New Federal Court Decision Illustrates the Use of High-Low Agreements in Mediation

The use of high-low agreements is a familiar mediation technique. In a nutshell, a high-low agreement represents a “partial” settlement of a dispute under which the parties to a mediation agree to a minimum recovery for the plaintiff, and a maximum payout by the defendant, and then proceed towards final resolution (typically through litigation or arbitration) subject to the agreement. The technique is appealing because it mitigates risk for both parties by avoiding extreme outcomes — irrespective of the resolution, the plaintiff is guaranteed a recovery of at least the low number, while the defendant caps its exposure at the high number.

A recent decision by the Oregon District Court referencing the use of a high-low agreement to resolve a lawsuit for invasion of privacy is illustrative. Pegatron Tech. Serv., Inc. v. Zurich Am. Ins. Co., No. 3:19-MC-00315-SI, 2019 WL 1895578 (D. Or. Apr. 29, 2019). In Pegatron, the plaintiff sent one of her electronic devices to a computer repair service. Shortly after, plaintiff learned that extremely private and embarrassing material stored on the device had been published online. Plaintiff threatened to sue the provider for nine figures, and the provider passed along the claim to Pegatron, which managed the computer systems that had been breached. Pegatron then tendered the claim to its insurance carriers.

In an effort to avert a lawsuit, Plaintiff and the repair service executed a mediation agreement under which they stipulated to liability and agreed to negotiate a recovery within a specified high-low settlement range. After researching jury awards and settlements in analogous cases, Plaintiff and the repair service were unable to agree on a number. Accordingly, under the terms of the agreement, the mediator determined the settlement amount within the specified high-low range. The insurers reserved their rights to challenge the reasonableness of the settlement amount in court, and later sought to depose Plaintiff concerning her damages. The Court’s decision addresses the insurers’ entitlement to take Plaintiff’s deposition.

For purposes of this article, the salient fact in Pegatron was the use of a high-low range to circumscribe negotiation over Plaintiff’s recovery on her invasion of privacy claim. Invasion of privacy cases are well suited to resolution through the use of a high-low agreement since the damages from invasion of privacy — typically consisting of mental distress — are difficult to quantify. See e.g., Doe v. Chao, 306 F.3d 170, 198 (4th Cir. 2002), aff’d, 540 U.S. 614 (2004). In Pegatron, it seems likely both sides wished to avoid an extreme outcome resulting from the difficulty of quantifying damages, but without conceding a particular number, and used a high-low range to accomplish that objective.

Importantly, high-low agreements are not just useful in mediation. In a December 2008 article, mediator John DeGroote proposes the following general scenarios in which a high-low agreement may prove useful:

• The defendant is simply not comfortable with the runaway downside risk the case presents;
• The defendant needs to cap her liability to satisfy some of her stakeholders (like insurers, lenders or the CFO);
• The plaintiff in a case with significant damages faces a real possibility of a defense verdict and needs to cover some expenses, such as medical costs;
• The plaintiff needs some money in the short term, and agrees to limit his potential recovery in exchange for an agreed-upon “low” where the low is paid immediately;
• The plaintiff or his lawyer needs to ensure that litigation costs are covered;
• The defendant needs to settle within the limits of her insurance policy to protect her assets but her carrier would rather take the lawsuit to trial.

A July 2017 article by the insurance defense firm of Morris Duffy Alonso & Faley discusses the use of high-low agreements in tort cases to protect the defendant from a runaway verdict in excess of insurance policy limits while protecting the plaintiff against a defense verdict. It cites to several New York State court decisions addressing interesting wrinkles arising in connection with the use of high-low agreements in tort cases such as whether a high-low agreement is a settlement for purposes of CPLR Sec. 5003-a (providing for prompt payment following settlement), and disclosure of a high-low agreement with one defendant (known as a “Mary Carter” agreement) to other defendants in a multi-defendant action.

I invite readers to share their own experiences using high-low agreements.