News and Events

NELF Spring Breakfast Program, May 3, 2007

Committing Your Company to Arbitration: Benefits and Pitfalls

Following brief introductory remarks by NELF’s President, Martin J. Newhouse, Esq., the moderator directed his first series of questions to Patrick Lane. In response to Mr. Gelb’s questioning, Lane explained that P&G has moved toward arbitration as its preferred methodology for resolving disputes with major competitors with whom the company expects to have recurring conflict. For that category of disputes, P&G has found that arbitration leads to a better quality resolution that is both quicker and less expensive than litigation. Over time P&G and each of its competitors can expect to be both plaintiff and defendant and so all parties have an interest in agreeing up-front to reasonable procedures. In Lane’s experience one-off disputes are far less likely to be successfully resolved in arbitration because the parties lack the same incentive to agree to reasonable procedures, and P&G tends to litigate those disputes.

When P&G arbitrates with competitors, the parties agree to apply the same substantive law that would apply in litigation but model their discovery procedures on non-U.S. models. They also agree to dispense entirely with appeals. If a dispute arises between P&G and one of its competitors, the parties work together to locate and hire three of the best and brightest available arbitrators. Lane finds that the resulting arbitration decisions are almost always unanimous. P&G is willing to accept an adverse decision by such a highly qualified panel without reserving appellate rights.

Lane does not use arbitration for disputes with consumers or against plaintiffs’ attorneys who have contingent fee arrangements with their clients, preferring instead to mediate those disputes. He does not mediate disputes that he selects for arbitration. He believes that P&G has gotten better at choosing the ADR method most appropriate to a particular dispute. If the company is prepared to compromise, it will choose mediation; if not, it will arbitrate and take the matter to a decision. Lane contrasts this with litigation where, he indicates, only about 3% of cases go all the way to a decision.

As to the particulars of arbitration discovery procedures, Lane explains that he shortens the time frame for discovery because work expands to fill the time available for it. He also by agreement dramatically reduces the scope and extent of paper discovery and the number of depositions to be conducted per side. Lane generally proposes three to four depositions per side but will agree to more if there is a demonstration of compelling need. He insists that arbitrations be confidential to the maximum extent possible.

Lane has employed high/low arbitration methodology and wants to try baseball arbitration, where each side offers the neutral(s) a specified damage figure and the neutral(s) must choose one of those two numbers. In some arbitrations, where the other party’s behavior is the real issue, Lane has limited the potential relief to cessation or alteration of that behavior, excluding monetary damages. In patent cases he does not allow arbitrators to fashion the remedy, but agrees in advance with his opponent on predetermined potential outcomes.

Judge Cratsley asked Lane why, in cases where stopping behavior is key, P&G doesn’t utilize courts of equity with the ability to issue preliminary injunctions. Lane clarified that, when there is need to try to stop conduct immediately, P&G may go to court. However, he has not found it easy to obtain such preliminary injunctive relief and finds seeking it to be counterproductive to relationships with competitors.

The panel moderator turned his attention next to Judge Cratsley and raised concerns about the fact that parties have been compelled to arbitrate securities cases since the late l980s and that no law is being made in the field as a result. Judge Cratsley agreed that the availability and application of precedent is one of the strengths of the judicial system and that to lose that for an entire field is a problem. Professor Park interjected that increasingly there are published sources of international arbitration decisions and awards. He specifically mentioned the availability on the internet of precedent involving arbitrations of international investment disputes, the publication by the ICC in Paris of sanitized awards with names deleted, and Mealey’s International Arbitration Reports.

Kenneth Feinberg suggested that, if the parties truly need judicial precedent, they will go to court. In his experience, if the parties want to arbitrate there is generally no cutting-edge legal issue at stake. Patrick Lane explained that P&G has moved to requiring arbitrators to provide so-called “reasoned decisions” articulating the bases for their decisions. This is a response to the desire of P&G’s business executives to know why a certain result has been reached and how to shape their behaviors going forward. Lane believes that reasoned arbitral decisions help avoid future disputes by allowing for such behavioral modification, whereas “litigation begets litigation.” In Lane’s experience, if one uses top-notch arbitrators business people will respect reasoned decisions and mold their subsequent behavior accordingly without the imprimatur of judicial precedent.

An attendee at the Breakfast Program commented that Lane seemed to be talking about arbitrations based on newly negotiated agreements as opposed to those which are shaped by arbitration provisions in pre-dispute contracts. Lane agreed with the questioner that arbitrations that arise out of original contract provisions tend to be unsuccessful. In his view the success quotient in arbitration correlates strongly with party cooperation in fashioning the process. In fact, in Lane’s experience arbitration generally goes poorly the first time he has to shape an arbitration procedure with a competitor. With repeat experience, both parties see the advantage of reasonable, negotiated procedures and the quality of the arbitrations improves.

The moderator next asked Judge Cratsley to address the case management tools available in litigation as opposed to arbitration. Judge Cratsley mentioned pre-trial motions for dismissal and summary judgment and Rule 16 conferences as tools for narrowing disputes and eliminating parties and/or claims. Judge Cratsley said, however, that the ability to have three skilled arbitrators who are expert in a particular field rendering a decision strikes him as an advantage of arbitration over judicial process.

Kenneth Feinberg next offered some observations on both arbitration and mediation. He does not find arbitration to be more efficient or cost-effective than litigation. In his experience pre-arbitration discovery now rivals what occurs in court, and mediation is much more effective as a mode of dispute resolution. He said that he finds mediation particularly beneficial in business disputes where the businesses are trying not to poison their relationships with each other. Asked to address the skill set of a good mediator, Feinberg emphasized creativity and flexibility and noted that mediation skills differ significantly from the skills of a litigator in either judicial or arbitral forums.

Richard Gelb indicated that he generally finds arbitration to be more difficult, time-consuming and expensive than litigation and asked Professor Park to share his perspectives on that question. Professor Park responded that it depends on the arbitration and that there are no absolute, across-the-board answers as to the optimal dispute resolution procedure. In Professor Park’s experience, arbitration is generally a good choice for resolution of international commercial disputes because it permits a level playing field linguistically and procedurally between parties coming from different cultures and because parties cannot be assured of judicial independence in certain parts of the world. Thus, in the international arena choosing arbitration is a way to enhance predictability and uniformity.

Richard Gelb offered that mediation can be an effective communication device that allows parties to feel that they have been heard and can come to closure. Kenneth Feinberg agreed and cited to a system that Liberty Mutual designed and implemented for mediation of homeowner’s claims arising out of Hurricane Katrina. Liberty proactively offered homeowners an opportunity to be heard before their chosen mediator from a diverse pool of local professionals. As a result, Feinberg said, Liberty had only a handful of lawsuits arise out of the disaster.

Both Feinberg and Park emphasized that to choose mediation is not necessarily to reject arbitration. Arbitration is always a possibility if the mediation is unsuccessful. Judge Cratsley indicated that he is a big proponent of mediation, but that the Massachusetts trial courts do not keep statistics on how many cases are successfully mediated.

Returning to the question of the requisite skill set for successful mediation, Patrick Lane said that he has found it counterproductive to bring trial lawyers to mediations and instead handles them himself. Richard Gelb said that he is a fan of mediation because it affords him an opportunity to tell his client’s story in a controlled way. Gelb wants a mediator who will perceive the legal issues, but usually lets the other side choose the mediator unless he has strong objections. This precludes a later claim by his opponent that the mediator was biased.

Richard Gelb further offered his perspective that a good trial lawyer is a “control freak,” driven to procure results for his or her client, who wants predictability in the discovery and introduction of evidence. The philosophy is that the more information one obtains through discovery, the more intelligent decisions one can make about prosecution or defense of a case. Given this perspective, Gelb tries to get as much formality built into arbitration procedures as possible. He does not, however, want experts as arbitrators; he wants neutrals. While there are no rules of evidence barring admission of evidence in the arbitration context, Gelb advises that those rules should still be relied upon by counsel in arguing the weight of the evidence.

Judge Cratsley noted that there are arbitration-related issues before the Massachusetts Superior Court. He specifically mentioned cases raising issues regarding the ability to move to compel arbitration after litigation has already begun, judicial intervention regarding the scope of discovery and whether particular issues are arbitrable, judicial review of arbitration awards, and issues regarding the scope and preemptive effect of the Federal Arbitration Act.

Kenneth Feinberg offered his perspective that 75% of a successful ADR is due to your choice of mediator or arbitrator(s). He advised that there is tremendous institutional authority in mediators and arbitrators and so they must be selected very carefully. The most challenging aspect of choosing a mediator, in his judgment, is determining what style one wants. For instance, parties must decide whether they are looking for a more passive facilitator or someone who will be more assertive in voicing an evaluation of the case. With respect to arbitration, Feinberg questioned whether you really get a neutral third arbitrator if you have two party arbitrators choose that individual. And he indicated that he would not arbitrate with a former federal judge, since at that point he might as well be in court.

Professor Park agreed with Mr. Feinberg that the choice of arbitrator(s) is critical. However, he does not agree with blanket rejection of former federal judges. Lane indicated that he votes with Feinberg in rejecting both former judges and experts and that he also rejects party-appointed arbitrators, an approach which he considers a “complete waste of time.” Lane goes with either one or three neutrals. Feinberg noted that the trend in the AAA and elsewhere is that, once selected, even a “party arbitrator” becomes neutral in that there can no longer be any ex parte contact. He also observed that the last twenty of his arbitrations involving panels all resulted in unanimous decisions, which he believes is an indication that the arbitrators were all acting as neutrals.

On the question of the formality of arbitration procedures, Patrick Lane expressed his belief that an air of formality is helpful in reassuring business people that they are getting a decision which is governed by law. However, his experience has been that imposing rules of evidence has been a failure and that it is better to give the parties time limits for presentation of their cases.

Kenneth Feinberg observed that one major problem with the informality of mediation is the concern of some parties that it is a sign of weakness to offer to mediate. In certain consumer cases, for example, parties may not want to consider mediation because of the signal it might send to the plaintiff’s bar that they are open to compromise, which could in turn lead to more claims. There are many strategic variables that need to be considered.

An attendee commented that he has clients who view arbitration as a “split-the-baby” process and that this approach could be taken by professional arbitrators who have a long-term interest in not angering either side to the controversy. The audience member suggested that litigation might be the best choice when the client has a clear-cut legal issue on which it might prevail (e.g., a case with a good defense under a statute of limitations or a case involving bad behavior but no causation of injury).

Picking up on these comments, Richard Gelb noted that two problems with arbitration from his perspective are the economic incentive that the arbitrators have to keep the process going and the incentive they have to protect against reversal by allowing in as much evidence as possible. In Gelb’s view most cases are lost because one puts in too much evidence and the lack of control over what is admitted into evidence in an arbitration is therefore of considerable concern.

While Professor Park conceded that the perception that arbitrators tend to “split the baby” is widespread, he’s not sure that it is the reality. He has participated in only one arbitration where the result was not intellectually rigorous, but in that case (the process for resolving claims by Holocaust victims and their heirs against Swiss banks before the Claims Resolution Tribunal in Zurich) compromise was built into the process. In Professor Park’s experience arbitrators want their resolutions to be intellectually correct and believe that their future business depends on that, not on pleasing the parties before them in any particular arbitration.

Kenneth Feinberg also disagreed with the “split-the-baby” perception of arbitration. He indicated that he does not worry as an arbitrator or mediator about whether one side will get angry with him as a result of his decision. Indeed, his repeat business often comes from the parties who did not appoint him to the previous panels. Feinberg could remember only one arbitration in which the panel on which he served did, indeed, “split the baby”—in fact, right down the middle of two conflicting expert valuations. That was an arbitration deciding on the fair market value of the original Zapruder film of the Kennedy assassination.

Patrick Lane then offered some practical procedural suggestions for approaching arbitration. The day before the arbitration commences he meets with the arbitrator(s), together with his opponent, to relay the message that both parties want a decision on the facts and the law as opposed to an unprincipled compromise. Before the decision is rendered, Lane approaches his adversaries to learn their thoughts on the process employed and any changes they would make next time around. This is how he has been able over time to develop agreed-upon procedures of mutual benefit, such as placing time limits on the length of case presentations.

Another Breakfast Program attendee commented that he has found it helpful to use former judges as mediators because they are able to tell clients how they would decide the matter or particular issues if hearing the case as a judge. Patrick Lane responded that the downside is that judges are not as creative in seeking resolution and that they are better suited to early neutral evaluations than they are to mediation. Kenneth Feinberg opined that you need someone who can facilitate discussion and see all of the impact that a case has on the parties.

Asked by the moderator to focus on the international arena, Professor Park explained that the motivation to arbitrate is often very different in the international context, where you may need arbitration in order to enhance procedural and decisional neutrality. On the enforceability of awards, he noted that an arbitration award from any arbitral panel in the United States has more international currency than even a decision of the United States Supreme Court. Professor Park pointed out that the United States is not party to international treaties governing enforcement of judgments because the international community generally objects to our use of juries in civil cases and allowance of punitive damage awards. Professor Park noted that there is an international convention (the New York Convention) which upholds arbitration agreements and awards and that, with narrow exceptions, a U.S. arbitration award will be recognized internationally.

According to Professor Park, Article 3 of the New York Convention indicates that arbitration awards are to be recognized based on the procedures of the jurisdiction where they are rendered. In the last four to five years, however, the 2nd, 4th and 9th Circuits have said that U.S. courts can refuse to enforce awards based on U.S. procedural law of forum non conveniens and insufficient contact with the jurisdiction.

Returning to the “splitting-the-baby” issue, Professor Park again indicated that there is no one size that fits all and that whether or not this will occur depends in part on the type of case involved. In a construction case, for example, where there are multiple claims, he suggests that parties may well see some horse-trading among arbitrators.

If there is any way to summarize the varied viewpoints expressed regarding arbitration, it is probably that one’s view of arbitration depends in large part on the particular nature of the disputes which one has attempted to resolve in that manner and the procedures which have been employed. Choosing a method of dispute resolution for a particular controversy is a complex matter, and identifying the most appropriate ADR methodology, the desired style and skill set of the neutral(s), and optimal procedures to be employed is key to a successful outcome.


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