ARBITRATION: The ‘New Litigation’
Q&A with Tom Stipanowich
Stradley Ronon At Work
ARBITRATION: The ‘New Litigation’
by Thomas J. Stipanowich ©2008
This article is summarized with permission of the author, Thomas J. Stipanowich, Professor of Law, Pepperdine University School of Law and Academic Director, Straus Institute for Dispute Resolution.
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In recent years, arbitration as a dispute resolution medium has seen unprecedented growth, in terms of both the quantity and nature of disputes subject to it. Conventional wisdom suggests businesses choose binding arbitration mainly because it is perceived to be different from litigation, with features such as cost savings, shorter resolution times, a more satisfactory process, expert decision-makers, privacy and confidentiality, and relative finality. Yet arbitration often falls short of popular expectations. Despite repeated evidence that business lawyers tend to view arbitration more favorably than litigation in key categories (fairness, speed to resolution and cost), the emphasis is frequently on perceived shortcomings, including unqualified arbitrators, uneven administration, the problem of arbitrator compromise and limited appellate review. Moreover, while advocates once promoted arbitration as a means of avoiding the contention, cost and expense of a court trial, modern business arbitration is more and more frequently described in terms similar to civil litigation: “judicialized,” formal, costly, time consuming and subject to hardball advocacy. By accepting the transformation of arbitration into a litigation like process, users of arbitration are losing sight of the key value of arbitration: choice.
The perceptions and realities of business arbitration processes are under tremendous strain and stress due to three significant developments that have interfered with the efficacy of arbitration. First, arbitration has been called upon to assume the burden of resolving virtually every kind of dispute and, in doing so, has become a surrogate for civil trial practice. To more effectively grapple with business disputes and the handling of large, complex cases, the character of arbitration has changed from a streamlined process into a protracted procedural ordeal, with lawyers invoking tools of zealous advocacy normally reserved for litigation. The “legalization” of commercial arbitration is increasingly a leading cause for complaints among business users, chiefly due to the delay and cost factors. Contrary to the original design of arbitration, lawyers continue to seek ways to make arbitration more like court trial, such as engaging in prolonged, extensive discovery tactics and including contractual provisions for expanded judicial review of arbitration awards.
Second, alongside the widespread adoption of arbitration is a parallel growth of mediation for resolving disputes more quickly and effectively. The benefits of mediation include a high degree of control over process and product with the assurance that a binding result only emerges upon agreement among the parties. Mediation holds out a realistic promise of a reduction in dispute cycle time and related costs, coupled with more creative, durable solutions and relatively minor risks. Mediation is often perceived to do a better job of providing the value traditionally associated with arbitration, as well as providing a better approach for preserving, maintaining and even improving commercial relationships. These perceptions suggest to some that we have passed the point at which commercial arbitration (at least in its present form) has achieved its maximum benefit to parties.
Third, binding arbitration provisions in standardized adhesion contracts governing employment relationships and consumer transactions are broadly enforced by courts, and this has attracted a great deal of controversy. Judicial enforcement of binding arbitration clauses ranges from enforcement in their entirety to the recognition of process limits under the standard contract notions of unconscionability and fraud. This extremely narrow judicial review of arbitration clause enforceability has led to Due Process Protocols developed by ADR provider groups, modification of arbitration rules, government regulation in the securities arena and statutory expansion. All these developments reflect concerns about the lack of choice facing many consumers and employees and the potential for overreaching by parties in a position of superior influence. The near-universal enforcement of binding arbitration clauses has contributed to their negative image and fueled a continuing struggle over the need for regulation of arbitration agreements, both in the form of adhesion contracts and in arms-length negotiation.1
An appreciation of these developments and their implications is critical for a more effective exercise of choice by users of arbitration and those whose decisions affect the arbitration experience, whether through counseling, drafting, advocacy or administration. Business users seek different things from arbitration, because business goals and needs vary by company, by transaction and by dispute. No one form of arbitration is always appropriate. For this reason, the primary value of arbitration is not speed, privacy or economy but rather the ability of users to make key process choices to suit their particular needs. To maximize the potential of arbitration, contract planners and drafters must move beyond a monolithic one-size-fits-all view of arbitration and make deliberate process choices appropriate to client goals and priorities.
Choice is what sets arbitration apart from litigation. If parties truly desire an expedited procedure in which speed and economy are the pre-eminent goals, it is possible to structure and implement a “lean program” to achieve those ends. If, on the other hand, cost-savings and a quick result are less important than a controlled “quasi-litigation,” that, too, is an option. It is for the parties to establish definite priorities for arbitration and to translate those priorities into action through their arbitration agreement and subsequent decisions. The key is fitting the process to the problem(s) – from the choice of decision-maker and forum to the time and location of hearings to all elements of procedure.
Business clients, guided by competent counsel, are in the best position to determine how and when arbitration will be brought to bear on commercial disputes and what kind of arbitration process will be employed. If business parties want arbitration to be a truly expeditious alternative to court, they must assume control of the process. Ideally, this includes not only choice-making at the time of contracting, but a strategic approach to conflict management, in which arbitration is considered among a variety of tools and options.2
In order to take charge and make effective choices regarding commercial arbitration, the first step is to make an effort to identify goals and priorities to be served by the mechanism for conflict resolution. These will undoubtedly include one or more of the following:
(1) flexibility
(2) low cost or cost efficiencies
(3) a speedy outcome, avoidance of undue delay
(4) “fairness” and “justice”
(5) legal due process
(6) results comporting with commercial, technical or professional standards
(7) predictability and consistency in result
(8) a final and binding resolution
(9) privacy and confidentiality
(10) preservation of a relationship, continued performance
The identified goals and priorities become touchstones for process selection.
It is often difficult to anticipate what kinds of disputes will arise under a contract and what the stakes will be. Dispute resolution provisions tend to be accorded low priority in contract negotiations, at least partly because raising the specter of conflict seems inappropriate at a time when the emphasis is on coming together. Transactional lawyers may also feel reluctant to make a negotiating point of arbitration, fearful of trading off more “substantive” elements. Without external support, transactional lawyers may simply fall back on inadequate boilerplate language or falter in custom drafting.
That said, significant business, legal and ethical imperatives require care in the selection and tailoring of arbitration and dispute resolution clauses. Clients and counsel face frustrations from a lack of precision in describing the process, a failure to clarify the consequences of a lack of compliance with specified pre-arbitration steps or procedures, the inability to join or to obtain discovery from third parties, a party-appointed arbitrator who functions inconsistent with expectations, a failure to adequately protect trade secrets, and enforceability and implementation issues surrounding a provision for expanded judicial review of an award. Choice regarding arbitration is too important to be left until the eleventh hour of negotiation; process options should be explored ahead of time – preferably after discussing key goals with the client. It is no longer ethically sufficient to tick off basic options (“mediation,” “arbitration”) and throw in convenient boilerplate language without reflection; lawyer-counselors must have or gain access to the knowledge and sophisticated tools necessary to address key process choices and issues. Provider institutions, responding to the need for new direction, should take the helm in developing alternative process templates to aid in the customization of dispute resolution clauses.3
Finally, in seeking to fulfill client goals and priorities though effective conflict management, arbitration should not be considered in isolation. Binding arbitration is often favored over traditional litigation but is ill-suited to be the primary process option for serving the day-to-day needs of businesses. Rather, the logical, normal first step is negotiation, followed in many commercial dispute resolution procedures by mediation. Only then should arbitration be considered, and part of that consideration must be a careful exercise of choice in identifying the type of arbitration to be called for in the governing document and whether arbitration or court-based litigation is the preferred final step in the conflict resolution process.
1 Of particular note is the expectation that Congress will consider several proposed amendments to the Federal Arbitration Act (FAA) in the coming term. One amendment includes the disallowance of pre-dispute arbitration clauses in employment, consumer or franchise disputes and explicitly directs the question of enforceability of an arbitration clause to a court rather than to an arbitrator. A second amendment prescribes due process standards for all arbitration agreements.
2 A benefit to engaging in private dispute resolution is the ability to preselect multiple mechanisms in a tiered approach. Tiered resolution systems typically direct the parties to initially negotiate and/or mediate, and if a resolution cannot be reached, the final “step” is either binding arbitration or litigation. The modern trend in stepped-up dispute resolution agreements is culmination in court rather than binding arbitration. Notably, the American Institute of Architects recently deleted from its contract regime the default arbitration provision in its standard stepped-up dispute resolution clause but retained mediation as a precondition to going to court.
3 Some provider institutions have begun to address concerns and provide options for handling discovery and appellate arbitration processes as well as develop streamlined alternative rules. See, e.g., Judicial Arb. & Mediation Serv. (JAMS), Streamlined Commercial Arb. R. & Proc. (2009), available at http://www.jamsadr.com/files/Uploads/Documents/JAMS-Rules/JAMS_streamlined_arbitration_rules-2009.pdf; Int’l Inst. for Conflict Prevention & Resol. (CPR), Expedited Arb. of Constr. Disputes (2006); JAMS Arb. Appeal Proc. (revised 2003), available at http://www.jamsadr.com/rules-optional-appeal-procedure/; CPR Arb. Appeal Proc. (1999).
Q&A with Tom Stipanowich
 Have the negative perceptions of arbitration processes prompted the growth of any new dispute resolution models?
In the construction arena, engineering professionals have pioneered “real time” approaches such as dispute review boards in order to nip conflict in the bud and, hopefully, avoid “lawyered” processes including arbitration, litigation and even mediation. They have achieved a significant level of success on major infrastructure projects. This same mentality underlies the growth of statutory adjudication in the UK.
In the health care area, Kaiser Permanente has broken new ground. Ten years ago, Kaiser received a lot of bad press on an in-house arbitration system that was promoted as being very speedy; the California Court struck down Kaiser’s program on the basis that the promotion was not borne out by reality. Now, Kaiser has developed a state-of-the-art point-of-care system involving ombuds who work directly with patients during their hospital stays. Again, the effort is to manage conflict much more proactively and avoid legal disputes as well as arbitration.
When is the best time to discuss dispute resolution goals and interests with a transactional client, and what is your advice on how best to broach the topic?
Business lawyers need to talk with clients about managing conflict in advance of negotiating the terms of a major commercial relationship. They should have a checklist of topics to go over regarding the client’s aims and a handful of process options to consider. Cost/benefit considerations require counsel to limit the number of choices a client must make. But it is important to at least provide the opportunity to go beyond standard boilerplate rules. My forthcoming article “Arbitration and Choice” will address some of these issues.
What tools would you most like to see provider organizations develop to help clients and counsel maximize the utility of alternative dispute resolution processes?
Lawyers can’t effectively provide clients good choices without the active support of conflict resolution organizations, whose procedures will be perceived by others as more neutral and credible than anything a client’s lawyer could draft. Today, major providers should be offering a range of templates including streamlined procedures; “stronger” limitations on discovery (see the new CPR “Modes”); additional confidentiality protections; and, perhaps, appellate arbitration.
Stradley Ronon At Work
Lee Rosengard and Marissa Parker's article, "Committing to Mediation: Enriched Resolution of Medical Malpractice Actions for Patients, Doctors, and Insurance Companies," was recently published by the Pennsylvania Bar Institute. The article describes the emerging trend among insurers and doctors to seek control over malpractice rates and the legal costs associated with medical malpractice disputes by asking patients to commit to pre-treatment agreements to arbitrate future disputes. Rather than focus on binding arbitration, the article advocates for insurers and doctors to use a pre-treatment commitment to mediation. As the article explains, mediation holds far more potential for medical malpractice stakeholders to control dispute-based costs, avoid frivolous litigation and resolve controversies that better satisfy all parties involved.
Stradley Ronon was pleased to host the spring meeting of CPR's National Task Force on Diversity in ADR. Ben Picker and Frances Gauthier are active members of the Task Force.
Ben Picker was reelected to the Board of Directors and Executive Committee of the American Arbitration at the AAA's Annual Meeting in New York.
Stradley Ronon partner Kevin Casey co-led a roundtable discussion, “Practical Strategies for Handling Disputes of All Sizes,” at the American Bar Association (ABA) Annual Meeting in Chicago. Casey is the incoming chair of the Alternative Dispute Resolution Committee of the Intellectual Property Law Section of the ABA.
Ben Picker has been certified as a mediator by the International Mediation Institute headquartered at in the Hague, Netherlands.
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