Author: Justin Shellaway

March 4, 2005

Companies continually find themselves in tenacious disputes with competitors, partners, vendors, customers and employees. Contrary to common perception, the company’s objective is not simply to win battles. In-house counsel is tasked with comprehensively minimizing a dispute’s costs, both measurable and intangible, present and future. In many cases, counsel can favorably alter the balance among costs by steering early on to alternative dispute resolution (“ADR”): typically, mediation and arbitration. 

THE COSTS OF CONFLICT

The full costs that disputes inflict are extensive. Most conspicuous are the hard dollars expended for (1) a judgment or settlement and (2) the process to reach that outcome, to outside counsel and legal industry helpmates such as discovery vendors and experts. 

In-house counsel’s purview, however, is broader than expenditures. They must also minimize disruptions to the business. When disputes divert the company from serving its customers, the revenue side of the ledger suffers. Output diminishes when personnel lose time and focus, and providing evidence for litigation is exhausting and stressful even to seasoned executives. 

Disputes may put fruitful relationships with a business partner or employee at risk. And a dispute’s effect can reverberate beyond the counterparty, impairing a company’s standing with employees, partners, the government, shareholders, or the public if it gains a reputation as hard to do business with or morally unconscionable. How the company resolves disputes can resound in other areas as products or services not delivered or missions not accomplished.

LET’S WORK IT OUT: MEDIATION

Mediation is an efficient tool for counsel who are open to ending disputes by agreement. It’s important that counsel impress upon business colleagues that this meeting of both sides’ key players provides the clearest exit ramp before more expensive investments in legal combat. Counsel can prepare colleagues to be integral participants who suspend their beliefs about just deserts to clear headspace for pragmatism.

A successful mediation helps manage all in-house counsel’s cost concerns. As with most settlements, it avoids a lopsided payout and ends legal expenses. It gets colleagues back to business quickly and heads off collateral damage to reputation. And going through the process gets business partners and employees in the habit of seeking accord on future disputes. 

The costs of mediation itself are manageable compared to litigation; the process is short and often (although not as effectively) held remotely. Parties already in court might have access to a pro bono mediator. For high-stakes disputes, top-flight mediators can charge five figures per day because they so frequently succeed in resolving disputes – a very reasonable expense for a high-exposure case.A mediator who settles a case is a bargain at $10,000 a day when compared to the costs (for each side) of 3 lawyers, averaging $600 per hour for a 10-hour day, plus often the cost of travel, hotel, meals, etc.

Mediation can find traction where bilateral negotiation gets stuck. Its forte is flexibility in crafting remedies – because it’s not always just about the money, but that’s the default focus when attorneys bargain with each other. Mediators elicit the parties’ motivations to discover bespoke solutions. Agreement might spring from an apology, changed conduct toward a third party, or a new way to keep working together. A judge or arbitrator ruling in an adversarial process won’t have the insight or authority to impose the ideal resolution.

Even a failed mediation can be worth the work. Counsel may learn their opponent’s best arguments and test their own in a low-risk setting. Plus, farsighted mediators may share their opinion of a party’s case – a reality check that resets business colleagues’ expectations and may break a logjam to settlement. Parties may narrow the dispute, and their prep and new knowledge form their outline for litigation or arbitration. They can mediate again at any time.

PRIVATE COURT: ARBITRATION

If the dispute doesn’t settle, arbitration provides a form of trial decided by one or more private-sector neutrals chosen by the parties. Arbitral awards are legally enforceable under the Federal Arbitration Act (for disputes involving interstate commerce or maritime transactions) and Tennessee’s Uniform Arbitration Act (for any controversy).¹ Let’s look at how arbitration affects different forms of cost.

The award: bookending risk

Arbitration may be attractive to in-house counsel looking to mitigate the risk of an unreasoned jury award driven by emotion. The trade-off is that the company may be less likely to avoid any award because arbitrators are often perceived to “split the baby”.² This perception may also make arbitrations less attractive when their defense rests on a strict legal contention like notice. Indeed, while arbitrators consider the substantive law that governs the dispute,³ they typically are not bound to adhere to it. Their latitude ultimately derives from the arbitration statutes’ narrow grounds for challenging awards, which do not include substantive legal error. Courts are empowered to vacate awards only for fundamental procedural flaws amounting to fraud in the award, or the arbitrator’s partiality, corruption, failure to hear material evidence or postpone the hearing for cause, or actions outside their granted powers.⁴ But arbitrators’ discretion is a design feature, not a bug. Counsel gravitate to arbitration when their dispute cries out for a fair view of the equities and real-world conditions. 

The uncertainty inherent in judging equity makes selection of the arbitrator critical to the outcome. Yet the arbitrators’ decisional predilections can be hard to discern. Their professional backgrounds are evident, but there is no comprehensive database of their decisions to consult, and no binding precedent. Some arbitral awards are revealed when enforced in court, but may lack the detailed reasoning of a judicial opinion. Instead, counsel gain insight into an arbitrator by word of mouth; a reputation for even-keeled temperament and middle-of-the-road decisions may earn them the business of both sides.

Process costs

So can the company save litigation costs? It depends on what the parties agree to. Arbitration is a customizable vehicle made by contract. The parties usually start with a set of rules built by an arbitration provider for their type of dispute.⁵ Then they amend the rules to accommodate the discovery they want, often adding depositions and mapping out the exchange of documents. The parties can agree to get all the depositions and documents they want from each other, with its attendant costs. Thus, freedom of contract allows arbitration to approach the litigation norm and habit of sweeping discovery. An arbitrator might discourage it, but unlike a judge, she is hired to assist the parties. Conversely, counsel seeking streamlined discovery may look to the arbitrator to maintain parsimony provided by the rules, especially on peripheral matters.⁶ In-house counsel may have a better chance of protecting her C-suite from the distraction of sitting for prep, deposition, and trial, as some arbitrators may not indulge calls to entwine them needlessly, and any such discovery is confidential. 

Approaching trial, there is less advocacy through motions and pleadings. Admissibility issues are few without a jury to prejudice; indeed, the arbitrator risks reversal under the statutes for excluding material evidence, not over-including it. Similarly, summary disposition of issues is rare; arbitrators tend to give parties the benefit of any doubt and allow their claims a full hearing, free of concerns for judicial economy. The arbitration process may not be speedier than litigation. But again, the parties’ agreement can drive efficiency; for instance, they can try bellwether issues at an early hearing and receive an intermediate arbitral decision, to inform preparation for the remainder and foster settlement. 

A key out-of-pocket cost is that arbitrators must be paid. The cost might be mitigated by selecting individuals with subject matter expertise who need less education on industry or technical matters than a jury or judge, potentially reducing expert witness expense and hearing time. When the final award is issued, it ends most attorney costs and employee distraction because usually there is no appeal.⁷ In all, a narrowly tailored arbitration in a complex matter could save six or seven figures – which in-house counsel would eagerly highlight – or exceed the cost of litigation.

Preserving relationships and reputation

Arbitration’s biggest draw may be its private nature. Hearings typically happen in a conference room, not an open courtroom, with the parties empowering the arbitrator to control who can be present and maintain confidentiality where she legally can.⁸ For feuding business partners, a private airing gives space for reduced tension and eventual reconciliation, especially helpful among international cultures for whom resorting to court is stigmatizing and relationship-ending. 

In-house counsel uses arbitration to shield embarrassing facts and outcomes from the media, particularly in employment cases with sympathetic individuals or company executives (though a witness might still post on social media). Conversely, when the company seeks public vindication on good facts, it may prefer its day in court.

PRACTICAL CONSIDERATIONS

Wading into ADR

Mediation is effective with modest investment, at any time and without prior agreement. It may be most effective once a party has fleshed out their own case’s best evidence and arguments, so they can persuade the mediator to persuade their opponent to settle. To apply a brake on disputes, counsel may place mediation clauses in their contract templates. They can specify the mediation’s length, location, and the manner for selecting the mediator, so if a counterparty leapfrogs to a lawsuit it is straightforward for a court to compel mediation in the manner they prefer. 

Parties may not realize they can arbitrate a dispute after it arises, without a prior agreement to do so. They can jointly ask the court to stay any litigation. Especially in disputes between businesses, in-house counsel can defer proposing arbitration internally and to the opposing party until it appears mutually beneficial. 

Alternatively, a company might decide pre-dispute to place an arbitration clause in a set of contracts. Doing so is easy when the counterparties can’t bargain over the contract, such as consumers. Yet imposing arbitration extensively is a nuanced and consequential component of a comprehensive litigation strategy. Before deciding, counsel may consider:

a) They can test the waters by placing the clause in only a subset of contracts, and as disputes arise, be guided by their experience. Companies have been known to regret an across-the-board decision to arbitrate disputes where cost savings fall short of expectations.

b) Future plaintiffs and attorneys may be deterred from litigation when a company consistently contests and defeats lawsuits. The privacy of arbitration diminishes this deterrence, but the prospect of smaller recoveries may increase it.

c) They will incur administrative and arbitrator fees. What if thousands of customers or employees file claims? This happened to Amazon in June 2024, when two law firms spearheaded the filing of over 15,000 individual arbitration claims to the American Arbitration Association (“AAA”) from delivery drivers challenging their classification as independent contractors.⁹ The AAA revised its rules and fee schedules for mass arbitrations in 2024¹⁰, but substantial costs can still accrue to the company.

d) If they owe an arbitral award, by paying it timely the result will not be disclosed in a public lawsuit to enforce it.

Backing out of ADR

What if a party doesn’t want to bother mediating? If mediation is in their contract, the opposing party can file a motion to compel their participation. A court in Tennessee can also send parties to mediation on its own authority and terms rather than the parties’.¹¹ Counsel tend to participate at least to the extent required; the content of the mediation is not before a court, but a party’s failure to abide by the letter or spirit of an order for mediation may come to the judge’s attention. 

What if a party wants to back out of an arbitration they’ve agreed to? If the other party concurs, fine; an arbitration agreement is a contract, so it can be rescinded. If the other party wants to arbitrate, the agreement to arbitrate usually is legally enforceable.¹² 

Nothing in this article constitutes legal or professional advice or creates an attorney-client relationship.

1. The Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 2, 9, 13 (2022); Uniform Arbitration Act (“TUAA”), TN Code § 29-5-302, 312, 315 (2021). 
2. The American Arbitration Association –  International Centre For Dispute Resolution cites studies disputing this contention. See “AAA-ICDR Awards Do Not Split the Baby: Countering      Counsel Perception in Commercial B2B Arbitration Cases,” go.adr.org/rs/294-SFS-516/images/2018_Split_the_Baby_WhitePaper.pdf (last viewed Oct. 20, 2024). 
3. See, e.g., “Commercial Arbitration Rules and Mediation Procedures”  P-2, American Arbitration Association (“AAA Commercial Rules”), adr.org/commercial  (checklist for preliminary hearing) (last viewed Oct. 20, 2024).
4. FAA,  9 U.S.C. § 10(a); TUAA, TN Code § 29-5-313.
5. See Volt Info. Sci., Inc. v. Bd. of Tr. of Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989); see, e.g., JAMS Comprehensive Arbitration Rules and Procedures, www.jamsadr.com/rules-comprehensive-arbitration; AAA Commercial Rules; AAA Employment Arbitration Rules and Mediation Procedures,” American Arbitration Association (“AAA Employment Rules”), adr.org/employment (each last viewed Oct. 20, 2024).
6. See, e.g., AAA Commercial Rules R-23(a) (“The arbitrator shall manage any necessary exchange of information among the parties with a view to achieving an efficient and economical      resolution of the dispute….”).
7. But see, e.g., AAA Optional Appellate Arbitration Rules, www.adr.org/sites/default/
   files/Optional_Appellate_Arbitration_Rules_Web.pdf (2013) (last viewed Oct. 21, 2024). 
8. See, e.g., AAA Commercial Rule R-26, R-45; AAA Employment Rule 22, 23.
9. CNN, “More than 15,000 Amazon Contract Drivers File Legal Claims Asking for Compensation for Overtime and Unpaid Wages” (June 12, 2024), cnn.com/2024/06/11/business/amazon-contract-workers-file-legal-claims (last viewed Oct. 26, 2024).
10. Adam Shoneck, “Mass Arbitration - How Did We Get Here & Where Are We Now?” (June 6, 2024), adr.org/blog/mass-arbitration-how-did-we-get-here-and-where-are-we-now (last viewed Oct. 26, 2024).
11. See Tenn. Sup. Ct. R. 31(3)(b); M.D. Tenn. LR 16.02; W.D. Tenn. L.R. 16.3(c) and App. D.1; E.D. Tenn. L.R. 16.4(a).
12. FAA, 9 U.S.C. § 2; TUAA, TN Code § 29-5-303.