Arbitration and Mediation: Avoiding the Cost of Litigation
By Dennis Boone
The nuances of mediation and arbitration, by now, are part of the DNA of those around the table, but there are, for the layman, important distinctions between these two tools for resolving disputes without the cost of litigation and trial.
Mediation in most cases involves a single mediator who does not judge the case. Rather, the mediator is there to help opposing parties find a pathway to resolve disputes. Arbitration is somewhat more structured, often with a single arbitrator or a panel of them, acting almost in the capacity of judges—ruling on evidence or writing opinions, which aren’t necessarily binding, but could be. When more than one arbitrator is involved, each side picks one, and those two recruit a third to create a dynamic for majority-vote decisions.
The goal is to avoid the costs of litigation, but that outcome isn’t ex-cluded; arbitration and mediation can be followed by litigation if there is no agreement through mediation, or if one party fails to comply with the terms of arbitration.One easy way to think of the distinction, at the risk of slightly oversimplifying matters, is to consider mediation closer to a non-binding process, and arbitration more binding in its scope.
No matter which pathway is cho-sen, those in the room agreed, the most important factors that determine success will be the lawyers’ ability to manage clients, read people, think creatively, be persistent as well as prepared, and pave the way for an agreement by ensuring that, as several of them noted, numbers put forth by the claimants are at least starting off in the same galaxy.
Distinctions between the two processes helped frame the panel’s discussion, which started with a look at trends in arbitration from the perspective, as Perry Brandt put it, “of recovering litigators.”
John Miller, of the Swanson Midgley law firm, quickly cited one difference between current arbitration processes and those from the days of early adoption, particularly within securities arbitration: “It’s remarkable how that has changed,” he said. “We started with a rule book that looked like a pamphlet, and thanks to lawyers doing what lawyers do, it’s like the Federal Rules of Civil Procedure,” a volume one wouldn’t want to have dropped on their head.
But there are good and bad aspects to those developments, Miller said, and the current challenge is to eliminate barriers to successful arbitration so that it remains more cost-effective and not as time-consuming.
For Russ Jones of Polsinelli, the process that produced some early-career successes he was part of seem distant memories compared to arbitration today. “I’ve been disappointed at how arbitrations, at least in large commercial cases, are not better, faster, or cheaper,” he said. “Discovery is almost as big and expensive as a regular federal case; the timeline is not always quicker.” The biggest concern he had, though, involved the lack of appellate-court review. “And I guess the other part I don’t like is having to pay the judge. Paying the judge, and then if he or she doesn’t get it right, as a practical matter, there’s nothing you can do about it.”
There’s also little to stop the train once it’s rolling, Brandt noted. “In a lot of cases, where you have a really good, solid legal defense, if you were in court, you’d be out pretty quick,” he said. “But if you’re in arbitration, you’re hearing them all, all the way, and then, even when you get there,
I’ve found arbitrators just don’t seem to care as much about things like statues of limitations and disclaimers and documents and that type of thing.”
From a business perspective, said Bill Beil of the German May law firm, “it’s a real risk-reward thing, because most business owners or shareholders panic at the thought of six or eight or 12 people off the street deciding the fate of their business, so they think, ‘If I’ve got an expert in the industry, that would be better for me—a dispassionate arbitration panel.’ ”
The differing levels of expertise between arbitrators and jurors in a court case, said Sara Welch, was not insignificant, especially “when you’re talking about sometimes complex legal defenses or legal theories and then you have those put into a set of instructions that the jury then has to figure out.”
Often, she said, a judge’s hands are tied because there are a lot of jury questions, the judge can only do so much in response without influencing a decision either way. “In some cases, you really want to have somebody who has that legal expertise, so that you don’t have to worry about if the jury is going to understand,” she said.
Jerry Bales, of Douthit Frets Rouse Gentile & Rhodes, likened arbitration litigation to religion and politics: “Everyone has an opinion about it,” he said. “Everybody’s right, and everybody’s wrong.” But we know there’s no appeal, he said, and we know there are limitations. “(If) we put it in an appeal process, and now it’s just like litigations; it can go on for years and years on appeal, so it’s give and take.”
Bill Beil also noted that, with certain disputes, these pathways are preferred by businesses that might not want their cases aired in a public domain. “Even if it comes out OK for you, the fact that it’s out there, while it’s out there, can really have a negative impact on your business,” he said. Businesses like the privacy aspects and executives are more likely in those cases to consider the matters private disputes that needn’t have to be aired before all their customers and potential customers—especially if there’s a risk of a long-running public show.
But that shroud of privacy, said Jeff Simon of Husch Blackwell, raises a larger question of whether the public good is served by keeping matters behind closed doors.
Shook, Hardy & Bacon’s Bill Martucci, who specializes in labor law, sees that field in particular as more complex when it comes to arbitration cases. “It really depends on the setting,” he said, “but there are a lot of advantages.”
Shifting the gears to the other half of alternative-dispute resolution, Perry Brandt recalled the days preceding mediation. “Over time, we’ve developed a whole new expectation that every occasion be mediated.” The process,he said, “has some warts on it from time to time, but I think it’s been a great benefit, especially to our clientele, on both sides, to have a potential for early resolution. “
Mediation became a standard practice in the 1980s, as a response to concerns among the general public that lawyers were the problem, he said, and had become an impediment to getting cases settled.
They would be held more accountable, the thinking went, if everyone went into a room and listened while the lawyers made their presentations. Instead, Brandt said, “over time, you see it’s usually been the clients, traditionally, who are more of a problem than the lawyers, which is why I think most mediations today don’t have an opening session. It turns out it wasn’t the lawyers—it was the clients.”
Jerry Palmer, of Palmer Mediation, LLC, noted that a business dispute is all about specific business considerations. “All we need to do is solve the business problem,” he said. There remains, however, a “but” in there somewhere, and Palmer delivered it: “But there are personality issues that are involved that are deeply ingrained, and feelings that have been hurt, or distrust that has occurred, and people who don’t want to be in the same room and hating each other, and in some cases are still doing business together.”
The value of mediation, then, is that an experienced neutral party can help guide the process of a resolution of the dispute. “They focus on interests rather than just the legal issues,” Palmer said.
But you can’t rush the process, he said, likening it to “no wine before its time. At times, cases pushed too quickly into arbitration bog down when defense counsel walks in and says, “You know when we learned about this case?
The day we got served with the complaint.” At that point, Palmer said, “they’re at an enormous disadvantage because they don’t know anything about it, the plaintiff has been back working on this, and working this theory, and developing information, etc.”
Issues of timing, said Perry Brandt, have been a long-standing concern.
“I’ve been pretty vocal on this timing issue, especially over in Kansas, for a few reasons. The first is, if you’re doing your job as a lawyer, there is a minimal amount of discovery that has to get done before you can really evaluate your case, and even though you may think on the front end, “Yeah, I know what this is about,”—no, you really don’t.”
Another consideration, he said, was that the earlier one is in the process, the more likely that emotion is still driving the parties involved, and a cooling-off period is in order. “If you go drag people who hate each other into a room after 60 days, it probably is not going to do as well if you did it after 150 days,” he said, “so I really agree with, ‘No wine before it’s time.’
With two good lawyers and two reasonable clients, said Jeff Simon, you don’t need a mediator. Unfortunately, that dynamic is a rarity, especially the reasonable-client aspect. And that’s when emotions can come into play, particularly when the guidance that lawyers need to provide won’t be welcome news.
“A lawyer can only go so far in being candid and direct and forceful with their own client before they sort of get to that point where the client says, ‘Well, whose side are you on?’” Simon observed. “And we owe them an obligation to be objective about their case, but more than that, they want to know we’re their advocate.”
One problem, said Jerry Bales is that mediation has become so routine now. As a result, “cases are taken into mediation without preparation. We used to be really prepared for these things, now it’s just more you show up and, ‘Oh yeah, I haven’t provided those documents yet,’ and, ‘I didn’t ask for those documents from the other side.’ No one is ready.”
That, said Simon, creates problems with clients who don’t understand the process. “You almost have to tell your client, ‘This is a requirement, we’re going to take investigative resolve, but I don’t think we’re going to make it very far, because we still don’t have enough information.’ Because you don’t want your client to walk out at the end of the day and say, ‘Why in the hell did you waste my time with this?’ ”
Russ Jones concurred, but pointed out that “one of the great things about mediation is that we will learn things. We will listen, and even if it’s not a joint session, we’ll still hear things through the mediators.”
Another consideration, said Perry Brandt, is that in many cases, “the plaintiffs just want to go in and tell their story, just for the psychological benefits of going in and telling their story to the mediator, and having the mediator listen, and after they’ve gotten it out, they’re kind of happy now and more willing to talk, if they just get the story out.”
Also impacting the process, and perhaps even the likelihood of successful resolution, is the selection of a mediator. They all may have been created equal, but the way they manage cases certainly isn’t.
“I use a lot of different mediators in town, and different mediators are good in different settings, with different types of personalities,” said Sara Welch. “Especially in employee cases, there is a lot of emotion, and you have a lot of different types of plaintiffs, so you really need to get a mediator who will be effective in communicating for that particular plaintiff, because otherwise, it’s not going to go anywhere.”
A key benefit of mediation, said Bill Martucci, is that “it permits your client to participate. It allows them to be a part of the process. It demystifies the litigation approach.”
Guiding a client toward a successful outcome requires a deeper understanding of people and personalities, as well as the law, participants agreed. And success is often grounded in values like diligence, creativity, persistence and perseverance. That goes for the lawyers and the mediators or arbitrators considering each presentation.
“One of the most important qualities you can get in a mediator is being able to read the room, find out if it’s a case that should settle, what are the obstacles,”
said Bill Beil. Recalling an oil-gas dis-pute in Denver that started one morning at 9 o’clock with the parties $59 million apart, “I wouldn’t have given a nickel that we’d be able to get it done,” he said.
But because the former federal judge hearing that action kept everyone at work until 2 a.m. the next morning, Beil said, “we got it resolved.” That, he said, speaks to the power of momentum in the process, and the value attached to a lawyer’s ability to correctly assess the direction of that momentum.
“As long as they keep their butts in the seats,” said Bob Schieber, “you can keep the process going.”
Like others in the room, Russ Jones has had his share of settlements reached in the early hours of the morning.
“That kind of persistence is important.”
So too, he said, is creativity in a mediator, up to a point—over-pursuing creative solutions can lead to situations where mediators become arbitrators, he said.
Another dynamic that can be an obstacle to resolution is failure to ensure that your client has the right people in the room—decision-makers authorized to make a deal.
“There should be a person who can accept the last offer, with the authority to do that, who doesn’t have to make a phone call,” Jerry Palmer said. “You have to have the right people in the seat.”
That should not, however, include a claimant who was involved in making the business decisions that created the issue at hand. “When I see the person at the center of dispute there, I just say ‘you have to have somebody else—call the mediator and say we’re not going to get anywhere.’ Again, it’s a matter of the personalities involved, and the emotions.”
Getting the authorized party to the table, though, can be a challenge in an era of increasing globalization, said Bill Beil. “With large global companies that have a U.S. presence, sometimes the decision-makers are in Switzerland,” he said. “They send the top U.S. guy, who comes in with a number, but says ‘I can’t get more unless I call Switzerland.’ That’s where creativity comes into play.”
Turning the discussion to the viewpoint of commercial clients, Perry Brandt asked for thoughts about what executives need to bring to the processes of mediation and arbitration. Given that both were developed as alternatives to litigation, he said, “what it calls upon for the lawyer is to do what supposed to do, not have knee-jerk responses.”
“It’s amazing,” said John Miller “how many people don’t even realize they have an arbitration clause in their commercial contacts; the first time they find out is when a dispute arises. Not only should you understand the clause, but your attorney should understand it, and understand the consequences.”
Business owners also need to dial in to the reality of the limitations to these alternatives, said Jeff Simon. “The client needs to know that the arbitration clause itself doesn’t lend predictability,” he said. “Often, it’s less predictable in arbitration, because so much depends on who the arbitrator is.” The normal rules of court procedure don’t apply, and there is no opportunity to review by a higher court.
“The perception is that it’s quicker, cheaper and faster, but there’s also more unpredictability,” Simon said. “Often times in arbitration, we’ve got Mary Smith of Denver or Albuquerque or Binghamton, but how will she look at the case? Who knows? The idea of it being a cure to the risk of litigation is not always the case.”
An issue that could be ticking away inside a company’s contract tranche is the structure of the arbitration clause itself. “At the transactional stage, you may have a dispute-resolution clause that is antiquated,” said Jerry Palmer. “Do they want mediation, then arbitration? Sophistication of those has grown over time. It’s important in the deal points or boilerplate to make that clear, or you may wind up in a court you don’t want to be in.”
Missouri, for example, appears to be moving toward changes in arbitration and media law that could affect current agreements. Sara Welch advised that business executives ensure that their arbitration agreements are updated to reflect any changes. “It’s going to change in Missouri, for sure,” she said. “Clients definitely need to think about the goals they’re trying to achieve, what this arbitration agreement is trying to achieve for you, and make sure it does achieve those goals.”
Cost considerations also should come into play, Russ Jones noted. “I tell clients the first thing they need to know that the filing fee in federal court is $350,” he said.
But for a case that will go before a panel certified by the American Arbitration Association is that the fee will be $75,000. “That may be a good thing, it may be a bad thing, but clearly, there should be more thoughtful analysis at the transactional stage as to what this clause should do. That has to be done at the front end.”
But deeper cost analysis, said Jerry Bales, is difficult because there isn’t sufficient data. “As a general rule, there’s an effort to make it more efficient and quicker,” he said. “I hope that it’s accomplishing that goal.”
The message to clients, said Bill Martucci, is that they need to be in control of the process as much as possible when a dispute arises.
“Mediation can be part of that, and you can design reasonable, fair procedures that fit their culture,” he said. “But it’s astonishing how many companies don’t quite have time to think that through and become the architects of their own future.”