ABA Section of Business Law
Business Law Today
March/April 1999
Top general counsels support ADR
Fortune 1000 lawyers comment on its status and future
By DAVID B. LIPSKY and RONALD L. SEEBER
Both authors are at the Cornell University/PERC Institute on Conflict Resolution in Ithaca, N.Y. Lipsky is director and Seeber is associate director.
Is corporate America ready for ADR? In some ways yes, but in some ways no.
One of the foremost trends in corporate America in the 1990s has been the shift from traditional litigation and government agency resolution of disputes toward the use of alternative dispute resolution. So far, however, policy makers in the public sector and corporations in the private sector have been making decisions about how to use ADR on the basis of very limited information. Now it seems that ADR has been in place long enough for assessments to be made about its effects, including whether it has resulted in systematic changes in how disputes are resolved.
We set out to answer those questions beginning in the spring of 1997 when we surveyed the legal counsel of the 1,000 largest U.S. corporations on their use of ADR, seeking information about the various types of processes they use and the types of disputes they attempt to resolve with it. We also sought to understand the prospects for ADR in the future. The full analysis of the responses to the survey is contained in our report, The Appropriate Resolution of Corporate Disputes: A Report on the Growing Use of ADR by U.S. Corporations (Cornell/PERC Institute on Conflict Resolution, 1998).
In this article we will briefly highlight some findings from our report and will also address a significant concern that arises out of our study: There clearly is a general lack of information and understanding about the mediation process, the single most significant ADR tool in use today. This lack of knowledge is critical because, as our survey showed, uncertainty about mediation and about the neutral community is one of the most significant barriers to the future growth of ADR and its use in business disputes.
We define ADR as the use of private parties to resolve disputes that might otherwise be litigated. It includes various techniques of third-party assistance, including mediation, arbitration, fact-finding, mini-trials and ombudspersons. Our survey shows that the vast majority of American corporations have used one or more of these techniques in the last three years. Of the 606 corporate lawyers we succeeded in surveying, 88 percent reported that their corporation had used mediation at least once in that period, while 79 percent reported using arbitration.
Fewer have used mediation-arbitration, or "med-arb," (41 percent) and mini-trials (23 percent). There is even less use of fact finding (21 percent) and peer review (11percent). Fifty-five corporations in our sample have an internal ombudsperson on staff, and 185 have an in-house grievance process. While there is widespread use of the whole gamut of techniques, it is clear that the corporate view of ADR is primarily limited to their experiences with mediation and arbitration.
Moreover, our survey revealed that the use of ADR is likely to grow in the future. Most of our respondents (more than 84 percent) say their organization is likely to use mediation in the future, and 69 percent say they are likely to use arbitration. A small minority says that they are unlikely to use mediation or arbitration in the future.
These trends are reflected in corporate policy and strategy on ADR. For example, very few corporations (less than 10 percent) describe themselves as "strong litigators," that is, as favoring litigation to resolve disputes in almost all cases. The "strong litigators" tend to have characteristics that distinguish them from the rest of the corporate world. These firms tend to be smaller (although it must be noted that even a small Fortune 1000 firm is still a very large business), under less cost and competitive pressure, and more profitable than the more pro-ADR firms.
The vast majority of corporations, however, consider ADR an appropriate alternative to litigation, and many even seek to use it as a matter of policy in every potential court case.
Corporate policy toward the use of ADR also varies by type of dispute. For example:
- There is widespread use of both mediation (78 percent) and arbitration (85 percent) in commercial disputes.
- There is also extensive use of mediation (79 percent) and arbitration (62 percent) in employment disputes.
- There is limited use of ADR in corporate finance, financial reorganization "and workout" disputes (8 to 13 percent).
- More than 60 percent have used mediation for personal injury disputes, while only a third have used arbitration.
- 40 percent have used mediation in product-liability cases, but less than a quarter have used arbitration.
Significantly, mediation is preferred to arbitration in all types of disputes.
For many corporate executives, the use of ADR is a strategy they hope will reduce costs and delays in their legal disputes. Saving time and money is also an important reason why they use arbitration, although it is a somewhat less important reason than it is for mediation. A majority (54 percent) of the respondents report that cost pressures on their corporations affected the decision to use ADR.
Corporate lawyers emphatically believe that ADR does pay off. It should be noted that our survey captured only our respondents’ perceptions; no one has collected the kind of hard data needed to support these perceptions. It is abundantly clear, nonetheless, that corporate ADR is primarily driven by the perception of high costs and lengthy delays associated with litigation. ADR is considered faster and cheaper. Our respondents reported overwhelmingly that ADR saves both time and money. More than 80 percent of the respondents said that mediation saves money, and a slightly smaller number said that arbitration does so. Likewise, 80 percent reported that mediation is quicker, again with a slightly smaller number reporting that arbitration saved time.
Our questions were asked in such a way, however, that the respondents are reporting procedural (or "transaction") savings, not savings in settlement costs. A significant minority fear that ADR will always be faster and cheaper when measured in transactional terms, but may lead to higher settlement costs. Very few corporations have undertaken the rigorous internal studies that are necessary to see if and how ADR pays off.
Corporate adoption of an ADR strategy has frequently resulted in additional responsibilities being carried by the corporate counsel’s office. In many cases, the general counsel has been a strong supporter of an ADR policy; often in other cases, the general counsel has given the corporation’s chief litigator responsibility for ADR. Occasionally, lawyers with special expertise in ADR have been added to counsel’s staff. The change in corporate conflict resolution strategy has also caused many corporations to encourage their outside law firms to develop ADR expertise.
A growing number of administrative agencies, such as the federal EEOC and state-level workers’ compensation boards, are now encouraging the use of ADR to resolve complaints that would otherwise need to be handled by the agency itself. Congress has encouraged the use of ADR in a growing number of statutes, including the Civil Rights Act of 1991 and the Americans with Disabilities Act. The court systems in more than half the states now encourage — or even mandate — the use of ADR to reduce court backlogs and to speed up the handling of disputes.
The U. S. Supreme court has been inclined to favor the use of ADR, especially in employment disputes. The court’s Gilmer decision in 1991 has led employers to include provisions in employment contracts that require employees to use arbitration to resolve disputes that might otherwise be heard by the courts. There has not been universal acceptance by the circuit courts of the validity of the application of the Gilmer principle to employment contracts. The Supreme Court, however, in its 1998 decision in Wright v. Universal Maritime Service Corp., reaffirmed the principles of Gilmer in refusing the opportunity to put a blanket prohibition on mandatory predispute arbitration.
Careful analysis of our survey results suggests that corporations also use ADR techniques to gain greater control over the process and outcome of dispute resolution. The respondents dislike the risk and uncertainty of litigation and view mediation as a means of effectively managing potentially risky disputes. For example, 81 percent of the respondents say their corporations use mediation because it provides "a more satisfactory process" than litigation, 66 percent say it provides more "satisfactory settlements," and 59 percent say it "preserves good relationships." Although our data reveal these factors to be more important for mediation than for arbitration, respondents also believe the use of arbitration improves their ability to manage disputes and reduces uncertainty.
Our survey data also suggest that the use of mediation appears to be more sensitive than arbitration to the economic and market context in which the corporation exists. Mediation appears to be much a more a tactical, ad hoc choice of the corporation while arbitration is most often mandated by existing and often long-standing contracts. Interpretation of the survey data suggests that corporate respondents see the use of mediation as widely applicable, while arbitration usage is more targeted to certain types of disputes, especially business disputes and those involving employment issues. Mediation and arbitration usage tends to differ significantly in other important ways, as revealed in our survey data in the box below.
One-third of the respondents who do not use ADR says that their senior managers oppose its use. About three-quarters say they don’t use mediation because opposing parties in disputes are unwilling to consider it. A majority (54 percent) says that their companies do not use arbitration because arbitrators’ decisions are difficult to appeal. Many corporate lawyers worry about arbitration because discovery isn’t required in the process and arbitrators are not confined to standard legal rules, such as those governing the admissibility of evidence.
In their forecasts of the future, our respondents expect that the use of mediation will continue to grow in a wide variety of disputes, but on balance they do not expect arbitration usage to grow further except in employment and commercial disputes. Respondents in general have a more favorable view of mediation than of arbitration and believe mediation has more widespread applicability and is more likely to save time and money. They have more reservations about the use of arbitration in part because of their concerns about arbitrators and the arbitration process, but believe it may be a very useful tool in targeted situations.
A majority of the respondents believe that mediators and arbitrators are only "somewhat qualified." Respondents appear to be especially concerned about the qualifications of arbitrators. Almost half say they lack confidence in arbitrators, while close to 30 percent say there is a shortage of qualified arbitrators. Corporate respondents told us there is no lack of people who are willing to serve as ADR neutrals, but, rather, there is a shortage of qualified and experienced neutrals.
This lack of confidence in neutrals has two primary origins. First, there is a significant concern in the corporate community about who the mediators are and where they come from. Nearly all of our respondents indicated some skepticism about the neutral community’s ability to respond to the growing demand for their services.
Second, there are significant questions about the lack of generally accepted standards governing the qualifications of mediators and more general fears about the uneven abilities of mediators. Although a handful of jurisdictions have attempted to establish minimum standards necessary to practice mediation, there is no consensus on these standards. There isn’t even an accepted view of what skills are appropriate or what competencies are necessary to practice mediation.
Moreover, the skills necessary for mediation success in one type of dispute (such as employment) may not be transferable to another type (such as environmental). This transference problem is clearly difficult to overcome. However, there is a lively debate among professionals over the question of whether process skills are more or less critical than substantive (or "contextual") knowledge.
There are a few highly regarded providers of neutral services, such as the American Arbitration Association and JAMS/Endispute, but it is clear from our survey that no single provider controls the marketplace for neutrals and competition among providers is growing more intense. When asked about the sources of neutrals for mediation and arbitration, most of our respondents said they searched for qualified neutrals from a variety of providers. We think that reflects a market still very much in development.
Mediators themselves differ on the role they ought to play in resolving disputes. Some mediators clearly see their role as facilitative — that is, they view their role as one of simply facilitating the negotiations between the parties, for example, by scheduling meetings, keeping the process orderly, etc. A second group of mediators see their role as evaluative — they not only manage the process of negotiation, but they also present their own view of offers and counteroffers and of potential settlements. They may even craft settlements themselves. A third group of mediators defines their role as transformative — they not only seek to solve the dispute at hand, but also to transform the parties and their relationship so that they can solve future disputes on their own.
It is clear that most of the business community is comfortable with facilitative mediation, perhaps less so with evaluative, and not comfortable at all with transformative. Unfortunately, many parties to a dispute can’t articulate or even agree on the type of mediation they need, nor is the market for neutrals well enough defined to allow users to distinguish easily one type of mediator from another.
All in all, many in the business community aren’t comfortable with the mediation process, and this is a problem that is not likely to be solved in the near future without a period of further experimentation. Our corporate respondents also expressed significant reservations about, and a lack of understanding of, the arbitration process. In sum, both arbitration and mediation are plagued by a lack of understanding and acceptance of both the processes and the neutrals who are central to those processes.
The results of our survey tell us much about the reasons for the explosive growth of alternative dispute resolution. As is often the case in survey research, as some questions are answered, others are raised. For American business to reap the benefits ADR promises, we need to know much more than we currently do. We need to know much more about the neutral community — especially their qualifications and competencies — and how to match specific mediators and arbitrators to disputes where their skills will be effective. Only then will the corporate legal community become fully comfortable with ADR processes.
We also need to understand more about the limits of ADR — can it be used (as some of our respondents believe) in all types of disputes or are some types better pursued through traditional litigation and agency processes? We need to study and measure more specifically the benefits of ADR. If it is truly simpler, cheaper and quicker than litigation, then full speed ahead.
But if, as is probably the case, there are some faddish aspects to ADR, then we need to understand where it can be used appropriately without the sacrifice of due process and other critical judicial safeguards. We are clearly in a period of transition to greater reliance on ADR to resolve business disputes — some observers have even referred to the ADR "revolution." But we need to develop a better understanding of the appropriate balance between public
