The Alternative to Alternative Dispute Resolution (ACC Docket)
August 3, 2010
When attorneys think of arbitration, they most likely think of the American Arbitration Association (AAA), the largest and most widespread organization that administers arbitration proceedings. The AAA, however, is not the only option. A non-administered arbitration, where no administering agency is involved in procedural aspects and all matters are handled either by the arbitrator or the parties themselves, offers a form of alternative dispute resolution that is truly faster and more cost effective.
History of the American Arbitration Association (AAA)
The AAA is a nonprofit organization founded in 1926 — following enactment of the Federal Arbitration Act — that functions as a large conflict management and dispute resolution services organization. 1 The AAA offers administrative services, including assisting in the appointment of mediators and arbitrators, setting hearings, and providing users with information on dispute resolution options.2
Many contracts include an arbitration clause naming the AAA as the organization that will administer arbitration between the parties, or specifying the AAA commercial arbitration rules to govern the proceedings. The AAA does not arbitrate disputes itself, but rather provides administrative support to arbitrations before a single arbitrator or a panel of three arbitrators. The arbitrators are chosen in accordance with the parties’ agreement or, if the parties do not agree, in accordance with AAA rules. Under its rules, the AAA may appoint an arbitrator in some circumstances, for example, when the parties cannot agree on an arbitrator or a party fails to exercise its right to appoint an arbitrator. 3
The process of administered arbitration through the AAA begins when a case is filed with the AAA. 4 The parties involved may file their cases via the AAA’s online filing system or through the AAA’s offices. Once a case is filed, parties may select from the AAA’s roster of 8,000 arbitrators, often referred to as “neutrals.” The AAA’s neutrals consist of both attorneys and non-attorneys, and are considered to have expertise in their respective fields.
Problems with AAA arbitrators
Though conventional wisdom touts arbitration as a faster and less expensive alternative to traditional litigation, administered arbitrations have become increasingly slow and costly for the parties.
For instance, the AAA requires parties to pay an administrative fee based on the amount of the claim or counterclaim at the time the arbitration demand is filed. These fees can be particularly high when compared with the filing fees of courts, and the fees increase in steps with the amount of the claim.
Under the AAA standard fee schedule, for example, the initial filing fee starts at $750 for claims under $10,000, but gets progressively more expensive as the amount of the claim increases. The fee can reach $12,500, plus .01 percent of the amount of a claim over $10 million (though the initial filing fee is capped at $65,000). 5 In addition, a case service fee is incurred if the case proceeds to the first hearing. The case service fee also gets progressively more expensive as the amount of the claim increases, starting at $200 for cases under $10,000 and going as high as $6,000 for cases over $10 million. If your company asserts a claim worth $20 million under the standard fee schedule, your initial filing fee will be $65,000, plus a $6,000 case service fee if the case proceeds to the first hearing.
In response to complaints about these onerous fees, the AAA recently launched a “cost-saving alternative” in the form of its “Pilot Flexible Fee Schedule.” The pilot program was offered to parties filing cases through May 30, 2010. 6 In general, the arbitration demand was made, and officially deemed filed, upon payment of an initial fee — about $1,000 for most cases. The parties then have 90 days to confer and choose an arbitrator or arbitrators by agreement. If the parties are successful in conferring and choosing an arbitrator, the parties receive a 50 percent discount applied against the proceed fee, which is due at the expiration of the 90 days. The proceed fee also gets progressively more expensive as the amount of the claim increases. A final fee is incurred for all claims and/or counterclaims that proceed to their first hearing.
Therefore, if your company were to assert a claim for $20 million, your initial fee would be $2,500 under the flexible fee schedule. If you and your opposing counsel are successful in choosing an arbitrator, your proceed fee will only be $32,500, but if you are not successful, the proceed fee is $65,000. The final fee is the same as the standard fee schedule: $6,000. In the situation where an arbitrator has not been pre-selected and appointed by the expiration of the 90 days, you could end up paying more under the flexible fee schedule than under the standard fee schedule.
In addition to the potentially exorbitant filing fee, parties still must compensate the arbitrator(s). This can become a severe burden, especially when the parties are required to have more than one arbitrator, either by agreement of the parties or rules of the AAA. Often you have to pay a fee based on the estimated hours that arbitrators will spend, well in advance of them starting to work on the case. According to the “AAA’s Procedures for Large, Complex, Commercial Disputes,” if the parties are unable to agree upon the number of arbitrators, and a claim or counterclaim involves at least $1 million, then the AAA requires three arbitrators to determine the case. 7
Moreover, administered arbitrations were once considered a quick alternative to litigation, and now the process can be almost as slow as traditional litigation. Contributing to this, and perhaps one of the biggest disadvantages to pursuing administered arbitrations under the AAA, are the limitations placed on communications with the arbitrator or arbitrators. The AAA’s rules provide that “no party and no one acting on behalf of any party shall communicate ex parte with an arbitrator or a candidate for arbitrator concerning the arbitration. . . .”8
With the AAA, the administrator acts as an exclusive channel for all communications between the parties, frustrating and unduly burdening a process that is intended to be informal and more accessible than traditional litigation.
Furthermore, if you add in the costs of the administrative fees along with the costs of the arbitrators, one could argue that arbitration is at least as expensive as traditional litigation in the court system.
Benefits of non-administered arbitration
One of the most significant benefits of non-administered arbitrations is flexibility. With no administering agency involved in the procedural aspects of arbitration, the parties are free to administer the arbitration at the pace they agree to. This means that the parties can resolve the dispute as fast as possible, setting a schedule with which both sides are comfortable. Parties also have greater flexibility in choosing the arbitrator and the hearing location.
Another benefit is speed. When both parties agree on a schedule for the arbitration, they condition the hiring of an arbitrator on that schedule.
Cost control is a third major benefit. By agreeing on a single arbitrator, which is much simpler than trying to find three who are agreeable to both sides, arbitrator fees are automatically reduced by two-thirds. In addition, restricting the operation to one arbitrator reduces the opportunities for “gaming” the process by trying to sneak in an arbitrator who will favor one party.
Finally, convenience may be the benefit that counsel appreciate the most. All it takes to discuss issues that arise, or to cope with unexpected developments, is a quick threeway conference call. No appointments with unavailable case administrators. No multiple arbitrators with shifting schedules to juggle.
How to arrange a non-administered arbitration
If your company plans to be a plaintiff, it may be difficult to arrange a non-administered arbitration until after your complaint is filed — unless you have an established relationship with counsel for the soon-to-be defendant. Making arrangements for dispute resolution too early will unnecessarily tip off your opponent to your intention to file, and may give them the opportunity to file first and control the choice of forum.
The filing of a complaint, however, offers a good opportunity for either you or your outside litigation counsel to reach out to the defendant’s counsel — sometimes even before service is affected — and propose staying the lawsuit while the parties arbitrate their dispute privately. Few judges can resist the likelihood of a dismissal on the merits in exchange for merely staying a lawsuit for a limited period of time to allow this sort of disposition.
If, on the other hand, your company is a defendant, your first call to opposing counsel should be a dual request for an extension of time to answer, while the two of you discuss the possibility of arranging to arbitrate the dispute.
Once again, it would be a rare court that would not give you the time for those discussions to take place. Once the conversation is under way, there are several agenda items that need to be pursued. Whether the parties can agree on an acceptable arbitrator is probably the most urgent. Since a group is not administering an arbitrator for you, you and opposing counsel need to pursue the question of whom you both trust. In most cities, that is not as hard to answer as you might think. Just as litigators know who the other sophisticated trial lawyers are in town, they know who they would trust to be fair and impartial in arbitrating their disputes.
Yes, each lawyer will hope or think that she has special insight into the history and proclivities of possible arbitrators, and will try to obtain a favorable decision-maker. But, more often than you might imagine, more than one mutually acceptable name will emerge from exchanges between counsel.
When counsel agree on an arbitrator, the next step is to agree on the approximate time frame for discovery and the ultimate hearing of the dispute. These dates need to be firm — not the expected-to-be-moved-a-couple-of-times dates that typically come out of preliminary case management conferences in court. This discussion will involve reaching agreement on how much discovery the parties want to permit. In a non-administered setting, this is entirely a matter of mutual agreement. Again, that isn’t as hard to reach as the clients probably expect, when litigation counsel are experienced and acting in good faith.
With these three preliminary agreements in hand — a proposed arbitrator, a proposed time frame and a proposed scope for discovery — counsel need to contact the proposed arbitrator without delay, in an attempt to get the arbitrator to agree to handle the matter in the agreed upon time frame. Of course, rates, locations and duration of the expected hearing also should be addressed in the initial conversation with the proposed arbitrator.
Normally, all parties and the newly-designated arbitrator will agree to resolve any discovery disputes on a telephone call to the arbitrator, with no need for motions or briefing unless it is at the arbitrator’s request. Most of the time, the preliminary agreement on timing and scope of discovery prevents any disputes from requiring arbitrator intervention.
While discovery is ongoing, the arbitrator has a limited role, and normally isn’t required to take an active part in the process. Freed of the need to clear every decision through AAA administrators, most sophisticated litigation counsel can negotiate discovery scheduling, resolution of any immediate legal disputes and other miscellaneous issues in short order. Since both sides have explicitly decided to resolve their disputes in this very cost-effective way, neither side has an incentive to delay discovery, or multiply disputes.
Hearings in non-administered arbitrations tend to go quickly. With a single arbitrator, who owes his allegiance to the parties who selected her, and not to AAA, there is little to no delay in proceeding. Even fairly complex disputes often can be heard in only one or two days by avoiding otherwise common issues associated with having a three-arbitrator panel — at least one member disappearing for periods of time on the telephone because she has to deal with real or contrived emergencies — and by keeping witnesses available by phone when possible.
It is useful for the parties and the arbitrator to agree (either at the outset or at the hearing) both how long the arbitrator may take to issue a ruling in the dispute, and whether or not a reasoned decision — as opposed to a one-paragraph summary ruling — is required. No enforcement mechanism exists, but the fact that the parties and their counsel actually selected the arbitrator acts as a powerful incentive for most arbitrators to do the kind of job agreed on in the time the arbitrator committed to.
Once the ruling is obtained, since no appeal is normally allowed (unless the parties have agreed otherwise in advance), all that remains is to return to court, if a lawsuit actually was filed. Let the grateful judge know that it is time to mark the case settled and dismissed, and collect that disposition credit on the docket.
Disadvantages to non-administered arbitrations
Though there are many advantages to non-administered arbitrations, there are a couple of potential issues to consider. For instance, non-administered arbitrations only work well when both sets of litigation counsel are able to work together professionally, especially in selecting an arbitrator and a time frame. Also, if your opponent is not likely to obey the rules or one of the party’s goals is to delay the proceeding on which you have mutually agreed, perhaps a non-administered arbitration is not for you.
Another potential disadvantage of non-administered arbitrations is the increased risk of damage from a bad decision. This shows up in several ways: a poor selection of an arbitrator, for example, hurts more when there is only one. Not using the AAA vetting process means you are relying even more heavily on litigation counsel’s judgment. And the absence of appeals means that a poor decision in the case will not be simply fixed on appeal.
These disadvantages don’t mean you shouldn’t try a non-administered arbitration — just that you need to exercise considerable care in selecting the right case and the right outside counsel to use in that case.
“How-to” Guide to Non-Administered Arbitration
1. If your company is a plaintiff: File the complaint, then reach out to defendant’s counsel and propose staying the lawsuit while the parties arbitrate privately.
Non-administered arbitration resources
There are several national and international organizations that provide self-administered alternative dispute resolution resources, for those parties that need help in locating an appropriate arbitrator. The International Institute for Conflict Prevention & Resolution (CPR) is a nonprofit organization that serves as an appointing authority for parties in need of neutrals. 9 CPR maintains a roster of arbitrators and mediators, with specialization in 17 practice areas. Most biographies of CPR’s neutrals are only available to CPR members. Fees are customarily based on the neutral’s own normal time charges. CPR receives no part of the panelist’s fees.
Judicial Arbitration and Mediation Services (JAMS) is another organization providing non-administered arbitration services. Founded in 1979, JAMS is a large private alternative dispute resolution provider. 10 JAMS offers a list of 250 full-time neutrals, including many former judges and distinguished attorneys.
Privately funded judicial proceedings
Privately funded judicial proceedings are a related form of alternative dispute resolution that provide many of the benefits of non-administered arbitrations. The concept of a private judging system was first introduced in 1976 in California. 11 Private judging allows parties to remove their dispute from the traditional court system and refer the case or issue to a retired judge, or, in some instances, to another neutral third party. Parties have the freedom to choose the private judge they feel is best suited to try their dispute. The parties are then responsible for compensating the private judge.12 The private judge has the full authority of the court, and his decision is enforceable and appealable in the public courts.
In 1984, for example, the Ohio General Assembly enacted Ohio Revised Code 2701.10, authorizing parties to consent to a form of alternate dispute resolution frequently referred to as “private judging” or “rent-ajudge.” 13 Generally, O.R.C. 2701.10(B)(1) provides that parties to a civil action or proceeding in an Ohio Court of Common Pleas may choose to have the action or proceeding referred to a voluntarily retired judge of their choosing for adjudication.14 Under the Ohio Revised Code, a “voluntarily retired judge” refers to “any person who was elected to and served on an Ohio court without being defeated in an election for new or continued service on that court.”
In addition to California and Ohio, other states such as Texas, New York, Alabama, Florida, Indiana and Colorado also have adopted some form of private judging. 15 In those jurisdictions, private judging helps to ameliorate overburdened systems and gives litigants yet another alternative to the traditional courts. Proponents of private judging argue that it:
• is cost-effective,Despite the many advantages of the system, private judging also raises some issues. For instance, some critics argue against secretly resolving these disputes out of the public forum. Another potential downside for parties that opt for this type of alternative dispute resolution is that, by doing so, they are sometimes required to waive their Seventh Amendment right to a jury trial. Of course, many companies will regard both of these issues as advantages.
• provides tailored expertise,
• preserves appellate review,
• is convenient,
• protects private information, and
• helps to alleviate congested dockets.16
In 2006 the Ohio courts addressed the issue of whether a retired judge, adjudicating a case or issue by stipulation of the parties pursuant to O.R.C. 2701.10, has the authority to preside over a jury trial. In State ex rel. Russo, Judge vs. McDonnell, Judge, 110 Ohio St.3d 144 (2006), the Ohio Supreme Court held that the statutory authority for cases or issues submitted to retired judges requires that all such matters be heard and determined by the judge — meaning that the retired judge is not authorized to preside over a jury trial, even with the consent of the parties.18
Non-administered arbitrations, like anything else, benefit from experience. Talk to your litigation counsel, look for an appropriate case and give it a try. You have nothing to lose except ridiculous filing fees, extraordinary arbitrator costs, and lots of delay and frustration.
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1 . www.adr.org/aaa_mission.
11. John W. Whittlesey, Note, Private Judges, Public Juries: The Ohio Legislature Should Rewrite R.C. § 2701.10 to Explicitly Authorize Private Judges to Conduct Jury Trials, 58 Case W. Res. L. Rev. 543, 543-574 (2008).
12. Id. at 544.
14. O.R.C. 2701.10.
16. Whittlesey, supra note 15, at FN5.
17. Id. at 545.
18. State ex rel. Russo, Judge vs. McDonnell, Judge, 110 Ohio St.3d 144 (2006).
• www.adr.org: The official website of the American Arbitration Association, providing information regarding the organization, dispute resolution services, filing a case, education programs, AAA’s neutrals and others resources.
by George R. Jurch III , Mark I. Wallach and Molly A. Drake
George R. Jurch III is general counsel for The Americas for Continental Automotive, Inc. He is responsible for overseeing the law, patent and license function for Continental Automotive in the Americas. Jurch previously served as general counsel in the United States and Canada for Continental Automotive and as assistant general counsel for Food Lion. He can be contacted at george.jurch@continental corporation.com.
Mark I. Walla ch is a partner at Calfee, Halter & Griswold LLP, co-chair of its litigation practice, and a member of the Federal Court Panel for ADR Procedures. He has 35 years of experience litigating complex business disputes nationwide on behalf of plaintiffs and defendants. Wallach can be contacted at firstname.lastname@example.org.
Molly A. Drake is an associate with Calfee, Halter & Griswold LLP. She represents private and public business in complex corporate and commercial litigation, and is a graduate of Case Western Reserve University School of Law. Drake can be contacted at email@example.com.
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