ADR and Suspected Fraud

fraud (frod), n. 1. An intentional perversion of truth for the purpose of inducing another to part with some valuable thing belonging to him or to surrender a legal right; 2. A false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations; 3. Deceit; trickery; cheating.

THE INVESTMENT

If you were a conservative investor who was looking for a modest return on your dollar, would you invest in unusual penny stocks with no track record? Of course not, the risk would be too great, though the reward, if one of the equities turned out to be the next Microsoft, could be tremendous. My sense is that most disputants are also not looking to achieve fame and fortune in litigation, but are looking for conservative investments (risk) with reasonable returns (reward).

Recently I had occasion to mediate a stream of disputes for a large department store ranging from slip and fall to false imprisonment. Each case was unique in it’s own way. The one thread that seemed to run through the risk analysis of defense counsel in which liability was seriously in question was whether or not there were actual injuries, and if so, were they related to the incident in question. I wondered why there was so much concern on each case? Was I so naive as to think everyone was being truthful? Then a pattern started to emerge that was striking. Many of the claimants either did not disclose to their lawyers previous injuries which were identical to those claimed, or the lawyers were not disclosing the injuries to the other side.

For example, consider the case of the woman who claimed that a clerk ran her over with a basket. Though the clerk said the woman did not fall, was fine after the incident and continued to shop, the woman claimed massive low back injuries that will necessitate surgery. Also, she claimed that during all the commotion she lost her diamond wedding band worth approximately $12,000, which was one of many red flags for the defense. The demand to settle was in excess of $250,000, with no offer on the side of the defense. A huge amount of written discovery requests, depositions and other related litigation tactics occurred and we were on the eve of trial.

Unfortunately, this woman forgot to tell her lawyer that she had a 15 year history of ongoing back problems and addiction to narcotics. As a drug addict, she needed money from this case to maintain her habit. This information was presented to me privately, outside the ears of the plaintiff and her counsel. I urged the defense to disclose this information to plaintiff’s counsel but initially they resisted, claiming that they would rather save it for trial unless the plaintiff would get realistic in this case. I advised the defense that without the tools to do a reality check, we had no chance at settlement. After some discussion, I was eventually provided with permission to share this information with plaintiff’s counsel, who was stunned when he saw the medical records of his client for the first time. Needless to say, the case was resolved quickly.

How many lawyers have had similar promising damage cases turn into time consuming, unprofitable pieces of litigation only to find out late in the game that the defendant has hunkered down because of suspected fraud? Wouldn’t it be nice to know early on in the case that the defendant has questions about the legitimacy of some aspect of the case, so the case can be properly evaluated?

Despite the obvious answers to these questions, many lawyers find themselves stuck, never knowing why certain cases are log-jammed in the system with no way out except through the litigation maze.

Drawing the lines in the sand are the defendants who are naturally concerned about paying out on cases that have suspicious qualities about them, such as a woman who loses her diamond wedding band in a fall, or a medical facility that is on its “watch list;” a low-impact case with “excessive” medicals; examinations going far beyond the range of the injuries involved; questionable treatment cycles; and the like.

Strategy or habit often dictates that until the eve of trial neither side will communicate to the other the real reasons the case is stuck. Not until then will the judge require that the parties discuss openly and candidly the various elements of the case.

THE DIVIDENDS AND RETURNS

An early investment in disclosure of information can provide dividends for counsel that will far exceed the returns from depositing the case in the standard path. Though I’m biased, I think using mediation to share that information is the safest avenue to get from point A to point B. The biggest dividend is that before a huge amount of financial resources are spent, the lines of communication will open so that informed decisions are made about how to resolve cases. Consider the tangible opportunities available in mediating the suspected fraud claim for both plaintiff and defendant:

  • Provides a place for an early evaluation
  • Allows for a strategic exchange of information
  • Allows you to engage in a dialogue in a “safe, non-threatening environment
  • Requires complete confidentiality
  • Enhances the probability of settlement
  • Eliminates wasteful litigation – a great time-saver for counsel on both sides

1. EARLY EVALUATION

In the mediation which occurs early in a case, the mediator serves the function of an agent of reality. By listening closely to the evidence available, or not available, the mediator can explore the consequences to all parties if their positions are taken to court. The ability to observe the plaintiff and the insured and review the facts of the case may provide both sides with information that was desperately needed to put a reasonable proposal on the table. In addition, the mediation setting provides each side with the chance to review:

  • the demeanor of the other
  • the veracity of each other’s story based on their own version
  • new documents not previously discussed in litigation i.e. medical bills
  • veracity of counsel from his demeanor

 On the other hand, the evidence might also reveal facts which counsel was not aware. Consider a typical personal injury case and the following might become known:

  • previous injuries not disclosed to the doctor
  • violations of the chiropractic code
  • inconsistencies between medical bills and records
  • unsubstantiated examinations/treatment

 Armed with this “new information,” all parties are then able to more intelligently communicate, with the aid of the mediator, different ways to resolve the case.

By introducing the resources of a third party neutral the parties are afforded a rare opportunity to strategically manage the flow of information in a way that benefits their case. Faced with new information and the potential need to reevaluate a case, mediation may be the most useful forum in which to explore methods of changing direction and the significance of not doing so.

2. STRATEGIC EXCHANGE OF INFORMATION

In managing the flow of information, the mediator capitalizes on the strengths and weaknesses of the parties by surveying information each side thinks might make a difference in its case. The typical dilemma in a mediation of this kind is how much of the investigative efforts to allow the mediator to reveal to the other side. While insurers might be armed with information such as a witness statement, questions about the medical clinic, or even proof that the plaintiff wasn’t at the accident scene, they may be reluctant to share it with the plaintiff for fear that if the case doesn’t settle, they would lose the impact at trial or arbitration.

While the value of using the fruits of the investigative effort at trial are in theory very sensible, the necessary transaction costs and attorneys fees to prove the case as well as the reality that most cases don’t get to trial are rarely taken into account. The costs and fees to prove the case could be completely eliminated by offering to share the information during the mediation session. In so doing, the mediator can be the conduit for making the kind of recommendations about settlement or dismissal which the parties and counsel are prepared to accept. By strategically revealing information at certain stages in the mediation, the mediator can slowly assist in rolling out each side’s position in such a manner that protects each side in the event they decide to go to trial. Each side maintains control of the flow of information, and decides when to reveal evidence based on calculated decisions about the impact of the evidence and how it might be received during the mediation. This is accomplished through close consultation with the mediator, who gauges the temperature of the parties and recommends the appropriate time to exchange or disclose critical information.

For example, if the defense has an undercover film of the plaintiff showing the plaintiff in compromising activities which completely undermine the case, the defense would explore with the mediator the right moment to allow the plaintiff to know about this information. When the mediator senses that the information would have an impact on the evaluation of the case such that resolution is possible by revealing the information, the mediator would get permission from the defendant to discuss the information with the plaintiff. This analysis holds true if the plaintiff presented evidence to the mediator that would undermine the defense position.

In short, the power in the mediation of this type of case is in the information available to the parties. If one party chooses to bargain by keeping their cards close to the vest, the other party will not likely make a concession or even consider the outcome contemplated by the party with all the information. By systematically controlling the flow of the information through a seasoned mediator, the ice can be broken and a fair negotiation of the claim can be accomplished.

In a recent case, the plaintiff suffered dramatic injuries after running head on into the defendant who was making a left hand turn on a busy street. The plaintiff was in a coma for 6 weeks and wasn’t able to testify about what happened. The 80 year old defendant told her insurer that the plaintiff was speeding. As a result, he caused the accident. No one on the defense side really checked to see if their client was lying. However, the plaintiff’s counsel was conscious and did investigate the plaintiff. What he found was that she was not permitted to drive a motor vehicle because she had been diagnosed by a leading medical facility as being legally blind before the accident occurred. The plaintiff was holding onto this evidence for court but disclosed it to me during the mediation. I was instructed not to share this information with the defendant.

The defense hired experts to testify about the speed of the plaintiff being the sole and proximate cause of the accident. Their testimony was based exclusively on the purported observations of the 80 year old defendant. Since there was no one to controvert her, the defense did not think they had much exposure if the case went to court. One thing the defense didn’t consider was that the client concealed the fact that she was legally blind.

Fortunately, plaintiff’s counsel allowed me to share the information about the defendant with her counsel on the condition that if counsel agreed that the information was relevant, the case would settle for a specific amount of money. Defense counsel was honorable and agreed to abide by the request. Almost immediately after the information was disclosed, the case settled.

In another case involving sexual harassment, a long term employee quit her teaching job on the premise that the principal sexually harassed her. The defining moment was when a parent of one of the students called the principal to complain about the teacher using sexual innuendo and providing the students with graphic sexual photographs during class. The principal called the teacher into the office to inform her of the complaint and request that she cease and desist from such conduct without permission from the parents and principal. The teacher bolted out of the principal’s office and wrote a threatening letter to the board of education complaining about the sexual behavior of the principal! In short, in self-defense she tried to wound the principal by claiming that he was the culprit, not her.

During the mediation, the forensic psychiatrist for the school was able to demonstrate a 20 year history of sexual assault, violence and other problems that were in the extensive records of the plaintiff. Needless to say, her lawyer wasn’t aware of any of these records until they were disclosed in the mediation. He just believed his client. It was quite a wake up call to learn that his client was mentally disturbed. The case went away after the disclosure of this information.

What are the factors common in both of these examples? The new information provided by the mediation process enabled the recipient of that information to make a decision based upon greater intelligence and to do so earlier rather than later. In each case, one party minimized its losses and another maximized its gains.

3. ESTABLISHING THE SAFE ENVIRONMENT

To establish a safe environment is to create a process within which parties are encouraged to communicate productively. It is an environment in which they are comfortable enough to send and receive clear messages. This environment is generally created with a simple ground rule prohibiting comment, criticism, or any other form of behavior that might in any way distract a party while he/she is speaking. The mediator acts as a sort of filter in which the discussion will be allowed to drain through.

The result of using this procedure may include any of the following:

  • When meeting together as a group, the parties may express their entire view of the dispute without fear of interruption, criticism, or even comment.
  • When meeting privately, the parties are open to brainstorming openly because they are not obliged to make commitments at that time. At the same time, the discussion of the case is realistic as opposed to simply posturing about positions.
  • In private, parties may explore settlement scenarios with the aid of mediator, i.e. use the mediator’s “sense” of where the other side is at and hence more effectively explore options for resolution.
  • Throughout, the safety of the process permits the parties to achieve a sense of having reached their optimum resolution

In other words, the safe environment of mediation is for lawyers who want to get their point across to the other side with the client in attendance, for lawyers who want to be sure all alternatives have been fully explored, and for lawyers who want to get a greater sense of what caused the other side to take their position before disclosing fully its own position. For example, if the defense wants to deliver the message that it thinks elements of plaintiff’s case are suspect, it can do so without fear of retribution or retaliation because the mediator may do the talking. This allows each side the ability to explore the full potential of each other’s case before committing oneself to a position that might be both embarrassing and financially challenging.

4. CONFIDENTIALITY

The idea of confidentiality is the foundation upon which mediation is built, and the reason mediators are able to resolve cases. What does that mean to the consumer? It means that they are encouraged to tell the mediator their secrets without fear of having information used against them at anytime in the future. This is a powerful asset to an injured victim who might have sensitive issues surrounding his claim such as preexisting injuries, questions concerning the medical treatment and so on. Using this asset as a sword to get a case settled is precisely what drives the successful settlement.

To confirm the availability of the asset of confidentiality, the mediator usually promises not to divulge any information without the permission of the parties. This allows the mediator to build trust and openness, and encourages an honest disclosure of information and cooperation. Without it, parties are hesitant to reveal too much, fearing delicate information might be used in a later court proceeding. Confidentiality therefore encourages candor, a full exploration of the issues, and the possibilities of settlement.

Many states, such as California, have statutes which provide limited protection against the release of confidential information in civil proceedings. For example, Evidence Code §1115-1128 protects disclosure of settlement discussions in a later court or administrative proceeding. Skilled mediators will make certain that any information is not transmitted across the table without the permission of all parties involved.

5. ENHANCES THE PROBABILITY OF SETTLEMENT

There are at least three reasons why the process enhances the probability of settlement:

  1. The information is coming through a neutral, increasing the chances that it will be heard objectively, and not defensively. As such, it is more likely to be analyzed effectively.
  2. Because the parties are present, participate actively in the exchange of old and new information, and understand the process in which new directions are explored, they are more likely to understand recommendations of others.  
  3. The Mediator has created a safe environment by developing ground rules that preclude interruption and unwelcome cross-examination and assure a respectful and polite atmosphere. In this environment, the parties feel empowered and are in a frame of mind to resolve their dispute.

The safe environment of mediation and the confidential sessions with the mediator offer an opportunity to explore alternative outcomes. This joint effort of parties, to produce, with the aid of a mediator, an outcome based on both old and new information leads to a greater likelihood of achieving an expedited result that reduces or eliminates drawn out litigation.

6. ELIMINATES WASTEFUL LITIGATION

The idea of abolishing litigation that is either going to resolve quickly or go nowhere fast is the goal of mediating suspicious cases. This goal can be achieved in every case with the determination of counsel who is willing to look at his case with candor and openness. At minimum counsel learns why the case is dragging out so long and might find an exit strategy for a case that is going nowhere fast. At best the case gets settled and a settlement check is received within a few days of the mediation conference.

Litigation is wasteful if it is either initiated inappropriately or maintained beyond a point where resolution appears reasonably feasible. Inappropriately initiated litigation is litigation that does not require the intervention of the judicial process but that could be resolved through more meaningful communication among the parties to the litigation.

In the area of fraud, the elimination of wasteful litigation often results when a mediation session provides an opportunity to review scenarios likely to occur outside the courthouse as well as inside. These scenarios may include pending or likely agency actions, the value of ongoing relationships with either the plaintiff or the defendant, and the desirability of controlling the outcome of a matter as opposed to “rolling the dice” where ethics, morality, and perhaps even criminal conduct have been brought into question.

While it would generally appear to be in the best interests of attorneys and their clients to prevail in court, the existence of other, and potentially larger, interests may dictate that the legal positions be abandoned. Frequently, the mediation session produces an awareness of broader interests and an assessment of their importance relative to the legal action which is the subject of the mediation. This assessment, assisted with the potentially more reasoned objectivity available in a safe environment often leads to the termination of actions otherwise labeled as fraudulent.

CONVENING THE PARTIES TO THE MEDIATION

How would a lawyer respond to a telephone call from a mediation provider who has been requested by a party to mediate a case? Is there a downside in investing in a private, confidential conversation with an opposing party about the case? If you are the defendant, how would you respond if the plaintiff made the same request of you?

There is a perception on the part of both defendant corporations and trial lawyers that he who recommends mediation first is viewed as weak. They wince at the idea of agreeing to come to the bargaining table, particularly when fraud is suspected. A simple strategy works – allow the neutral to act as the go between or “convener” i.e. the person that makes the call. This allows for face saving in the event the other side says no, and might even provide you with some clues as to why the case is dragging on for so long.

Another strategy is to encourage parties to participate in a “pledge,” or agreement to mediate any cases with a particular insurer. Here is an example of how some trial lawyers and insurers addressed the issue of convening a mediation without looking weak: The insurance carriers entered into an agreement in which they pledged to mediate certain types of disputes submitted by plaintiff’s counsel. The pledge enabled either party to serve upon the other a Request to Mediate followed by the selection of a mediator and scheduling within 90 days. Given the widespread acceptance of mediation, it is not surprising that the program has received broad support from both the insurance industry and the Plaintiff’s bars. Furthermore, the existence of the pledge alone makes it simpler to convene the mediation. For those still clinging to the fear that a request to mediate may be a sign of weakness, the pledge is helpful because it applies to all cases and as such does not imply a “message” as to any single case.

Litigants in other areas of law have expressed interest in entering into a pledge similar to the one above. Given the potential savings of time, effort and cost, and given the fact that mediation is entirely voluntary and can terminate at any time, the implications of the pledge remain primarily positive. For counsel involved in large volume personal injury cases, the potential, through the pledge, for productive discussions and early resolution of cases through mediation is enormous.

The insurance industry has already evidenced its broad acceptance of the mediation concept. This acceptance is an opportunity for the Plaintiffs’ bar to assess the potential for broader-based, more productive, settlement discussions available through the simplified access to mediation offered by a pledge to mediate. Before dismissing mediation as just one more “hoop” to jump through, skeptics should remind themselves of the potential benefits of this hoop which has a settlement rate in excess of 85%.

CONCLUSION

The ability to find out the reasons why a claim is bottle necked in the system is a smart investment that yields high returns. Using the mediation process as an affirmative business strategy will either unlock the door to settlement of the case, or at minimum understand why things have stalled. With that understanding, an intelligent financially responsible strategy can be designed for the case.

Jeffrey Krivis is a private mediator and arbitrator in Los Angeles, and teaches mediation at Pepperdine Law School/ Straus Institute for Dispute Resolution. He is also on the board of directors of the International Academy of Mediators. This article appeared in the summer 1998, Dispute Resolution Journal of the American Arbitration Association.
 

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