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American Bar Association

ABA Section of Business Law


ABA Section of Business Law
Business Law Today
March/April 1999


ADR: A litigator’s perspective

Viewing the pluses and minuses

By STEVEN A. WEISS

Weiss is a business litigator at Schopf & Weiss in Chicago

Are you tired of litigation? Are the executives at the company you’re advising getting downright angry about being deposed too often? If you’re a litigator, maybe it’s time to think of an alternative form of dispute resolution. Let’s look at the pros and cons of ADR.

Litigation has become increasingly ineffective in dealing with many business disputes. The cost of litigation, combined with the time to resolution and the burden on company executives, often renders it a distasteful experience for corporate clients. Although many companies have in-house counsel who are accustomed to the trials and tribulations of litigation, company executives still have to be involved, either as witnesses, in settlement negotiations, or in explaining the case to other management.

As a result, alternative dispute resolution has become an increasingly popular method to resolve commercial disputes. From a litigator’s perspective, this trend toward dispute resolution has advantages and drawbacks. On the plus side, it usually allows for a faster, less expensive resolution, and therefore a more satisfied client. On the minus side, ADR does not always allow a lawyer to delve deeply enough into the evidence, and in the case of nonbinding arbitration or mediation, can sometimes lead to a more expensive and slower resolution.

In general, alternative dispute resolution is accomplished through either arbitration or mediation. The primary difference between the two is that in mediation, the sole purpose is to have the parties reach a settlement, whereas in arbitration, an actual ruling or decision is made. A mediator acts as a settlement referee, and normally presents his or her conclusions on the ultimate outcome of the case only to the extent that they may advance the settlement process.

Since it is not binding on the parties, mediation is only successful if the parties can arrive at a mutually agreed result, with the mediator’s assistance. Arbitration can be required by a contract or other agreement, or can be agreed to by the parties after a dispute arises. Mediation can also be contractually required or done voluntarily. Generally, a contract sets out the basic type of arbitration or mediation by reference to a particular organization or method of alternative dispute resolution.

Arbitration can be binding or nonbinding. Binding arbitration is similar to traditional litigation in that the parties present their cases and the arbitrator renders a decision on the merits. It is most useful where the parties have a legitimate dispute that both sides want to resolve quickly and efficiently. While binding arbitration is usually a result of a contract clause requiring arbitration in the event of a dispute, it should also be considered where no arbitration clause exists, but parties have a dispute they want to resolve. Binding arbitration is best when it is implemented from the beginning of the dispute, because in that situation the full advantages of reduced time and cost can be recognized. Arbitration is most like litigation, in that the parties normally engage in discovery and make formal presentations to the arbitrator. Because of these aspects, arbitration is usually more expensive than mediation, though less expensive than litigation.

Nonbinding arbitration also includes the presentation of a case, but the arbitrator’s decision is not binding on the parties and is more of a guideline to help the parties arrive at a settlement. It only helps in limited situations. From my experience, nonbinding arbitration is only useful when the parties have litigated for a while, discovery is mostly or completely finished, and the parties are trying to reach a settlement. Even in that situation, nonbinding arbitration frequently is not as valuable as mediation.

In a nonbinding arbitration, the most important factor is the arbitrator’s credibility with the parties. It serves no useful purpose if the parties’ response to an arbitrator’s nonbinding ruling is that the arbitrator simply did not know what he or she was doing. For this reason, I highly recommend using a former judge or other person of stature as the arbitrator in nonbinding arbitration. A client is much more influenced by a ruling/recommendation from a former judge than an arbitrator who is simply another business person whose judgment may or may not be better than that of the client.

Arbitrations are sometimes conducted by a panel of three arbitrators, with each party selecting its own "party-arbitrator" and the party-arbitrators selecting a third, impartial arbitrator. I think that this procedure has value only in specific situations and should not be regularly used. Unless there is a good reason for this approach — for example, if the parties will not be able to agree on a neutral arbitrator or the issues are so factually or legally complex that it is likely that a single arbitrator will make mistakes — the party-arbitrators are nothing more than additional voices for the parties, and are redundant.

My preference is to have an independent group identify a number of potential arbitrators, and provide their backgrounds and any potential conflicts or contacts with the parties. The parties then have a set number of peremptory strikes. The remaining candidates are then "voted for" by assigning rankings to each candidate. The nonstricken candidate with the lowest total ranking is appointed as the arbitrator. This same method can be used for a three-arbitrator panel.

There are also variations on arbitration, including "baseball" arbitration in which each side proposes a settlement figure or terms of resolution, and the arbitrator must choose one or the other. The advantage to this approach is that it forces the parties to be reasonable in their proposals. If a demand or offer is too far from what makes sense, the arbitrator is likely to choose the other side’s only slightly unreasonable proposal. Another type of arbitration involves the parties agreeing in advance to a range of results within which the arbitrator’s decision must fall. This is sometimes useful where the parties have conducted their own settlement discussions, but are then stuck at a particular position. The parties can then have the arbitrator choose a number at or between the parties’ last settlement positions.

Mediation is most useful after some, but not all, of the discovery has been conducted. At too early a stage in the litigation, it is easy for a party to use lack of information as an excuse not to move forward. I favor having each side identify what additional documents or information it needs, prior to the mediation, to avoid that type of excuse. Typically, this results in limited, targeted requests for additional information, rather than the all-inclusive requests frequently contained in formal discovery requests. It is also crucial that persons with decision-making authority be present at the mediation. Otherwise, it is too easy to hide behind the lack of authority.

In selecting an arbitrator, the focus should be on some of the same qualities you would look for in a good judge. These include intelligence, legal ability and understanding, and practicality. In arbitration, as opposed to litigation, you have the luxury of choosing someone who has knowledge in the particular area of law or fact involved in your dispute. Conversely, a mediator’s technical legal competence and familiarity with the business area of the dispute is less important than in arbitration where the arbitrator must render a decision.

The focus in mediation should be on a mediator with good experience and skills in mediation, regardless of his or her knowledge of the specific area of law. It is helpful for the mediator to be knowledgeable enough to ask questions and point out weaknesses in each party’s position, but since mediation is nothing more than a formalized settlement procedure, the real value of a mediator is being able to bring the parties together and in suggesting alternative solutions to the dispute. A good mediator has to establish trust with the parties and must be able to get each side to go a little further toward settlement than they would go by themselves. The mediator should also seek a win-win situation by determining the real interests of each party and then try to give each side what it wants most.

Since a mediator cannot force a settlement, the mediator’s bias or previous relationships with opposing counsel or the opposing party are less important than would be true for a judge or arbitrator. I favor allowing the other side to choose the mediator, or choosing between several mediators suggested by your opponent. A prior relationship between the mediator and the opposing party can sometimes help your case, because the party does not want to be perceived as unreasonable or intractable by a mediator with whom he or she has a prior relationship. Additionally, the opposing party may have more trust in the mediator, and hence be more likely to agree to the mediator’s suggestions, if they have a prior relationship.

A growing number of organizations now offer arbitration and mediation services. Some specialize in providing former judges as dispute resolvers. Others focus on a specific type of dispute such as international disputes or construction cases. Increasingly, these organizations are for-profit, and are, in a sense, in competition with the courts to resolve disputes.

The primary advantages of ADR over traditional litigation are time and money. Both arbitration and mediation involve less discovery than litigation, and the parties are much more in control of the timing than in litigation, where overcrowded dockets frequently lead to long delays in getting to trial. Mediations generally do not require live witnesses and evidence. Frequently, the mediation is accomplished through presentations by the lawyers, or a combination of the lawyers and a single-party representative. A "position paper" or other submission is frequently used to apprise the mediator of the facts and issues. Discovery is often handled informally, with each side relying primarily on their own evidence. In arbitrations, the parties generally conduct more discovery than in mediation, but the discovery is usually more streamlined than in full-blown litigation. Since successful mediation necessarily results in a final resolution, and arbitration frequently precludes an appeal, the parties also save time and money by avoiding the appeals process.

However, in the mediation and nonbinding arbitration contexts, the cost and time savings must be tempered by the fact that if the mediation or arbitration is unsuccessful, the time and cost to trial has generally been increased by the delay and expense of the mediation or arbitration process. Since no final resolution has been achieved, the parties must still go through the time and expense of traditional litigation, on top of what has already been spent.

Another advantage to arbitration, and to a lesser degree mediation, is that the parties can develop their own ground rules. When arbitration or mediation are required by contract, the format and rules of the arbitration are normally included in the contract, either expressly or by reference to a particular arbitration group, such as the American Arbitration Association. Many of these groups have their own rules and procedures that can be incorporated into the contract. However, even where the arbitration organization has its own general rules relating to discovery and procedures, the parties can usually develop their own specific plan.

The parties can agree to specific discovery and timelines, exchanges of witness lists and exhibits, and other aspects of the arbitration. While courts will sometimes allow the parties to comment on procedural issues, parties usually do not reach such agreements in traditional litigation, and some judges will not allow intrusion into what the judge feels is the court’s prerogative. Additionally, since they are being paid by the parties, arbitrators are generally more willing to accept agreements between counsel on scheduling issues. If arbitration is by agreement, the parties can set their own rules in terms of whether it is binding, what appeals rights, if any, are available, how many arbitrators are used and how they are chosen, what discovery can be conducted, and the procedures for the arbitration. Similarly, the parties typically agree, with the mediator’s assistance, on the procedures for the mediation.

Alternative dispute resolution is also advantageous where one or both parties do not want to set precedent or "make law." For example, an insurance company or other entity engaged in repetitive disputes may seek arbitration rather than litigation to avoid having a small or medium-sized case make bad law affecting numerous other disputes. In such a situation, it is also advantageous to the opposing party because the insurance company will not devote resources beyond the magnitude of the dispute solely to make good precedent.

Mediation has another advantage over litigation or arbitration. In mediation, the parties and the mediator have the ability to fashion remedies or results that could not be achieved through litigation or arbitration. For example, noncompete agreements, continuing relationships and other noneconomic terms are much more easily achieved through mediation, where the parties can achieve a win-win situation.

The resolution of a breach of contract case may be that the parties continue their relationship, but at a higher or lower price to compensate for the alleged breach. A court cannot award that type of relief. In an employee noncompete dispute, the party’s real goal may be to prevent the other side from soliciting its employees, not to prevent it from competing. This type of resolution can be achieved in mediation, even in the absence of a nonsolicitation agreement. An infringement claim can result in a cross-license or negotiated modifications. In sum, mediation can result in much more creative solutions than litigation.

There are also disadvantages to mediation and arbitration. The lesser amount of discovery can be a detriment as well as an advantage. In a case where most of the relevant information is in the hands of your opponent, less discovery may pose a serious problem. While this drawback can be alleviated in mediation by simply not agreeing to settle without the necessary information, it can be more difficult in arbitration where the arbitration rules or the arbitrator may limit discovery more than would be the case in litigation.

Similarly, the lack of a right to appeal can be a disadvantage when you must urge a change in law or interpretation or otherwise go against the grain. Some clients, used to the multiple levels of the courts, are reluctant to rely on a single, final adjudication.

As a general rule, my experience is that it is more likely that an arbitrator or mediator will seek to "split the baby" than will a judge. Thus, alternative dispute resolution is usually advantageous if you are representing a client with a weak case. I have never heard of a mediation resulting in one party receiving nothing, although such a result is much more possible in arbitration. Similarly, a case with good equities but bad law or facts is also a prime candidate for arbitration or mediation. On the reverse side, if you are representing a client with a very strong case, you might want to insist on baseball arbitration to prevent a compromise result.

Alternative dispute resolution is also helpful when representing a client with little money or who otherwise cannot afford the time and expense of full-blown litigation. As discussed above, arbitration and mediation tend to require significantly less cost and time than litigation and thus can alleviate some of the pain of litigation. However, keep in mind that if nonbinding arbitration or mediation fail, the ultimate time and expense can be greater than litigation alone.

One of the most useful aspects of mediation is in getting past a settlement roadblock caused by the parties’ refusal to "bid against themselves." Frequently, one party makes an offer or demand that is only slightly better than a previous offer or demand. In response, the other side says that it will not respond to such a small movement. The offeror then says, "I won’t bid against myself," and refuses to budge from a previous settlement position. The result is a stalemate, with neither side willing to move the settlement negotiations forward. Mediation can be very helpful in getting past this obstacle, as the mediator can push the parties to reveal what they would do if the other side had made another offer. I recently had a mediation where at the end of two days, the mediator outlined a package that he then asked each side to "sell" to their client. This was successful where normal inching toward the middle was not.

Where arbitration or mediation is required by the controlling documents, timing is not much of an issue. As discussed above, timing becomes more critical when dispute resolution is being used voluntarily. If attempted too early in a case, the parties may not have enough information to accurately evaluate their case. If too late, the parties may have become too entrenched in their positions. Additionally, parties sometimes will not focus on a problem until it becomes a more pressing concern.

I find that ADR works best after the parties have engaged in some discovery and some exploration of their respective positions. Thus, it is usually most successful after the initial written discovery exchanges and a few depositions. If it is attempted before this stage of litigation, I recommend that the parties agree as to what additional discovery should be conducted, either formally or informally. Alternative dispute resolution is also most effective immediately before a court ruling on an important motion or issue, such as summary judgment or a motion to dismiss. At that time, both parties have to worry about what happens to their case if they lose the motion. Resolution at that time buys each side certainty.

I am a fan of mediation. My experience is that if the parties go to mediation with a real desire to have it be successful, the result will be a settlement. Consequently, the client receives a faster, less expensive resolution of the dispute. A happy client is a repeat client. The times that I have seen mediation fail are when either one party is not negotiating in good faith, or where the mediator is not very good. Although it is possible for mediation to fail because the parties, in good faith, have a disagreement as to the value of the case, that is generally not the problem.

Binding arbitration is also a useful tool, especially where a relatively quick resolution is required. Binding arbitration, without the right to appeal, usually ends a dispute. The only exception is where one side or the other attacks the procedure itself (for example, based on an undisclosed bias), or attacks the contractual provision requiring arbitration. The "fairness" of the arbitration, and whether it is better or worse than litigation, depends on the ability of the arbitrator.

I generally do not favor nonbinding arbitration. In fact, I cannot recall a case of mine in which it was successful. If the arbitrator’s ruling supports your client’s view of the case, your client normally endorses it fully and will not budge from a previous settlement position. On the other hand, if the arbitrator’s ruling is contrary to your client’s position, the client normally views the arbitrator as incompetent, or comes up with some other reason why the result at trial will be different.

ADR resolution is being used more and more to avoid what is perceived as the courts’ inability to efficiently resolve business disputes. Since the vast majority of cases settle before trial, it makes sense to try to resolve the case part way through the litigation process, rather than on the eve of trial. Similarly, for those cases that would otherwise go to trial, binding arbitration can achieve a final resolution, generally more quickly and inexpensively than the courts. As alternative dispute resolution becomes more accepted, and the arbitrators and mediators become more successful in resolving disputes, we will probably see even more dispute resolution. It makes sense to embrace ADR and use it as a tool to help your clients obtain better results, more efficiently.

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