NAM PERSPECTIVE

April, 2015

THE COMMERCIAL DIVISION'S PILOT PROJECT FOR MANDATORY MEDIATION: WHEN MANDATORY IS NOT MANDATORY

By: Hal Neier, Esq.

Hal Neier, Esq. Recognizing the unquestionable value of mediating commercial disputes, the New York Supreme Court, New York County, launched a pilot project by which certain cases assigned to the Commercial Division are automatically referred to mandatory mediation. Because it has been just a short while since the pilot project became effective, it is far too early to tell how it is working. But certain things are clear from the very structure of the new mandatory mediation program. Most notably, it is not entirely mandatory. While it can be hoped that parties will take advantage of the pilot project—which allows parties to select mediators either from a private ADR firm or from the Commercial Division panel — the ability of parties simply to stipulate out of the program leaves a potentially significant gap in its effectiveness.

By way of background, on June 23, 2014, the Administrative Judge of the Civil Branch of the Supreme Court, New York County, issued an Administrative Order establishing “a pilot project for the automatic referral of certain Commercial Division cases to mandatory mediation.” Under the pilot project, which became effective on July 28, every fifth case assigned to the Commercial Division is automatically referred to “mandatory mediation” under the auspices of the Commercial Division’s longstanding ADR Program, which has been in place since 1996 and will continue to run parallel with the pilot project. The parties are free to choose their own mediator or select from a roster of neutrals assembled by the Commercial Division.

Although the provisions governing the pilot project, set forth at Rule 15 of the ADR Rules, repeatedly refer to “mandatory mediation,” an examination of Rule 15 makes clear that parties may simply agree to opt out of the mediation program. Specifically, Rule 15(a) provides that “[e]very case so designated shall proceed to mediation in accordance with this Rule unless (i) all parties stipulate that the case is not suitable for mediation, or (ii) the assigned Justice exempts the case from mediation upon a showing of good cause by a party as to why mediation would be ineffective, unduly burdensome, or unjust.” (Emphasis added.) In other words, if the parties all agree, they may simply opt out of the “mandatory mediation” program—no showing required, no questions asked. Although it is too soon to know how often parties will avail themselves of this opt-out provision, its very availability appears to be at odds with the central purpose of the pilot project—to compel mediation early in the life of a commercial litigation before substantial resources have been expended. This purpose was articulated by the Task Force in its Report and Recommendations to the Chief Judge of the State of New York, dated June 2012: While mediation can facilitate settlement at all stages of a litigation, both parties and the court system commonly achieve even greater benefits to the extent that the parties are able to resolve their disputes before engaging in the protracted and expensive disclosure and motion practice that modern business litigation typically entail. Indeed, at times parties feel that they have little disincentive to continue to litigate if they have already incurred substantial legal costs. The Task Force, therefore, proposes that the New York County Pilot Mediation Program be structured to provide for mediation before the parties have reached this tipping point, but to provide sufficient time so that limited, cost-effective, settlement-related information exchange can occur—either through formal disclosure or in the course of the mediation itself. Task Force Report at 27.

The ability of parties simply to opt out after their case has been designated for mediation would seem to undercut this salutary purpose. It is one thing for a Justice to determine, after a party’s showing of “good cause,” that mediation in a particular case “would be ineffective, unduly burdensome, or unjust.” ADR Rule 15(a). It is something else entirely for the parties simply to stipulate—without any showing—that a case “is not suitable for mediation.” Id. Though it is obviously true that parties cannot be forced to settle a lawsuit, mandating that they make a good faith effort to mediate the dispute near the start of the case hardly seems draconian.

The potential benefits of early mediation cannot be overstated. First and foremost, the case might actually settle, sparing the parties and the court substantial resources that would otherwise be expended in protracted litigation. And even if the case does not settle during the initial mediation attempt, there is tremendous benefit in the parties focusing at an early stage on the issues most central to the case and on a realistic range of damages—which almost invariably occurs during settlement discussions. The parties may choose to embark on limited settlement-related discovery or be in a position to narrow the scope of discovery going forward. Such early mediation also could help shape the parties’ future expectations and “bracket” the range of possible settlement outcomes, setting the stage for subsequent mediation efforts. In contrast to these and other significant advantages associated with early mandatory mediation, the burdens and potential prejudice to the parties are minimal.

It may be some time before the impact of the “opt-out” becomes known. As noted, the pilot project first became effective on July 28, 2014, and cases are not designated for mediation until after the filing of a Request for Judicial Intervention and assignment to the Commercial Division. While there are relatively few stipulations thus far on file, it will be important to closely monitor the results of the pilot project—and the frequency of “opt-out” stipulations in particular—to assess whether modifications should be made before the pilot project is extended to more cases within New York County or to other counties in the State.

Whatever changes may be necessary or advisable in the future, the pilot project is an important step in the right direction. It is a well known fact that the overwhelming majority of commercial cases—like all lawsuits—settle in advance of trial. It is also widely understood that pretrial settlements are essential to the functioning of an already overburdened court system. Ira B. Warshawsky, former Justice of the Supreme Court, Nassau County, Commercial Division, wrote the following about the Task Force’s proposed pilot program shortly before it was enacted:

One thing is clear, mediation, whether it be chosen voluntarily or mandated by the court system, is a vital part of commercial litigation in New York. The system will collapse under its own weight if more cases do not move out of the system and into an ADR format.

Hon. Ira B. Warshawsky, What’s New in the Commercial Division (NAM Perspectives, Apr. 2014). For these reasons, the Chief Judge’s Task Force and the Supreme Court should be applauded for implementing a program designed to facilitate the early mediation of cases in New York’s busiest Commercial Division. But the pilot project as it is currently structured may not go as far as it should in promoting this worthy objective. While it is true that mediation will be mandatory in cases where not all of the parties agree to opt out, allowing parties to stipulate out of mediation without a showing of good cause leaves a potentially huge hole in the program. Old habits die hard. And absent a truly mandatory program for early mediation, too many commercial litigators may continue to lead their clients down the long and costly road of full-bore litigation without seriously considering mediation until the parties are already heavily invested in the fight.

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(1) The pilot project was recommended by the Chief Judge’s Task Force on Commercial Litigation in the 21st Century and by the Commercial Division Advisory Council.

(2) Under the existing ADR Program, a Commercial Division justice assigned to a particular case can direct the parties to ADR “where the Justice deems it useful to do so or upon consent of the parties.” Rule 3(a)(1) of the Rules and Procedures of the Alternative Dispute Resolution Program of the Commercial Division (the “ADR Rules”).

(3) The Task Force apparently recognized the importance of maintaining the mandatory nature of the pilot project— which it denominated in its Report as the “Pilot Mandatory Mediation Program”—and stated that the program should only “provid[e] for parties to opt-out of mediation in those rare situations where mediation would be ineffective or otherwise unjust.” Report at 27 (emphasis added). Unfortunately, this restrictive language did not find its way into the actual proposal.

(4) The requirements of the ADR Rules are relatively modest: The parties are required to attend only four hours of mediation, after which the mediation may be terminated by any party. ADR Rule 10(a) & (f). And the ADR Rules expressly ensure the confidentiality of the mediation process. ADR Rule 8. Moreover, unless otherwise ordered, court proceedings are not stayed during the mediation, so parties need not worry about delay resulting from an unsuccessful mediation.

(5) Under a recent modification of Uniform Rule 202.70, a party has 90 days from service of the complaint to file an RJI if it wishes to seek assignment to the Commercial Division. Once a case has been designated for the pilot project, ADR Rule 15(a) gives the parties 30 days to decide whether to stipulate out of mediation.

(6) According to Kevin Egan, Mediation Coordinator for the Commercial Division of the Supreme Court, New York County, 80 cases have automatically been referred to mediation since the inception of the pilot project, and 7 have thus far opted out by stipulation of the parties

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Hal Neier, Esq. is a member of NAM's (National Arbitration and Mediation) NY Metro Roster of Neutrals and is available nationwide for mediations and arbitrations. He is a longtime advocate of Alternative Dispute Resolution and has extensive experience handling complex commercial matters in both mediations and arbitrations. As a partner at Friedman Kaplan Seiler & Adelman LLP, a highly regarded New York Law firm, he is a litigator with broad experience in the areas of Commercial, Employment, Securities, Intellectual Property, Entertainment and Professional Malpractice.

Click here to view Hal Neier's resume.

For any questions or comments, please contact Jacqueline I. Silvey, Esq. / NAM General Counsel, via email at jsilvey@namadr.com or direct dial telephone at 516-941-3228.
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