Litigation or arbitration is expensive, and the costs are increasing with the requirements for e-discovery. One dynamic that leads increased transaction actions without a corresponding benefit can be seen in the above video, the dollar auction game.

A lawsuit or arbitration is what economists call an "all pay auction". Each party to the lawsuits bids, by paying legal fees, for the change of winning the prize, a favorable judgment or award.

But people can collectively overbid, as stunningly demonstrated above. In a dramatic example of how competitive attorney's can aggravate costs, the longest jury trial for wrongful dismissal in Ontario history lasted 8 weeks, Jack v. Women's College Hospital. At stake was overtime for 9 month's of employment.

The economist's advice is not to play this type of auction. However, this advice is not practical and mediators Peter Klarfeld, Michael K. Lewis, and Peter Silverman have a better way to control cots and manage litigation risk: Mediation.

At the recent ABA Forum on Franchising, held in Toronto, part of their "Mediating Franchise Disputues" was about using mediation to control litigation risks. (Their joint paper covers much more than a discussion about controlling costs and the mediation paper and cd can be purchased from the ABA, directly along with all the other ABA materials from the 32nd Annual Forum on Franchising. I highly recommend the paper.)

Michael K. Lewis is an Adjunct Faculty member for the Harvard Program of Instruction for Lawyers Mediation Workshop. Lewis's colleague, Robert H. Mnookin, in his book "Beyond Winning" describes litigation or preparing for a trial that never takes place:

"In litigation it can sometimes seem as if each side is frantically preparing for a trial that will never take place. One side drafts a complaint, files motions, takes depositions, goes through document production, prepares for trial --all with the knowledge that it will probably settle the case. And each side knows this. It is like an arms race: each side builds up an arsenal, hoping never to use it. Each needs the arsenal to signal a readiness for battle. But each would also benefit if both sides could agree to reduce the weapons stockpile. The problem is that neither side wants to disarm first."

So what type of personality does the mediator need to have to help the parties "disarm"? Lewis thinks that judges can make bad mediators because "the judge is going to give the parties a mini-trial and the push to judgment can miss out on the richness of alternative solutions."

As advocates, Lewis argues, we need to "think through the business relationship, how we restructure the relationship, and to think about what the other person's business problems are and what might work for both of us." Ideally, by doing so we would uncover sources of surplus value that are not available through the litigation process.

Silverman is more cautious about the prospects for mediation:

"Many franchise disputes do not offer this type of opportunity for surplus value.

Many disputes involve issues of quality control, royalties or lease payments the franchise can't keep up with, a build-out the franchisee can't afford, a franchisee losing money who's looking to get out and get his money back, or an encroaching proposed unit.

These are disputes that will likely end within a defined range of results and someone with experience and good judgment could probably give pretty good odds on where they'd end up.

Thus the surplus value is the reduction of the transaction costs and the management of risk."

A recent source of higher transaction costs, the cost of revealing confidential information through a mistake in electronic discovery was discussed in Hot Button Privilege Issues for Franchise Counsel, by Eric H. Karp and Les Wharton.

"Document production has become an enormously time consuming and expensive undertaking. With the explosion of the use and availability of electronically stored information (ESI)75, this problem has grown exponentially. It is no longer uncommon for cases to involve the disclosure of hundreds of thousands of documents involving millions of pages."

"Out of necessity, high-volume document production substantially increases the cost and effort involved in pre-production reviews of documents, to ensure that privileged materials such as those covered by the attorney-client privilege and the attorney work product doctrine are not released to the opponent."

One approach outlined by Karp was to reach one of two types of agreements regrading production of documents.

"The most common approach, generally requires the parties to use good faith efforts to cull privileged documents from their production, but also allows them to "claw-back" or take back privileged documents that were inadvertently produced.

....

An alternative and much more risky approach is the use of a "quick peek" production agreement under which all responsive documents are produced without any prior review for privilege.

Following the initial review by the receiving party, the documents are returned to the producing party which then conducts the privilege review of only those documents the opposing party designated as those it wished to receive.

Only one trial attorney admitted to using the quick peek technique, and only a handful were willing to use the claw back. All feared the possible ramifications of inadvertently disclosing privileged documents are were willing to ratchet costs up to avoid this problem.

But, mediation as process can be used to monitor the production process to make sure that it doesn't get out of hand, especially e-discovery. Documents that a party had a "quick peek" at can returned to the other party as a part of a confidential mediation process and not merely an agreement between counsel. The mediation process can be drafted in a way to both protect confidentiality and to keep costs low.

Silverman goes further, "Mediation agreements, custom cooperative approaches (like take a peek) or continuing "referee-mediation" can deal with trying to lower costs and insuring fairness at every stage of arbitration or court."

In the end, Michael Lewis describes the best reason to use mediation:

"Business disputes should be looking for business solutions, and if they cannot save their business relationship, they should find an inexpensive way to terminate the relationship."

Mediation qualifies on all counts.

I have written about Gerd Gigerenzer's work on heuristics before, but I had not realized that Robin Hogarth has done some very important work on predictions by experts in social science.

This is a terrific little video, and pay attention to what Hogarth has to say about predictions by experts: brings to mind another Robin who has doubts about experts with no track records.

Thanks to the Copy Writing Maven for this humorous take on negotiation. While, the Maven saw vendor relations, I saw lawyer to client relations.

Very funny, especially the final scene.