded to the plaintiffs.[24]

Courts have found, however, that there may be a difference between the types of disclosure that are necessary depending on whether the parties are in negotiation or have reached a settlement.

For example, in a personal injury case from the 1960s, Spaulding v. Zimmerman, a defendant's doctor performed an exam on the plaintiff and learned that the minor plaintiff had an aneurysm that the plaintiff's doctor had not found.[25] This report was made known to the defendant's counsel prior to negotiations.[26] The day after trial was called, the parties settled the case and the court approved it without knowledge of the aneurysm.[27]

Two years later, the plaintiff discovered the aneurysm and brought forth an action for additional damages against the defendant.[28] The Minnesota Supreme Court found that while negotiating, the defendant did not have a duty to disclose this knowledge, but they did have to disclose it once the parties reached a settlement.[29]

While the lawyer was not found to have violated any ethical rules, by not disclosing the plaintiff's condition during settlement, the settlement agreement was ultimately still set aside for failure to fully contemplate the injuries.[30]

Pursuant to Model Rule 4.1, the Montana Supreme Court found in a 2007 ruling in In re: Potts that a lawyer's failure to correct another party's mistaken understanding of the total value of an estate in a will contest was a violation of this ethical rule.[31]

In another case, however, the U.S. District Court for the Southern District of Florida in a 2019 ruling in Alexsam Inc. v. WildCard Systems Inc. found that a plaintiff's counsel's actions did not rise to the level of being sanctionable when the attorney failed to disclose that the plaintiff had filed a complaint in court that was unknown to defendant while at mediation.[32]

In failing to find a violation, the court held that Model Rule 4.1 does not impose an affirmative duty to inform an opposing party of all relevant facts, such as the filing of the lawsuit.[33]

While not decisive on whether a lawyer violated Model Rule 4.1, the U.S. District Court for the District of Maryland in a 2002 ruling in Ausherman v. Bank of America Corp. found that there was a sufficient basis to refer a lawyer to a disciplinary committee when that lawyer admitted he lied in a settlement demand letter.[34]

The letter at issue stated that the lawyer could obtain the name of a "John Doe," who the attorney claimed was a kingpin in a scheme to obtain the plaintiffs' credit reports and disseminate them.[35] This information was offered to the defendant bank in exchange for a demanded sum.[36] Later, during his deposition, the lawyer admitted that he did not actually have a way to obtain the name of this alleged kingpin when he made that representation.[37]

Further, if there are material misrepresentations by either the lawyer or mediator made during a mediation process, as shown in the examples above, there is a risk that any settlement reached in the context of that mediation will be set aside as void.[38]

Conclusion

Although there is a generally accepted idea that settlement and mediation communications are entitled to confidentiality protections, each state's rules regarding confidentiality differ. Given this jurisdictional variation, and the fact that ethical rules have been extended to apply in the mediation context, lawyers should maintain integrity and take care in making statements asserted while mediating.

Lawyers should be mindful of not only their own statements asserted during mediation, but also those of the opponent and the mediator. And if a settlement is obtained on the basis of a material misrepresentation asserted during mediation, the settlement can be vacated, and the attorney asserting the misrepresentation can be found in violation of ethical rules.

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Jennifer Gibbs is a partner and Amanda Rodriguez is an associate at Zelle LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] For example, the City of Philadelphia requires Covid-19 related landlord/tenant disputes to participate in mediation prior to filing a court action. Eviction Diversion Program, City of Philadelphia, https://phlevictiondiversion.org/ (last visited Jan. 20, 2021).

[2] Am. Bar Ass'n Comm. On Ethics and Prof'l Responsibility, Formal Op. 06-439 (2006).

[3] Stewart Edelstein, How to Make Sure Your Negotiation Statements Don't Cross the Ethical Line, The American Bar Association (July 27, 2017), https://www.americanbar.org/groups/litigation/committees/young-advocates/practice/2017/how-to-make-sure-your-negotiation-statements-dont-cross-the-ethical-line/.

[4] Id.

[5] Statewide Grievance Comm. v. Gillis , No. CV030479677S, 2004 WL 423905, at *13 (Conn. Super. Ct. Jan. 28, 2004).

[6] James K. L. Lawrence, Lying, Misrepresenting, Puffing and Bluffing: Legal, Ethical and Professional Standards for Negotiators and Mediation Advocates, 29 Ohio St. J. on Disp. Resol. 35, 38 (2014).

[7] See id.

[8] See Fran L. Tetunic, The Irony of Mediator As Problem Maker: Mediator Misconduct Setting Aside Mediated Agreements, 23 Harv. Negot. L. Rev. 177, 187 (2017).

[9] Andrea C. Yang, Ethics Codes for Mediator Conduct: Necessary but Still Insufficient, 22 Geo. J. Legal Ethics 1229, 1237 (2009).

[10] See Fed. R. Evid. 408.

[11] Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc. , 332 F.3d 976, 980 (6th Cir. 2003).

[12] Id.

[13] Michael E. McCabe, Jr., The Curious Case of the Twerking BigLaw Attorney, McCabe & Ali LLP, https://ipethicslaw.com/the-curious-case-of-the-twerking-biglaw-attorney/ (last visited Dec. 22, 2020).

[14] See id.; Kevin Stawicki, Chevron Defeats Bias Suit Marred by Butt-Shaking Allegation, Law 360 (July 31, 2020, 2:29 PM), https://www.law360.com/articles/1297176.

[15] Hon. Raymond T. Lyons (ret.), How Confidential Are Mediation Communications? 36-AUG Am. Bankr. Inst. J. 36, 36 (2017).

[16] Willingboro Mall, Ltd. v. 240/242 Franklin Ave., L.L.C. , 215 N.J. 242, 256, 71 A.3d 888, 896-97 (2013).

[17] Alfieri v. Solomon , 358 Or. 383, 406, 365 P.3d 99, 112 (2015).

[18] Lyons, supra note 15, at 37.

[19] Id.

[20] 640 F.3d 1034 (9th Cir. 2011).

[21] Virzi v. Grand Truck Warehouse & Cold Storage Co. , 571 F. Supp. 507, 508 (E.D. Mich. 1983).

[22] Siegel v. Williams , 818 N.E.2d 510, 516 (Ind. Ct. App. 2004).

[23] Id.

[24] See id.

[25] Spaulding v. Zimmerman , 263 Minn. 346, 352, 116 N.W.2d 704, 709 (1962).

[26] Id. at 707-08.

[27] Id. at 708.

[28] Id.

[29] Id. at 709.

[30] Id. at 353-54.

[31] In re: Potts , 2007 MT 81, ¶ 20, 336 Mont. 517, 522, 158 P.3d 418, 421.

[32] Alexsam, Inc. v. WildCard Sys., Inc. , No. 15-CV-61736, 2019 WL 2245420, at *10 (S.D. Fla. Feb. 13, 2019).

[33] Id.

[34] Ausherman v. Bank of Am. Corp. , 212 F. Supp. 2d 435, 451 (D. Md. 2002).

[35] Id.

[36] Id.

[37] Id. at 450.

[38] Tetunic, supra note 8, at 200; Virzi, 571 F.Supp. at 508.

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