System Slowdown

Eric C. Liebeler recalls a nightmare arbitration involving Honeywell International Inc., where he is now chief litigation counsel. The liability phase of the $50 million breach of contract dispute, originally scheduled for 10 days, lasted 45 days spread over 18 months. Faced with the prospect of an equally draining damages phase, the company settled, but not before legal fees topped $5 million and each of the three arbitrators took home $480,000.

"The arbitrators weren't very hard edged," Liebeler says. "We got no traction whatsoever on any dispositive motions, we got no traction whatsoever on any evidentiary rulings. Either side could put in any evidence they wanted without any relation to the federal rules of procedure."

"Arbitrators don't have to have reasoned decisions and sometimes the parties are left scratching their heads," says David Schlecker, partner at Anderson Kill & Olick. "Then you are essentially stuck with the decision because the right of appeal is very limited."

Others point a finger at arbitrators for failing to keep the process running efficiently. Liebeler puts the blame for the protracted Honeywell case squarely on the arbitration panel. "There is an incentive for them to spread it out," he says, noting that arbitrators, who are paid by the hour, failed to put time limits on the process.

Outside counsel also are criticized for failing to adequately research the arbitrators they agree to use. Law firms often maintain lists of arbitrators to exchange with opposing counsel, but that may not result in the best choice, says Bryan, who believes in-house attorneys shouldn't rely on their outside counsel to select the arbitrator.

"You should be very thoughtful about the arbitrator you select," agrees J. Michael Watson, senior counsel at Wells Fargo. "I would encourage devoting a lot of time and energy to being sure the arbitrator you select is knowledgeable in the subject area of the dispute."

The parties should specify which organization will handle the arbitration, and where the arbitration will take place. This determines the rules that will apply and the arbitrators who will hear the case. They also should decide whether one arbitrator or a panel of three should handle the proceeding.

Using one arbitrator will expedite the process and simplify scheduling, as well as reduce arbitration fees. But in large, complicated disputes, using three arbitrators mitigates the risk of an off-the-wall decision. Wells Fargo addresses this conundrum by setting a threshold dollar amount. If the dispute is worth more than that amount, the parties will use three panelists. If it's worth less, they will select one arbitrator to resolve the dispute.

"There are circumstances where Honeywell would absolutely insist on arbitration," he says.

So arbitration, with all its warts, is here to stay. As a result, all sides--arbitration providers, law firms and in-house counsel--are moving to address the complaints. The arbitration organizations are tightening rules and training and promoting expedited procedures. Law firms are recognizing that in-house counsel won't be satisfied with an arbitration that costs as much as litigation. In-house attorneys are taking a more active role in supervising the process.

Senior Editor

Mary Swanton

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