Legal Affairs: DISPUTE RESOLUTION
THE EXPLOSION IN PRIVATE JUSTICE
After 11 years of legal battles and an estimated $100 million in costs, a small group of investors suing over a failed 1982 merger between what was then Gulf Oil Corp. and Cities Service Co. decided to end their litigation nightmare. The parties turned to arbitration. They hired a retired appellate court judge, rented a large room, agreed to take just three weeks for the case, and forfeited any right to appeal the judge's decision. "This could have dragged on forever," says the investors' lawyer, Thomas H. Moreland, whose clients won $90 million. "From our perspective, common sense finally prevailed."
Not so long ago, such a solution would have seemed radical. But after years of academic study, pilot projects, and judicial debate, alternative dispute resolution (ADR) has come into its own. Individuals and corporations, sick of overcrowded courts and soaring legal costs, are fueling what is fast becoming one of the most successful experiments in privatization. Now Congress is going further with a proposal to make ADR a voluntary substitute for litigation as part of its drive for tort reform. "This is now mainstream," says William K. Slate, president and CEO of the largest ADR provider, American Arbitration Assn. (AAA).
RAPID GROWTH. A whole new industry is emerging to meet the explosive demand for private justice.
Judicial Arbitration Mediation Services/Endispute, the largest for-profit private justice provider, is so confident of future demand that it's contemplating a public offering to fuel expansion, says CEO John Unroe. The Orange (Calif.) company, with $43 million in 1994 revenues, has been growing at a 20% rate. And JAMS, with 350 adjudicators in 28 cities, plans to go global this fall with the opening of an outpost in London.
On the nonprofit side, the New York-based AAA manages annually a civil caseload one-fourth the size of the civil cases filed with the federal court system. In 1994, AAA boasted revenues of around $100 million and handled nearly 60,000 cases, involving claims valued at $5 billion. The Center for Public Resources, a coalition of large companies and law firms, is currently managing more than 100 disputes over some $8.9 billion. Says Frank E.A. Sander, director of Harvard Law School's Dispute Resolution Program: "ADR has become so appealing because the judicial system has failed so many people."
With private justice's newfound prominence, however, critics fear that individual rights and fairness may be sacrificed to achieve greater efficiency. Arbitrations and mediations generally are abridged versions of trials, with truncated discovery rights and briefer presentations of evidence. And ADR judges are not required to follow established case law. "ADR determines the settlement value of a case, which need not be equated with the merits," says Kenneth R. Feinberg, who is negotiating for Dow Corning Corp. in the massive breast-implant litigation.
TIMELY BOOM. But to most legal and business experts, ADR's benefits outweigh its shortcomings. Luminaries such as former New York Governor Mario Cuomo, former FBI director William Webster, and once Supreme Court nominee Robert Bork have signed up as highly paid referees. Harvard Law School is launching
a journal this fall devoted to ADR. Blue chips from General Mills Inc. to IBM are setting up their own dispute-resolution programs. And Attorney General Janet Reno recently announced that the Justice Dept. would assign 170,000 civil cases a year to private arbitrators. "The issues are timeliness, predictability, and fairness," says James J. Seifert of Toro Co., a lawn-mower manufacturer that has seen a 70% drop in the cost of settling claims since installing a voluntary ADR program. "You can't get that through the legal system."
The boom in ADR is especially timely in California, where the state's three-strikes law is unleashing new pressures on the courts. A Rand Corp. study estimates that the measure, which cracks down on repeat offenders, could cost the state as much as $6.5 billion a year to enforce. In Los Angeles alone, the judiciary predicts that pending three-strike cases will cost the county an additional $78 million to manage. But in part because of an aggressive ADR program, civil filings in Los Angeles County have plummeted since 1987--from 49,000 to 28,000 in 1993--helping to clear the pipeline for judges managing the growing docket.
The private sector uses ADR in a number of ways. Farmers Insurance Group Inc. created a pilot program in California and Oregon for voluntary mediation of auto-injury claims. It resolved some 7,000 cases at a savings of $4 million. While that's only a fraction of the insurance giant's $300 million in annual legal costs, the company expects yearly savings to grow to $20 million or more by 1997 as Farmers rolls out the program nationwide, according to Mickey Shields, director of liability claims.
FLAT RATE.. Toro, the lawn-mower company, borrowed a technique from the health-care industry. Like the arrangements managed-care outfits craft with doctors, Toro guarantees a minimum number of cases to Court Alternative Group, a Florida mediation firm, and pays the group a flat fee per matter to get disputes settled before they become lawsuits. "It's really a form of capitation," says John J. Upchurch, chairman of Court Alternatives.
Still, some critics complain that ADR favors business. That's the charge in a class action brought against Bank of America, which sent notices to customers informing them that disputes will only be settled through binding arbitration. Plaintiffs say the bank needs their consent before forcing them into arbitration and out of their right to a jury. But a judge last year took the bank's side, deciding that ADR is a preferred route for dispute resolution. The case is now on appeal.
Another concern is that private arbitrators have too much unchecked clout. Recent rulings have extended the authority of arbitrators by making an appeal nearly impossible. "Arbitrators now have powers that would make any self-
respecting judge drool with envy," says Arthur Gilbert, an appellate court judge in Ventura, Calif. In January, the California Supreme Court ruled that the arbitrator in a hardware-patent dispute between Intel Corp. and Advanced
Micro Devices Inc. could dispense "unusual and even bizarre punishment" so long as it "even arguably" relates to the dispute. "That case sent a chill through the business community," says Rand researcher Deborah Hensler.
To reassure its critics, industry leaders, in conjunction with the American Bar Assn., are attempting to create a national oversight system and uniform ethical guidelines. A draft proposal is expected to be ready within six months. But that hasn't satisfied some critics, who worry that in the rush to embrace an alternative legal system, the traditional court system will suffer even more. "We make a strong rhetorical commitment to the public justice system, but we are unwilling to fund it," says Judith Resnik, a law professor at the University of Southern California. "I don't think the answer is letting the private sector pick up the slack." For JAMS and others in the ADR business, though, picking up the slack is proving to be a gold mine.
The Idea Is Spreading
At least 35 states have alternative dispute resolution (ADR) programs. And new ADR options are pending around the country. Here are some existing programs:
CALIFORNIA Judges may refer disputes of $50,000 or less to nonbinding arbitration before heading to court. Standard real estate contract disputes also are handled through ADR.
OHIO State officials have launched ADR programs, including one that teaches dispute resolution techniques in primary and secondary public schools.
FLORIDA The Florida Supreme Court educates and certifies mediators who hear cases referred by trial judges. Also, worker's compensation claims go through court-administered mediation.
DATA: BUSINESS WEEKBy Eric Schine in Los Angeles and Linda Himelstein in New York