Dispute Settlement: Arbitration at 50 Paces
Andelman, David A., Management Review
When Rhone-Poulenc Rorer got into a dispute a year ago with Immune Response Corp. over who would control the clinical trials of an AIDS vaccine, they turned not to a federal court in St. Louis but to the local office of the American Arbitration Association. It was a big investment for both sides ($50 million each), and ultimately an even bigger issue for the medical world. Too big and too urgent for the courts, they believed, but just right for alternative dispute resolution. What could have been an endless and costly trial was resolved within just three months. (The end result turned out to be a compromise--Rhone-Poulenc Rorer got the marketing and distribution rights; Immune Response Corp. got contractual rights to control all R&D, including all clinical and regulatory activities.) Rhone-Poulenc Rorer spokesman Bob Pearson had this to say: "We're all adults. [ADR] allowed us to move on and do business."
ADR is becoming a hot topic these days in the legal world. It's the focus of the nation's judicial and legal system, a favorite of Attorney General Janet Reno, the subject of a number of bills (most died in the 103rd Congress, but it should be high on the 104th's agenda), and above all the focus of endless debate in corporate boardrooms and union bargaining tables, in court houses, laboratories and on assembly lines. And it's even becoming a big business in its own right with a wide range of for-profit clones of the AAA springing up across the country.
The two most commonly used ADR techniques are mediation and arbitration, though there are now scores of line extensions, including fact-finding, mini-trials, conciliation, neutral evaluation and private judging. Basically, the difference is in degree of compulsion. Mediation carries no compulsion. A mediator's mission is simply to bring together two or more parties in a dispute and try to find some middle ground that will resolve it short of litigation or coming to blows. An arbitration is one step short of a trial.
An arbitrator--or quite often in high-stakes corporate issues a threeperson panel of arbitrators--will listen to arguments and witnesses from both sides, examine the evidence, then render a binding decision. In most jurisdictions, an arbitration ruling carries the same force as a court ruling--and may even be appealed to the courts.
With no centralized database, no national system of registration, regulation or tabulation, it's difficult to estimate just how big the market has become. But a survey by the litigation services group of Deloitte & Touche showed that among a sample of 246 corporations and litigators, some 3,248 ADR procedures had taken place from 1990 to 1992. And in the past two years, specialists believe the pace may have even doubled.
"Most of the world want their day in court," says Richard Naimark, corporate senior vice president of the American Arbitration Association, which bills itself as the largest arbitration organization in the United States. "These processes give you a chance to tell your story, often in your own words, often uninterrupted. You don't get that anywhere else. Even if you wind up on the losing end, you have some assurance you were listened to and that your viewpoint was taken into consideration, so you tend to buy into the result."
There are many other reasons that arbitration and mediation have become such hot properties. Court calendars have become so crowded in some parts of the country that a matter of civil litigation may take a decade or longer to get to trial. Moreover, it can take weeks, even months to educate a judge or jury on, say, the subtleties of software computer codes or genetic transformations. Indeed, what most ADR cases have in common is that they are highly complex, often technical areas that seem to cry out for specialized expertise and arbitrators are often expressly selected for their expertise in the specific area in dispute. "Judges tend to be experts in process, not subjects," says Naimark. "What is really driving the move toward arbitration is the quality of the results in fields that demand subject-matter expertise."
So when would it be more appropriate to go to arbitration? Are there certain cases that best lend themselves to that process? These questions are perhaps best answered by examining the fields in which arbitration has had the most explosive growth in recent years.
According to the Deloitte & Touche study, the largest single area seems to revolve around contract disputes. But ADR in all its forms is also being used to settle construction claims, business insurance claims, disputes over copyrights, trademarks and other intellectual property, patent infringement suits, securities fraud suits, merger and acquisition disputes, disagreements over stock and asset valuations, environmental disputes, human resources, employment and civil rights suits, and personal injury claims. Even NAFTA has arbitration provisions that are expected to become an important growth area.
How It Works
How exactly does ADR differ from a traditional courtroom situation? First, there must be agreement by both sides to use ADR and which form to employ. "The main consideration must be [an agreement] to resolve what can be resolved at the lowest possible level, even keeping it within the company if possible," says Daniel Pagano, a leading Boston-based ADR practitioner who specializes in labor and employment issues.
Ben & Jerry's, for example, set up an ADR process that could become a model for corporations. "It's based on introducing everyone in the company to concepts of conflict resolution throughout the workplace--a process that works from a mutual understanding of what it's all about," explains Pagano. The first phase is mediation using employees at a particular site trained in dispute resolution. If an employee rejects the mediation efforts, the case then goes to a site council and finally to the company council, which has the president, an employee and a member of board of directors and functions through secret ballot--effectively turning into an arbitration. But perhaps most important, the entire process may be inaugurated only by the Ben & Jerry's employee, not by management.
Frequently, the only real opportunity for dispute resolution, particularly in the labor arena, is mediation, since inevitably, if it fails, both parties can walk away. It can also take much longer. A strike at the Harvard Club of New York went on for nearly a year, including a variety of attempts at mediation after the union refused to accept arbitration. Other times, when a court actually orders ADR, mediation can be given a sharply restricted timetable before turning to compulsory arbitration. Mediation will begin at 9 a.m. and if there's no agreement by noon, arbitration proceedings will begin.
Increasingly, however, agreement that arbitration will be used is written into a contract in advance so that any disputes that might arise would automatically proceed to arbitration. Or arbitration may be selected after a dispute arises by agreement of both parties.
The first case on the 1994-95 docket of the United States Supreme Court was argued over precisely the issue of when arbitration must be used in a dispute, with the results being watched closely. In Allied-Bruce Terminex vx. Dobson, the issue was whether arbitration, which is a guaranteed right in interstate commerce, can be used in a purely local, small business matter. In summarizing the issue, Justice Antonin Scalia also summarized the essence of why arbitration is so often written into a contract: "The whole reason you enter into an arbitration agreement is because you don't want to litigate. You have now destroyed [the utility of such] arbitration agreements if every time you have to litigate on whether arbitration is applicable."
The issue cuts to the heart of the process of arbitration. Arbitration in the federal courts was established as a somewhat vague concept by Congress in the Federal Arbitration Act of 1925 and hasn't fundamentally changed since then. But the judicial landscape has changed dramatically over the last threequarters of a century. And neither Congress nor the courts have truly kept pace. "Do we need a clear statement of congressional intent?" asked Justice David H. Souter rhetorically. In the next Congress, it is likely there will be clarification. In the confusing days of recess of the 103rd Congress last October, two bills that would have clarified ADR applications and practices died before reaching a vote. Their sponsors intend to revisit the issue during the next session.
Once ADR is agreed on, there comes the selection of the arbitrator. This is often the most difficult and rancorous part of the entire process. There are two principle nonprofit arbitration bodies--the American Arbitration Association, headquartered in New York and the Paris-based International Chamber of Commerce, which deals more heavily with international disputes. Each maintains vast lists of experts in individual fields who are also trained in the techniques and practices of running an ADR procedure. Its fees cover presentation of the lists of practitioners from whom the disputants can choose as well as services to make certain the entire process runs smoothly. The size of the fees varies with such factors as the estimated size of the dispute (anywhere from $300 to $1 billion dollars or more) and the number of arbitrators (a single arbitrator or a three-person panel).
At the same time, there are some for-profit corporations that have grown dramatically in recent years--the largest being the Judicial Arbitration and Mediation Service, or JAMS, a company born in California but which recently merged with its major East Coast competitor, In Dispute, to create a nationwide organization. Its members are largely retired judges, which often makes lawyers and judges more favorably disposed to using their services, though they may not always have the same technical expertise in a narrow discipline as the arbitrators offered by the AAA.
Finally there is a growing number of freelance practitioners. Many former attorneys or specialists in various fields have set up shop and rely on their contacts and reputations to solicit clients. Some have banded into small group practices or firms--much like attorneys--with one big difference. There is no bar association of arbitrators, no state or federal licensing authority. Yet in most jurisdictions, their findings are fully enforceable in a court of law. Which, ironically, is the argument proponents of the existing system use to justify their existence.
"Our existence is based on our reputation for neutrality and integrity," says the AAA's Naimark. "This is a powerful regulatory force. In a sense we are more regulated that the courts. We receive daily guidance from the courts and legislatures about what the law is and how it should be applied. And finally, the courts can overturn any arbiter's award that is structurally inappropriate. If the process runs amuck, the courts can correct it."
It's in the discussions over who's going to be the arbitrator of a particular case where many arbitrations fall off a cliff. Last January, a Texas judge ordered J. Meg Olson, a senior NCR Corp. sales executive, to take her case of sexual harassment to the AAA as specified in the standard employment contract she signed. But, she contended in a second suit she filed nine months later, she found that AAA's employment discrimination arbitrators were heavily biased in favor of the employers. Of the 15 names the AAA gave her to choose a three-person panel, Ms. Olson contended in her suit, only three were women and all but one were lawyers who represented primarily corporations. When she complained to the AAA, they merely widened the male pool of management attorneys.
"The pool does have some older white men," Naimark concedes, "but that is changing very quickly. Most attorneys, plaintiff and defense, want people with a current knowledge in the field that is being arbitrated. When there are tough legal issues also involved, that narrows the pool further."
Still, as the industry matures, expertise broadens, and the field comes increasingly under government scrutiny and regulation, ADR seems well positioned to become a first choice for dispute resolution rather. For the moment, though, there is still an element of caveat emptor.…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Dispute Settlement: Arbitration at 50 Paces. Contributors: Andelman, David A. - Author. Magazine title: Management Review. Volume: 84. Issue: 1 Publication date: January 1995. Page number: 49+. © 1988 American Management Association. COPYRIGHT 1995 Gale Group.
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