In January 2011, in Cassel v. Superior Court (2011) 51 Cal 4th 113 (“Cassel”), the California Supreme Court once again iterated that mediation confidentiality absolutely precludes the admission of anything that occurred during the mediation, in any subsequent litigation. Thus, as in Cassel, where a party alleges that his counsel committed legal malpractice during the mediation, that party is precluded under California’s mediation confidentiality statutes (Evidence Code §1119 et seq.) from seeking any sort of redress for the alleged professional negligence and/or breach of fiduciary duty purportedly committed by her counsel during the mediation.

            Once again, this conclusion was emphasized in a recently unpublished California appellate court decision – Gossett v. St John, Wallace, Brennan & Folan, Second District Court of Appeals of California, Division Eight, Case No. B222502 (May 12, 2011). (Thank you to my colleague Alec Wisner for highlighting this case!). Plaintiff Charles Gossett is a 50 percent shareholder, Chief Official [sic] Officer and Chairman of the Board of CRG Marine Laboratories, Inc. (“CRG”). In 2007, CGR retained a law firm – St. John, Wallace, Brennan, & Folan (“SWBF”) – to advise CGR on employment issues.

            In 2008, one of CRG’s employees, Mark Baker, claimed that CRG owed him unpaid commissions. The parties agreed to mediate.

            At the mediation, CRG’s attorney John St. John took a very passive approach, remaining silent through most of the mediation. Eventually, the parties reached a settlement. St. John produced a settlement agreement that he had prepared in advance of the mediation but had not discussed with Gossett. After Baker modified the agreement and signed it, St. John looked it over and told Gossett to sign it. Gossett skimmed it and signed it. At the time, Gossett did not realize that, he, individually, would be liable for the payment to Baker if CRG did not pay the settlement amount. He realized this only after he requested another attorney review the agreement after the mediation.

            Consequently, Gossett sued SWBF for legal malpractice alleging several alleged errors and omissions by SWBF during the mediation including failing to advise him of his individual liability. SWBF filed a motion to dismiss contending that all of the alleged errors and omissions occurred during the mediation and thus under Cassel v. Superior Court, supra, and California’s mediation confidentiality statutes – Evidence Code §1119 et. seq. – the case must be dismissed: any evidence of what occurred during the mediation is absolutely inadmissible.

            The trial court agreed, granting the motion to dismiss, and the appellate court affirmed.

            Cassel v. Superior Court, supra, is the latest in a long line of rulings from the California Supreme Court holding mediation confidentiality to be inviolate. In light of this latest ruling, efforts are being made to create an exception to mediation confidentiality that would allow for such legal malpractice actions to be brought.  Recently, the Beverly Hills Bar Association (“BHBA”) adopted Resolution 10-06-2011 (RESOLUTION ) which would amend Evidence Code Section 1120 by creating an exception to mediation confidentiality by allowing for disclosure and permitting the use of attorney-client communications made during mediation in a subsequent State Bar Disciplinary action, an action for legal malpractice and/or an action for breach of fiduciary duty. 

            During the upcoming California State Bar Convention in September 2011, the Conference of California Bar Associations will discuss the BHBA resolution and vote whether to approve it. If approved, a legislative sponsor will then be sought for introduction into the California legislature for consideration.

            In Cassel, the Court felt constrained to rule as it did stating:

“We express no view about whether the statutory language, thus applied ideally balances the  competing concerns or represents the soundest public policy. Such is not our responsibility or our province. . . . Of course. the Legislature is free to reconsider whether the mediation confidentiality statutes should preclude the use of mediation–related attorney-client discussions to support a client’s civil claims of malpractice against his or her attorneys.” (Id. at p.136.)

            Many within California will watch the Conference of California Bar Associations to see if it adopts the Beverly Hills Bar Association’s Resolution. In all probability, I and many others suspect that it will do so.  Assuming our collective suspicions are correct, the next issue is whether our legislature will take up the invitation of our Supreme Court to reconsider the issue. To state the obvious, it is a very topical, much debated  issue full of complexities on both sides. (For example, while 11 jurisdictions have adopted the Uniform Mediation Act  containing this exception (see, section 6(a)(5)) in varying forms (including District of Columbia, Idaho, Illinois, Iowa, Nebraska, New Jersey, Ohio, South Dakota, Utah, Vermont and Washington), others view it as a “slippery slope”.) Should the legislature take it up, there will be much in the press about it. Stay tuned for the next installment on mediation confidentiality in California.

            . . .Just something to think about!   

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             Recently, I conducted a mediation that never really got started. Why? Because coming into the mediation, plaintiffs and their counsel did not understand the status of their case, or exactly where matters stood procedurally. Thus, while plaintiffs believed they could bargain from a position of strength, on a “take it or leave it“ basis, defense counsel were telling me otherwise.

            The matter involved the wage and hour laws of California. Plaintiffs, who had been parking valets, for the defendant employer, alleged that they had not been paid overtime, were not allowed to take meals and rest breaks and were not being given the tips proffered by customers, but that the employer was keeping this money.

            To obtain all of these monies allegedly owed, plaintiffs filed their complaint with the Labor Commissioner of the State of California. That entity entered an award in favor of one plaintiff but against the other plaintiff.

            The defendant employer – believing that the hearing officer in the Labor Commissioner’s office misunderstood or misconstrued the evidence – appealed the adverse decision in favor of the one plaintiff who received an award.  By statute, this appeal is heard by a superior court judge de novo, i.e. anew. That is, the superior court is not merely deciding whether the Labor Commissioner erred, but rather, is hearing the case as though it had never been heard or tried before the Labor Commissioner. The Superior Court  makes its own determinations independent of what the Labor Commissioner determined.

            At the same time, plaintiffs filed a separate civil action in Superior Court for these same claims – overtime, meal and rest breaks and tips. In light of the pending appeal, the defendant employer filed a motion to dismiss which, for the most part, the trial court granted.

            At this point, plaintiffs discussed  filing an amended complaint but did not file a motion with the court seeking permission to do so.

            At the last hearing before the Court – which is now hearing both the civil action and also the appeal from the Labor Commissioner – the Court set both the hearing date in July for the appeal and a trial date in 2012 in the civil action. The Court also set a briefing schedule for the appeal.

            At the mediation, it soon became apparent that plaintiffs’ counsel was under the impression that the hearing date in July was for something other than the de novo appeal of the Labor Commissioner’s determinations.  As told to me by defense counsel, what plaintiffs’ counsel had submitted in compliance with the briefing schedule did not discuss the Labor Commissioner’s  order but something else.

            Further, both counsel and plaintiffs did not appreciate that since the appeal was de novo, they could not assume they were entitled to all sums found by the Labor Commissioner to be due. That is, they could not insist – on a “take it or leave it” basis – that they be paid the Labor Commissioner’s award or else the mediation was over!

            In truth, according to defense counsel, Plaintiffs would not be negotiating from a position of strength; leverage was not on Plaintiffs’ side.

            All of the above came to light in the first few moments of the mediation. Needless to say, the mediation ended abruptly; plaintiffs’ counsel terminated the mediation upon realizing that she had a lot of work to do to try to oppose the appeal at this late date. Not surprisingly, neither plaintiffs nor their counsel were able to change their mindset about their case on such little notice. They needed time to go back to regroup and to process the information they learned at the mediation.

            So, the morale of the tale is simple: understand your own case – both its facts and where it is in the procedural quagmire – before walking into mediation. Otherwise, you may find yourself negotiating from a false sense of strength, attempting to invoke leverage that you do not have. Obviously, this will not lead to a resolution.

            . . .Just something to think about!

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            One good thing about mediation is that the parties are free to change their minds on any issue as many times as they want during a mediation. . . until they sign a settlement agreement. Once  an agreement is signed, the settlement is extremely difficult, if not impossible, to unwind.

            Earlier this month, the Winklevoss Twins (of Facebook fame) found this out the hard way. In The Facebook, et al. v. Narendra, Case No. 08-16745, the Ninth Circuit Court of Appeals refused to let them back out of a settlement they made with Facebook and Mark Zuckerberg. (Facebook vs Narendra)

            As has been widely publicized, the Winklevoss Twins and Divya Narendara (“Twins”) claim that Mark Zuckerberg stole the idea for Facebook and so sued both Facebook and Zuckerberg in Massachusetts. Zuckerberg and Facebook counter-sued in California adding ConnectU as a defendant and alleging that these defendants stole data and tried to steal users.

            The federal District Court in California eventually dismissed the Twins due to a lack of jurisdiction but then ordered the parties to mediate their dispute.

            Prior to the mediation, the parties signed a Confidentiality Agreement stipulating that

 “. . . all statements made during mediation were privileged, non-discoverable and inadmissible “in any arbitral, judicial or other proceeding.” ” (Slip Opinion at p. 4902).

            After a day of negotiations, the parties signed a handwritten, one and a third page “Term Sheet and Settlement Agreement” (“Term Sheet”). Therein, the Twins agreed to give up ConnectU in exchange for $20 million in cash and $45 million in shares in Facebook (now estimated to be worth about $200 million.)  (See, Los Angeles Times April 21, 2011 article.)

            However, the negotiations fell through during discussions on the final deal documents. Facebook filed a motion to enforce the settlement. ConnectU opposed the motion arguing that the Term Sheet was not enforceable as it lacked material terms and was procured by fraud. The trial court found the Term Sheet to be enforceable and ordered completion of its terms.

            The Ninth Circuit agreed, affirming the trial court’s order. As part of the settlement, Facebook was to acquire all of ConnectU’s shares in exchange for cash and a percentage of Facebook’s common stock. To accomplish this, the attorneys drafted more than 130 pages of documents typically required to finalize an acquisition. 

            On appeal, the Twins argued that if the terms set out in these voluminous acquisition documents were “required” and “typical”, then they should have been included in the Term Sheet; because they were not, it is unenforceable.

            The Ninth Circuit rejected this argument finding that the Term Sheet complied with the requirements of California contract law.

            Next, the Twins argued that Facebook misled them as to the value of its stock. An internal valuation prepared to comply with the federal tax code put the value at $8.88 per share. In contrast, the Twins claimed they were led to believe that the value was four times as much and so were defrauded.

            The Court rejected this argument noting:

       “The Winklevosses are sophisticated parties. . . . They engaged in discovery, which gave them access to a good deal of information about their opponents. They brought half-dozen lawyers to the mediation. Howard Winklevoss – father of Cameron and Tyler, former accounting professor at Wharton School of Business and an expert in valuation – also participated. A party seeking to rescind a settlement agreement by claiming [fraud] under the circumstances faces a steep uphill battle (citations omitted). Id. at p. 4906.

            Finally, the Ninth Circuit addressed the issue of mediation confidentiality, but only superficially. It agreed that the trial court was correct to reject the proffer of certain evidence by the Twins about what was said and not said during the mediation, in light of the Confidentiality Agreement signed by the parties. The Ninth Circuit though did not delve into a discussion of mediation confidentiality, its purpose and importance. It simply concluded:

“. . .The Winklevosses are not the first parties bested by a competitor who then seek to gain through litigation what they were unable to achieve in the marketplace. And the courts might have obliged, had the Winklevosses not settled their dispute and signed a release of all claims against Facebook. With the help of a team of lawyers and a financial advisor, they made a deal that appears quite favorable in light of recent market activity. See Geoffrey A. Fowler & Liz Rappaport, Facebook Deal Raises $1 Billion, Wall St. J., Jan. 22, 2011, at B4 (reporting that investors valued Facebook at $50 billion – 3.33 times the value the Winklevosses claim they thought Facebook’s shares were worth at the mediation). For whatever reason, they now want to back out. Like the district court, we see no basis for allowing them to do so. At some point, litigation must come to an end. That point has now been reached.”

            In sum, signing on the dotted line means that the matter is  truly over!

            . . .Just something to think about!

 Postscript:  A couple of weeks ago I wrote a blog entitled “An American Hero” about Kenneth Hughey who had been a POW in Vietnam at the Hanoi “Hilton”. Recently, I received an e-mail from a reader who, as a young boy, wore a bracelet with Ken’s name on it as part of America’s effort to support our Vietnam POW’s. He kept the bracelet all these years and offered to return it to him. Ken wrote him an e-mail, accepting the offer. Wow!… the wonders of the internet!

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            Sometimes, a party may have her expert participate in a mediation by being physically present and/or preparing a report for use at the mediation. If the matter does not settle, the question then arises whether mediation confidentiality precludes the use of the expert and/or her report at trial; is she precluded from testifying? Is her report inadmissible at trial?

            These issues confronted the Court of Appeals in New Mexico in Warner v. Calvert, Docket No. 29,674 (decided February 9, 2011) (Slip Opinion). (I want  to thank my colleague Alex Wisner for bringing this case to my attention!)  It was an interlocutory appeal of the trial court’s order appointing Judith Wagner as an expert witness and determining that her valuation report – prepared for purposes of mediation – may be admitted at trial. The defendants took issue with these rulings and so appealed.

            In the underlying litigation, the plaintiffs John Warner and Nina True each claimed that they were entitled to money damages as well as stock in the defendant corporations, North American Pizza Solutions, Inc., a New Mexico corporation, and Albuquerque Pizza Solutions, LLC, a limited liability company. Warner and True alleged that they had loaned money to John Phillips to build and operate these companies, with these loans being secured by Phillips’ stock in the companies. In addition, Phillips had allegedly assigned his equity interests in these companies to Warner and True.

            The court ordered the parties to mediate. At the first mediation, the parties realized they needed additional information to evaluate settlement. As a result, the parties retained Ms. Wagner to value the companies and the stock and then prepare a report “for the purposes of mediation.” It was clear that Ms. Wagner’s report was for use at mediation.

            After Ms. Wagner prepared and submitted her valuation report, the parties reconvened the mediation. Ms. Wagner did not attend the mediation although her report was used during the mediation. The mediation did not result in a settlement, and so the case was set for trial.

            Plaintiff  John Warner then filed a motion to appoint Ms. Wagner as an expert witness at trial which the court granted. The trial court also ruled that her valuation report could be admitted at trial. The defendants appealed, contending that New Mexico’s newly enacted mediation statutes precluded both Ms. Wagner appearing as a witness and her valuation report being admitted at trial.

            The Court of Appeals – noting that Ms. Wagner was a “non-party participant” in the mediation as defined by Section 44-7B-2(F) (Statute) (even though she was not physically present) – held that although Ms. Wagner was not precluded from testifying at trial per se, the scope of her testimony may well be limited: “under New Mexico’s mediation statutes, Ms. Wagner will not be able to disclose any mediation communications unless some exception applies.” (Id.) (Exceptions)

            However, the court found that her valuation report constituted a mediation communication because it was a written statement that was “made for purposes of considering, conducting, participating in . . . a mediation.” Section 44-7B-2(B).(Statute) Thus, the court concluded that it was not admissible at trial and that no exception applied that would allow otherwise.(Confidentiality) The court thus rejected the contention of appellants that although the valuation report constituted a mediation communication, it should be admissible because the documents underlying the report were discoverable and admissible.

            While the statutes in New Mexico appear to be quite similar to, (if not almost identical to) those of the Uniform Mediation Act and thus different than those enacted in California, the result in California would most likely be the same. In Rojas v. Superior Court, (2004) 33 Cal. 4th 407, the California Supreme Court held that materials prepared for use at mediation were not discoverable as they were protected by mediation confidentiality in California Evidence Code §1119. (Expert testimony was  not an issue.)

            Thus, while experts can prove quite valuable in settling a case at a mediation, careful thought must be given about whether to use them for this purpose. Pursuant to “mediation confidentiality” statutes, should the case not settle, the expert’s subsequent use and value to the dispute may be severely limited.

            . . . Just something to think about.

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          In recent weeks, the California appellate courts have issued decisions on diverse topics. Two of these decisions, although seemingly disparate, may not be so, on closer analysis. By discussing the most recent one first, hopefully, my quandary will become apparent.

          On March 2, 2011, the Fourth Appellate District issued its opinion in Martinez vs Kia Motors America, Inc (E049780), (Martinez v Kia Appeal decision ) holding that under California’s Song-Beverly Consumer Warranty Act (Civ. Code Section 1790 et seq.), a consumer plaintiff may, indeed, seek replacement or reimbursement for an allegedly defective vehicle, even though Plaintiff no longer possesses the vehicle! 

          It seems that Plaintiff Juanita Martinez purchased a new 2002 Kia Sedona. Thereafter, she had significant problems with the vehicle while it was still under warranty. More particularly, in June 2005, the car started shaking and making strange noises and smoke started  coming out from the engine.  Plaintiff smelled a strong acidic odor which she believed to be battery acid. She pulled to the side of the road. A third party who happened to be an auto mechanic looked at the engine and advised that he   thought the alternator had overcharged the battery. So, Plaintiff called her son, requesting that he purchase a new battery and bring it to her. He did so. (Id. at 3-4.)

          Plaintiff then had the car towed to a Kia dealer who denied warranty service. She then had it towed to a second dealer; its “Master Technician” spent approximately 10 hours inspecting and working on the car and concluded that plaintiff “… incorrectly tried to jump-start the vehicle battery by reversing the polarity, thus causing the problems”. (Id. at 4.). Consequently, that dealer, too, denied warranty coverage. As plaintiff did not have the money to pay for the repairs, she left the vehicle with the second dealer, (since it would not run) so that the dealership “…could fix it. “ (Id).   

          Plaintiff also stopped making the payments on the car loan. So, the lender repossessed the vehicle and had it towed to a third dealer who discovered that the problem was, indeed, with the alternator, and who fixed it under the warranty. 

          Even though the vehicle was now in the possession of the lender, Plaintiff sued   Kia under California’s Song-Beverly Consumer Warranty Act (“Act”).  Kia took the position that since plaintiff no longer had possession of the vehicle, she lacked standing to sue and filed a summary judgment motion on this ground. The trial court granted it.

          The appellate court reversed, holding that under the Act, “a plaintiff does not need to possess or own the vehicle to avail himself or herself of the Act’s remedies.” (Id. at 4). Reviewing the statutory framework very carefully, the appellate court determined that nowhere in any of the pertinent statutes, is there any language stating or providing “…that the consumer must own or possess the vehicle at all times in order to avail himself or herself of these remedies.” (Id. at 7.)  Rather, all that the pertinent statutes require is that the buyer

‘‘“deliver [the] nonconforming goods to the manufacturer’s service and repair facility” for the purpose of allowing the manufacturer a reasonable number of attempts to cure the problem.” (citation) Once this delivery occurs and the manufacturer fails to cure the problem, the “manufacturer shall” replace the vehicle or reimburse (make restitution to) the buyer….” (Id. at 7-8.)

         The appellate court also rejected the notion that the principles of restitution and revocation found in the common law and the Uniform Commercial Code should apply:

 “ Under common law and the Uniform Commercial Code, a party seeking to rescind a contract must generally return any consideration received. Pursuant to Civil Code section 1691, subdivision (b), a rescinding party must “[r]estore… everything of value which he has received … under the contract.” Under Uniform  Commercial Code sections 2604 and 2608, where a buyer revokes acceptance of the goods, “the buyer may store the rejected goods for the seller’s account or reship them to him or resell them for the seller’s account….” Defendant argues that these principles also apply to the restitution remedy under the Act. We disagree.” (Id. at 13). (emphasis original)  

         Thus, the appellate court concluded that a consumer may obtain replacement or restitution under the Act  even though the consumer no longer possess or owns the vehicle.

         So… the question arises, what exactly are the plaintiff’s damages? Is the plaintiff entitled to the full value of the vehicle? To only the amounts she paid down and/ or on her loan? To an amount somewhere in between? What happens if she is later sued for a deficiency on the loan? Or, is she entitled to a replacement vehicle? And if so, at what value? Interestingly, the statutes in the Act addressing the amount of damages, simply state that in the case of a replacement vehicle, “the manufacturer shall replace the buyer’s vehicle with a new motor vehicle substantially identical to the vehicle replaced” while in the case of restitution, “the manufacturer shall make restitution in an amount equal to the actual price paid or payable by the buyer.” (Civil Code section 1793.2(d)(2)(A) and (B). (Emphases added.)

         If one reads these statutes with the same strictness as did the appellate court, it might appear that Plaintiff is entitled to a windfall in that she should be awarded either the full purchase price or a brand new replacement vehicle “substantially identical” to the one that was repossessed.

         And, this is where the second appellate decision comes in. In Cabrera vs E. Rojas  Properties, Inc (B216445), ( Cabera v Rojas)the Second Appellate District Court decided, on February 18, 2011, that in the context of a personal injury action, Plaintiff was entitled to recover  from the defendant (who caused her injuries) only the amounts actually paid by her own medical insurer to the hospital, doctors and other medical providers rather than the amounts billed by those entities to the insurance company. Specifically, the medical providers had billed Plaintiff’s medical insurer the sum of $57,534.45, but after adjustments, were paid only $8,914.26. The appellate court held even though Plaintiff had the foresight to carry medical insurance, Plaintiff was still not entitled to obtain a windfall by being awarded the amount billed rather than the amount paid as against the defendant; Plaintiff’s damages against the defendant could only be the $8,914.26 actually paid; Plaintiff could not collect a windfall from the defendant by being awarded the billed amount of $57,534.45.  As this opinion notes, other appellate courts in California have held the opposite (ie., that the Plaintiff would be entitled to an award of $57,534.45 and thus to a “windfall”) and so the issue is pending before the California Supreme Court. (See note 2 at page 6.) 

          So, applying the notion from this most recent personal injury case that Plaintiff is not entitled to a windfall but should collect only what was actually paid and not the full amount “billed”, what ARE plaintiff’s damages under the Act? And if one does apply this rule from this personal injury case, is it contrary to the language of Civil Code section 1793.2(d)(2)(A) and (B), noted above, which seems not to envision the situation in which a consumer who no longer owns or possesses the vehicle and never fully paid for it, seeks restitution or replacement?

          It will be most interesting to see how the trial courts deal with these issues, and even more interesting to see how the parties deal with them in my next “lemon law” mediation!

          … Just something to think about!     

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