What Does it Mean to Have “Settlement Authority” at a Mediation?

Local rules implementing alternative dispute resolution procedures typically provide that mediation attendees must have “settlement authority.” But what exactly does that term mean? Is attendance by outside counsel enough if someone else with full settlement authority is just a phone call away? A federal magistrate judge recently explored these questions in a mediation arising out of an insurance coverage dispute. Long v. Am. Family Mut. Ins. Co., S.I., 2019 WL 5819968 (D. Kan. Nov. 7, 2019).

The plaintiff (Mr. Long) had purchased a property insurance policy from American Family Mutual Insurance Company that provided $224,100 for dwelling coverage and $224,100 for personal property coverage. After a fire caused significant damage to Mr. Long’s home and personal property, he made a claim for the policy limits. American Family tendered payment for property damage to the house, but denied coverage for Mr. Long’s personal property on the basis that Mr. Long lied on his policy application by failing to disclose that he had a 20-year-old conviction for marijuana possession. American Family also asserted other policy exclusions. Mr. Long sued for breach of contract.

The parties scheduled a mediation, prior to which the mediator reminded them that attendees must have settlement authority, as per Local Rule 16.3 for the District of Kansas, which provides in relevant part:

Attendance by a party or its representative with settlement authority at the mediation is mandatory, unless the court orders otherwise. The purpose of this requirement is to have the party or representative who can settle the case present at the mediation . . . The parties’ attorney(s) responsible for resolution of the case must also be present.

The same rule authorizes the court to sanction a party that does not comply with these requirements.

Mr. Long personally attended the mediation with his counsel, but American Family was represented solely by its attorney. Mr. Long demanded $320,000, but defense counsel only had authority to settle for $20,000. After the mediation concluded, Mr. Long moved for sanctions and the scheduling of a second mediation on the ground that American Family’s counsel lacked settlement authority. American Family responded that its attorney had full settlement authority because $20,000 represented significantly more than the value of the case in light of its various defenses.

The court cited a prior Kansas District Court decision holding that a person does not have settlement authority when he has to pick up the phone to call someone else to find out whether he can go any higher or lower in response to a demand at the mediation. Instead, a person with settlement authority is someone who has the ability to make settlement decisions at a mediation without first having to check with someone else.

The court further held that having settlement authority does not necessarily mean that an attendee must have authority to meet its adversary’s demand. The court,  however, then qualified that principle:

[A]uthority to meet the other party’s demand could be a relevant factor in an appropriate case. But a plaintiff seeking sanctions on the basis of the party representative having inadequate settlement authority must, at a minimum, demonstrate that the plaintiff’s settlement demand was reasonable and that the defendant’s settlement offer was unreasonable. Here, Mr. Long has not presented any evidence suggesting that his $320,000 demand was reasonable or that American Family’s $20,000 offer was unreasonable. (emphasis in original).

Ultimately, however, the court awarded sanctions and ordered a second mediation because it found that American Family’s participation in the mediation solely through its attorney did not satisfy the Local Rule. It noted that the purpose of mediation is to engage both the parties and their attorneys and that delegating full authority to the attorney frustrates this purpose by insulating the party from the mediator’s counsel and advice.

The standard embraced by the court seems sensible in most respects. The notion that settlement authority means having the power to make a decision without first having to check with someone else is reasonable (although parties are certainly free to agree with the mediator that individuals with full authority will be available by telephone). See Dvorak v. Shibata, 123 F.R.D. 608, 609 (D. Neb. 1988) (dynamic of mediation is lost “if the only person with authority to negotiate is located away from the courthouse and can be reached only by telephone.”).

It is also makes sense to permit a party to limit the settlement authority of its representative at a particular mediation session to a specific bottom line. See G. Heileman Brewing Co. v. Joseph Oat Corp., 871 F.2d 648, 653 (7th Cir. 1989) (“In our view, “authority to settle,” when used in the context of this case, means that the “corporate representative” attending the pretrial conference was required to hold a position within the corporate entity allowing him to speak definitively and to commit the corporation to a particular position in the litigation. We do not view “authority to settle” as a requirement that corporate representatives must come to court willing to settle on someone else’s terms, but only that they come to court in order to consider the possibility of settlement.”).

But the court’s proposition that an attendee may be deemed to have insufficient settlement authority because it sticks to a bottom line that the court finds unreasonable seems highly dubious. A party may take certain positions at a mediation for many different reasons; indeed, taking seemingly “unreasonable” positions may be part of its negotiating strategy (of course, certain bottom lines – like offering $500 in a multi-million dollar case – might properly be deemed bad faith by any measure).

In sum, it seems, so long as the attendees from each side have the authority to reject or accept demands within a predetermined range without having to pick up the phone (unless otherwise agreed between the parties and the mediator), a court should not involve itself in evaluating the reasonableness of the positions taken at the mediation. Because otherwise it is, in effect, passing judgment on the parties’ negotiating tactics.

We invite readers to share their thoughts.

For an insightful discussion of further authorities on this issue and helpful practice pointers, see “Mediation and the Thorny Issue of Settlement Authority” on Law360 (subscription required).