By John Bickerman and Divonne Smoyer
(Published in The Legal Times, December 5, 1997)
Two major studies of litigation trends in corporate America reveal that the use of alternative dispute resolution (ADR) in the nation's largest corporations is up. An on-going study of the country's 1000 largest corporations being conducted by Cornell University in cooperation with the Foundation for Prevention and Early Resolution of Conflict (PERC), a non-profit organization in New York City, shows that, in the past three years, the vast majority of U.S. corporations have used one or more forms of ADR in resolving a broad range of disputes, including: employment, environmental, sexual harassment, contracts, securities and age discrimination claims. Based on the survey responses of more than 600 corporate counsel, deputy counsel and chief corporate litigators, Cornell researchers believe that this use is likely to grow significantly in the future, due to, at least in part, the rising costs of litigation, an increase of ADR provisions in employment and commercial contracts and court mandates of ADR processes.
A similar survey of general counsel and outside corporate attorneys conducted by the accounting firm Deloitte & Touche also revealed an increase in the use of ADR - as much as 28 percent in the past three years - especially in the area of mediation.
Although groups such as the American Arbitration Association and the CPR Institute for Dispute Resolution have always touted ADR as a cost-saving and time-efficient alternative to protracted litigation, a major study of its use in corporations has not previously been undertaken, and evidence of its prevalence has been somewhat sketchy. While the results of the Cornell/PERC study are still preliminary pending release of a final report in late December, it is, to date, the largest empirical study of its kind: 1000 corporations were surveyed with a response rate of 60 percent, representing a cross-section of large American firms. David Lipsky, the Director of the project, hails the study as the "most comprehensive effort to date" and as a "significant advancement in the assessment of the use of ADR in the business community." Among other things, the Cornell/PERC study tracks the use of ADR by case type and compares the rates of usage by corporate size. The Deloitte & Touche study surveyed more than 200 large corporations and law firms nationally and focuses primarily on the use of mediation and arbitration.
Use of Mediation Surpasses Arbitration
According to both studies, mediation and arbitration are, by far, the most prevalent form of dispute resolution in corporate America. Eighty-eight percent of U.S. corporations report using mediation, while 79 percent have used some form of arbitration in the past. Nonetheless, the Cornell/PERC study found that corporations have also been experimenting with other forms of ADR such as med-arb, mini-trials, fact-finding, peer review and early neutral evaluation.
Despite this variety, the clear trend is toward mediation. Deloitte & Touche researchers found that, where once arbitration was the primary ADR method chosen by in-house counsel, mediation is now the method of choice. In a similar survey conducted three years ago by the accounting firm, 51 percent of corporations chose arbitration as the favored method and only 41 percent chose mediation. The preferences are now the reverse: 65 percent prefer mediation, while only 28 percent favor arbitration. According to the Cornell/PERC study, over 84 percent say they are either "likely" or "very likely" to use mediation in the future, while 69 percent say they will use arbitration. Cornell researchers also predict that the use of mediation will be characterized by extensive growth and will quickly outstrip the use of arbitration.
One reason for this reversal is the increasing realization that arbitration, in many instances, is nearly as time-consuming and expensive as conventional litigation. "There is a popular misconception that arbitration is quick and cheap. That's not always the case," one respondent to the Deloitte & Touche survey said. Often the discovery process in arbitration is just as onerous as in litigation and delays are common. According to Peter Steenland, Senior Counsel for Alternative Dispute Resolution for the U.S. Department of Justice, in his testimony before the House Committee on the Judiciary earlier this fall, "arbitration is the most resource-intensive . . . of the ADR tools, and [in many cases] its use has often undercut rather than promoted efficient dispute resolution."
In addition, arbitration, particularly if it is binding, carries a risk beyond litigation: not only do the parties surrender control of the process to a third party but, unlike with a judge, whose decision may be appealed, arbitrator decisions are only appealable in limited circumstances such as obvious bias. Flagrant factual errors or misapplications of law are typically overlooked by courts who are reluctant to review arbitral awards. See e.g., Barnes v. Logan, 122 F.3d 820 (9th Cir. 1997) (punitive damage award in securities arbitration upheld although arbitrators mistakenly applied California law instead of Minnesota law, which would not have allowed such damages, where arbitrators did not act in "manifest disregard of Minnesota law").
Moreover, corporations are increasingly encountering resistance by courts in enforcing agreements to arbitrate. According to Carrie Menkel-Meadow, a Professor at Georgetown Law Center, courts are becoming "more skeptical of the fairness of such agreements," particularly in the employment and health benefits contexts, as is shown by the recent case Engalla v. Permanente Medical Group, Inc., 64 Cal. Rptr. 2d 843 (1997), where the California Supreme Court questioned the fairness of a mandatory arbitration provision in an HMO plan.
The Cornell/PERC study reports that, increasingly, the corporate view is that mediation is a "more satisfactory process" than litigation, "preserves good relationships," and is perceived as more cost-effective than other ADR techniques. The research shows that mediation is preferred to arbitration in virtually all types of disputes, particularly in personal injury and products liability cases, and that it is often the "tactical, ad hoc choice of the corporation." According to Professor Menkel-Meadow, this is because mediation offers "greater flexibility in the ability to develop suitable processes and, hence, more appropriate outcomes." In contrast, arbitration has a more narrow use. Where arbitration is used, it is most often mandated by existing and often long-standing contracts such as fixed labor or supply agreements. Accordingly, sectors that rely on such contracts are still heavy users of arbitration.
ADR Usage Varies by Corporate Size
Another chief finding of the Cornell/PERC study is that use of ADR generally tends to vary by company size and age. While most responding to the Cornell/PERC survey indicated a favorable response to the use of ADR mechanisms, use of ADR by the largest, more established firms and smaller corporations in relatively new or innovative industries contrasts sharply.
The largest companies surveyed - the so-called "blue chip" corporations - with an established international presence disproportionately favor the use of ADR. Indeed, of the 10% of corporations responding that they nearly always attempt to use ADR, most fell into this category. The study preliminarily shows that corporations in the top quartile are more than several times likely to engage in ADR than litigate. These firms, the Cornell/PERC study suggests, tend to be more established in the market and have tended to be under significant cost pressure in recent years. Their institutional memory of past litigation (for example, their experiences with class actions, mature torts, and the like) may also guide their preferences for ADR.
In contrast, the most litigious corporations - those that rarely, if ever, use ADR - fell disproportionately in the bottom quartile of those surveyed. By and large, these companies tend to be younger, less-established companies in emerging high technology sectors where the law is relatively undeveloped and where competition is keen. Thus, these firms tend to litigate to foster a favorable legal environment and to establish themselves in the global marketplace. Parties engaged in disputes with these firms are likely to be drawn into costly litigation and to have their offers of mediation or arbitration rebuffed.
Reservations About Qualifications of Neutrals
Despite favorable experiences with ADR and a willingness to continue its use, companies surveyed by Cornell believe that mediators and arbitrators are only "somewhat qualified"- particularly when it comes to resolving complex cases requiring specialized knowledge - and that this impacts their decision to use ADR. These concerns are also reflected in the survey data collected by Deloitte & Touche. Respondents appear to be especially concerned about the qualifications of arbitrators: nearly half say they have a lack of confidence in arbitrators and close to 30 percent say there is a shortage of qualified arbitrators. According to Ron Seeber, the Associate Director of the Cornell project, concern over qualifications is heightened where arbitration is binding. "Arbitrators have quasi-judicial powers and their rulings are binding, so the stakes are higher when they are involved in resolving disputes . . . Corporations seem to accept the qualifications of mediators with less reservation, because one does not have to rely on their findings," Seeber says.
Despite this relaxed scrutiny for mediators, however, corporations are also critical of mediator qualifications: 30 percent of those surveyed revealed their lack of confidence in mediators and 20 percent complained of the lack of experienced people.
According to Seeber, part of the uneasiness of corporate America with the qualifications of neutrals is the lack of standards. "There is no real national accreditation system for neutrals" he says, "virtually anyone can claim him or herself to be a neutral." Unless this concern is addressed and the field moves aggressively to produce more skilled, experienced neutrals, Seeber says, "it will act as a significant limiting factor on the future growth of ADR."
