What does the “Orgasmatron,” the “Tingler,” and a contaminated property have in common? Surprisingly, a very important lesson for all California litigators and mediators. With a pair of (regretfully unpublished) legal opinions, the First Appellate District has in the span of two months, helped shape when those term sheets often signed at the end of a successful mediation will became a binding settlement agreement…and when they will not. It is a lesson that, if learned, will protect and preserve your future mediated agreements; and if ignored, will leave you with one seriously unhappy client.
The lesson begins with Tender Loving Things, Inc. v. Robbins (1st App. Dist., A103989), the April 20, 2005 opinion coming out of the San Francisco courts. Hoping to recreate the success of the apparently famous Australian “Orgasmatron,” a pair of personal massage device developers created the “Tingler,” expressively described by the Court as a “massage device made from copper wires that proceed out of a handle, somewhat resembling a distended whisk broom.” The Tingler, explained the Court, is placed over the scalp to create “pleasurable sensations similar to ‘goosebumps.’” The parties to this dispute, apparently sensing a vibrant demand for scalp goosebumps, entered into a manufacturing and marketing relationship with the design of bringing the Tingler to the scalps of the masses. However, the electricity between the parties soon fizzled because the parties found themselves in arbitration, in federal court, and in state court … in rapid succession. If a case cried out for mediation, it was this one; and thus to mediation the parties proceeded.
The mediation was successful, and here is where the lesson begins. Under California’s strict mediation confidentiality structure of Evidence Code Sections 1115-1128, everything that happens in mediation is generally confidential and inadmissible in court, even settlement. For instance, Section 1119(a) states:
“No evidence of anything said or any admission made for the purpose of, in the course of, or pursuant to, a mediation or a mediation consultation is admissible or subject to discovery, and disclosure of the evidence shall not be compelled.”
This is not the wimpy “settlement privilege” of Evidence Code Section 1152 (settlement discussions are inadmissible to prove liability, but are admissible for all sorts of other reasons). In mediation, nothing is admissible for any reason. This includes settlements! Under the express terms of the statute, an oral settlement could never be enforced in court because it could never be proven to exist: An oral settlement reached by the parties (i.e., “anything said”) “in the course of, or pursuant to, a mediation” is not “admissible or subject to discovery, and disclosure of the evidence shall not be compelled” in any action.
One might think the rule would be different with respect to written agreements. However, even written agreements prepared “in the course of” a mediation are inadmissible and protected from discovery. Section 1119(b) (“No writing … that is prepared for the purpose of, in the course of, or pursuant to, a mediation or a mediation consultation, is admissible or subject to discovery, and disclosure of the writing shall not be compelled” in any noncriminal proceeding.)
And, of course, all of the settlement negotiations themselves are confidential: “All communications, negotiations, or settlement discussions by and between participants in the course of a mediation or a mediation consultation shall remain confidential.” Section 1119(c).
With all communications and documents inadmissible, how is any mediated settlement agreement ever enforced? California Evidence Code Section 1123 supplies the answer: “A written settlement agreement prepared in the course of, or pursuant to, a mediation, is not made inadmissible, or protected from disclosure, by provisions of this chapter if the agreement is signed by the settling parties and any of the following conditions are satisfied: (a) The agreement provides that it is admissible or subject to disclosure, or words to that effect. (b) The agreement provides that it is enforceable or binding or words to that effect . . . .”
In other words, for a settlement reached during mediation to be enforceable in California, it must be in a signed writing and contain language expressing the parties’ intent that the document is to be admissible or binding, or otherwise to fall outside the mediation’s protections. (To be technically accurate, oral agreements reached in mediation can also be made admissible under certain other-worldly circumstances, such as where the parties just happen to have a tape recorder handy to record the agreement, and the presence of mind to reduce the deal to a writing “within 72 hours.” See California Evidence Code Section 1118 for the strange details.)
All of these rules are based on a recognition that mediation cannot survive without true confidentiality. Mediation works because parties can safely let down their guard; they can expose weaknesses; they can explore true interests and motivations; they can brainstorm creative solutions. Without absolute confidence that one’s statements will never be heard inside a courtroom, who would be willing to admit that he may have accidentally left that sponge in the patient’s gut, and that he’s really really sorry? And yet, it might be this apology that breaks the settlement impasse and leads to a lasting resolution.
The California Supreme Court understands this, despite a flurry of challenges by parties and wayward thinking trial courts. Indeed, in Rojas v. Superior Court (33 Cal.4th 407, 2004) and Foxgate v. Bramalea (26 Cal.4th 1, 2001), the Supreme Court reaffirmed that everything that happens in mediation, stays in mediation – even documents prepared for purposes of mediation that could be used as evidence in a subsequent lawsuit. They are inadmissible in court. (And to close any loopholes, the mediator himself or herself is rendered legally “incompetent” to testify about anything that happened during the mediation process. California Evidence Code Section 703.5.)
Good mediators know these rules and hence tend to apply subtle (or not so subtle) pressure on the parties at the mediation to come up with a signed “binding” document before anyone is allowed to leave the building. However, and here is where the parties in Tender Loving Things ran into trouble, many mediations do not have the luxury of time during which complex written settlement agreements can be drafted with the care they deserve. Indeed, many mediated settlements, particularly those with complex facts, multiple issues, or difficult parties, do not settle until late in the day . . . or evening . . . or even early morning.
As experienced mediators and attorneys know all too well, the momentum gained from a full day of difficult negotiations, combined with fatigue, hunger, and a locked restroom door, all help create the mysterious dynamics necessary to bring some disputing parties together. It is then that the settlement agreement must be drafted and signed…before Settlor’s Remorse can creep in. The risk of losing a settlement explodes exponentially, especially in complex and contentious disputes, if the parties leave the mediation room without a signed document in hand. And yet, a complex settlement agreement, addressing multiple issues, and having long-term consequences, cannot be drafted with heavy eyelids and a full bladder. It takes time.
So very often mediators and parties do what they can before they leave the safe confines of the mediator’s candy-laden conference rooms to prepare a writing that will survive the California Evidence Code restrictions. After the handshakes and smiles, the parties (sometimes with the help of the mediator) will often prepare a “term sheet,” or “summary of settlement terms” or some similar outline of all of the essential terms they have addressed, often in messy longhand on lined paper, replete with interlineations and maybe even a coffee stain or two. And because the parties want the Court to be able to enforce the hard-earned settlement agreement, and thereby avoid the need to file a new breach of contract action should subsequent enforcement become necessary, the experienced parties will include as one of the bullet points an express adoption of California Civil Procedure Code Section 664.6:
“If parties to pending litigation stipulate, in a writing signed by the parties outside the presence of the court or orally before the court, for settlement of the case, or part thereof, the court, upon motion, may enter judgment pursuant to the terms of the settlement. If requested by the parties, the court may retain jurisdiction over the parties to enforce the settlement until performance in full of the terms of the settlement.
Which (finally) brings us back to the clever parties in Tender Loving Things (or TLT). After the arbitration, state court action, federal court action, and successful mediation, the parties understandably did not want their settlement to slip away. Hence, when the complicated deal was struck in mediation, the parties put the main deal points down in writing. Indeed, the so-called “Stipulation For Settlement; C.C.P. 664.6” contained a multi-paged attachment called a “Term Sheet,” which, according to the court, “extensively listed numerous detailed terms of the agreement regarding manufacturing and marketing of the Tingler” – and contained an express 664.6 adoption. However, the term sheet also contemplated the preparation and execution “of a more formal ‘final agreement’ that would contain additional incidental terms,” a more formal agreement that was never completed despite months of additional negotiations. (Recall above: The risk of losing a mediated settlement really does skyrocket when the parties leave the safe confines of mediation.)
And so the table was set for the Court. Under Section 664.6, Tender Loving Things applied to enforce the settlement as reflected by the term sheet signed by the parties at the mediation. Defendant Robbins objected, claiming the items on the term sheet were too uncertain to form an enforceable contract. Moreover, a number of contract provisions, such as a dispute resolution clause, were expressly desired by the parties, but had not yet been negotiated or agreed upon at the time the mediation term sheet was prepared.
Meanwhile, in nearby Solano County, a near parallel tale was unfolding, though with a more mundane contaminated commercial property substituting for the salacious Orgasmatron and Tingler. In Goodrich Corporation v. Autoliv ASP, Inc. (First App. Dist. No. A106077), the parties settled their dispute after an all-day mediation, signing “a handwritten memorandum of settlement” that stated expressly that it was intended to be “binding and admissible for purposes of a motion to enforce this agreement pursuant to Code of Civil Procedure, Section 664.6.” As in TLT, the parties intended, following the mediation, to draft and execute a more comprehensive settlement document. And, as in TLT, that future never arrived as the parties, left to their own devices outside the mediation, were unable to agree on the more formal terms. Finally, like the plaintiff in TLT, the plaintiffs in Goodrich moved to enforce the terms of the mediated settlement that were reflected in the handwritten memorandum.
In both cases, the trial courts granted the motions, enforced the settlement agreements as reflected by the term sheets, and dismissed the lawsuits. And in both cases, the defendants appealed to the First Appellate District. But here, the parallelism ended for in TLT, the Court affirmed the trial court and enforced the term sheet as a binding contract of settlement; while in Goodrich, the Court held the agreement to be too uncertain to constitute an enforceable agreement and sent the matter back to the trial court for further litigation.
Why? What was the difference between the two settlements that allowed one to be enforced, but not the other? The answer is apparent once the legal context is understood. First, as both courts recognized, a settlement is nothing more than a contract to be analyzed under standard contract legal principles. Hence, whether a term sheet is an enforceable contract depends in part on the intent of the parties, and in part on whether the terms contain the necessary certainty and definiteness to be enforced.
For instance, there is no reason a term sheet, even one to be later memorialized in a formal writing, cannot in and of itself be a binding agreement (or more accurately, the reflection of a binding agreement). Indeed, California case law is replete with examples of agreements being enforced once the terms are definitely understood, “even though the parties intended that a formal writing embodying these terms was to be executed later.” (1 Witkin, Summary of California Law, Contracts (10th ed), 133.) The key is intent. If the parties intend the term sheet to reflect the agreement of the parties, there exists a contract, and the subsequent understanding to transform that contract to a pretty piece of paper is immaterial to the obligations agreed upon. See, e.g., Stephan v. Maloof (1969) 274 Cal.App.2d 843. On the other hand, if the parties intend the agreement to be incomplete until subsequently reduced to a writing and signed, then the term sheet is not a binding agreement until satisfaction of the condition subsequent – the signed writing. Witkin, supra, at 134.
But a term sheet intended to reflect the parties’ agreement is not alone sufficient to render that summary of terms a binding contract. Otherwise, both agreements in TLT and Goodrich would have been enforced. Rather, as recognized by both courts, to be enforceable, the parties must actually have agreed upon all material terms, leaving no material matters left for future consideration; and all terms must be identified with such certainty and definiteness that “the precise act which is to be done” is clearly ascertainable by the court. Goodrich; Stephan, supra; Elite Show Services, Inc. v. Staffpro, Inc. (2004)119 Cal.App.4th 263. In other words, where material terms (such as the price of property being purchased) are not yet agreed upon, or where it is not at all clear what obligation a party has undertaken (e.g., to build an “undesigned area in the future for a specified maximum sum”), there is no mutual assent and hence no agreement. See, e.g., Robinson & Wilson v. Stone (1973) 35 Cal.App.3d 396.
As mentioned, both TLT and Goodrich acknowledged these basic rules of contract construction as they reviewed the signed term sheets before them. However, not surprisingly in light of their ultimate holdings, they spun things a little differently: The TLT panel, which enforced the parties’ settlement contract, emphasized “the modern trend” favoring the carrying out of the parties’ intentions “through the enforcement of contracts,” and disfavoring “holding them unenforceable because of uncertainty.” On the other hand, the Goodrich panel, which held the term sheet unenforceable, focused more on the need for objective “outward manifestations [of consent that would] show that the parties all agreed ‘upon the same thing in the same sense.’”
However, and this is where the practical lesson comes in for attorneys and mediators alike, the real difference in the appellate opinions was not in the subtle presentation of the law or the spinning of public policy, but in the detail of the deal points set out by the parties themselves in their term sheets. In TLT, the Court “was struck” by the “specificity” of the “eight page written document executed by the parties,” noting that it contained key elements of the licensing arrangement, including price per unit, royalty amount, trademark assignment, licensing details, and more. Just as significantly, the court noted that the terms that were missing – including the dispute resolution provision that the parties expressly wanted but had not yet developed or agreed upon – were merely “incidental details” that did “not go to the heart of the settlement agreement, or impair its enforceability.” The term sheet contained, “albeit in a somewhat informal format, all the crucial elements of the parties’ agreement.” As a result, the Court upheld the term sheet as a settlement contract binding on the parties and enforceable by the trial court under 664.6.
By contrast, the Court in Goodrich noted that while the parties had set out in the summary sheet certain specific terms, at least one of these terms –the amount of money plaintiffs would contribute to the costs of the environmental remediation – was arguably ambiguous. The Court was swayed by the fact that after the mediation, as the parties attempted to prepare the more formal settlement document, the parties took opposite and inconsistent interpretations of this important cost-sharing provision. As the Court noted, “it became clear the parties had not agreed to the ‘same thing.’” The Court explained that had the language used in the term sheet been clear and unambiguous, the Court would have found “mutual assent” to have existed, and would have thereupon enforced the agreement. However, because the language used was “susceptible to the interpretations advanced by both parties,” the Court determined that there was no mutual assent to a critical term of the deal … and thus no contract of settlement to begin with.
So what do the experiences of these parties teach future litigants and mediators in California who want to ensure mediated settlements stay settled? First, a wise lawyer will bring to every mediation a laptop with a fully drafted form settlement agreement. Even with complicated disputes involving many non-monetary issues, a framework for a workable agreement can often be anticipated and draft language prepared in advance. In this way, when settlement is finally reached, the parties are able to document the deal with much greater specificity than would otherwise be available with a chicken-scrawled term sheet on the back of a donut-encrusted napkin.
Second, if relying on a term sheet, take the time to identify all of the essential elements to an agreement and ensure that each element is specifically addressed in the writing. Indeed, this is not a bad exercise for the parties and mediator to undertake together before any drafting takes place so as to better strengthen the deal and ensure that no loopholes exist through which a party can later slip. The written term sheet will be enforced, but only if there is mutual assent as to all elements essential for the deal. Even dispute resolution procedures should be raised and agreed upon if possible. After all, another court may not agree with the TLT panel that an arbitration provision is merely “an incidental detail.”
Third, if the parties cannot reach agreement on terms they consider minor or incidental (or more likely they run out of time or energy to address them at all), think long and hard before putting the lack of agreement on those terms in writing. In other words, a provision in a term sheet that states “the parties will negotiate and agree upon a mutually acceptable alternative dispute process,” raises a red flag to any reviewing court that terms the parties obviously believe are material enough to include in their term sheet have not yet been agreed upon. If a subsequent formal settlement agreement is not reached for any reason and one party seeks to back out of the deal, the express “lack of agreement” will be Exhibit One to the trial court supporting the argument that the parties lacked mutual assent on all essential terms.
Fourth, as required by Section 1123 of the California Evidence Code, to break free from the protective cloak of the mediation statutes, make sure that somewhere in the settlement document it is stated that the parties intend the agreement to be binding and the settlement document admissible in Court. Specific adoption of CCP Section 664.6 might alone be sufficient to satisfy this requirement, but why take chances.
Fifth, consider a clause granting the mediator limited powers to resolve disputes (as an arbitrator) that might arise in the drafting of the subsequent written agreement. The newly-constituted arbitrator could select the language proposed by one party or the other, or draft his or her own language, that best reflects the mediator/arbitrator’s understanding of the deal reached by the parties at the mediation session. This alternative may be preferable to the more expensive and risky alternative of trying to enforce a term sheet before the trial and (in the case of TLT and Goodrich) appellate courts. (Thanks to Barry Winograd, an Oakland, California, mediator for this suggestion.)
Finally, forget not the power of Section 664.6 of the California Code of Civil Procedure. By specifically referencing this potent code section in the term sheet or settlement agreement, the parties can adopt a quick, easy, and effective process for enforcing the agreement they so painstakingly created. It allows the parties to get before the judge quickly to enforce settlement terms, without the need for the filing of a new enforcement action. Indeed, its ease of use even serves as a deterrent to otherwise recalcitrant opponents who might be considering shirking their settlement duties, or engaging in minor breaches that, while annoying, do not justify the filing of a new lawsuit.
Whether the Tingler ever replaces the Orgasmatron as the scalp massager of choice remains to be seen. However, at least in legal circles, it has the potential of providing comfort to litigators and mediators across the state who heed its lessons on how to protect those mediated settlement agreements.