ADR Finds True Believers
Companies make the leap -- and save tens of millions of dollars
David Hechler
The National Law Journal

June 25, 2001

The year was 1992, and James W. Durham, general counsel of the Philadelphia Electric Co., was still grappling with a case he'd inherited three years earlier. It had all the elements of a litigation nightmare.

A nuclear power plant had been shut down by federal regulators after his company's control room operators had been found asleep on the job. The plaintiffs were three utilities with which his company had a continuing partnership, the claims totaled $300 million, attorneys' fees had been mounting for nearly four years and the last thing he needed was an expensive trial and more bad publicity.

Durham had been imploring the companies to try mediation and, 10 weeks before their trial date, they finally did. It took all of two days. The settlement totaled $131 million -- with no trial, no appeals and no admission of liability. Durham still recalls the moment fondly: "When it was all said and done, the mediation cost less than the postage bill had been for the litigation."

To many people back then, alternative dispute resolution (ADR) was still something of a novelty. That was why Durham had trouble convincing the companies to give it a try. But by 1997, when David B. Lipsky and Ronald L. Seeber, two Cornell University professors, surveyed the Fortune 1000, 87 percent of the companies responding had used mediation at least once during the previous three years and 80 percent had used arbitration.

Today, most of the organizations that collect ADR data report substantial increases in recent years. For example, of the cases filed between 1996 and 2000 with the American Arbitration Association, mediations and arbitrations combined almost tripled. In the wake of the U.S. Supreme Court's ruling in March 2001 that mandatory arbitration clauses in employment contracts are legal (Circuit City Stores v. Adams, No. 99-1379), many in the field, including the Cornell professors, expect the numbers to explode.

From their own widely cited research, Lipsky and Seeber conclude that roughly 10 percent of the Fortune 1000 dislike ADR and rarely use it. Another 80 percent are in what Lipsky calls an experimental mode:

The pair spent 18 months examining 19 companies from the Fortune 1000. In their study, which will be published later this year in a New York University labor law book, they will explain why companies made the leap.

CASE STUDY

One company they studied was Durham's. Philadelphia Electric is now part of Chicago-based Exelon Corp., and Durham retired in March 2001, but the system remains.

The legal department was different when he arrived in 1988. Nearly all legal work was done by outside firms that had little incentive to contain costs, Durham recalls. The in-house department consisted of six or seven lawyers who mostly assisted the hired hands. His mandate was to change that.

As president of the Oregon State Bar, Durham had created its first dispute resolution committee, and he was determined to introduce ADR to his new department. Even as he was hiring, he was grooming his staff, emphasizing from the first interviews his vision of lawyers as "problem solvers."

Within three years he had 25 lawyers handling their own cases. With 200 pending at any given time, Durham's goal was to "recalibrate the litigators to think about early evaluation" and, when appropriate, prompt settlement.

At Philadelphia Electric, a utility company, most cases were predictable:

slip-and-falls, crashes into utility poles. As long as the claims were legitimate, he favored settling immediately: "It's important to be able to say, 'We screwed up.' Everybody makes mistakes. The important thing is how you resolve them after they're done."

Yet, Durham discovered, the vast majority of company disputes weren't even in his domain. Appliances damaged by power surges, for instance, passed through the claims department, which processed thousands each year. So Durham successfully lobbied to have them folded under his umbrella. To maintain public trust, Durham felt it was especially important to quickly resolve claims filed by customers.

The best way to do that, he reasoned, was to allow adjusters to settle on the spot, so he literally put checkbooks in their hands. The result: Adjusters processed more claims more quickly and the average settlement cost dropped. "So everybody won," he says.

HANDLING EMPLOYMENT DISPUTES

When it was appropriate, Durham didn't shy away from litigating. Each year, the company was hit with employee discrimination claims, most of which Durham deemed meritless. He "basically won them all" he says. Yet, he also recognized that these cases revealed a problem. Amicably resolving disputes with employees was as important as doing so with customers, and that wasn't likely to happen in court.

Durham believes this was a driving force behind the company's most ambitious ADR initiative of all: the development of a system to resolve employment disputes without having to go to court. Another factor was the need to change the relationship between workers and managers as the company braced for competition after deregulation. This was the human resources department's concern when it created a system in 1993. Here's how it works:

If a dispute involves a legally protected right, like the right not to be discriminated against, employees can opt for internal or external mediation or voluntary, binding arbitration, according to Ellen Wolf, director of employee dispute resolution. The company will even reimburse employees for up to $2,500 in legal fees.

When protected legal issues aren't involved, such as discipline for unauthorized absences, employees dissatisfied with a supervisor's decision may request a binding hearing before a peer review panel. Panels comprise three peers, a manager and a supervisor, none involved in the conflict and all volunteers with special training. Panels aren't authorized to change policies, procedures, performance ratings or salaries, Wolf says. They judge whether supervisors' decisions were consistent with existing policies. Sometimes the stakes couldn't be higher: They can reinstate a fired worker or restore back pay. But the system had problems.

TOO ADVERSARIAL

When Wolf was hired, in 1995, she found a system that was used but a process that was adversarial. Panelists themselves complained that many conflicts could have been resolved earlier by a simple conversation, Wolf recalls. She assembled a team of a dozen employees from different levels and divisions, put together focus groups, and the result was a new option, part of a program called People*Solve. Before hearings, employees embroiled in disputes may now meet with trained peer coaches who prepare workers for conversations with their supervisors.

In 2000, 92 percent of the cases brought to the coaches were resolved, which meant 40 percent fewer panels than in 1999, according to Wolf. Employment lawsuits and cases brought by the U.S. Equal Employment Opportunity Commission were reduced 44 percent over the same period.

ANOTHER BOOSTER

Another company the Cornell professors studied was FMC Corp., a leading producer of chemicals and machinery. Like Durham, General Counsel Stephen F. Gates was already an ADR booster when he arrived. He had seen it succeed at Amoco, where he had worked for 23 years, the last five as GC. Early resolution of disputes had saved more than just time and money. Distraction was a hidden cost of litigation, which often took on a life of its own.

While he didn't find any real proponents at FMC, he found a sophisticated, 20-lawyer legal department that "was very receptive to ADR.

"The real knack in ADR is finding or inventing the right format for the particular dispute," Gates says. If two parties disagree about the correct reading of a contract, the best solution may be hiring a decision-maker. Where the issues are purely financial and the range of differences narrow, he's found negotiation will often suffice. For example, lawsuits on behalf of people injured or killed operating FMC construction cranes are most often resolved through settlement discussions.

On the other hand, Gates has enjoyed some of his greatest success with mediation -- sometimes under unlikely circumstances. When he suggested mediating a case in which FMC was accused of selling defective Bradley fighting vehicles to the U.S. Army, the case had been litigated for 14 years. FMC had already lost in court. A judge had reduced the jury's $380 million verdict to $87 million, boosted to $110 million with interest and legal fees. Still, both sides were appealing, so Gates suggested mediation. In two days, they settled for $80 million.

Gates hasn't yet formalized a system at FMC, as he did at Amoco, because he's only been on the job a year. "It's on the agenda," he says. In the meantime, the tools and the mind-set are there, and he believes they are already practicing it.

What do the companies that have implemented conflict management systems have in common? That was one question the Cornell professors set out to answer. Many companies had a crisis, usually in the form of a large lawsuit, Lipsky says. Some had smaller suits that rolled in regularly.

Virtually all the companies had a James Durham or a Stephen Gates.

AN ARDENT ADR ADVOCATE

"There's always someone who is an ardent advocate for ADR," Lipsky says. When the champion is a lower-level employee, he continues, the company may take an ad hoc approach. When a company adopts an integrated system, the champion is usually an executive.

Conversely, the pair also found common features among the skeptics. "A lot of CEOs are saying, 'What's the real business case?' " notes Seeber. Without an ADR champion or a litigation crisis, the issue may be off a company's radar screen, or it may have emerged all too visibly in a bad experience. The professors speak of the need for institutionalization to ensure a system's survival. If a company's system is built by a champion on whom it depends, the system may collapse after the champion leaves. That is the test that determines whether the corporate culture has truly changed.

FMC will face the test this fall, when the company splits in two and Gates becomes a consultant to both but general counsel to neither. He has confidence that both companies will retain the same approach, he says.

Exelon is already in the post-Durham era. Durham believes ADR concepts are accepted by the people and built into the contracts. Besides, he says, he doesn't have time to worry. He's too busy pursuing the new role he's fashioned since he "retired."

"I'm on the other side of the table now," he declares. "I'm a mediator."

AND THIS ARTICLE TOO

Settling Disputes
An effective way to settle disputes catches on
Tamara Loomis
New York Law Journal

June 25, 2001

David Rodd, a mediator with the New York office of JAMS, the alternative dispute resolution powerhouse, does not get hugged every time he helps parties resolve a dispute. But he definitely gets more hugs than he did in his previous life, as a litigator at Cravath, Swaine & Moore. He has even participated in group hugs on occasion.

He likes his job a lot, for that reason. "It feels good to be hugged," he said. "It feels good to help people resolve their differences."

Lawyers appear to like mediation too. In a survey of JAMS clients last year by an independent firm, an extraordinary 95 percent of the respondents said they would use JAMS again, and almost as many said they would use the same mediator again. JAMS, which handles about 8,000 mediations a year nationwide, is the largest private provider of mediation services in the country.

Plaintiffs' lawyer Joseph Garrison praised the mediation process, in which a neutral third party assists disputing parties to reach a negotiated settlement, as "much better than a settlement conference with a judge." He said his office, the New Haven, Conn.-based Garrison, Levin-Epstein, Chimes & Richardson, has used mediation maybe 50 times.

And mediation's fan club is just getting bigger. In the first five months of 2001, cases in JAMS' New York office soared by more than 50 percent compared with the first five months of 2000. Much of the growth was in employment, but mediation of business disputes is rising as well, especially in the intellectual property, Internet-related and international arenas.

Even the agencies are jumping on the bandwagon. According to JAMS mediator Michael Young, the copyright office recently asked JAMS to mediate a royalty issue involving Internet broadcasts of concerts.

90 PERCENT SUCCESS RATE

The good will mediation generates is easy to understand considering that the success rate, at least at JAMS, hovers around 90 percent. And a one or two day mediation, which is typically how long they last, can bring an end to a litigation that has dragged on for years.

In addition to time and money savings, lawyers and their clients find a number of other features of mediation attractive. Perhaps most appealing is the chance to have a skilled "neutral" -- as mediators are called in alternative dispute resolution parlance -- available to shepherd a mediation through to resolution.

A private mediator, unlike a judge, can devote his full time and attention to the mediation at hand. Discussions can and do go well into the night, JAMS' Ross said, adding that he knows the mediation went late "when I come home and my wife is asleep."

Court-run settlement conferences, in contrast, are usually too short and "too much of a pick a number" exercise, Garrison said, although he added that federal magistrate judges were often quite good, and willing to give the discussions a full day to boot.

Private mediators also offer a flexibility that traditional court-directed settlement conferences do not. For instance, one can bring in a co-mediator, such as an expert in the field or even a trusted friend of the parties, as Ross did in a dispute between two feuding brothers.

Choice of mediator is also another obvious advantage over the courtroom. "You get a known quantity," said Robert W. Gottlieb, a partner at Rosenman & Colin, who said he has used JAMS "half a dozen times," mainly in partnership and construction disputes.

At JAMS, lawyers can cherry pick among an impressive crop of legal minds. Numbering among JAMS' 200 neutrals, for instance, is Ambassador Richard Sklar, who came over to JAMS after heading the U.S. program to redevelop Southeastern Europe. JAMS also recently lured Chief Magistrate Judge Edward Infante from the U.S. District Court for the Northern District of California, who is widely considered one of the best settlement judges around.

Finally, mediation is often perfect for employment disputes and other emotionally charged situations, where the client needs to vent.

A good mediator will "let [the client] say his piece, and then set the tone for proper behavior," said Philip M. Berkowitz, head of the employment group at Salans. "It's key that everyone can walk out of these things with their head held high," he added.

"It's a personal, intimate process for many involved," said JAMS' Ross, who handles a lot of employment matters. "I never leave the therapy part at home."

Mediation is not without its limitations. A lot depends on the skills of the neutral. Plaintiffs' employment lawyer Ann Vladeck, of New York's Vladeck, Waldman, Elias & Engelhard, who said she has successfully used a mediator a dozen or so times, in part faulted the mediator for the one case that did not settle.

She is still a fan of mediation, though. "You can go to a five star restaurant sometimes and get a bad meal," she said, "but it's still a great restaurant."

For that reason, Vladeck advised lawyers considering mediation to research whom they select. "Talk to people who've had similar cases to yours, and ask their opinion of the mediators they used," she said, adding that lawyers should also be sure to get information "from both sides of the aisle."

COST IS A FACTOR

Mediation can also be expensive. JAMS' Young said that fees typically run from $350 to $600 per hour, although some of the ex-judges in JAMS' California offices charge up to $15,000 per day.

With these kinds of fees, it is not surprising that JAMS has been criticized as a courtroom for the rich. But when the stakes are high, cost is less important than getting the right person, said JAMS CEO Steve Price.

"It's like heart surgery," he said, "wouldn't you choose the best person you could possibly go to?"

Lawyers who use mediation largely agree. In last year's survey of JAMS clients, two out of five said it was "expensive but worth it."

Mediators work hard for their money, though. Ross recently successfully mediated a class action suit against TWA in which nine women alleged they were sexually harassed by supervisors at Kennedy airport. The mediation stretched out over 18 months, with maybe 10 face-to-face sessions and "dozens and dozens of phone calls, by far the longest mediation I have ever conducted," he said.

It was an enormously emotionally draining experience," Ross said, adding that at one point he felt like crying, "but didn't."

JAMS CEO Price agreed: "It's very stressful work. Mediators tell me they'd rather be at the dentist's office."

But there is nothing like the payoff of a successful outcome, for everyone involved.

Price described one such scene which recently took place at JAMS' Los Angeles office. The dispute was between a rock group and their talent agent. "All day they were going at it," he said, "but they finally came to a resolution at the end of the day."

Afterward, Price said, when everyone came out into the lobby area, the musicians took out their instruments, formed a circle around the neutral and serenaded him.

"They were celebrating their mediator," he said.

Thursday, June 14, 2001

U.S. Probes Analysts' Alleged Bias

Congressional Panel Holding Hearings to Examine if Analysts Are Biased Toward Companies

By MARCY GORDON: AP Business Writer

WASHINGTON (AP) -Lawmakers are examining whether Wall Street analysts have become cheerleaders for companies the analysts' investment firms own stock in or do business for, giving investors biased advice.

The issue of financial analysts' independence has caused concern among federal regulators, prompted an inquiry by New York state's attorney general and spurred Wall Street's biggest trade group to adopt a voluntary code for analysts.

Critics of analysts' conduct say they have shaken public confidence by making rosy stock recommendations as the market plummeted. At one point during the slide, when the Nasdaq composite index was down 60 percent, less than 1 percent of analysts' recommendations were to sell.

The perceived conflict of interest arises because the brokerage firms for which analysts work often invest in the companies being scrutinized and can profit from the analysts' recommendations.

``This is about Mom and Pop back home spending their $200'' on investments based on analysts' recommendations, Rep. Richard Baker, R-La., chairman of the House Financial Services subcommittee on capital markets, told reporters Wednesday.

The panel was hearing testimony Thursday from Marc Lackritz, president of the Securities Industry Association, which unveiled the new ``best practices'' guidelines for analysts earlier this week. They require analysts to clearly disclose their holdings in companies they cover and prohibit them from trading against their own recommendations. Analysts, who earn an average of about $200,000 yearly (including bonuses), should not have their pay directly linked to the investment banking transactions handled by their firms for companies they cover, the guidelines say.

Officials of the Wall Street group said the marketplace will enforce the rules by rewarding good securities research and punishing bad, and therefore new federal regulations or legislation are not needed.

Baker, while insisting that self-regulation by the securities industry would be the best solution, said the guidelines were ``a first step'' but not an adequate remedy because they don't provide for monitoring by an impartial outside party such as the Securities and Exchange Commission.

Quoting his hero President Reagan, Baker said, ``You trust but you also verify.'' Rep. John LaFalce of New York, senior Democrat on the Financial Services Committee, criticized the Wall Street guidelines.

He expressed concern that they are voluntary and ``do not go far enough to protect investors from the serious problems they face when relying on the recommendations of analysts who have apparent and direct conflicts of interest relating to their investment advice.''

Baker plans a broad inquiry, with more hearings to come, also looking at the roles played by investment bankers who work with analysts, companies that may pressure analysts for favorable recommendations of their stock, big investors such as mutual funds and pension funds, and financial journalists who pump up analysts' reputations.Other witnesses at Thursday's hearing were Benjamin Mark Cole, author of ``The Pied Pipers of Wall Street: How Analysts Sell You Down the River,'' and Damon Silvers, associate general counsel of the AFL-CIO, who has criticized analysts' conduct.

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