Neutral Evaluation: An ADR Technique Whose Time Has Come

Mediation and arbitration get all the ink in the ADR press, but more and more "neutral evaluation" is becoming the ADR technique of choice. For certain types of cases, or at certain points in the life of a case, neutral evaluation can often be a better choice than mediation or arbitration -- although ultimately it works best when used as a prelude to either of those processes. Neutral evaluation, which has nearly all the benefits of mediation and arbitration yet little of their downsides, is truly an ADR technique whose time has come.

What Is It?

"Neutral evaluation" (also known as "early neutral evaluation," or "ENE," and sometimes simply called "case evaluation") can actually be many different things. Just as there are many different 'styles' of mediation (directive or non-directive; caucus or non-caucus; evaluative or facilitative; etc.), and just as there are many forms of arbitration (binding or non-binding; high/low; baseball; and so on), so too there are many different things that happen under the general rubric of "neutral evaluation." The only difference is that since neutral evaluation is a comparatively new kid on the ADR block, these different 'styles' or forms of neutral evaluation don't have nicknames yet.

At its core, neutral evaluation is exactly what it says it is: a process in which a third party neutral examines the evidence and listens to the disputants' positions, and then gives the parties his or her evaluation of the case. But it can be much more than that too. It can be an extraordinarily flexible, beneficial process, and in the hands of a skilled neutral evaluator it can go way beyond someone simply hearing the facts of a case, then pegging a number or outcome to it.

The development of neutral evaluation as an ADR technique came about in response to a reality we have all been confronted with many times: one of the main reasons cases don't settle sooner than they ultimately do is because someone -- sometimes one of the parties, sometimes an attorney, or maybe an adjuster -- has misunderstood or mis-evaluated the case. That leads to unrealistic ideas about the probable outcome of the case, which in turn leads to unnecessary stubbornness, which in turn leads to a trial date, which leads to the courthouse steps, and so on.

There is nothing worse than getting down to the final few weeks before trial, then trying to tell a party who has spent the last year paying his lawyer $75,000 to get the case from point A to point B that even if he gets to his beloved point C, the most he can ever collect is $25,000 -- and to add insult to injury, he'll never get to point C anyway, no matter how much he spends, because it simply doesn't exist, and the only thing that really matters in the case is point D.

If only that party and his attorney could have had some sort of 'reality check' earlier on in the litigation, they might not have become so enamored of their own mistaken notions about the value or viability of the case, and there might have been more money available to settle the case, or less invested and thus less required to resolve it.

Until recently, the primary sources of that reality check were either judicial arbitration or the mandatory settlement conference just before trial. The main problem with those techniques, at least from a case management perspective, has been that they either come too late in the case, when everyone is dug in (the settlement conference), or they are conducted so haphazardly that it's all too easy for the participants to shrug off the result as an aberration (judicial arbitration).

With the recent advent of privately-conducted mediation the problem of getting to the settlement table too late in the game has been lessened somewhat, but only somewhat. There are several reasons -- some legitimate and some not -- why it's often difficult to do either mediation or judicial arbitration early in the life of a case. Sometimes the psychological barrier is too great to suggest mediation early on, or sometimes you really do need more discovery and analysis in order to understand the true value of the case. And more often than not, judicial arbitration is little help in saving money because to do it properly and get a result that isn't skewed by too many uncertainties, you really do need to complete your discovery first, have your experts on board, etc.

The Federal Court ENE Experience

The federal courts, mainly through the efforts of Magistrate Wayne Brazil from the Northern District of California, have pioneered an "early neutral evaluation" or "ENE" program which is designed to tackle this very problem. It is similar to the state court's judicial arbitration program in that the neutrals are pro bono volunteers, the process is free to the litigants, and the process usually only takes a few hours. But it has significant differences too. The most prominent difference is that it is done early on in the litigation, before much discovery is done. In the federal courts, the process works something like this:

  1. A case is randomly assigned to the ENE program, but either of the parties may opt out. A neutral evaluator is randomly assigned to the case, although an attempt is made to match the evaluator's expertise with the subject matter of the particular dispute.
  2. Sometimes there is some 'case development' before the ENE session, usually in the form of a single pre-session conference call with the neutral evaluator and counsel, but sometimes not.
  3. The parties submit written evaluation statements, sometimes including documents and testimony, but often simply offers of proof.
  4. At the ENE session, the parties' attorneys present a summary of their client's case, and the evaluator questions the attorneys in a back-and-forth session designed to clarify issues and identify the 'hot-spots' in the case.
  5. The evaluator privately prepares a brief written evaluation -- but before presenting this to the parties, he or she will often ask the parties if they want to use the evaluator as a settlement neutral before seeing what opinion the evaluator has reached. If so, they can do that, but if not, at some point the neutral evaluator presents his or her evaluation of the case. Sometimes this involves giving the parties a number that the evaluator thinks the case will net at trial, or what the settlement range of the case should be, or some sort of guidance along those lines.
  6. Neutral evaluators in federal court also often help the parties with case planning, such as helping formulate discovery plans and schedules, helping define what issues might be ripe for determination by pre-trial motion, and so on.

The neutral evaluation program we have launched in San Mateo County through the Multi-option ADR Project ("M.A.P." - see end of this article for details) differs from the federal program in that it is voluntary, and neutrals will be chosen by the parties and paid at market rates (with modest means and pro bono options if appropriate). In other particulars, our NE program is relatively similar to the federal model.

The benefits of an early neutral evaluation are obvious: getting some good neutral feedback on your case before you launch off and spend a ton of money on a case that may not be worth it; helping to focus the parties on the issues that really matter so that time and money isn't wasted chasing phantom issues; and giving clients or attorneys a good reality check before they get dug in with unreasonable positions.

But trying this technique too early can have its drawbacks as well, drawbacks that are not all that different from doing any ADR technique too early in a case. For example, if there is certain critical information that the parties just don't know because they haven't reviewed all the documents or interviewed all the witnesses, a 'neutral evaluation' may not only be neutral, but inaccurate as well, and it could possibly do more harm to a case than good. Or, if the case is really going to turn on credibility or witnesses, or there is a chance that someone may be able to change their story to bolster their case, then it may be not only difficult to be as candid as one must be for the process to work, but it may be suicidal for one's case as well.

The three most critical factors bearing on the success of any ADR process are what, who and when:

  1. what process are you going to use?;
  2. who is your neutral going to be?; and
  3. when in the life of your case are you going to hold your session?

It helps to have these questions in mind before making decisions about any ADR process, but there are no magic bullets or pre-ordained formulas to follow in answering any one of them.

As far as timing goes, sometimes neutral evaluation is going to be an effective tool when used early in a case, while in other cases it may be most effective if it's used near the end of the case - and sometimes it won't be an effective tool at any point. Likewise, there are no ironclad guidelines for determining whether neutral evaluation is the best process for your case or not. But from my experience, I think a few patterns are beginning to emerge which may help you make some of these decisions.

  • Complicated, unusual cases. Neutral evaluation is often good in complicated cases, for example, where there are difficult mixed issues of fact and law, gray-area damages issues, or difficult evidentiary issues, and so on. A skilled neutral evaluator can sit the participants down, walk them through the problems of the case, and tear the veils from their eyes step-by-step.

I once defended a legal malpractice case in which the attorney admittedly had waited too long to do something, but as irony would have it, the plaintiff actually ended up being better off because of the delay. If the attorney had done what the plaintiff was urging should have been done in order to have met the standard of care, the plaintiff would have inherited even less money than she ultimately received. Needless to say, the plaintiff's attorney was rather suspicious when I kept pushing this novel theory (and to tell the truth even I was a bit incredulous too, but there it was, staring us in the face). Some of the evidentiary issues in the case were mind-boggling too, so we decided to conduct a neutral evaluation in hopes of making some sense of the case. Our neutral evaluator led us through an analysis of what it would take to prove the claims and defenses, step by step, brick by brick.

The remarkable thing about that experience was that by the time we had been at this for two days, it simply became apparent what the value range of the case had to be, and we slid seamlessly from a neutral evaluation into a relatively painless mediation, which settled the case. In this particular case we kept the clients out of the neutral evaluation process, and only brought them in for the mediation phase. I have no doubt that if we had simply convened a classic mediation from the outset in that case, it would have failed. After going through the neutral evaluation process, however, neither of us could buffalo the neutral when it came time to mediate. He knew the case inside out, and understood it as well as we did, if not better, and so there was no room for posturing, only for being realistic.

  • The need for privacy and a quick, intelligent resolution. Neutral evaluation is often good for cases which present not just thorny legal or factual issues, but also where the parties desire both privacy and avoiding the negative consequences of litigation. There are several reasons why many high-tech disputes are perfect candidates for the type of neutral evaluation/mediation process I just described above, and why this process is gaining such currency in Silicon Valley. Consider the following example:

Hi-Tech, Inc. is just about to get the huge new infusion of venture capital needed to get it over the last design hurdle before it can go public with its new product, a microchip that can be implanted in the base of the neck of small children, which allows them to actually hear, process and respond to what their parents are saying. Unfortunately, the attorney for their main competitor, Lo-Blo, Inc., has just written the CEO a letter saying that HTI stole one of LBI's key software designers, who took LBI company secrets with her when she jumped ship, and LBI is threatening HTI with a brutal lawsuit involving mega-damages, injunctions, patent-infringement claims, press conferences, food fights - the works.

HTI wants this problem resolved, and fast, but they want it resolved out of the public eye, because if this dispute hits the papers, the venture capitalists will scatter like cockroaches in a tanning salon. Binding arbitration won't work, because there's too much at stake, and the parties are reluctant to waive the right to appeal. Besides, that could take as long and be almost as expensive as traditional litigation anyway. And mediation won't work, because the outside director in charge of getting the venture capital completely disagrees on settlement strategy with the inside director who started part of the company in his garage and wants to be on the cover of Time Magazine; neither of them has a really good handle on what a good settlement would be, because they don't really understand the implications of the threatened lawsuit. The CFO is trying to convince the general counsel that they can't afford the Mother of all lawsuits. The CEO has an ego the size of Maryland, and there is no way he's going to simply "cave in" and pay LBI a ton of money now. And, most importantly of all - none of these top-level decision-makers even understands anything about the science behind their microchip anyway, so none of them has even a clue as to whether LBI's threatened lawsuit is merely blowing smoke, or about to blow them off the map. A mediation session with all these characters going at it (and their equally disjointed counterparts on the other side) would tax the resources of even the best beard-stroking mediator, and would almost certainly fail..

But neutral evaluation has something for everyone here - privacy, to satisfy the outside director; speed, to satisfy the inside director; a lack of great expense, to satisfy the CFO; a non-binding process which leaves all legal options completely open even if it fails, to satisfy the general counsel; and most importantly, a non-binding, nonadversarial vehicle for getting everyone to understand what is at stake, and what can best be done about it - without the need for filing a lawsuit. All they have to do is line up a few technical and legal experts, pitch the case to them informally, and then discuss the ins-and-outs until it becomes apparent what the best options are. With a process like this, even the CEO's mother can come to understand what's at stake. Instead of just shooting from the hip, the players can deal with the dispute carefully and intelligently - all before the litigation even gets started.

If this sounds a lot like an evaluative mediation, or a non-binding arbitration, or what a special master does in complex litigation -- it is, in many respects. But the big difference is that no one has to come to the table worrying about being pressured to settle, or having to face the specter of explaining an unfavorable judgment to the shareholders. That tends to get people to the table more quickly, and with less reason to posture.

  • Where the case will turn on expert opinions. Neutral evaluation is often a great ADR technique where the crux of the case is going to involve expert testimony. To a large extent this is already being done (and in San Mateo County has been done for many years) with the use of special masters in complex litigation, particularly construction defect litigation. If the case is going to turn on which experts are believed as to whether some professional met the standard of care, or if you're going to have to rely on expert testimony to determine the scope of a reasonable fix, you might as well sit down from the start and simply have the experts talk. If you really want to find out the best way to fix a building, for example, the last place you want to do it is with experts sitting in the dock in front of twelve angry men and a judge. It should go without saying that experts (and everyone else, for that matter) can be a lot more candid in a private neutral evaluation session than they are before a jury.
  • Neutral Evaluation as a prelude to mediation. In cases such as the ones above, neutral evaluation works very well as a prelude to mediation. You can get started without any of the psychological barriers that come with settlement negotiations. If the parties work honestly at the evaluation session, the worth of the case becomes obvious. This prevents the posturing which is so often the bane of settlement sessions.
  • Neutral Evaluation as a case management tool. Just as later neutral evaluation often makes the settlement value of the case obvious, early neutral evaluation often makes it obvious what discovery is essential, as well as exactly what needs to be proved in order to prevail. The case is brought into focus early, so there is less chance that everyone will get caught up chasing phantoms and wasting time and energy on issues that are ultimately irrelevant.
  • The need for trust and candor. Neutral evaluation usually works best when there is a high level of trust between the opposing attorneys, and when the participants are willing to be candid about their cases (although I don't mean to suggest you shouldn't do it if relations are anything less than cordial; even if someone is trying to hide the ball, a neutral evaluation session can still be very valuable). To the extent possible, however, the attorneys should be mutually interested in letting the actual case unfold, and they should not be thinking about tricking the other side, or manipulating the outcome - at least not too much.

While this may sound unusual or even unrealistic (aren't we all trained to think that vigorous representation is manipulating the outcome?), it's actually the safest way to conduct a case. In litigation, 'cleverness' more often than not becomes too clever by halves anyway, and before you know it you've sliced yourself with the other side of your own knife. I've found through experience that the extent to which one must resort to sleight of hand or trickery to gain the upper hand in a case is often indicative of the extent of the weakness of the case on the merits. Candor can often be a devastating 'strategy' by itself, a good indicator of the strength of one's case.

Neutral Evaluation Has Many of the Benefits of Arbitration and Mediation

Any dispute resolution process by definition brings a certain amount of 'baggage' to the table, generated by its very structure and purpose. This structural 'baggage,' like everything else in life, always has a plus and a minus to it.

For example, the primary structural baggage which litigation and the trial bring to the table is the requirement that there be a winner and a loser. The upside of this is that you can get a result in which the person who was 'wrong' can (theoretically) be forced to make restitution to the person who was 'right,' without resort to violence. On the other hand, this requirement of a winner and loser can be something of a structural defect as well, in that it tends to set off a chain reaction of negative events, such as the desire to lie, cheat, deceive, overpower, etc. in order to win (because if you don't win, you lose, and nobody wants to lose); and that mindset in turn leads people to want to spend more and more money in their attempt to vanquish their opponent, which leads to more desperate measures, which leads to more expense, and so on and so on.

The baggage which arbitration brings to the table is similar: arbitration is an adjudicative process, where the win/lose hammer can be even more final than in classic litigation, and thus where the stakes can lead to nearly as much desperation, expense and insane results as a trial (it just happens a little bit more quickly, and you can drink coffee and eat donuts in the comfort of some attorney's office while it happens to you). Even non-binding judicial arbitration (which is something of a cousin to neutral evaluation in concept, if not in practice) can have adjudicative, permanent effects on your case, such as a judgment if one does not timely move for trial de novo. So there is a certain risk to arbitration, even non-binding arbitration, which can make you think twice before leaping into it.

The baggage which mediation brings to the table is primarily emotional: mediation is avowedly a settlement process, where the parties have already, just by agreeing to engage in it, let down their guard a little bit as far as their 'toughness' about the 'invincibility' of their positions. This aspect of mediation, i.e., the fact that by its very structure it requires the participants to acknowledge that they are there to settle the case, often presents such a psychological barrier that the technique never gets used until the parties are forced to use it -- usually at a settlement conference only days or minutes before trial - and then, just like most medical treatments postponed, it really hurts.

Neutral evaluation, on the other hand, carries with it neither the settlement baggage of mediation, nor the adjudicative baggage of arbitration.

Far from carrying the stigma of weakness which some people (incorrectly) think is shown by a call to mediation, a call to your opponent to engage in neutral evaluation can actually be interpreted as a challenge of strength. If someone balks at engaging in ADR because they think they've got such a great case, you can always appeal to their vanity by pointing out that if they have such a great case, they shouldn't be afraid to lay it all out on the table in a neutral evaluation session, for the whole world to see. You can say to them, 'If your case is so good, you can't possibly have anything to hide, right?' Then they are in the awkward position of indicating to you a fear or weakness about their case if they don't agree to engage in this ADR process.

And unlike arbitration, neutral evaluation has none of the baggage of adjudication. It is a completely voluntary process from which no order, judgment, sanction or levy of costs or fees will ever result, under any circumstances.

The only thing that is likely to result from neutral evaluation is understanding - which, admittedly, can sometimes be a rather scary thing itself, and which, I suppose, can in some circumstances be 'baggage' as negative as that carried by any other dispute resolution mechanism.

The reason there is no one dispute resolution mechanism which is a cure for any given dispute is because successful dispute resolution is a function of many different factors, most of them simply having to do with good-old-fashioned human nature.

Neutral evaluation is not a solution to every case, and in some cases it simply won't work. And this slippery thing we call "neutral evaluation" is not one simple, monolithic, identifiable process anyway. How can you tell the difference between "neutral evaluation" slipping into a mediation on the one hand, and an evaluative mediation where the mediator brings a lot of subject matter expertise to the table on the other hand? Is there a difference between a "neutral evaluation" process aimed at leading to better case management and case mentoring, as opposed to what a special master or referee often does when organizing a complex case?

I honestly don't know the answer to these questions, and I'm not sure we need to know all the answers before we continue our exploration. But at this early stage of our development of more sophisticated ADR processes and techniques, perhaps it doesn't matter as much what name we give it, as long as everyone is better off after going through it than before. The names and nicknames will come in time, naturally enough.

Whatever it really is, or whatever we may eventually end up calling it, I am convinced that something along the lines of the process we now call "neutral evaluation" will some day become a cornerstone of our justice system, every bit as important as mediation and arbitration.

*article courtesy of Pike & Fischer, Inc.