In commercial mediation, parties may reach a point at which the gap between the latest offer and demand has narrowed to within a relatively close range, but the parties display reluctance to make any further substantial moves as part of traditional (incremental) settlement negotiations. In these circumstances, the judicious use of the Double-blind Offer Method has, in my experience, frequently been effective at bridging this gap.
Explanation of the “Double-Blind Offer Method”
A mediator employing the Double-blind Offer Method should obtain the parties’ informed and explicit agreement to engage in a potentially binding mediation procedure that will have two components.
Component 1: each party will extend an offer that will not be made known to the other side unless a settlement results. (I am using “offer” here to include both the plaintiff’s assertion of the amount it will accept (“demand”) as well as a defendant’s offer to pay).
Component 2: in advance of this process, the parties will expressly agree upon a percentage figure (e.g., 70%) that will determine whether the gap between the two offers is close enough for the case to settle. (We will refer to this fraction as the “closing percentage”). Specifically, the parties will pre-agree that if the margin between the two offers is equal to or greater than the specified percentage, then the case will settle at the midpoint between those two offers. (There are variants on this method, which I’ll explore in further posts).
Here are three examples to illuminate how this method works in practice:
1. Plaintiff and defendant agree in advance that the “closing percentage” will be 80%. Plaintiff confidentially conveys to the mediator a demand of $2,000,000. Defendant confidentially conveys to the mediator an offer of $1,500,000. Defendant’s offer is 75% (1.5/2.0=75%) of plaintiff’s demand. Because the offer fell short of 80% of the demand, the procedure has not settled the case (though mediation can of course continue, including via another round of double-blind offers).
2. Plaintiff and defendant agree in advance that the “closing percentage” will be 70%. As above, Plaintiff confidentially conveys to the mediator a demand of $2,000,000 and defendant confidentially conveys to the mediator an offer of $1,500,000. Defendant’s offer is 75% (1.5/2.0 = 75%) of plaintiff’s demand. Because, relative to plaintiff’s demand, the offer is greater than the agreed closing percentage of 70%, per the parties’ agreement in advance of beginning this process, the difference between the demand and offer is split, and the case is settled at $1,750,000.
3. Plaintiff and three defendants agree in advance that the “closing percentage” will be 70%. As above, Plaintiff confidentially conveys to the mediator a demand of $2,000,000. In this example, Defendant A offers $500,000; Defendant B offers $800,000; and Defendant C offers $600,000, for a total of $1,900,000. (No defendant is informed of the amount of any other defendant’s offer). Because, relative to plaintiff’s demand, the sum of defendants’ offers exceeds the agreed closing percentage of 70% (1.9/2.0=95%), the difference is split and the case settles at $1,950,000.
In this scenario, the defendants usually will have pre-agreed that their ultimate contribution to the settlement will equate to the ratio of their respective offer to the collective sum offered. For example, Defendant A, whose offer represented 26.3% of the total offer, will fund 26.3% of the total of $1,950,000, or $513,158.89. (Note that this is $13,158.89 higher than the nominal amount of Defendant A’s offer).
Practice tip: a party making an offer in the context of such a Double-Blind Offer process should be reminded that if a settlement results then its ultimate contribution will exceed the nominal amount of its offer and, therefore, its representatives should run the numbers in advance to confirm they have settlement authority at that level. For example, a party representative who offers $900,000 as part of a double-blind offer process in which the “closing percentage” is 90%, should make sure the company has authorized an offer up to $950,000, as that’s the maximum amount to which it will be bound should the amount of plaintiff’s demand be within 10% of defendant’s offer. Likewise, a plaintiff making a demand must recognize that a settlement, if it ensues, will be lower than the dollar amount of that demand.
Why this method is often effective in overcoming deadlocks
While an experienced mediator will be proficient in multiple resolution methods that are effective in various circumstances, the Double-Blind Offer Method is particularly effective in facilitating resolution in the face of a party or parties who are reluctant to make a significant move in whole or in part because of ”process” concerns. For example, a party may have a legitimate concern that conveying to the other party a significant move could lead to a loss of credibility or an unwarranted expectation as to the amount of settlement authority. This may be of particular concern where the parties or counsel anticipate prospective settlement negotiations in the context of future disputes arising from other matters. Defendants can be reluctant to reach a point where their next-to-final offer doesn’t result in settlement, yet becomes a perceived floor at subsequent negotiations.
Similarly, a party may fear a loss of credibility if it openly makes a large move when earlier in the mediation it conveyed the impression it would not move to such a dollar range. And, in multi-defendant actions, the double-blind method can overcome a defendant’s reluctance to offer an amount in excess of what it believes is its “fair allocation” relative to co-defendants, as the defendant will not learn in advance what any other defendant will be offering.
In such instances, the double-blind offer procedure affords a methodological “veil” that can allow the parties more flexibility. The procedure repositions the negotiation such that the perceived cause of moving “too much” shifts to the process and thus away from the negotiators. This often frees up the negotiators sufficiently to overcome what otherwise appeared to be an unbridgeable impasse.