By Steven G. Mehta
Yesterday, I was in a meeting and discussing mediation services when I was shocked by what I heard. An attorney told me that a prominent mediator (He who shall not be named) in California charged a contingency fee for a mediation.
Specifically, the attorney told me that the case was worth seven figures and the mediator told the parties that he would charge 5 percent of the settlement amount divided by each side, but only if the case settled. I was shocked to hear that because of my belief that such fees are illegal.
I went to my computer to double check the issue and reaffirmed that such fees are illegal.
Here is the California rule:
CRC, Rule 3.859. Compensation and gifts
(a) Compliance with law
A mediator must comply with any applicable requirements concerning compensation established by statute or the court.
***
(c) Contingent fees
The amount or nature of a mediator’s fee must not be made contingent on the outcome of the mediation.
Sub section (c) makes it very clear that such a fee cannot be charged. I was interested to see what other jurisdictions allowed and found that there are a few jurisdictions that allow such fees but the vast majority do not. Moreover, mediator organizations also discourage the practice.
Geoff Sharpe of Mediator Blah Blah identified an article, however, in support of such contingency fees.
The case for and against (but mainly for) contingency billing by mediators is put in the well reasoned, but appallingly named, Contractarian Economics and Mediation Ethics: The Case for Customizing Neutrality Through Contingent Fee Mediation by Scott Peppet of CU Law. And find out why this minority view says neutrality is not undermined simply because of mediator interest in the outcome!
The problem with the contingent fee mediator – besides being unethical in most jurisdictions – is that it creates an appearance of impropriety and creates a bad taste in the mouth of the prospective clients. Moreover, from a business standpoint, the mediator has two clients: the Plaintiffs and Defense. Although many plaintiffs attorneys may be familiar and accepting of such fees; the defendants typically do not regard them in a favorable light. As such, even if the plaintiffs considered the fee arrangement, it is likely to turn off the defendants’ attorney. Indeed, the attorney I spoke with last night was turned off by the fact that the mediator could theoretically do a few hours worth of work and earn over $50,000.
Many attorneys also do not like mediator fees that are tied to the size of the case. In other words, if the case is six figures or less it is one fee; seven figures, then another fee.
The reaction I heard last night about the mediator (He who shall not be named) was a visceral reaction. The attorney relaying the story did not know of the ethical issue. He simply reacted by stating that he did not believe that was right that the mediator share in the fee. He stated that he thought that would taint the neutrality of the process and would make the mediator a third player in the mediation. Instead of trusting the mediator’s advice as neutral, the parties may have to consider whether the advice is given solely because the mediator wants to settle the matter and collect his handsome contingency fee. After all 5 percent of $1,000,000 is $50,000.
The reality is that not only is it unethical to charge such a fee, but it is also bad business.
Mediation Matters 
11 comments
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November 1, 2009 at 10:27 pm
stevemehta
Comment From Patricia Porter on Facebook:
That’s actually against the Professional Standards to charge a contingency fee…whoa.
November 1, 2009 at 10:28 pm
stevemehta
Posted by John Leo Wagner on Facebook. Steve, as much as I respect your insight and ability, you are just flat wrong on this one. Although I do not use contingency billing, I would certainly consider it in an appropriate case. It is manifestly NOT unethical to conduct a mediation on a contingent basis in California, except with respect to a mediation coming from a court-connected mediation program. The rule cited: California Rules of Court, Rule 3.859, is included in Article 2 of Chapter 3 of the California Rules of Court. The heading to Article 2 reads: RULES OF CONDUCT FOR MEDIATORS IN COURT-CONNECTED MEDIATION PROGRAMS FOR CIVIL CASES.
I agree that the market in Southern California may not be ready to generally embrace contingent mediation fees. I also agree that further discussion of the efficacy of contingent billing is a valid exercise. Having founded and administered a court-annexed mediation program, I understand the reason for this rule, as there is some imperative for a court not to REQUIRE the payment of a contingency fee. However, if the parties and the mediator outside the auspices of a court-annexed program voluntarily agree to this method of compensation, there is nothing ethically wrong with it.
If a mediator is willing to work for nothing unless the case settles, God bless him or her. Having been the the official recipient of complaints about mediators for a period in excess of 10 years, I can definitively say that by far the most common criticism of mediators is that THEY GIVE UP TOO SOON. A no-settle, no-pay mediation contingency fee is one way to address this problem. If you have a really important case and you want the full attention of a busy, talented mediator–then this may be the way to go.
A number of very prominent mediators from coast to coast have been using different forms of contingency billing for many years now, and as far as I can tell, none of them has left behind a dissatisfied party or drawn a charge of unethical conduct.
November 1, 2009 at 10:30 pm
stevemehta
Posted by Naomi Stal on Facebook:
Mr. Wagner, with all due respect, just because you cite a rule does not make behavior ethical. The nature of contingency fees is such that it provides an incentive to produce a specific outcome so that if the professional succeeds in satisfying the client(s), then the professional is amply rewarded. This entire reward system completely undermines the nature of a mediator as a neutral.
While you claim that a criticism of mediators is that they “give up too soon” and therefore contingency agreements are a great solution to t his fix, the danger of mediators that move in the other direction is by far greater than an innocuous complaint.
Mediators that “do not give up” are not called mediators. They are called settlement driven, aggressive negotiators. This is NOT mediation. This is dangerous to the process, dangerous for the attorneys, parties, and to the integrity of the practice.
November 1, 2009 at 10:42 pm
stevemehta
I am so glad that I have received such great comments on this topic. I had thought it would be an interesting discussion and I am glad that it has sparked some debate on this topic.
I think the topic merits substantially further discussion. John, thank you for clarifying my citation. I agree the rule does addressed court ordered mediations and not “voluntary” mediations that are outside of the court system.
My preference has been to comply with these rules even though a case may not “officially” be such a court referral. This is especially so since many cases are referred to “voluntary” private mediation by the court.
Second, my concern mirrors Naomi’s in that I do not want the mediator to be a separate third party in the mediation that is incentivized by the dollars. By definition, the mediator is supposed to be neutral. However, I am concerned that not only might a mediator no longer be neutral if he or she has a stake in the outcome, but that for the same reason the courts often create rules regarding attorney and judge behavior as being improper because of the “appearance of impropriety.”
A question that is correllary to this issue then becomes could an arbitrator have a contingency fee of some sort?
Another problem with the communication of this issue is that contingency fees have an emotional component. Often it is viewed as the more money the client makes, the more that the representative makes. Thus it would be interesting to see how that would work in mediation.
John and Naomi, thank you again for your wonderful and thought provoking comments. I think this will be a topic that will create a quandary for many.
November 1, 2009 at 10:45 pm
stevemehta
Posted by John Leo Wagner on Facebook:
Naomi: There may be some kinds of contingent fees that undermine the neutrality of a mediator. I tend to think that a percentage of the amount of the settlement has that effect, because the mediator has an incentive to maximize the plaintiff’s recovery. I am sure this is what pulled Steve’s trigger in his first posting. Even this may not be unethical, however, if the parties are fully aware and agree to the fee arrangement. I can envision a situation where a defendant would want such an arrangement, in order to placate a reluctant and wary plaintiff’s lawyer so that he would engage in the mediation process.
Be this as it may, however, doing a mediation on a “no settlement-no fee” basis where the “fee” is a predetermined amount (no matter what the ultimate settlement figure is) does not undermine neutrality. If you have a case, a statute, a rule or an ethics opinion that contradicts this, I would like to see it. There is little or no market demand in the private sector for mediators who are not persistent, creative “closers” who are vigorous in follow-through. The state of the art has changed, so that effective follow-up is expected.
November 1, 2009 at 10:47 pm
stevemehta
Another thought on this issue, Wouldn’t simply market conditions help create the force that is necessary to make sure that mediators follow up and push hard to help the settlement? If a mediator is not doing the necessary work to settle the case, won’t the market simply not use him/her again?
November 3, 2009 at 12:49 pm
Larry
Steve,
If you believe the story to be true, why don’t you name the mediator? Or is it possible that the story you were told was simply gossip, and not factual?
Larry
November 4, 2009 at 9:19 am
Susan Yates
Thanks for raising this interesting discussion. I see two distinct issues of contingency fees that are raised in this situation. It was described as “5 percent of the settlement amount divided by each side, but only if the case settled.” The discussion so far has revolved around payment if the case settles and how that would effect the effort of the mediator. While this does create a mediator’s financial interest in settling the case, and therefore have some effect on self-determination of the parties (for good or ill being the question), I see the much more vexing problem as the AMOUNT of payment being determined by the AMOUNT of the settlement.
Because the mediator’s fee would be determined by the amount of the settlement of the case, he or she has a stake in the terms of settlement under this fee agreement. The mediator now has a dog in the fight. Indeed, the plaintiff may like this arrangement, because any increase in the settlement benefits the mediator, but the defense should disapprove this fee arrangement. The lower the settlement, the less the mediator receives, and that is in opposition to the defense’s interests. Whether an individual mediator can mediate impartially or not, there is the question of whether this maintains the appearance of impartiality.
A mediator seeking guidance might look to the Model Standards of Conduct for Mediators, approved by the AAA, ACR and the ABA in 2005. Standard VIII B. says “A mediator shall not charge fees in a manner that impairs a mediator’s impartiality,” and further “A mediator should not enter into a fee agreement which is contingent upon the result of the mediation or amount of the settlement.”
I understand how some mediators’ feel about this: “I am mediating at a table with lawyers who will make a lot of money if I settle this case with companies that will save untold amounts of money if I settle this case. Why should I be tethered to an hourly or daily rate? Why shouldn’t I be rewarded when I am successful?
It is important to look at this deeper side of the contingency issue, not just the question of pressure to settle, but also the mediator having a stake in the amount of settlement.
November 4, 2009 at 9:40 pm
Charles B. Parselle
In California a substantial and growing set of rules govern the conduct of a mediator but only in ‘court-connected’ mediations; this bizarre phrase is intended to distinguish the well-paid private mediation market from the unpaid ‘court-connected’ mediation market. This is misleading because all mediations are court-connected because they are all about settling cases filed in the court. The private mediation market is completely unregulated so there can be no question of wrongdoing in negotiating a contingency fee. When we think of contingency fees, we generally think of a percentage of the recovery. I find it hard to believe any lawyer would agree to allow a mediator’s fee to be a percentage, because that would clearly encourage the mediator to beat up on the defendant and hold out for the highest possible settlement number. But I see nothing wrong in a mediator offering to serve for a fixed fee payable only if the case settles, because that is merely a marketing tactic in the competition with other mediators.
I also find it curious and growingly improper for the field of mediation to be both regulated and unregulated, depending on how the mediator acquires the case.
November 4, 2009 at 10:05 pm
stevemehta
Charles, your comment about regulation in court v. private cases as being treated the same is a very important one. thanks for your thoughts.
November 4, 2009 at 10:08 pm
stevemehta
The question of neutrality is definately at issue when the fee is based on the outcome. What if the fee wasn’t based on the dollar amount, but just the result. Several comments have indicated that they believe that it is acceptable. I agree with you Susan, that there is still an issue of whether the mediator has an undue stake in settling, and would the advice be the same if they were about to not get paid for a lot of work? Thanks for your thoughts.