Mediation Day: Valuing Uncertainty (Part 1) – How Parties Deal with the Unknown
As we review the narratives, I’ll have a list of questions from the brief and pre-call, some I know the answer to, some I don’t. I’m highlighting disagreements between the parties’ respective stories, pointing out open factual or legal questions, and defining what can be decided during the mediation and what cannot. Open-ended questions are usually the most effective tool, especially when asking a party to take the other side’s perspective. “How do you think the other side will respond?” “What is the other side’s story?” These dovetail with the pre-mortem question we discussed during our pre-call: “Imagine the trial is over, the verdict comes back against you. Why did that happen?”
Purpose of the Push Back
I ask these questions to see how a party confronts uncertainty. The answer matters, but so does watching how the party handles the unknown.
Aswath Damodaran argues there are six ways that people handle uncertainty: denial, heuristics, herding, outsourcing, divine intervention, and confrontation. For my analysis below, I combine heuristics and herding because they overlap when valuing a legal case. Unlike Damodaran, I don’t care which method is “best.” But his framework helps me observe, understand, and communicate risk. I meet the parties where they are. Each approach calls for a different communication style.
Practitioner’s Note
Review the ways Damodaran suggests people deal with uncertainty. Identify your default. Then identify your client's. Understand what your default mode communicates to the mediator. If you want to communicate something different, be intentional about what you say and how you say it.
Denial
The refusal to engage. “Valuing the case is impossible.” For Damodaran, this investor refuses to even attempt to model the value of an asset, closing their eyes and hoping the risk vanishes. In mediation, this shows up as a “hard line,” “bottom line,” and absolute positions without nuance. Absolute certainty in one’s position is a form of denial.
The approach isn’t novel. It is often the default for parties trying to show strength. But taking absolute positions while staying at the mediation doesn’t show strength. It shows the party is unprepared, fearful, and handles uncertainty through denial.
The approach is fine, if dull. You’re missing a chance to unearth an idea that might move the needle in the other room. Your mediator will keep working the process and discount your absolutism. Your mediator notices you haven’t left and reads that as interest in resolution paired with no idea how to get there.
Eventually, the I will press a denier to make a decision: stay or leave. And if you say one thing (“This is my bottom line”), but do another (stay at the mediation), I’m going to discount what you’re saying.
If you refuse to grapple with uncertainty or engage in substantive discussions but stay at the mediation, I start to think you’ve already accepted what’s on the table. Now you’re negotiating over a widget, not the case. I’ll keep communicating your denial to the other side, but the suspicion that you’re ready to accept their last offer will color the rest of the mediation – including any mediator’s proposal.
Another denier focuses on the other room instead of their own case. Plaintiffs who focus on the cost of defense; defendants who make assumptions about contingency fees and litigation funding. These deniers can be refocused, but acknowledge what they’re really after: they want to know they’ve inflicted pain or “sent a message.” Emphasizing that any resolution will send that message often refocuses this denier back to their own risks and rewards.
Practitioner’s Note
Denial is the default for inexperienced parties. Before the mediation, tell your client that denial doesn’t show strength. The day will run better for it. But that’s also why we schedule full-day mediations – a long day focused on one problem lets the party sit with it, acknowledge it exists, and then focus on how to move forward. If you’ve got a client who hasn’t been through the litigation wringer before, expect some level of denial, and tell your mediator: this client is going to resist grappling with uncertainty. Your mediator can then assume the role of the “bad guy” by asking open-ended questions that force confronting the uncertainty, while you keep your “zealous advocate” posture.
Heuristics and Herding
For Damodaran, people who rely on heuristics to value an asset look to peer comps, historical averages, or common multiples instead of digging into what this company is doing now. For example, looking at an industry-average P/E ratio instead of performing an individualized discounted cash flow (DCF) analysis for a particular company.
Similarly, when herding, an individual will look to see how the crowd has valued an asset and rely on that assessment as their own.
Litigation matters aren’t readily susceptible to DCF analysis, nor is there an easy industry-wide P/E ratio for parties to latch onto. Similarly, no crowd is valuing the uncertainty of any one case. In litigation, heuristics and herding dovetail and are even used by courts when approving class settlements.
There’s a general understanding that a “market” exists for any case type. Past outcomes are referenced in almost every mediation – recent MSJ wins, jury verdicts, past settlements, or general rules of thumb practitioners learned from mentors. Using past results to predict future outcomes is often where institutional parties (insurance companies) like to begin.
For these parties, a mediator must know the rules of thumb, market models, and jury results being publicized. This is especially true in wage and hour cases: settlements are public, defendants don’t want to set any market highs, and plaintiffs don’t want discounts published.
Class counsel are also concerned about getting any settlement through preliminary and final approval, where judges in California have been inserting themselves more into the settlement process. See Dunk/Kullar, see also Hanlon v. Chrysler Corp., 150 F.3d 1011, 1027 (9th Cir. 1998) (“[s]ettlement is the offspring of compromise,” the question upon preliminary approval “is not whether the final product could be prettier, smarter or snazzier, but whether it is fair, adequate and free from collusion.”). Court intervention has become more prevalent even though a court should not second-guess the parties or substitute its judgment, particularly when experienced counsel familiar with the litigation have reached settlement.
Judges don't have full visibility into every case on their docket. They can't review every document or wrestle with the parties — they decide on page-limited briefs. So they rely on rules of thumb when determining if a class settlement is within the “range of reasonableness.” See 4 Newberg on Class Actions §11.25. Unlike asset valuation, case valuation (especially class case valuation) often requires heuristics and an understanding of how others have valued similar cases.
If both parties are using the same rules of thumb to value a case, I’m not getting in the way. But when one party anchors to a rule of thumb that artificially increases or decreases the case value, I’ll refocus the party on the case at hand. When a party uses past jury or MSJ results, they often don’t have all the facts of that case. And even if they do, experienced practitioners know that you can feel like you’ve got a case on all fours, present it to the judge or jury, and get a completely different result. But engage with the rule of thumb. Don’t dismiss it. Acknowledge the shortcut exists and has been used. Then ask if that shortcut fits this unique case.
Practitioner’s Note
Come prepared with an understanding of the “market,” especially how the other side uses heuristics to value the case’s uncertainty. If you’re unsure what common rules of thumb the other side may use, ask your mediator. They can map the terrain and tell you which shortcuts the other side will likely use.
If you are planning to deviate from the common heuristics or how others would value your case, flag those distinctions for your mediator early and often. The sooner your mediator can prime the other side to deviate from their common approaches, the better.
Next week: Outsourcing, divine intervention, confrontation, and what Damodaran’s framework misses in litigation.
Until then,
Monday x Morello Mediation.