Is Your Pre-Litigation Mediation Clause Well-Drafted? A Cautionary Tale from California

The popularity of pre-litigation mediation clauses continues to grow. Such clauses are appealing because they provide parties with a window of opportunity to settle a dispute before becoming embroiled in litigation and incurring all of the attendant costs. Such opportunities are especially valuable where a dispute arises out of an existing relationship — pre-suit mediation can preserve a relationship that might otherwise be permanently wrecked by the adversarial nature of litigation.

That said, pre-litigation mediation clauses need to be well-drafted, or parties can face unwelcome consequences. Illustrating the problem is a recent California federal court decision dismissing a complaint for failure to allege compliance with a pre-litigation mediation clause. See Sor Tech., LLC v. MWR Life, LLC, 2019 WL 4060350 (S.D. Cal. Aug. 28, 2019).

In Sor, two online travel companies had entered into a written technology and services agreement. Section 20(b) of the agreement contained the following pre-litigation mediation clause:

Prior to filing a lawsuit, the Parties agree to attempt to resolve the dispute in good faith through mediation conducted by a mediator to be mutually selected. Mediation will be conducted in San Diego County, California, unless otherwise agreed to by the Parties in writing signed by both Parties. The Parties will share the costs of the mediator and mediation equally. Each Party will cooperate fully and fairly with the mediator and will attempt to reach a mutually satisfactory compromise to the dispute within thirty (30) days after it is referred to the mediator.

The relationship between the parties broke down after the plaintiff discovered that the defendants had allegedly copied portions of the plaintiff’s website without authorization. On September 6, 2018, plaintiff sent defendants written notice to mediate under Section 20(b), and then purportedly asked defendants multiple times to agree on a date and specific mediator. The defendants allegedly failed to cooperate with these requests. Concluding it had done all it could to schedule a mediation, plaintiff sued defendants on October 12, 2018, for copyright and trade dress infringement, and breach of contract. The defendants moved to dismiss under Rule 12(b)(6) on the ground that mediation was a condition precedent to filing a lawsuit.

Plaintiff opposed dismissal on the ground that (1) the defendants failed to cooperate with plaintiff’s efforts to mediate in a timely manner, and (2) the mediation clause did not apply to the infringement claims because they did not arise under the Agreement. The Court rejected both arguments, and ruled that by failing to plead completion of mediation prior to filing suit, plaintiff had failed to state a required element of its claims. The dismissal was without prejudice to refile once plaintiff fulfilled its obligation to mediate prior to filing suit.

Concerning plaintiff’s first argument, the Court carefully parsed plaintiff’s allegations, noting that while alleging that defendants “stonewalled and sabotaged plaintiff’s repeated mediation efforts,” the complaint never alleged that defendants actually refused to mediate; only that defendants never “committed to mediate.”

Plaintiff argued that the agreement contained a “time is of the essence” clause, but the Court observed that the mediation clause itself provided a 30-day period to resolve the dispute through mediation “after it is referred to the mediator.” There was, however, no deadline to appoint a mediator and commence mediation. As the Court explained:

Because the Parties had yet to refer the matter to a mediator, the thirty-day clock never began to tick. Plaintiff does not point to any other provision in the Agreement that would require the mediation to start within a specific time. The Court therefore will not impose a time limit the Parties never agreed upon in their contract.

The Court added that the delay in the start of mediation did not constitute a waiver by defendants of their right to enforce the pre-litigation mediation clause.

Concerning plaintiff’s second argument against dismissal, the Court observed that while the pre-litigation mediation clause in Section 20(b) of the agreement only referred to the filing of a lawsuit, other clauses in Section 20 made clear that the scope of subparagraph (b) extended to any actions arising out of or related to the Agreement. Thus, even the infringement claims were subject to pre-litigation mediation.

We have to sympathize with the plaintiff here. It clearly made efforts to schedule a mediation, and craftily, the defendants seem to have hemmed and hawed without actually ever refusing to mediate. It’s not clear how long this cat-and-mouse game would have to go on before the Court would conclude that the defendants had waived their right to enforce the pre-litigation mediation clause. Presumably, the plaintiff was not facing any sort of statute of limitations, but obviously it cannot be happy with the open-ended delay occasioned by the dismissal.

At bottom, plaintiff’s unfortunate situation is traceable to a poorly drafted pre-litigation mediation clause that set a deadline to complete the mediation, but did not fix any deadline to actually select a mediator and commence mediation. This provided an opening for the defendant to drag out the process so long as did not outright refuse to mediate.

In conclusion, pre-litigation mediation clauses provide value by giving parties an opportunity to explore settlement before commencing litigation. But those clauses need to be well-drafted, including fixing a deadline to commence (and not just complete) a mediation.