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.