Chapter 6:
Pretrial and Trial Practice
IV. Alternative Dispute Resolution
Some form of alternative dispute resolution is likely to be offered, or may be required, before or after filing a federal action. Before an action is filed in court, many federal agencies make use of either voluntary or mandatory, nonbinding ADR procedures as part of their investigative or adjudicative operations./294/ In certain cases, consumers and employees may be bound by contract to submit their claims of federal law violation to mandatory, binding, private arbitration./295/ When the contract is enforceable, access to federal court may be precluded. In cases not so precluded, federal courts are mandated to provide for nonbinding ADR procedures, although the courts have discretion to determine which cases are appropriate for ADR referral./296/ Settlement offers made during the litigation of a claim, either as part of ADR process or informal negotiations, may present challenging ethical, strategic, and legal issues for the practitioner. This section examines the ADR issues that are most likely to come up in cases handled by legal aid attorneys.
IV.A. Early Use of ADR
A well-prepared plaintiff may consider pursuing settlement of a case before filing and, subsequently, through use of the federal court’s ADR procedures. Sending a settlement offer or a demand for relief to defendant or to defendant’s counsel shortly before filing the action is often wise. If for no other reason, doing so permits the plaintiff to say that an attempt was made to resolve the matter outside of court. Plaintiff’s counsel may want to present a written settlement offer again to defense counsel before the first pretrial conference. The court’s ADR process may require a report of prior attempts at settlement.
The plaintiff’s post-filing request, in a Rule 16 report or subsequent conference, to refer the action to ADR forces the defendant who does not want to participate to have to object to a settlement conference. Scheduling a settlement conference early in the case, before completion of discovery, can be helpful to a legal services program with limited resources to pay for deposition transcripts and other expenses. Consider asking that the settlement conference be set after the time for service of initial written discovery and before holding any depositions. A plaintiff with good command of the facts may want to set the conference for a date after service of the written discovery, but before answers are due, to give incentive for the defendant to settle without having to complete time-consuming discovery. Early use of ADR process may help the plaintiff in several ways.
First, if the case is not fully settled through ADR, the defendant may be pressured to stipulate to key facts, and thus avoid the need for expensive discovery. Second, when there is statutory authority for award of attorney fees (and the plaintiff is not represented by a legal services program funded by the Legal Services Corporation), the settlement conference is an opportunity for the mediator to discuss with the defendant and its counsel the costs potentially involved in further litigation. Third, a plaintiff who prepares a thorough and factually detailed complaint before conclusion of discovery can present a more thorough explanation of the case and relevant law than defense counsel. This may result in pressure by the mediator to the defendant to settle. Given the uncertainty of success in federal litigation and the common interest among clients to resolve matters promptly, creative opportunities for settlement should not be overlooked. This, of course, will require close coordination and consent of your client.
IV.B. Forms of Judicial ADR
The Alternative Dispute Resolution Act of 1998 requires that “[e]ach United States district court shall authorize, by local rule, the use of alternative dispute resolution processes in all civil actions, including adversary proceedings in bankruptcy . . . .”/297/ The ADR process “includes any process or procedure, other than adjudication by a presiding judge, in which a neutral third party participates to assist in the resolution of issues in controversy, through processes such as early neutral evaluation, mediation, mini-trial, and arbitration . . . .”/298/ Many variations in ADR processes are used in the federal court system, but the most common is some type of mediation. The use of ADR in a case is frequently first raised at the initial Rule 16(b) pretrial conference, and the parties may be ordered to participate in a settlement conference held before or after completion of discovery./299/
The Civil Justice Reform Act of 1990 authorized district courts to hold mandatory settlement conferences. Although the settlement or mediation process is generally nonbinding, good-faith participation by representatives authorized to settle can be enforced. This participation requirement applies to the federal government./300/ While participation in ADR can be compelled, binding arbitration of cases in court is limited to districts identified in the 1988 legislation./301/
IV.C. Successful Use of ADR
If the local ADR process uses third-party neutrals (rather than court officers or court staff) there might be an issue regarding the expense of compensating the neutral. If the court previously granted permission to proceed in forma pauperis, the indigent party may not be required to pay anything. The local ADR rule may provide a procedure to substitute a magistrate or court officer for the third-party neutral when the expense of ADR is an issue. The other party may agree to cover the full cost to utilize a third-party neutral. Perhaps a volunteer mediator would be available through your local pro bono referral program. If ADR cost is a concern, the problem should be raised before the court issues a referral order requiring participation in the ADR process. The referral order addresses compensation of the neutral when there is a cost to the parties. Whether the court uses a standard form referral order or modifies one for particular cases, asking to see the court’s form well before a referral may be made is a good idea.
Perhaps the most common type of ADR process utilized in federal court practice is referral to a mediator (magistrate judge or private counsel) who will conduct a settlement conference. The referral order to ADR will probably require the parties to submit at least one settlement conference statement. The local procedure may call for exchanging these statements, followed by filing a confidential letter or supplementary statement given only to the mediator. There is no commonly employed format for settlement conference statements; they may not even be uniform within the same district. Typically the referral order may require exchanging statements approximately one week before the conference and filing confidential statements the day before the conference.
On the date of the settlement conference, counsel and the parties are expected to appear (in person or by telephone) and orally summarize their litigation positions. The magistrate judge (or other mediator) typically meets separately with counsel and the parties to discuss the case and facilitate reaching a partial or full settlement of the action.
The instructions for preparing the settlement statements emphasize that they should be concise or may set a short page limit. A page limit on the written statements is a significant advantage for the plaintiff who filed a detailed complaint. Attaching copies of the favorable cases to the statements and including the citations in the written statements may be helpful. One reason to prepare a more detailed complaint than is required by the federal rules is to have a full exposition of the legal claims and factual bases for them and thus reduce the amount that needs to be stated in the settlement conference statement./302/
An issue that may arise in settlement discussions when monetary relief or damages are sought is how to deal with a lump-sum offer. The plaintiff may be asked to offer a number for settlement of any monetary claims. How do you calculate this when you are seeking future wages or private disability benefits for an unknown duration? The amount of such prospective income can be discounted to present-day value, and there are various formulas to calculate this, depending upon assumptions about inflation and other factors./303/ The well-prepared plaintiff should anticipate this issue. For the mediation or settlement conference, plaintiff’s counsel should have available the relevant case authority for the formula to be used in computing interest, inflation, and present value.
IV.D. Enforceability of Arbitration Agreements
A contract provision requiring the parties to submit disputed claims to binding arbitration may preclude litigation of federal statutory claims in federal court./304/ The Federal Arbitration Act was enacted in 1925 to encourage nonjudicial resolution of commercial disputes./305/ The Supreme Court has held that the Act manifests a liberal federal policy favoring arbitration of claims./306/ Enforcement of federal statutory rights may be subjected to mandatory, binding arbitration unless a specific provision in the legislation sought to be enforced precludes such alternative resolution of claims./307/ When, however, a federal agency is the plaintiff and has statutory authority to select a nonarbitral forum, that choice governs even though the individuals on behalf of whom it has sued would have been subject to mandatory arbitration./308/
The party seeking to avoid arbitration must show an inherent conflict between arbitration and the purpose of the statute sought to be enforced in federal court./309/ In Green Tree Financial Corp.–Alabama v. Randolph, the Supreme Court noted a consumer might show that large arbitration costs create a conflict between enforcement of the arbitration agreement and the federal statute./310/ The Court noted, but declined to address, another argument against enforcement of the arbitration agreement: preclusion of opportunity to bring a class action to enforce the consumer protection law./311/
A plaintiff meeting the burden to demonstrate unaffordability of arbitration was found in Phillips v. Associates Home Equity Services Inc./312/ In Phillips the court noted that the filing fee for arbitration would likely be at least twelve times what it cost to file a case in federal court./313/ Although language in the arbitration agreement allowed for the possibility of waiving the fees or shifting the costs from the consumer, the district court followed the Supreme Court’s Green Tree decision and found that the possible benefit of the waiver language was too speculative to ensure avoiding excessive costs in the arbitral forum.
Courts have declined to adopt a per se rule against enforcement of mandatory arbitration when the agreement calls for the parties to split the fees. A fee-splitting agreement may be unenforceable, but complaining parties must meet the burden to show that they are unable to afford fees or that enforcement of the agreement would foreclose protection of an important substantive right in the arbitration forum./314/ The courts may be more likely to conclude that an arbitration agreement is unconscionable when it contains not only questionable fee-splitting provisions, but also such features as oppressive notice deadlines and substantial restrictions on the relief available./315/
A significant factor in meeting the standard to show unaffordability may be whether the party qualifies for in forma pauperis status. In Camacho v. Holiday Homes, for example, the plaintiff alleged Truth in Lending Act violations in a retail installment agreement, and she successfully argued that enforcement of a mandatory arbitration agreement would preclude her from vindicating federal statutory rights because the arbitral forum was financially inaccessible to her./316/ The plaintiff qualified for in forma pauperis status, but she did not rely on that determination alone to make the unaffordability argument. She also filed a detailed declaration of her financial condition. The district court noted that not all of the arbitration fees were subject to waiver or deferral on a showing of “extreme hardship” under the commercial American Arbitration Association rules, and, therefore, the agreement could not be enforced./317/ The court also stated, however, that it would reconsider its decision if the creditor agreed to bear the costs associated with arbitration./318/ The D.C. Circuit similarly agreed to uphold arbitration of an employee’s Title VII discrimination claim only if the employer assumed responsibility for payment of the arbitration fees./319/ Because utilizing arbitration is often in the creditor’s or employer’s interest, these decisions provide authority to negotiate for the defendant to pay the arbitration fees fully, in exchange for the potential plaintiff’s agreement to waive objection to submitting the case for arbitration.
When a party is required to proceed in an arbitral forum, all rights granted by the statute(s) sought to be enforced are applicable./320/ The Federal Arbitration Act provides an opportunity to appeal arbitration decisions to federal court, but the standard of review of the decision is very deferential. Generally, the appealing party must show that the award manifests a disregard of applicable law, conflicts with a strong public policy, is arbitrary and capricious, completely irrational, or fails to draw its essence from the underlying contract./321/
294. While the Social Security Administration does not yet make use of alternative dispute resolution (ADR) for claims, the Equal Employment Opportunity Commission uses voluntary mediation of its private-sector discrimination complaints, and it implements compulsory mediation of its federal employment complaints. The details of the federal agency’s ADR policies are accessible on its website, www.eeoc.gov/federal/md110/chapter3.html. See 29 C.F.R. § 1614.102(b)(2).
295. An arbitration agreement in an application for employment can be enforced against an employee even though there is no written employment contract. Circuit City Stores v. Adams, 532 U.S. 105 (2001).
296. See, e.g., In re Atl. Pipe Corp., 304 F.3d 135 (1st Cir. 2002).
297. Alternative Dispute Resolution Act of 1998, 28 U.S.C.§ 651(b).
298. Id. § 651(a).
299. See Fed. R. Civ. P. 16(c)(9).
300. See Schwartzman v. ACF Indus., 167 F.R.D. 694, 698 (D.N.M. 1995). See also Executive Order No. 12,988, 61 Fed. Reg. 4729 (Feb. 5,1996); Memorandum of Guidance on Implementation of the Litigation Reforms of Executive Order 12,988, 62 Fed. Reg. 39250-52 (1997).
301. The Judicial Improvements and Access to Justice Act of 1988, Pub. L. No. 100-702, 102 Stat. 4642 (codified as amended in scattered sections of 28 U.S.C.), authorized judicial arbitration of cases in a maximum of twenty districts; the Alternative Dispute Resolution Act continued this limitation on implementation of arbitration as a form of judicial ADR. The Federal Judicial Center, www.fjc.gov., issues good free publications on federal court procedure. Two publications currently available are Robert J. Niemic et al., Guide to Judicial Management of Cases in ADR (2001), and Robert J. Niemic, Mediation and Conference Programs in the Federal Court of Appeals: A Sourcebook for Judges and Lawyers (1997). The Civil Litigation Management Manual, issued jointly by the Federal Judicial Center and the Judicial Conference of the United States, the Committee on Court Administration and Case Management (adopted Mar. 2001), includes sections on ADR and judicial settlement guidelines and offers insight into many other aspects of federal practice.
302. Another drafting practice with particular benefit for later use in ADR is annexing key documents as exhibits to the complaint. Reading the correspondence and notices preceding the filing of the action gives the mediator a more objective impression of the history of the dispute (and the lack of responsiveness of the defendant in resolving the dispute without need for litigation). A defendant who does not similarly annex the key supportive documents to the answer may be at a comparative disadvantage when there are page limits to settlement conference statements.
303. See Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523 (1983), for a discussion of these factors.
304. Challenges to the enforceability of arbitration agreements, either because the contract as a whole or the arbitration clause are void as a matter of state law, are beyond the scope of this section. The most recent Supreme Court case dealing with this set of issues is Buckeye Check Cashing v. Cardegna, 126 S.Ct. 1204 (2006) (Clearinghouse No. 55,836).
305. Federal Arbitration Act, 9 U.S.C. §§ 1 et seq.
306. Rodriguez de Quijas v. Shearson/American Express Inc., 490 U.S. 477 (1989); Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983).
307. Gilmer v. Interstate/Johnson Lane Corp. , 500 U.S. 20 (1991) (an agreement requiring binding arbitration of an age discrimination complaint was enforceable because Congress, in enacting the Age Discrimination in Employment Act, did not explicitly preclude arbitration of complaints). An example of explicit preclusion of mandatory arbitration is in the Magnuson Moss Warranty-Federal Trade Commission Improvement Act, 15 U.S.C. §§ 2301-2312 (vehicle warranty claims).
308. Equal Employment Opportunity Comm’n v. Waffle House, 534 U.S. 279 (2002) (the Equal Employment Opportunity Commission may sue employer in federal court under the Americans with Disabilities Act).
310. Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79 (2000).
311. The Third Circuit rejected this argument as a basis to escape subjecting a Truth in Lending Act claim to private arbitration. See Johnson v. West Suburban Bank, 225 F.3d 366, 377 (3d Cir. 2000), cert. denied, 531 U.S. 1145 (2001).
312. Phillips v. Assoc. Home Equity Servs., 179 F. Supp. 2d 840 (N.D. Ill. 2001).
314. See Bradford v. Rockwell Semiconductor Sys. Inc., 238 F.3d 549 (4th Cir. 2001); Shankle v. B-G Maint. Mgmt. of Colo., 163 F.3d 1230 (10th Cir. 1999). See also Blair v. Scott Speciality Gases, 283 F.3d 595 (3d Cir. 2002). An arbitration agreement requiring each party to pay their own attorney fees, regardless of the outcome, can render the agreement unenforceable. McCaskill v. SCI Mgmt. Corp., 298 F.3d 677 (7th Cir. 2002).
315. Anthony v. Alexander Int’l, L.P., 341 F.3d 256 (3d Cir. 2003).
316. Camacho v. Holiday Homes, 167 F. Supp. 2d 892 (W.D. Va. 2001).
319. Cole v. Burns Int’l Sec. Servs., 105 F.3d 1465 (D.C. Cir. 1997).
320. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc., 473 U.S. 614, 628 (1985).
321. See Williams v. Cigna Fin. Advisors Inc., 197 F.3d 752, 758 (5th Cir. 1999), cert. denied, 529 U.S. 1099 (2000).