Why Choose Alternative Dispute Resolution?
Lawsuits can be incredibly expensive for all involved, not just for those on the losing side. Even a win can mean thousands in legal fees and months or years of litigation that disrupt daily business. In large companies, that lost time can actually be far more expensive than any direct monetary loss. A lawsuit means that managers and executives could be pulled away as witnesses, forced to spend countless hours preparing to take the stand (Pierce, 2015). Additionally, a lawsuit is inherently risky. A favorable outcome is never assured when one goes before a jury. A 2008 study by Randall L. Kiser, Martin A. Asher, and Blakeley B. McShane investigated over 2,000 cases where a settlement was rejected and the case proceeded to trial. They found that when the trial resulted in huge costs for the losing party, on average $43,000 for plaintiffs and $1.1 million for defendants (Glater, 2008). With so much on the line, alternative dispute resolution is a popular alternative to a trial. Alternative dispute resolution is a pre-litigation way of facilitating a compromise between two parties, most commonly taking two forms: mediation and arbitration.
Arbitrations are like an informal trial (Pierce, 2015). While there is a non-binding variety (similar to a mediation) most arbitrations are legally binding and cannot be contested. Each side has an arbitrator and argues before a tribunal consisting of either an individual or a group. The arbitration is not open to the public, can be made confidential and the decision is final (Resnik, 2015). This creates a similar outcome to a trial but is generally faster, cheaper and more private.
Because of these benefits, many companies include a provision in contracts that force disputes into arbitration rather than litigation (Arbitration, 2015), but these clauses are controversial. A former broker at Morgan Stanley is suing the brokerage firm for forcing civil rights lawsuits into arbitration and forbids employees from participating in class action lawsuits, claiming that it violates her rights and hides racial issues within the company from the public (Antilla, 2015). Ridesharing company Uber has such a clause with their driver contract, but it is currently being contested in California courts (Rosenblatt, 2015). Two drivers have filed class action lawsuits alleging that they should be treated as employees instead of contractors. The contractor model is integral to the success of Uber, so naturally they tried to settle the case in arbitration by arguing that the lawsuit fell within the arbitration clause in their contractor contracts (Weber, 2015). Ultimately a California judge ruled that this clause was unenforceable due to inconsistencies and contradictions.
In cases like these where a lot is on the line for powerful companies, there may first be a court decision as to whether or not an arbitration clause can be enforced at all. Many employees who file a class action lawsuit against a large corporation may see themselves as a whistleblower. Financially, they may be better off using an alternative dispute resolution, however they do not just want money. They want to bring to show the public some injustice within their companies. That is why the terms of these arbitration clauses are so important. Usually lawsuits carry more than just financial risks, and if one party can force the other into arbitration it can significantly reduce both the costs and the potential for abuse.
These issues were recently brought to light in the second season of the HBO television show Silicon Valley, which centered around a pending lawsuit between tech giant Hooli and Pied Piper over intellectual property. The lawsuit was crushing Pied Piper under millions in legal fees, a company devaluation, and making it impossible for them to grow. Hooli was banking on this. They did not possess the intellectual property in question (in this case, a file compression algorithm), but had already told the public they had something better. They desperately needed Pied Piper’s algorithm to advance their technology. The lawsuit not only gave them a shot at gaining the intellectual property, but it scared away any potential Pied Piper investors. This suppressed their growth enough for Hooli to either begin creating an algorithm of their own or offer Pied Piper a buyout for a fraction of their value. Normally a case like this would not end up in arbitration because of the disparity in resources and motivations of the two companies, but through blackmail, Pied Piper was able to force the case into arbitration (Graff, 2015). Both sides argued their case in front of the tribunal, who eventually ruled in Pied Piper’s favor, saving them millions and allowing them to get their company back on track. While the arbitration process was clearly simplified and heightened for comedic effect, it did illustrate how powerful and useful an alternative dispute resolution can be (Banks, 2015).
Unlike arbitrations, mediations are not legally binding. Both parties agree to the outcome and the mediator has no decision making authority (Awada, 2014). Since a mediation is more informal than an arbitration, they can take many forms. A lawsuit could enter a mediation to find an agreeable settlement, disputes between friends or neighbors could use a mediator to find a resolution, or high school students can mediate arguments between fellow students, typically called peer to peer mediation (Cook et al, 2013). The mediation is completely private and confidential. Both parties must enter into a mediation voluntarily and agree on a mediator. Neither side has to abide by the mediator’s decision and can stop negotiations at any time for any reason (Elkind, 2015). Because the dispute is settled entirely out of course, the outcome can be much more favorable and customized. In litigation or arbitration, there is typically a winner/loser decision. Mediations provide an opportunity for a true negotiation between both sides, with each offering compromises (Holtzman, 2015).
Mediations are also a good option if both parties are hesitant to enter into litigation or arbitration. Since they are private and and non-binding, it is a relatively low risk way to potentially resolve a conflict. It is advisable to enter into a mediation as early as possible, before emotions begin to run even higher in the wake of the dispute. Many court systems actually require mediation sessions before lawsuits can proceed (Pierce, 2015). This saves the government money and frees up the courtroom for truly difficult cases. Despite these benefits, mediations are not always successful. When a mediation fails, it is often because one party feels they have invested too much to settle (Elkind, 2015).
Whatever the situation, it is the mediator’s job to facilitate a settlement or compromise. In order to do this, he or she must be completely impartial and aware of the many different facets of the issues at hand. The process is similar to untying a knot made of several different threads. If the mediator tried to free only one string, the knot may get worse. It is only after the entire knot is understood and analyzed that it can be undone, and all strings must be freed in the process (Caspersen, 2015). The mediator must understand what motivates each side, what issues are the most important, and what areas result in emotional pitfalls. This is done by watching, listening, processing, and responding (Zarankin et al, 2014). The mediator can accomplish this in many ways, both by meeting with both sides at once, individually, or in all likelihood a combination of both (Awada, 2014). Eventually, the source of the conflict becomes clear and the mediator can propose effective solutions.
Arbitrations and mediations provide powerful alternatives to litigation. They save time, money and aggravation. While not appropriate for every case and are not always successful, arbitrations and mediations allow both sides the opportunity to come to a peaceful and private resolution. With such obvious benefits, it is no wonder why they have become a popular method of settling disputes.
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