“Kaplan’s Executive Guide unravels the mysteries, complexities, and absurdities of modern litigation and its alternatives with penetrating insight, fine judgment, and common sense.”—Douglas G. Baird, Harry A. Bigelow Distinguished Service Professor of Law, The University of Chicago Law School

“Provocative and well-written, Gary Kaplan’s book offers lawyers and business executives a new framework for considering and addressing costly disputes. Although litigation is sometimes necessary, the Executive Guide persuasively shows the importance of planning for potential lawsuits and using proven ADR processes to manage and contain their impact.”—Judith Harris, Esq., Partner, Reed Smith, LLP

“As one who had a strong case, but unrealistic expectations as to time and monetary cost of litigation, I encourage every executive, business owner, and healthcare provider to read Gary Kaplan’s Executive Guide to Managing Disputes. As Mr. Kaplan persuasively explains, the high cost in time and money and uncertainty of litigation makes it a dubious and stressful undertaking, even for the strongest cases. In view of this problem, Gary Kaplan's book, in a sensible and compelling manner, encourages business and healthcare professionals to plan for disputes rather than unrealistically hope that none will arise. By using Gary Kaplan's ADR guide, one can safeguard against costly, time consuming, and wasteful litigation.”—David Gilliand, President, Geodax Technology, Inc.

“Gary Kaplan has succeeded in crafting a work on ADR accessible to the layperson. Any executive who is concerned about the potential for litigation (and that should be everyone) should both read this book and insist that it be standard issue for inside counsel.”—Nick Frollini, Associate Director, Institute for Software
Research, Carnegie Mellon University

“As an advisor to closely held businesses, I have seen far too many internal squabbles devolve into wasteful and self-destructive litigation. With clarity and insight, Gary Kaplan both explains the risk and identifies critical—and surprisingly simple—steps to prevent minor disputes from turning a profitable and productive business into little more than a treasure trove for competing lawyers.”—David Pellegrini, Ph.D., Director, the Global Consulting Partnership

“Gary Kaplan does a wonderful job documenting the exorbitant costs of legal disputes and showing how firms can make effective use of ADR to avoid or minimize the burdens of costly litigation.”—Charles B. Craver, Freda H. Alverson Professor of Law, The George Washington University School of Law

Gary Kaplan's book incisively addresses the broad range of disputes that can undermine business productivity.  As consultants, we are often brought into the middle of conflicts between managers who have conducted their investigations, developed their grievances and prepared to do battle in hopes of a favorable decision by senior executives who may be far removed from the facts. The costs of such internal battles can be as astonishing asin litigation.  The Executive Guide both explains why business disputesoften spiral out of control and provides sound guidance for managing such

challenges.    Thanks, Gary!"—David Sirota, Senior Managing Consultant IBM Corporation

"Needless workplace disputes can hurt even the best run business by diverting attention and resources from productive uses.  In the Executive Guide, Gary Kaplan clearly and thoughtfully explains  how ADR can resolve isolated disputes through timely and meaningful intervention and prevent them from sparking costly chain reactions or even litigation."—Amy Cook, Director of Human Resources, Ariba, Inc.

"The Executive Guide is a superb introduction of Alternative Dispute Resolution (ADR) to business executives.  It bridges the gap between academic theory and practical application, showing executives how ADR can be used in business settings to significantly reduce the cost of resolving a wide variety of disputes.

The book begins by describing the default model of dispute resolution: civil litigation.  Litigation, however, is an awful way to resolve most business disputes - it is a lengthy, expensive process in which the parties have little control over the outcome.  ADR, by contrast, is much more likely to resolve disputes efficiently and palatably because it can neutralize the inherent human biases and strategic incentives that otherwise impede timely settlements.  The Executive Guide to Managing Disputes explains how business executives can create and implement effective ADR programs for their organizations."
—Richard Bales, Professor of Law, NKU/Chase Law School

On December 6, 2009, the Pittsburgh Post-Gazette published my Op-Ed about the wasteful antitrust litigation filed by West Penn Allegheny Health System against Highmark, Inc. and UPMC.

The Arbitration Fairness Act Reconsidered And Proposals for Sensible Law Reform

By Gary L. Kaplan, Esq.1
Introduction
Various consumer advocacy groups have complained of the use of arbitration in
consumer and employment disputes on grounds that arbitration favors corporate clients over
individuals, because (i) arbitrators have incentive to favor businesses that could become repeat
customers; (ii) arbitration is more costly for individuals than litigation (because parties do not
need to pay the judges); (iii) it is more difficult for individuals to obtain legal counsel for
arbitration than litigation; (iv) “secret” arbitration precludes judicial review and appeal: and (v)
individuals should not be forced to give up their rights to a jury trial by contract (where
individuals have no power to negotiate alternative terms).

2
Such arguments have led to the introduction in Congress of legislation that, if
enacted, would largely preclude businesses from requiring arbitration in their standard form
agreements with consumers and employees.2 Those standard arbitration agreements have been
termed “pre-dispute” arbitration agreements to contrast them with agreements to arbitrate, in lieu
of litigation, after a dispute arises.
There are plainly many instances in which consumers have been injured by unfair
or even abusive arbitration requirement. But stories of such harms tell only part of the story.
Arbitration, like other forms of ADR, can reduce wasteful expenditures on disputes that increase
not only the cost of providing goods and services to the market but also resulting costs to
consumers of purchasing those good and service.
This paper discusses concerns raised about consumer arbitration and legislation
that has been proposed to address them. In addressing concerns about concern arbitration, this
paper attempts to provide a balanced assessment of the benefits and harms flowing from
consumer arbitration and to provide context to consider arbitration in light of the dispute
resolution alternatives presently available for addressing such concerns.
Finally, this paper proposes more moderate legislative alternatives than have been
proposed by consumer advocacy group. Pending proposals would essentially eliminate
mandatory pre-dispute arbitration agreements. By eliminating a dispute resolution alternative
that has potential to provide substantial savings, however, those proposals have the potential to
do more harm than good. Instead, I suggest a series of more moderate reforms designed to
protect consumer interest while allowing the societal benefits of efficient dispute resolution to
continue to accrue.

2 See, e.g. 110th Congress, S. 1782, The Arbitration Fairness Act of 2007. The
Senate Judiciary Committee held hearings on this bill on December 12, 2007.
Working Paper
© 2009, Gary L. Kaplan, All Rights Reserved.

3
Consumer Arbitration and Fairness
In testimony before the Senate Committee on the Judiciary, the case against
arbitration in consumer disputes was made by a representative of a public interest law firm, F.
Paul Bland, Jr. Mr. Bland argued:
• “A large and rapidly growing number of corporations are requiring millions of
consumers to give up their rights to a jury trial… and instead to submit all of their
legal claims to binding mandatory arbitration.
• Most consumers have little or no choice before submitting to arbitration…
• Private arbitration companies are under great pressure to devise systems that favor
the corporate repeat players who draft the arbitration clauses… For example,
arbitrators who rule against corporation in favor of individuals are often
blackballed from serving as arbitrators in future cases.
• Many corporations tack on lots of unfair provisions to the arbitration clauses that
are not inherent to the idea of arbitration, but the further rig the system against
individuals. For example, some corporations impose “loser pays rules” to
discourage individuals from bringing claims; some corporations insert
provisions… that strip individuals of substantive statutory rights; some
corporations require people to arbitrate their claims across the country; and some
corporations use arbitration clauses to ban class actions.”3
Political arguments against arbitration often rely upon anecdotal evidence to
overstate alleged biases against individuals, while ignoring substantial deficiencies in the
supposedly preferred court procedures. For example, the notion that consumers “give up” a right
to a jury trial falsely assumes that consumers could demand a jury trial even for small consumer
disputes that would be relegated to small claims court or other limited procedures.
Further, the limited available empirical data does not demonstrate a clear pattern
of bias against individuals. In testimony before the Senate Judiciary Committee, Professor Peter
B. Rutledge explained, “[s]ome studies have found evidence of a repeat player phenomenon
3 Bland, Peter Testimony of December 12, 2007, before the Senate Judiciary
Committee on S. 1782 the Arbitration Fairness Act of 2007

4
while others have found no demonstrable effect. Further, even where repeat player effect exists,
the cause is not clear. Most research suggests that the repeat player effect—if it exists—is not
due to the arbitrator’s financial incentives but, instead, to the “’learning effects’ from the repeat
player’s experiences.”4
To the extent a study purports to establish a clear bias against individuals, its
conclusions may simply reflect a poor study design. For example, in its testimony to Congress,
Public Citizens cited evidence that First USA Bank won over 99 percent of arbitrations and that
some arbitrators for the National Arbitration Forum routinely handled a large number of cases
each day. Public Citizens’ analysis, though, ignores that fact that most (or all) of the arbitrated
matters concerned nothing more than simple defaults on credit card bills.
Further, the case against arbitration ignores both the social cost of clogging the
courts with relatively simple matters that could be handled more efficiently by other means and
the social benefit of reducing the cost and inefficiency of such disputes. If corporations are
prohibited from employing efficient dispute resolution methods, there can be little doubt that the
greater cost of inefficient procedures will be passed along to consumers in the form of higher
prices for consumer goods. The net effect of such higher costs would be that consumers who
avoid disputes would be subsidizing those that do not.

4 Rutledge, Peter B., Testimony of December 12, 2007, before the Senate
Judiciary Committee on S. 1782 the Arbitration Fairness Act of 2007 (citing Lisa Bingham, Is
there a Bias in Arbitration of Nonunion Employment Disputes? An Analysis of Actual Cases and
Outcomes, 6 INT’L J. ON CONFLICT MGMT. 369, 380 (1995) and Lisa Bingham & Shimon
Sarraf, Employment Arbitration Before and After the Due Process Protocol for Mediation and
Arbitration of Statutory Disputes Arising Out of Employment: Preliminary Evidence that Self-
Regulation Makes a Difference in ALTERNATIVE DISPUTE RESOLUTION IN THE
EMPLOYMENT ARENA: PROCEEDINGS OF THE NYU 53RD ANNUAL CONFERENCE
ON LABOR 303, 323 & Table 2 (Estreicher & Sherwyn eds. 2004), with Elizabeth Hill, Due
Process At Low Cost: An Empirical Study of Employment Arbitration Under the Auspices of the
American Arbitration Association, 18 OHIO STATE J. ON DISP. RES. 777, 816 (2003)).

5
If, as seems likely, most consumer disputes (excluding products liability matters)
involve payment defaults on credit agreements of one type or another, arbitration is likely to
reduce the costs of such disputes overall. For a company that regularly conducts business in all
50 states, the cost of simply identifying and complying with the highly diverse rules of state and
local courts for obtaining default judgments would be substantial.
Of course, notwithstanding an overall cost reduction, the cost to individual
consumers may be greater for arbitration than for litigation. Unfortunately, other than arguments
based upon anecdotes, there appears to be little empirical evidence that compares the cost of
litigation to the cost of arbitration for consumers.
The lack of data about the cost to consumers of arbitration, however, does not
preclude an evaluation of the fairness and economic reasonableness of the process under
traditional legal standards.

Arbitration: Unconscionability, Separability, and Right to a Jury Trial

In addition to opposing arbitration of consumer dispute on grounds that it raises
the cost of disputes for consumers, opponents argue that arbitration clauses in consumer
agreements unfairly force consumers to agree to arbitration that, in turn, deprives consumers of
constitutional rights to a jury trial and due process. In discussing arbitration, as in other areas,
arguments that focus on the risk to individual rights stand as a counterbalance to arguments
based on economic efficiency. For example, a dictatorship or society without individual rights
is likely to be far more efficient than a democracy, but few would argue that a dictatorship is
more fair or just.
The potential conflict between the rights of consumers and economic efficiency,
however, is hardly unique to arbitration. In commercial matters, the courts have routinely upheld

6
one-sided agreements that require consumers to give up procedural rights. For example, the
Supreme Court has upheld contracts that impose liens on debtors, even though they deprive them
of due process, see Mitchell v. W.T. Grant Co., 416 U.S. 600 (1974), forum selection clauses that
require consumers to sue in foreign, and possibly distant, states, Carnival Cruise Lines, Inc. v.
Shute, 499 U.S. 585 (1999), and clauses that provide consent to be sued in foreign states, Burger
King Corp. v. Rudszewicz, 471 U.S. 462 (1985).5

Waiver of Jury Trials

Some courts have set a higher standard for waivers of rights to a jury trial. In
National Equipment Rental, Ltd. v. Hendrix, 565 F.2d 255 (2d Cir. 1977), the Second Circuit
held that a waiver of a right to a jury trial must be “knowing,” Contract language providing for
such a waiver, standing alone, was held to be insufficient. The Hendrix court explained:
It is elementary that the Seventh Amendment right to a jury is fundamental and
that its protection can only be relinquished knowingly and intentionally. [citations
omitted]. Indeed, a presumption exists against its waiver. [citations omitted].
There is little doubt that the provision relied on by NER fails to overcome this
presumption. The waiver clause was set deeply and inconspicuously in the
contract, and Justice Black, dissenting in National Equipment Rental, Ltd. v.
Szukhent, [375 U.S. 311, 332-3] (1964), aptly characterized the nature of NER's
form agreements: this printed form provision buried in a multitude of words is too
weak an imitation of a genuine agreement to be treated as a waiver of so
important a constitutional safeguard . . . it exhausts credulity to think that they or
any other layman reading these legalistic words would have known or even
suspected that they amounted to (such) an agreement . . .. (565 F.2d at 258.)
Since Hendrix, most courts specifically addressing the issue have adopted its test
and required a showing that a jury trial waiver was knowing, voluntary, and intelligent. For
example, the Second, Fourth, and Tenth Circuits, and many federal district courts, have held that
5 See Stephen J. Ware, “Arbitration Clauses, Jury Waiver Clauses, And Other Contractual
Waivers of Constitutional Rights,” 67 Law and Contemporary Problems 167 (Winter/Spring
2004).

7
the party seeking to enforce a jury trial waiver has the burden of demonstrating that the other
party acted with the requisite state of mind. See id.; Leasing Serv. Corp. v. Crane, 804 F.2d 828
(4th Cir. 1986); Telum Inc. v. E.F. Hutton Credit Corp., 859 F.2d 835 (10th Cir. 1988), cert.
denied, 490 U.S. 1021 (1989). See, e.g., Dreiling v. Peugeot Motors of Am., Inc. 539 F. Supp.
402, 403 (D. Colo. 1982) (emphasizing that the burden of proving waiver is a "very heavy" one).
By contrast, the Sixth Circuit imposes the burden on the party objecting to the jury trial waiver.
See KMC Co. v. Irving Trust Co., 757 F.2d 752 (6th Cir. 1985) (explaining that "in the context of
an express contractual waiver the objecting party should have the burden of demonstrating that
its consent to the provision was not knowing and voluntary.")
Under Hendrix, in evaluating a waiver of jury trial, courts consider a variety of
factors, including (1) whether the jury waiver clause was conspicuous; (2) the parties' relative
bargaining power; (3) the business experience of the parties; (4) whether the contract was, in
fact, negotiated, and (5) whether the waiving party was represented by counsel. This standard is
far more exacting than the standards that have been generally applied in determining whether or
not to enforce an arbitration agreement against a consumer. See, e.g., Doctor’s Associates v.
Casarotto, 517 U.S. 681 (1996)(holding that Section 2 of the Federal Arbitration Act, which
requires courts to enforce arbitration agreements “save upon such grounds as exist at law or
equity” for the revocation of any contract, means that arbitration clauses cannot be singled out
for heightened scrutiny under state law but must instead be examined “upon the same footing as
other contracts.”)
The strict standard applied by the courts in reviewing contractual waivers of the
right to a jury trial are impossible to reconcile with either the lesser standard applied to other
waivers of procedural, jurisdictional or due process rights or with the Supreme Court’s consistent

8
enforcement of arbitration agreements, even in the face of seeming unfairness to individual
parties. See, e.g., Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006)(holding that
arbitrator, not court, had jurisdiction to decide whether contract was unconscionable and
unenforceable); Doctor’s Associates, Inc. v. Casorotto, 517 U.S. 681 (1996)(holding that the
FAA preempted a Montana law that required any contract requiring arbitration to provide notice
on its first page, in underlined capital letters, that the contract is subject to arbitration).
Professor Stephen Ware argues that the most likely and preferred means of
harmonizing these inconsistent bodies of law is to reverse the trend toward heightened scrutiny
of jury trial waivers and, instead, to treat such waivers no differently than other contractual
agreements, i.e., to enforce such waivers without inquiry into the “knowing” consent of the
parties. The alternative, he argues, would be to overturn a wide range of longstanding doctrine
in cases ranging from arbitration, forum selection, property-deprivation, and the like.)6
But Professor Ware’s argument does not fully address the policy questions raised
not only by the inherent disparity in bargaining power between corporate proponents of
arbitrations and consumers, but also the disparity in such parties’ likely knowledge of arbitration
and the implications of an agreement to arbitrate any dispute. (He does, however, correctly note
that “Doctor’s Associates establishes that disclosure requirements and other mild anti-contract
law will not become part of arbitration law unless Congress amends the FAA.”7) In his view, it
is enough that consumers unknowingly waive procedural rights all the time and, he argues, to
treat arbitration and waivers of jury trials differently would make a mess of the law.
6 Stephen J. Ware, “Consumer Arbitration As Exceptional To Consumer Law,” 29
McGeorge Law Review 195 (Winter 1998).
7 Ibid. at 216.

9
Before discussing policy alternatives for consumer arbitration, however, it is
necessary to address another doctrine that distinguishes arbitration agreements from all other
contractual terms—namely, the doctrine of separability.

Separability

The separability doctrine originated in the Supreme Court’s decision in Prima
Paint Corp. v. Flood & Conklin Manufacturing Co, 388 U. S. 395 (1967). In that case, Prima
Paint sought rescission of contract with Flood & Conklin based on alleged fraud and to enjoin
Flood & Conklin from proceeding with an arbitration based on an arbitration clause contained in
the allegedly fraudulent agreement. In response, Flood and Conklin sought to stay the lawsuit
pending the outcome of the arbitration. The trial court granted the stay sought by Flood and
Conklin, and the Supreme Court affirmed. In so doing, the Supreme Court created the doctrine
of “separability,” which provides that an agreement to arbitrate must be considered separately
from the contract in which it is included. Under this doctrine, based on the Court’s interpretation
of the FAA, a court is not permitted to void an arbitration clause on grounds that the contract as a
whole was fraudulently induced or otherwise invalid; it could only void an arbitration clause if
the agreement to arbitrate was itself the result of fraud or other infirmity. Specifically, the Court
held that “arbitration clauses as a matter of federal law are ‘separable’ from the contracts in
which they are embedded, and that where no claim is made that fraud was directed to the
arbitration clause itself, a broad arbitration clause will be held to encompass arbitration of the
claim that the contract itself was induced by fraud.” 388 U.S. at 402.
In Buckeye, supra, the Supreme Court reiterated and perhaps extended the
separability doctrine in holding that a state court was preempted by the FAA from deciding, as a

10
matter of state consumer protection law, that a contract containing an arbitration clause was
invalid and that the enforceability of the contract was instead to be decided in arbitration.
Viewed in isolation, Prima Paint and Buckeye appear to create a bright line that
precludes a court from invaliding an arbitration clause on grounds that it is part of an invalid
contract. The bight line, however, becomes fuzzy when one considers grounds for declaring a
contract illusory, or void ab initio, as opposed to unenforceable on grounds of public policy as in
Buckeye. For example, what if a party claims the contract containing an arbitration clause was
signed under duress, by a person without authority, or with a forged signature?
Such issues are addressed, in part, in a separate line of Supreme Court cases,
which include First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995)(holding that
the courts, rather that arbitrators, decide the question of whether the parties, in fact, agreed to
arbitrate a dispute) and Howsam v. Dean Witter Reynolds, Inc, 537 U.S. 79 (2002)(stating that “a
gateway dispute about whether the parties are bound by a given arbitration clause raises a
‘question of arbitrability’ for a court to decide.”). See also Sphere Drake Ins. Ltd. v. All
American Ins. Co., 256 F.3d 587, 590-91 (7th Cir. 2001)(holding that First Option implies that
the doctrine of separability applies only to cases based upon a “defense to enforcement” of a
contract, but not to cases asserting that “no contract came into being.”).
With respect to consumer arbitration and unconscionability, the Supreme Court
has left open a slim basis for courts to invalidate arbitration clauses. In Green Tree Financial
Corp-Alabama v. Randolph, 531 U.S. 79 (2000), the Court stated, in dicta, that an arbitration
agreement may be unenforceable if costs are so prohibitive as to preclude the vindication of
rights in arbitration and the party opposing arbitration proves “the likelihood of incurring
[prohibitive] costs.” Subsequently, however, federal courts have emphasized that in assessing

11
the unconscionability of an arbitration clause, state courts may not treat arbitration clauses
differently than any other type of contract. See, e.g., Gay v. CreditInform, 2007 WL 4410362
(3d.Cir. December 19, 2007)(relying on Section 2 of the FAA, which provides for that courts
may refuse to enforce arbitration clauses only “upon such grounds as exist at law or in equity for
the revocation of any contract.). See also Perry v. Thomas, 482 U.S. 483, 493 n. 9 (1987)(“Nor
may a court rely on the uniqueness of an agree to arbitrate as a basis for a state law holding that
enforcement would be unconscionable.”)

The State of the Law of Consumer Arbitration

Notwithstanding the Supreme Court’s consistent support for enforcement of
arbitration clauses, states courts have pressed forward to limit the compulsory arbitration of
consumer disputes.
For example, in Tillman v. Commercial Credit Loans, Inc, slip. op., Case No.
360A06 (N.C. January, 25, 2008), the Supreme Court of North Carolina held that an arbitration
clause in a form loan agreement was both procedurally and substantively unconscionable, and
therefore unenforceable, because “the clause is one-sided, prohibits joinder of claims and class
actions, and exposes claimants to prohibitively high costs.” In so holding, the North Carolina
court relied on Green Tree, supra, and Bradford v. Rockwell Semi-Conductor Systems, Inc., 238
F.3d 549 (4th Cir. 2001)(stating that any inquiry into arbitration costs must be “a case-by-case
analysis that focuses… upon the claimant’s ability to pay the arbitration fees and costs, the
expected cost differential between arbitration and litigation in court, and whether that cost
differential is so substantial as to deter the bringing of claims.”) .
Likewise, numerous state courts have held that arbitration clauses that preclude
class actions are procedurally unconscionable, because they prevent potentially large numbers of

12
plaintiffs with small claims from pursuing claims. See Scott v. Cingular Wireless, 161 P.3d 100,
1004 (2007)(citing cases from 16 jurisdictions finding that such clauses are procedurally
unconscionable.”)
By contrast, most federal courts have rejected such challenges to arbitration
clauses. See, e.g., Gay v. CreditInform, 2007 WL 4410362 (3d.Cir. December 19, 2007);
Jenkins v. First Am. Cash Advance of GA, LLC, 400 F.3d 868, 877 (11th Cir. 2005).
The significant number of conflicts between state and federal courts concerning
the unconscionability of consumer arbitration clauses is perhaps more importance than the
substance of the courts’ disagreements, because it highlights the present uncertain state of the
law. To the extent that arbitration of consumer disputes has the potential to create efficiencies,
the uncertainty of the law undermines that objective. Further, to the extent that it is desirable to
balance consumer interests against efficiency, legislation, rather than judicial decisions, is likely
the more sensible means of doing so.

Legislative Alternatives To Promote Fair and Efficient Resolution of

Consumer Disputes

The Arbitration Fairness Act of 2007

In 2007, both houses of Congress considered a bill entitled the “Arbitration
Fairness Act of 2007” (The “AFA”). If enacted, the AFA would (i) declare any “predispute
arbitration agreement” invalid, if it sought to require arbitration of (a) “an employment,
consumer, or franchise dispute;” or (b) “a dispute arising under any statute intended to protect
civil rights or to regulate contracts or transactions between parties of unequal bargaining power.”
As discussed below, such a sweeping elimination of broad categories of arbitration agreement

13
would be an extreme response to concerns that can, and should, be handled in a less drastic
manner.
The AFA, moreover, would repeal the “separability” doctrine by proving that
“[e]xcept as otherwise provided in this chapter, the validity or enforceability of an agreement to
arbitrate shall be determined by the court, rather than the arbitrator, irrespective of whether the
party resisting arbitration challenges the arbitration agreement specifically or in conjunction
with other terms of the contract containing such agreement.” (Emphasis Added).
In setting forth an extreme response to concerns about consumer arbitration, the
AFA would, in effect, throw out the baby with the bath water. In many instances, arbitration
plainly reduces costs related to consumer disputes. By eliminating arbitration of consumer
disputes as a meaningful option, the AFA would inevitably result in wasteful litigation expense
and increased costs of consumer products. Further, the proposed ban is far more draconian than
necessary to counterbalance the disparity in bargaining power (and resources) between
consumers and business.
The extreme treatment of consumer arbitration in the AFA is demonstrated by the
“findings” set forth in its preamble to justify amending the FAA. Reasonable alternatives to the
proposed ban on pre-dispute arbitration agreement are available to respond to each of the
“findings” in support of the legislation:

1. “Few people realize, or understand the importance of the deliberately fine print
that strips them of rights; and because entire industries are adopting these clauses,
people increasingly have no choice but to accept them.”
Response: This issue is not unique to arbitration. Consumer agreements routinely require
consumers to litigate in foreign forums, to waive jury trials, to confess judgment and/or grant
liens. In the absence of a pre-dispute arbitration agreement, there will seldom be arbitration

14
since one side, or the other, will have a strategic incentive to take advantage of the inefficiency
or cost of litigation. The obvious remedy for inadequate disclosure to, and knowledge of,
arbitration is to require clearer notice and explanations of the implications of arbitration, such as
its cost, confidentiality, etc.

2 “ Private arbitration companies are sometimes under great pressure to devise
systems that favor the corporate repeat players who decide whether those
companies will receive their lucrative business.”
Response: Apart from the fact that there is little empirical evidence to support this assertion, a
more sensible solution would be to penalize arbitration providers that “rig” their systems in favor
of one side or the other. For example, rather than declare arbitration itself to be an unfair and
deceptive trade practice, which it is not, it would make more sense to declare the use or
implementation of a biased arbitration mechanism to be such. In any event, the FAA already
provides that an arbitration award may be set aside “where there was evident partiality or
corruption in the arbitrators, or either of them,” Section 10(a)(2), or for decisions in excess of the
arbitrator’s authority. Section 10(a)(4).

3. “Mandatory arbitration undermines the development of public law for
civil rights and consumer rights, because there is no meaningful judicial
review of arbitrators’ decisions. With the knowledge that their rulings will
not be seriously examined by a court applying current law, arbitrators
enjoy near complete freedom to ignore the law and even their own rules.”
Response: It is doubtful that the great majority of consumer disputes raise novel questions of
law. Further, the wide discretion of arbitrators is not unique to consumer disputes. The main
protection afforded any party in arbitration is the right to select and/or veto a proposed arbitrator.

15
4. “Mandatory arbitration is a poor system for protecting civil rights and consumer
rights because it is not transparent. While the American civil justice system
features publicly accountable decision makers who generally issue written
decisions that are widely available to the public, arbitration offers none of these
features.”
Response: It is hardly clear that most consumers would prefer to have their defaults made
publicly available or that most consumer disputes are addressed in “written decisions.” To the
extent that this is considered to be a valid concern, however, the solution is simply to eliminate
the confidentiality of consumer arbitration awards.

5. “Many corporations add to their arbitration clauses unfair provisions that
deliberately tilt the systems against individuals, including provisions that strip
individuals of substantive statutory rights, ban class actions, and force people to
arbitrate their claims hundreds of miles from their homes.”
Response: None of the “unfair provisions that tilt the systems against individuals” are unique to
arbitration. Courts have enforced forum selection clauses, jury waiver clauses, and prohibitions
against class actions in agreements unrelated to arbitration. To the extent such clauses are
deemed unjust, the sensible response would be to bar such clauses from any agreement relating
to resolution of disputes. As discussed below, it would be necessary to permit the courts to
implement such prohibitions.
A somewhat stronger case can be made for abolishing the separability doctrine, as
it applies to consumer actions. First, a principal benefit of arbitration is the ability of the parties
to select an arbitrator with experience in the subject matter of the dispute, as opposed to a
generalist judge. This feature of arbitration affords little if any benefit with respect to the
questions of whether a contract was induced by fraud or deception or whether it contains
unconscionable terms. To the contrary, one might reasonably expect a judge to have equal or
greater familiarity with such issues. Consequently, to the extent an arbitration hearing is delayed

16
to allow for court ruling on the enforceability of the contract, the incremental cost of such delay
is likely to be minimal. Because either a judge or arbitrator would need to decide the issue in
any event, arbitration would reduce the cost of resolving this issue only if the arbitrator would
decide it more quickly with less briefing or argument by the parties.
Second, a judicial decision on the enforceability of an arbitration agreement may
often be more efficient than submission of the question to an arbitrator. Many disputes regarding
the arbitration of consumer disputes arise because of a plaintiff’s desire to pursue a class action
in court. In such cases, if arbitration is required, the plaintiff may simply opt to forego his or
claims. By contrast, if a contract and/or arbitration clause is deemed invalid, the defendant might
have a significant incentive to negotiate a prompt settlement.
Third, the separability doctrine cannot be reconciled with cases concerning jury
trial waivers. As discussed above, the dominant view is that waiver of the right to a jury trial is
subject to stricter scrutiny than other waivers of contractual rights. Under the separability
doctrine, however, a party may be deemed to have waived his or her right to litigate in court
without any judicial scrutiny of the circumstances of such waiver.
Finally, and perhaps most importantly, separability may eliminate an important
check on the arbitration process adopted in the parties’ agreement. In the absence of some
judicial review (and/or greater transparency), the potential for implementation of a biased
arbitration procedure is heightened.
It should be noted that the repeal of the separability has the potential itself to
invite costly proceedings. In California, for example, the doctrine was severely restricting in an
appellate court decision, Main v Merrill Lynch, 67 Cal App 3d 19 (1977). In Main, a brokerage
firm customer, alleged that the defendant defrauded her by misrepresenting an arbitration

17
agreement and, as a result, she claimed was unaware of her obligation to arbitrate claims. The
court held that the mere allegation of fraud was enough to allow the court to hold a mini trial to
determine whether or not the plaintiffs’ arbitration clause resulted from fraud.
Cases following Main raised the prospect of costly mini-trial as a predicate to
arbitration. The cost of the mini-trial, in turn, often compels parties to give up arbitration rights
so as to avoid the costs of both a mini-trial and arbitration. If the parties chose to participate in
the mini-trial the cost of the overall proceeding—regardless of completing in litigation or in
arbitration—would be far greater than otherwise. For such reasons, the reasoning of Main was
gradually narrowed and finally eliminated in Rosenthal v Great Western Financial Securities, 14
Cal 4th 394 (1996).
As discussed below, however, it may be possible to eliminate the unintended
consequence of costly mini-trials by establishing clear rules for disclosure and consumer –
thereby eliminating or simplifying the need to review allegations of fraudulent inducement or the
like.

An Economic Approach to Consumer Arbitration

In opposing arbitration of consumer disputes, advocacy groups are quick to
identify stories of seeming unjust treatment of individuals compelled to pursue claims through
arbitration rather than litigation. Such stories fail not only to address the shortcoming and
inefficiencies of litigation as a dispute resolution mechanism, but also perhaps the most relevant
question: namely, how much are consumers willing to pay to retain full access to the courts,
rather than to submit dispute to arbitration?
The most analytically sound, although perhaps unrealistic, means of affording
consumers the right to maintain full access to the courts would be simply to require all consumer

18
products and/or services companies to offer a non-arbitration or a traditional court option for
consumers, if they choose to seek arbitration of disputes. The caveat, though, is that the
companies would be permitted to charge different prices to consumers for their products or
services depending upon the selected option and provided that the differential reasonably
reflected the cost difference of insuring and/or covering the cost of the different options.
Assuming that the administrative difficulties of such a scheme could be met, it
would enable consumers to decide for themselves whether their perceived benefit of continued
access to the courts would be worth the additional expense. Further, it would avoid requiring
consumers who favor or at least accept the benefits of more efficient dispute mechanism to
subsidize those who prefer to retain access to costly court procedures.
Of course, practicality and administrative costs of the “economic” approach
render it implausible. On the other hand, the economic approach, along with critical review of
the AFA, suggests principles to inform the evaluation more practical proposals for reforming
consumer arbitration. Specifically:
• Legislative reform should consider not only consumer rights respecting dispute
resolution procedures, but also the cost and relative efficiency of alternatives.
• Protection of consumer rights should not, to the extent reasonably possible,
deprive consumers of the cost savings associated with efficient dispute resolution
procedures. Although if consumers were asked, in the absence of any economic
context, if they want to preserve their right to litigate consumer disputes, many
would answer affirmatively. That is not, however, the relevant question. Instead,
consumers need to be asked how much they would be willing to pay to maintain

19
access to the courts as opposed to being provided with non-judicial, but fair,
alternatives.
• Legislative reform, to the extent possible, should avoid requiring cost-conscious
consumers to subsidize procedures desired by process-conscious consumers, i.e.,
those who desire to maintain access to the courts.
• To the extent that consumer protection laws or regulation prohibit agreements that
impose unreasonable procedural requirements or limitations on consumers, they
should apply with equal force to litigation and arbitration. On one hand,
restrictions on consumers that are permissible with respect to litigation, such as
forum selection clauses, should also be permissible with respect to arbitration. On
the other hand, parties should have incentive to adopt arbitration where, as a
decision-making and administrative process, it is more efficient than litigation,
but they should not be given incentive to adopt arbitration as means of evading
consumer protection laws. In other words, the evasion of consumer protection
regulation should not be considered an “efficiency” affecting the choice of a
dispute mechanism.

A Proposal for Reform

Rather than eliminate a potentially efficient dispute resolution mechanism, a
sensible approach to reform would be to identify the aspects of arbitration that disadvantage
consumers when compared to litigation and create mechanisms that level the playing field by
eliminating “impermissible” efficiencies, i.e., cost saving that result from disadvantaging
consumers or depriving them of legal safeguards, rather than from reducing the cost of fair
procedures to resolve disputes.
.

20
Consumer groups and the proponents of the AFA have identified five (5)
concerns about consumer arbitration, as follows: 8
1. Lack of Consumer Awareness and Understanding of Arbitration
2. Biased Decision-Makers who favor “repeat players.”
3. Lack of Accountability and Judicial Review
4. Lack of Transparency
5. Unfair Procedural Restrictions and prohibitive costs
Each of these concerns can, and should, be fairly addressed without eliminating
arbitration as an option for efficient dispute resolution. Indeed, the American Arbitration
Association has developed a “Consumer Due Process” protocol that would extend procedural
protections to consumers that are greater than those that may be available with respect to judicial
procedures. See http://www.adr.org/sp.asp?id=22019.
With the foregoing principles in mind, reasonable legislative reform with
respect to consumer arbitration could include:

Legislative Repeal of the Separability Doctrine for Consumer Disputes

As noted above, the application of “separability” to consumer disputes does little
to reduce the overall costs of resolving consumer disputes, but may prevent even-handed
application of consumer protection laws. For example, some states have adopted laws
prohibiting enforcement of waivers of the right to file class actions on grounds that such
agreements would deprive consumers with small claims of meaningful access to the courts.
8 The preamble to proposed Act also argues that (i) the FAA was intended to apply only
to business disputes and (ii) the Supreme Court has judicially changed the meaning of the Act to
apply it to consumers. Apart from the fact the express language of the Act has no such
limitation, these assertions say nothing about whether arbitration is fair or unfair for consumer
disputes.

21
While the merits of such laws can be debated, the question of whether or not such law governs a
particular consumer transaction should not depend on the dispute resolution method set forth in a
form agreement.
In addition, repeal of the separability doctrine for consumer disputes would allow
the courts to serve as gatekeepers to prevent abusive, biased, or intrinsically unfair arbitration
procedures.
Because of the risk, discussed above, that repeal of separability might result
wasteful mini-trial, this proposal should be considered only if safeguard are also adopted that, on
one hand, would reduce the likelihood of fraudulent inducement of an arbitration agreement and,
on the other, assure that the absence of fraud can be presumed.

Harmonization with Standards for Waivers of Seventh Amendment Rights

and other Consumer Protection Measures

Arbitration plainly implicates the right to a jury trial for civil actions at law under
the Seventh Amendment to the U.S. Constitution. Although numerous cases have addressed the
enforceability of express waivers of the right to a jury trial, arbitration clauses have largely been
exempted from such review.
Consumer concerns about unknowing relinquishment of Seventh Amendment
rights could be efficiently addressed by subjecting arbitration agreements to the same standards
as express waivers of jury trial rights. In other words, an arbitration agreement would be
enforced only if reflected a consumer’s knowing waiver of his or her right to a jury trial.
Coupled with revocation of the separability doctrine, such a requirement would provide
substantial incentive for delivery of adequate notice and explanations of arbitration to
consumers.

22
In addition to notice protection association with a waiver of rights to a jury trial, it
may also be appropriate to adopt measures to assure the fairness and integrity of consumer
arbitration proceedings. For example, legislation should require arbitrator neutrality and provide
protections against unreasonable forum-selection clauses. Although the cost of conducting
arbitrations in all 50 states may restrict the savings from arbitration and such clauses are
enforced even with respect to litigation, it seems unfair to require, for example, a consumer in
New York to attend a hearing in California. One solution to this issue may be to permit forum
selection clauses in connection with arbitration but also to require such clauses to provide for
teleconference and/or videoconference hearings to avoid travel expenses.
Class action waivers have also been identified as unfair components of arbitration
clause. Such waivers should likely be treated in the same way as class action waivers
unconnected to arbitration and possibly in the same way as jury trial waivers. At a minimum,
notice of the waiver should be clear and conspicuous.

Restricting Arbitration Costs to Consumers to Comparable Court Costs

Leveling the field between arbitration and litigation for consumers requires
assurances that arbitration will not be selected for dispute resolution for the purpose of unfairly
restricting consumers’ access to the chosen forum. The simplest way to achieve such parity is to
require the corporate party who has selected to bear any cost increases related to that choice,
such as the cost of the arbitrator and administration of the arbitration.
The corporate party should bear the bulk of the costs of consumer arbitration not
because it is likely to have a deeper pocket than a consumer litigant, but because that is the party
likely to garner the lion’s share of savings from arbitration. Even a cursory examination of the
costs and benefits to each party demonstrates the unequal allocation of efficiencies.

23
Indeed, in the absence of cost allocation rules, arbitration is likely to be a more
costly dispute resolution process than litigation. For consumers, the main cost difference
between litigation and arbitration is likely to be the fee and expenses for the arbitrator(s) and/or
case administrator. Whereas the consumer pays nothing for a judge and possibly only nominal
court costs, the arbitration expense could be substantial.
The main efficiency from arbitration of consumer disputes is likely to be
administrative savings to the consumer products or services company. By avoiding the need to
prepare to litigation in multiple jurisdictions with multiple procedures, forms, and rules, the
savings to such a company could be substantial. The other main efficiency is likely to be a
shortening of the time required for dispute resolution. Meanwhile, and in contrast to business
disputes or product liability matters, there may be less efficiency savings from discovery
limitations, expert decision-making or the like, simply because consumer disputes tend not to
involve complex technical subjects or other non-routine matters.
To the extent that arbitration is conducted more efficiently than litigation,
consumers might benefit from lower legal fees and faster decisions, but such benefits are
unlikely to outweigh the increased costs for several reasons. First, most substantial consumer
actions are litigated pursuant to a contingency arrangement with a lawyer or law firm. As a
result, any difference in the scope or duration of discovery between litigation and arbitration is
unlikely to have direct financial consequences to consumers. Although, in theory, a reduction in
the cost of discovery to the lawyers handling such contingency matters could be reflected in a
lower contingency payment, the market for contingency legal service is unlikely to be
sufficiently transparent and competitive to reflect such an effect.

24
Second, and perhaps more importantly, most plaintiffs’ attorneys believe, and the
available data suggests, that juries tend to award greater damages than judges. It would be
reasonable to assume that arbitration awards would more closely follow those of judges than of
juries.
Accordingly, most of the efficiencies from arbitration of consumer
disputes are likely to inure to the benefit of the corporate party rather than consumers. If,
therefore, the corporate party is required to bear the additional costs of arbitration, it
would have incentive to adopt arbitration for its form agreement only when justified by
procedural efficiencies and not, as asserted by consumer advocates, as a ruse to impair
consumers’ access to just procedures for resolving their disputes. Further, and unlike a
consumer, the corporate party would be able to spread the additional costs and savings
over multiple disputes and pass along any costs saving to all consumers of its products or
services.

Conclusion

In sum, arbitration has the potential to allow for more efficient resolution of
consumer disputes than litigation. Unlike business arbitration, however, it also has potential for
abuse and to deprive a class of parties of fair adjudication of their claims or defenses. The goal
of any reform legislation, therefore, should be to create incentives for use of arbitration only
when it will in fact result in costs savings while protecting consumers’ basic rights by preserving
parity with litigation.
In contrast to economically rational reform, the Arbitration Fairness Act of 2007
would simply bar all consumer arbitration and likely harm most consumers by preventing the
savings that could be created with fair and efficient ADR programs.

Medical Malpractice:A Simple But Powerful Proposal For Malpractice Reform

American Health Lawyers Association:  Health Law Weekly January 16, 2009 Vol. VII Issue 2

Malpractice litigation has led to countless calls for tort law reform and has
often been blamed for driving physicians from practice in high-risk fields,
such as obstetrics and gynecology, because of the resulting high costs of
insurance. In Pennsylvania, for example, malpractice premium increases
have caused significant concern about the future availability of physicians in
high-risk specialties.[2]

Recent case studies of dispute management by certain progressive
hospitals, however, suggest that malpractice litigation (and its extraordinary
costs) can be dramatically reduced through dispute management programs
that include mediation, apologies, and expressions of concern to affected
patients and their families. Just as leading consumer products companies
have dramatically reduced product liability litigation by treating injured
customers with respect and offering a prompt avenue for addressing their
concerns,[3] healthcare systems—like the University of Pittsburgh Medical
Center, the University of Michigan Health Systems, Veterans’ Administration
Hospital, and others—have dramatically reduced malpractice claims by
similar measures.

In view of the extraordinary success of medical dispute management
programs based on mediation in large health systems and the simplicity of
such programs, the key question is why such systems have not been more
broadly adopted. Impediments to broad-based adoption of medical dispute
management programs—all of which can be addressed with a modicum of
planning and oversight—include lack of knowledge, inadequate
infrastructure, and poor coordination among providers, insurers, and
regulators.

Indeed, the healthcare market is especially well suited for the adoption of
cost-effective dispute resolution mechanisms. The first two necessary
elements of an effective malpractice reform program are:
Require patients and their families, by advance agreement, to engage
in confidential mediation of claims in advance of filing suit, and
Provide ready and timely access to skilled mediators focused upon
early and fair resolution of claims and potential claims.

The first element—agreements to mediate in advance of filing suit—can be
seamlessly integrated into the forms routinely executed by patients upon
intake. The second element—a mediation panel—can be developed with
modest effort and little cost because of the opportunity it provides to panel
members to increase caseloads.

Because of the different, and sometime conflicting, incentives of providers
and payors who are not affiliated with large health systems, widespread
adoption of cost-effective dispute management programs is likely to require
incentives to deploy and participate in such programs (notwithstanding their
simplicity and their benefits). Most significantly, although large health
systems tend to be self-insured, and therefore, directly realize the financial
savings from early dispute resolution, providers who are not self-insured
may not realize comparable direct benefits. To encourage widespread
adoption of cost-saving mediation programs, therefore, providers will need
to be given incentives to do so.

The simplest and most powerful incentive is likely to be direct financial
benefit in the form of reduced malpractice premiums. In other words, a
third necessary element for successful malpractice reform based upon
mediation and dispute management is:

Providers who adopt and implement dispute management programs
based upon early mediation would be granted discounts on
malpractice premiums.

Like discounts to homeowners who install alarms, discounts to providers
would encourage protective safeguards that both benefit the insured and
reduce claim costs. In the short run, an effective reform program would
need to discount malpractice premiums at least enough to offset costs of
establishing and/or participating in a mediation program and, in the long
run, to reflect improved claims experiences.

This simple three-step reform program would dramatically reduce both the
procedural cost of resolving alleged medical errors and the size of
settlement payments. Extraordinary savings are almost inevitable
because:

Many, if not most, malpractice litigation results not from an alleged
medical error but from insensitive and non-communicative dealings
with affected patients and their families after a problem arises.
Mediation provides a safe forum in which providers and patients can
freely communicate without fear that their statement and admission
will be used against them in subsequent proceedings.
Early mediation provides to all parties information about the
wastefulness and harmful consequences to all parties of prolonged
litigation.

In view of inherent human characteristics and biases that affect
perceptions of a dispute and negotiations, mediation is more likely to
achieve an efficient and just settlement of a dispute than direct
negotiations between the parties.
Even if early mediation fails, it may open a line of communication
that can shorten litigation with an early settlement.

A. An Overview of Mediation

Mediation is “a process in which a neutral person or persons facilitate
communications between the disputants to assist them in reaching a
mutually acceptable agreement.”[4] Because a mediator has no decisionmaking
authority, he cannot render a binding decision on the parties. A
mediator does not hear testimony or evidence, and has no authority to
impose a decision on the parties. Nonetheless, even when mediation does
not result in a complete settlement, it may enable the parties to narrow the
scope of their dispute or decide upon expedited procedures for resolving
remaining areas of conflict.
Mediation typically proceeds in three main stages. If the mediation does not
result in a complete settlement, the parties may extend the process based
upon progress made during the initial session.
First, the parties (and their counsel) and the mediator convene in a joint
session. After opening remarks by the mediators, the parties are given the
opportunity to state their respective positions and objective for resolving
the dispute.

Second, the parties separate and the mediator engages in shuttle
diplomacy. The mediator will relay proposals and responses between the
parties after helping them to frame their dialog in a constructive manner.
The mediator also may serve as an impartial sounding board and provide
each side with a “reality check” as to their respective view. In addition, the
mediator probes for common ground that may provide a basis for
resolution.

Third, the parties and mediator will reconvene in a joint session to iron out
final details of an agreement. If a full settlement has not been reached, the
parties may nonetheless agree to remove certain of the issues from the
case, to an efficient procedure for resolving remaining issues (in lieu of
litigation), to exchange a limited range of information and thereafter to
reconvene, and so on. In many cases, mediation initiates a continuing
dialog and process for achieving a settlement in a cost-effective manner.
Like other forms of alternative dispute resolution (ADR), a hallmark of
mediation is confidentiality. Statements made during mediation are not
typically admissible in litigation, and the parties (and mediator) can further
assure confidentiality by agreement. Because a skilled mediator can filter
confidential information and frame the parties’ discussion in ways that
enhance the likelihood of success, mediation can enable parties to reach a
mutually beneficial agreement in circumstances in which direct negotiations
would fail.

In most cases, the benefits of mediation far outweigh its risks and costs.
The principal risks related to failed mediation are: (i) its comparatively
modest cost and time commitment; and (ii) its potential for educating an
opponent about a party’s strengths, weaknesses, and strategies. In most
malpractice cases, the cost of mediation is immaterial to the cost of the
overall dispute. The risk of disclosure can be addressed by clearly
instructing the mediator as to information that can, and cannot, be shared
with the opposing party.

The benefits of mediation are, by contrast, potentially substantial. It is well
known that over 95% of litigated cases settle prior to judgment. Indeed, in
2004, the Litigation Section of the American Bar Association (ABA)
undertook a “major project” termed the “Vanishing Trial” project to better
understand the causes of the decline in trial rates over the past 50 years.

The ABA’s analysis demonstrates how rarely, in fact, the filing of a
complaint leads to trial:
In federal courts, the decline in trials has been steep and dramatic. In
1962, there were 5,802 civil trials in the federal courts and 5,097
criminal trials, for a total of 10,899. In 1985, total federal trials had
risen to 12,529. By 2002, however, trials had dropped to 4,569 civil
trials and 3,574 criminal trials. Thus, our federal courts actually
tried fewer cases in 2002 than they did in 1962, despite a
five-fold increase in the number of civil filings and more than
a doubling of the criminal filings over the same time frame. In
1962, 11.5 percent of federal civil cases were disposed of by
trial. By 2002, that figure had plummeted to 1.8 percent.[5]
To the extent that mediation expedites the settlement process, it can
generate substantial cost savings. Further, and unlike court rulings and
arbitration, mediation may enable the parties to renew or develop mutually
beneficial arrangements based on areas of common interest identified in the
mediation process.

Because mediation affords the parties substantial flexibility in fashioning
settlements, it can provide an especially powerful forum for resolving
medical disputes. Many potential claims can be resolved by providing
apologies, recognition of family members, medical monitoring
commitments, or other actions suited to the needs of the specific patient
and his or her family. Mediation allows the parties to explore such
alternatives to the purely monetary awards of litigation.

B. Dispute Management Programs in Healthcare: A Track Record of
Success

1. University of Pittsburgh Medical Center

The University of Pittsburgh Medical Center (UPMC), the largest health
system and employer in Western Pennsylvania, has achieved stunning
success within the first three years of its program to address healthcarerelated
disputes with prompt intervention and mediation. UPMC’s program
is designed to reduce uncertainty and lower costs, while promoting patient
safety.

From October 2004 through January 2008, UPMC resolved 90% of the 117
cases that entered its mediation program in advance of trial. Of those
cases, 101 either settled during mediation or shortly thereafter. Further, as
explained by UPMC counsel Richard P. Kidwell and Robert Voinchet, the
settlement rate was reflected in substantial reductions of legal
expense.[6]

In February 2005, after the first few months of the mediation
program, the expenses incurred in mediated cases were compared
against those in cases that were tried to plaintiffs’ verdicts or were
settled in the same dollar range as the mediated cases. Mediation
expenses averaged approximately $75,000 less per case than the
expenses in cases tried or settled. When this same analysis was done
in February 2006, the savings averaged about $65,000 less per
mediated case. This slight decrease is attributable to increased
efficiency in overseeing litigated cases. Another analysis compared
the timing of the mediation process in two sets of mediated cases.
The first set consisted of cases that were reported prior to the
initiation of the UPMC mediation program but were resolved at
mediation. The second set consisted of cases that were reported after
initiation of the UPMC mediation program and were settled at
mediation. The average length of time between opening and closing
the files in the first set was 1,126 days and the defense costs
averaged slightly in excess of 569,000. Those same averages in the
second set of cases were 276 days and just under 523,000.[7]
The success of UPMC’s program, moreover, demonstrates the significant
savings and related benefits that can be realized with only modest changes
to a healthcare organization’s processes and orientation. UPMC’s dispute
management program rests on four main elements: (1) inclusion of a
mediation agreement in the documents to be executed by patients upon
intake; (2) identification of mediators available to address disputes in a
timely manner; (3) educational materials about the program for patients;
and (4) an easy mechanism for patients and their families to enter into
mediation.

Based on a similar mediation agreement used by Johns Hopkins University
Hospital, UPMC requests patients to execute the following:

AGREEMENT TO MEDIATE CLAIMS
By initialing below, I agree that any claim which may result from the
care provided to me by the doctors, nurses and other healthcare
providers in any UPMC facility shall be subject to the laws of
Pennsylvania. I also agree that before any lawsuit is filed related to
the care provided to me, I must attempt to resolve any claim through
mediation, which must take place in the Commonwealth of
Pennsylvania. I am not waiving my right to a jury trial. Mediation is a
process in which a neutral third person tries to help settle a claim.
This agreement is binding on me and any person making a claim on
my behalf.[8]

Dispute resolution programs are likely to succeed only if they are easy for
parties to access and use. UPMC addresses these key issues by providing
patients with education materials about the program, accessible program
administrators (who also serve as gatekeepers), and ready access to
mediators at no charge.

2. University of Michigan Health System

The New York Times recently reported on a similarly successful dispute
management system used by the University of Michigan Medical Center:
For decades, malpractice lawyers and insurers have counseled
doctors and hospitals to “deny and defend.” Many still warn clients
that any admission of fault, or even expression of regret, is likely to
invite litigation and imperil careers.
But with providers choking on malpractice costs and consumers
demanding action against medical errors, a handful of prominent
academic medical centers, like Johns Hopkins and Stanford, are
trying a disarming approach.
By promptly disclosing medical errors and offering earnest apologies
and fair compensation, they hope to restore integrity to dealings with
patients, make it easier to learn from mistakes and dilute anger that
often fuels lawsuits.
* * *
At the University of Michigan Health System [UMHS], one of the first
to experiment with full disclosure, existing claims and lawsuits
dropped to 83 in August 2007 from 262 in August 2001.
[9]
It has also been reported that, after implementing its program, UMHS’
defense litigation costs decreased from an average of $65,000 per case to
$35,000 per case for a cumulative savings of $2 million annually.
Consequently, the UMHS’ annual attorney fees have dropped from $3
million in 2002 to $1 million in 2005.[10]

3. Veterans' Administration Hospital and Rush Medical Center
Among the first healthcare institutions to adopt a proactive approach to
dispute resolution was the Veterans’ Administration Hospital in Lexington,
Kentucky. The hospital has a policy to share with patients and their families
any medical error or mistake and, in fact, to inform them of their right to
seek relief. The policy has been remarkably successful. In the 17 years
since the Lexington Hospital adopted its policy of communicating medical
errors, it has an average claim payout of $16,000. By contrast, the national
average settlement for a medical malpractice case by a VA Hospital is
$98,000.[11]

A somewhat different, but similarly effective, program was initiated by
Chicago’s Rush Medical Center in 1995 to respond to increasing legal costs.
Rush Medical Center uses a mediation agreement that provides for an
exchange of submissions and brief presentations by each side at a
mediation conference, which is then followed by discussions in caucus with
each side. The unique feature of the program is that it provides for
co-mediation (i.e., mediation with two mediators), with each side selecting
one of the mediators. The mediators are chosen respectively from lists of
trained plaintiffs and defense malpractice attorneys. In the first five years of
the program (1995–2000), 80% of the 55 malpractice cases submitted for
mediation were resolved in much less time than comparable nonmediated
cases in the area, and the settlement payments were generally less than in
nonmediated cases. Further, although Rush Medical Center was concerned
that the relatively quick and cost-effective co-mediation program might
result in an increase in the number of lawsuits, there was actually a slight
reduction in the number of lawsuits filed during this time.[12]
In short, dispute managements systems based on mediation have proven
extraordinarily successful in reducing the cost of malpractice disputes.

C. Impediments to the Adoption of Dispute Management Programs

for Medical Errors

Although the impediments to developing dispute resolution programs have
not been as rigorously studied as such programs themselves, a few
impediments seem likely: (i) misconceptions about mediation and aversion
to admissions; (ii) stakeholder conflicts; and (iii) unrealistic overoptimism
about the prospects for a malpractice claim. Each of these impediments is discussed below.

1. Misconceptions and Traditional Aversion to Disclosures

Perhaps the greatest impediments to the adoption of progressive dispute
management systems are lack of knowledge, fear of making admissions
that could be used in court, and fear of inviting additional lawsuits
A provider may believe that proactive engagement, communication, and
especially apologies may be considered signs of weakness that will
encourage groundless or weak claims to be initiated. Some commentators
have argued that our legal system discourages apologies on the theory that
“what you say can, and will, be held against you.”[13] On the other hand,
studies suggest that the most important factor leading to medical
malpractice lawsuits is ineffective (or nonexistent) communications with
injured patients and their families.[14]

One outgrowth of the realization that communication (as opposed to lack of
communication) discourages malpractice claims has been the adoption of
“medical apology statutes.” Approximately 30 states have adopted laws to
prevent the use of apologies as an admission of guilt or liability.[15] Most of
the “apology” laws, however, provide immunity only for “expressions of
sympathy” and the like, but not admissions of fault. The tenuous distinction
may, to a significant extent, undermine the effectiveness of such laws in
promoting frank communication at the outset of a dispute.

In comparison to medical apology statutes, mediation offers far greater
assurances of confidentiality. Most states have adopted statutes that
establish privileges and/or confidentiality for all disclosures in
mediation.[16] In addition, statutory protections for confidentiality in
mediation can be bolstered by contractual agreements prohibiting the use
of information exchanged in mediation for any purpose other than the
mediation itself. Moreover, the courts have aggressively protected the
confidentiality of mediation sessions to protect the public’s interest in the
efficient resolution of disputes.[17]

In perhaps the most comprehensive study of corporate strategies for
addressing workplace disputes, the authors explained that “the choice of an
organization’s conflict management strategy [or lack of strategy] we
discovered, often reflects the [key] decision makers’ dominant disposition
regarding the nature of conflict.”[18] Some companies opt to fight every
battle to the hilt, believing that conflict implies pure winners and pure
losers and that aggressive responses to conflict are needed to discourage
future claims. Other companies recognize that many disputes admit a range
of possible resolutions—many of which may be beneficial to both sides.

2. Stakeholder Conflicts

Reluctance to initiate a dispute management program and/or ADR generally
also may stem from conflict among stakeholders, such as provider
organizations, physicians, and insurers. Although all of the stakeholders
might benefit from ADR, physicians may have strong incentives to litigate,
rather than to reach negotiated settlement.
First, once a dispute arises, the physicians may not have a direct financial
incentive to reduce the cost of the dispute, because malpractice insurance,
rather than the physician, is likely to bear the direct costs.
Second, and perhaps more importantly, since 1990 all payments made on
behalf of a physician to settle a malpractice claim are reported to the
National Practitioner Databank (NPDB).[19] Intended to keep dangerous
practitioners from migrating from state to state to avoid detection, in
practice the NPDB serves as a severe impediment to the efficient settlement
of disputes. Many physicians refuse to consent to cost-saving settlements
for fear that a listing in the NPDB will damage their careers.[20] Although,
in theory, listings in the NPDB are confidential and can be accessed only by
appropriate authorities, such as credentialing committees, hospitals, and
licensing boards, physicians are often obligated to “self-report” any listing
when seeking new employment or insurance. In addition, cynicism abounds
about the confidentiality of the NPDB.

3. Inertia and Undue Optimism

Perhaps the most significant impediment to adopting an efficient dispute
management system is good, old fashioned, inertia. History is replete with
examples of good (and even essential) ideas that were ignored or ridiculed
for challenging the status quo.[21]
In addition, providers are prone to be overoptimistic about their ability to
control outcomes and avoid malpractice claims. No physician is apt to admit
that his or her patients can expect only “average” results. Just as,
according to Garrison Keillor, all of the children of Lake Wobegon are “above
average,” almost all physicians would not only characterize themselves as
“above average” but would also be insulted at the suggestion that they fall
anywhere below the top 10% of their peers.
Self-deceptive overconfidence is perhaps endemic to human nature. One
study found that fully 94% of university professors believe they do a better
job than their colleagues.[22] Similarly, most people think that they are
more intelligent and fair-minded than average.[23]
Overconfidence may be closely related to irrational forces affecting
decision-making: individuals often believe they have more control over
outcomes than is possible. The New Jersey lottery provides a good
illustration of this phenomenon. The lottery was a failure when ticket
purchasers were given computer-selected numbers; it became a huge
success when it was revised to permit purchasers to select their own
numbers—even though the odds of winning were the same in either case.
Similarly, physicians—like people in other circumstances—are prone to
overestimate the likelihood of positive outcomes and underestimate the
likelihood of negative ones. In a seminal study, college students rated
themselves much less likely than their peers to suffer from a drinking
problem, have a heart attack, be fired from a job, or divorce a few years
after getting married, even though statistics show otherwise.[24] Similarly,
one review of the academic literature revealed the following:
Second-year M.B.A. students overestimated the number of job offers
they would receive and their starting salaries.
Students overestimated the scores they would achieve on exams.
Almost all the newlyweds in a U.S. study expected their marriages to
last a lifetime, even while aware of the divorce statistics.
Professional financial analysts consistently overestimated corporate
earnings.
Most smokers believe they are less at risk of developing smokingrelated
diseases than others who smoke.[25]

D. A Practical Approach to Malpractice Reform

In explaining the conditions and strategies necessary for organizations (and
societies) to change long-standing, but inefficient or even destructive
behaviors, research in behavior science and insights from innovators in
business and nonprofit organizations have identified three essential
requirements for beneficial change.[26] Most significantly, research
demonstrates that it is not enough for a business or nonprofit to explain a
good (or even great) idea to its workforce, customers, patients, suppliers,
or partners and wait for it to be understood and adopted; instead, change
requires:
Identification of the two or three critical behaviors that serve as
triggers for the targeted process or practice. Critical or “vital”
behaviors often act like one-way gateways to either entrenched but
misguided pathways or innovative, better, ones.[27] When you return
your rental car and cross the one-way spikes in the driveway, even
though it is possible to drive around the parking lot and re-exit the
front gate, for most of us it is simply too late to fill-up the tank on
your own and thereby avoid the penalty for bring back a less-than full
tank. Human interactions and processes work much the same way: if
you can identify the key behaviors that serve as gateways to paths
that avoid waste and promote productivity, and persuade people to
adopt those behaviors, the preferred paths become seemingly
unavoidable and inevitable.
1. Deploying multiple, reinforcing, influence strategies to both educate
and persuade the relevant parties to adopt the critical gateway
behaviors.[28] For dispute resolution systems, the focus of such
2. education and persuasion will be the parties and potential parties to
disputes leading to wasteful and often unnecessary litigation such as
suppliers, customers, employees, and patients.
Why are multiple strategies needed to promote beneficial and seemingly
simple changes? Because people are not computers with on/off switches,
but have multiple and often competing traits affecting both motives and
behaviors. Often it is not enough to win over someone’s mind to a new
idea, but you must also win over his or her heart and instincts.
In The Happiness Hypothesis, Psychology Professor Jonathan Haidt uses the
metaphor of a person riding an elephant to explain why it can be so difficult
to stop even destructive behaviors that we fully understand to be harmful
(like smoking, overeating, etc.). The person (i.e., the rider) represents the
rational, most modern (in an evolutionary sense) part of the brain, while
the elephant represents the more primitive emotional and instinctive.
Modern theories of rational choice and information processing don’t
adequately explain weakness of the will. Older metaphors about
controlling animals work beautifully . . . . The image that I came up
with for myself as I marveled at my weaknesses, was that I was a
rider on the back of elephant. I’m holding the reins in my hands, and
by pulling one way or the other I can tell the elephant to turn, stop,
or go. I can direct things but only when the elephant doesn’t have
desires of his own. When the elephant wants to do something, I’m no
match for him . . . . To understand the most important ideas in
psychology, you need to understand however the mind is divided into
parts that sometimes conflict. We assume that there is one person in
each body, but in some ways we are each more like a committee
whose members have been thrown together to do a job but who
often find themselves working at cross purposes.[29]
In Influencer,[30] the authors identify six distinct, but overlapping
strategies that help align rational, emotional, and instinctive sentiments in
favor of beneficial organization change. Those “influence strategies” include
(1) providing positive and negative personal incentives to encourage the
critical behaviors that precipitate change; (2) training to facilitate use of,
and comfort with, the new process; (3) providing direct personal and
vicarious experiences with the new process to overcome distrust and risk
aversion; (4) providing mechanisms for social support (and peer pressure)
to encourage the desired behaviors; (5) providing tools for, and easy access
to, new methods, and (6) creating organization or program structures that
align with, rather than impede, the desired changes. While successful
implementation of a new program that changes long-standing practice may
not require deployment of every potential influence strategy, reliance on a
single strategy alone is unlikely to succeed.

E. Practical and Powerful Malpractice Reform

With respect to malpractice reform, the vital requirements necessary for
productive change are easy to identify. Providers must expect and plan for
disputes by adopting a mediation program of proven efficacy. The challenge
is to persuade providers to adopt a program and both providers and
patients to participate in good faith.
Indeed, healthcare is especially well suited for dispute management
because the key mechanism for promoting mediation (in advance of
litigation) is already in place. Patients expect, and routinely sign, a multiple
of forms in advance of treatment. The addition of a mediation agreement,
which fully preserves a patient’s access to the courts, provided mediation is
given a chance, is unlikely to be objectionable and, indeed, may not even
be noticed.

A mediation agreement alone, however, would be ineffective if the cost (in
time and money) to initiate mediation discourages prompt participation.
Accordingly, an effective malpractice reform program should provide an
infrastructure (such as a panel of mediators on call) that allows for prompt
initiation. In addition, because mediation is likely to promote cost savings
for providers to a greater extent than for patients and their families, and
because patients may have little meaningful power to refuse to sign a
proper mediation agreement, the cost of malpractice mediation should
generally be borne by the provider.

Just because a mediation program would encourage efficient resolution of
medical disputes and save potentially extraordinary sums, does not mean
such programs will be adopted. Healthcare and hygiene provides the most
notable examples of the inability of good ideas to spread of their own
accord. For example, scurvy was the bane of sailors for centuries. When
Vasco de Gama successfully circled the Cape of Good Hope in 1498-1499,
over half of a crew of 160 died from scurvy during the voyage. In 1601, a
British sea captain named John Lancaster discovered that he could
completely prevent scurvy by giving sailors a little lime juice every day. This
cure, however, was not fully adopted by the British Navy until 1865.[31]

Similarly, by the late 1840s, Dr. Ignaz Semmelweis had demonstrated the
unequivocal effectiveness and importance of hand washing for avoiding
infections in clinical settings. His efforts to encourage hand washing, and
those of other early hand washing proponents like Dr. Oliver Wendell
Holmes, were rejected for decades, until well after his death from infection
in 1865. [32]

To address malpractice claims efficiently, the key practice that must be
accepted and incorporated into common practice is simply the addition of a
mediation agreement into patient intake forms. Without incentives
specifically directed at this practice, however, it is unlikely to be adopted. As
noted above, physicians will inevitably underestimate the likelihood, and
consequences of, malpractice claims. In the abstract, it is easy to dismiss
the risk of an action and assume that, since it will be covered by insurance
in any event, it will not disrupt a physician’s practice or life.
In addition, physicians may mistakenly assume that providing an easy
forum for raising malpractice concerns will invite disputes that would
otherwise be avoided. Although this issue has not been formally studied,
anecdotal evidence suggests that it is wrong. Hospital systems adopting
mechanism that promote open and caring communications report
reductions in the number of claims ultimately filed.[33]

Overcoming such barriers could require a combination of education,
governmental and regulatory support, and financial incentives. The latter
two categories require elaboration.

Assuming that a simple mediation program would generate savings, why
would financial incentives to adopt the program be needed? Although
mediation is likely to generate savings over time, the cost, however
modest, of implementing a program would not generate any immediate
savings. Faced with an out-of-pocket cost in the short run to set up a
program, and the mere prospects for savings in the long run, many if not
most providers would simply do nothing. Further, financial savings from a
mediation program may provide greater financial benefits to a malpractice
insurer than to the physician or provider who establishes a program. Finally,
disincentives to settle as a result of NPDB reporting might discourage
physician adoption of even the most cost-effective dispute management
program.

How then could financial incentives be deployed to encourage adoption of a
beneficial mediation programs? Malpractice insurers could follow (and/or be
encouraged to follow) the model of liability insurers who provide discounts
for home alarms, car alarms, and other circumstance that are likely to
reduce insurance losses.

In short, for the marketplace to adopt programs that have tremendous
opportunity for savings with little downside, it is likely necessary for
malpractice insurers to grant discounts to providers who implement
reasonable mediation programs providing prompt communication and
opportunity for early settlements with patients and their families. The
discounts, moreover, would likely need to fully offset any program costs.
Because the cost of implementing a mediation program is unlikely to be
very high, the threshold for economic viability of such a reform program is
also unlikely to be very high.

On the other hand, there is unlikely to be sufficient data to identify the
appropriate discount rates during the initial years of such programs. For this
reason, it may be necessary to obtain governmental support for such
programs until they achieve an equilibrium or tipping point that allows them
to be self sustaining.

F. Conclusion

Malpractice litigation has inflicted a heavy toll on the national healthcare
system by driving up insurance costs, promoting costly defensive medicine,
and discouraging providing from practicing in states that have been
severely affected. Reform based upon proactive dispute management with
early mediation would not solve the healthcare crises but, in view of the
track record of successful programs, it would dramatically reduce the
harmful consequences of costly and often needless malpractice litigation.
Further, the suggested reform is compatible with the needs and interests of
all stakeholders. For patients and families, early mediation would open an
otherwise unavailable channel of communication to express feelings and
reactions to poor outcomes and learn of the circumstances giving rise to the
unwelcome result. For physicians and providers, early mediation offers a
safe environment in which to answer questions, express sympathy, and
work with patients and families quickly to resolve concerns and/or identify
alternatives to costly litigation. For payors, early mediation is likely to
reduce payouts both for unnecessary and costly litigation and awards.
As amply demonstrated by the Clinton Administration’s healthcare reform
proposals of the early 1990s, overly ambitious programs—however well
intended and designed—are likely to fail from the weight of their own
complexity. By contrast, the proposed dispute management reform has
three simple elements:
Require agreements to mediate in advance of malpractice litigation.
Provide timely access to skilled mediators.
Insurance incentives to implement a program of early mediation for
claims related to alleged medical errors.
This simple reform plan has potential to save extraordinary sums related to
wasteful litigation while improving quality of care as the result of better
communication and, in the long run, a reduction in the need for costly
defensive medical practices.

WORKS CITED AND BIBLIOGRAPHY

Deason, E. E. (2001). The Quest for Uniformity in Mediation Confidentiality:
Foolish Consistency or Crucial Predictability? Marquette Law Review , 85,
79.
Mello, M. M., & Kelly, C. N. (2006). Effects of a Professional Liability Crisis
on Residents' Practice Decisions. Obstetrics & Gynecology , 105 (6).
Mello, M. M., Studdert, D. M., Schumi, J., Brennan, T. A., & Sage, W.
(2007). Changes in Physician Supply and Scope of Practice During A
Malpractice Crisis: Evidence from Pennsylvania. Health Affairs , 26 (3),
425-435.
Arkes, H., & Blumer, C. (1985). The Psychology of Sunk Cost.
Organizational Behavior and Human Decision Process, 35, 124–140.
Arkes, H., & Hutzel, L. (2000). The Role of Probability of Success Estimates
in the Sunk Cost Effect. Journal of Behaviourial Decision Making, 295–306.
Armor, D. A., & Taylor, S. E. (2002). When Predictions Fail: The Dilemma of
Unrealistic Optimism. In T. Gilovich, D. W. Griffin, & D. Kahneman,
Heuristics and Biases: The Psychology of Intuitive Judgment (p. 334).
Cambridge University Press.
Atwood, D. (2008, April 1). Impact of Medical Apology Statutes and Policies.
Journal of Nursing Law, 12, 43–53.
Babcock, L., & Loewenstein, G. Explaining Bargaining Impasse: The Role of
Self-Serving Biases. Journal of Economic Perspectives, 11, 109–126.
Birke, R., & Fox, C. R. (1999). Psychological Principles in Negotiating Civil
Settlements. Harv. Negotiation L. Rev., 4 (1), 16–17.
Clinton, H. J., & Obama, B. (2006). Making Patient Safety the Centerpiece
of Medical Liability Reform. New England Journal of Medicine, 354 (21).
Coase, R. (1960). The Problem of Social Cost. Journal of Law and
Economics, 3 (1), 1.
Cooley, J. (2002, February). A Dose of ADR for the Health Care Industry.
Dispute Resolution Journal.
Guadagnino, C. (2004, April). Malpractice and Mediation Poised to Expand.
Physician’s News Digest.
Hastorf, A. T., & Cantril, H. (1954). They Saw a Game: A Case Study.
Journal of Abnormal and Social Psychology, 49 (1), 129–134.
Kahneman, D., & Tversky, A. (1982). Subjective Probability: A Judgment of
Representativeness. In D. Kahneman, P. Slovic, & A. Tversky, Judgment Bias
Under Uncertainty: Heuristics and Biases. New York: Cambridge University
Press.
Knox, R., & Inkster, J. A. (1969). Postdecision Dissonance at Post Tim.
Journal of Personality and Social Psychology, 8 (4), 319–323.
Leibman, C., & Hyman, C. (2004). A Mediation Skills Model to Manage
Disclosure of Errors and Adverse Events to Patients. Health Affairs, 23 (4),
22–32.
Lipsky, D. B., & Seeber, R. L. (2003). Emerging Systems for Managing
Workplace Conflict. Jossey Bass.
Lipsky, D. B., & Seeber, R. L. (1998). In Search for Control: The Corporate
Embrace of ADR. Univ. of Pennsylvania Journal of Labor and Employment
Law, 1, 133–157.
Loftus, E. F., & Wagenaar, W. A. (1988). Lawyers’ Predictions of Success.
Jurimetrics, 28, 437, 450.
Mnookin, R., & Ross, L. (1995). Introduction. In K. Arrow, R. H. Mnookin, L.
Ross, A. Tversky, & R. Wilson, Barriers to Conflict Resolution (pp. 1–24).
New York: W.W. Norton & Co.
Refo, P. L. (2004, Winter). The Vanishing Trial. Litigation: The Journal of the
Section of Litigation, 30 (2), online edition.
Rooney, J. F. (2008, July 8). An Early Resolution for Disputes. Chicago
Lawyer.
Ross, L. (1977). The Intuitive Psychologist and His Shortcomings:
Distortions in the Attribution Process. In L. Berkowitz, Advances in
Experimental Social Psychology (Vol. 10, pp. 173–220). New York:
Academic Press.
Sack, K. (2008, May 18). Doctors Say ‘I’m Sorry’ Before ‘See You in Court.
New York Times.
Trevarthen, D. S. (n.d.). Powerpoint Presentation: Toro’s Alternative Dispute
Resolution Program Handling Product Liability Claims and Lawsuits.
Tversky, A., & Kahneman, D. (1974). Judgments Under Uncertainty:
Heuristics and Biases. Science, 185 (4157), 1124–1131.
Wason, P. C. (1960). On the Failure to Eliminate Hypotheses in a
Conceptual Tack. Quarterly Journal of Experimental Psychology, 12,
129–140.
Weinstein, N. D. (1980). Unrealistic Optimism about Future Life Events.
Journal of Personality and Social Psychology, 39 (5).

Footnotes

[1] Mr. Kaplan is a Partner in the Pittsburgh law firm of DeForest Koscelnik
Yokitis Kaplan & Berardinelli, and his practice focuses on dispute resolution
and information technology. He serves as a Neutral on panels of the
American Health Lawyers Association, the American Arbitration Association,
and other organizations. A graduate of the University of Chicago Law School
(JD 1983), and Yale University (B.A. 1980), Mr. Kaplan teaches as a
Professorial Lecturer at The George Washington University Law School, and
he is the author of "Executive Guide to Managing Disputes: Using ADR to
Save Time and Expense in Business, Healthcare and the Workplace" (Beard
Books, 2009) (forthcoming). Mr. Kaplan can be reached at
This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
[2] See (Mello & Kelly, 2006); (Mello, Studdert, Schumi, Brennan, & Sage,
2007).
[3] For example, the Toro Company has had remarkable success in reducing
the cost of production liability disputes and payment after adopting a
proactive alternative dispute resolution program in the early 1990s. See
(Rooney, 2008).
[4] California Evidence Code § 111.5.
[5] (Refo, 2004). Although less accurate data were developed with respect
to state courts, the data studied from 22 states indicated a 28% decline
from 1976 and that 99.4% of filed cases were resolved in advance of trial.
[6] (Kidwell and Voinchet, 2008).
[7] Id.
[8] Id.
[9] (Sack, 2008).
[10] (Atwood, 2008).
[11] Id.
[12] See (Cooley, 2002) and (Guadagnino, 2004).
[13] See, e.g., (Tyler, 1997).
[14] (Leibman & Hyman, 2004).
[15] See, e.g., California Evidence Code § 1160 (2001).
[16] (Deason, 2001, p.79) (identifying numerous state statutes protecting
confidentiality of communications in mediation).
[17] E.g., Foxgate Homeowners Assoc., Inc., v. Bramalea Cal., Inc. 26
Cal.4th 1 (2001) (holding that there are no exceptions to the confidentiality
of communications in mediation under the applicable California statutes).
[18] (Lipsky & Seeber, Emerging Systems for Managing Workplace Conflict,
2003, p. 119).
[19] Even a settlement payment of $1 on behalf of a physician obligates the
payor to report the subject physician to the NPDB.
[20] Physicians can sometimes take advantage of exceptions to the
reporting obligation. First, if a physician belongs to a professional
corporation of at least two physicians or employed by a group or other
entity, a settlement in the name of the corporation or organization rather
than in the name of the physician is generally not reportable. Second, a
payment made by a physician on his or her own behalf is not reportable.
Third, a payment made in advance of a written demand or claim may not
be reportable. See generally 45 C.F.R. Part 60 (National Practitioner Data
Bank For Adverse Information On Physicians And Other Health Care
Practitioners).
[21] (Rogers & Rogers, 2005).
[22] (Cross, 1999).
[23] (Birke & Fox, 1999, p. 7).
[24] (Weinstein, 1980).
[25] (Armor & Taylor, 2002).
[26] See generally (Patterson, Grenny, Maxfield, McMillan, & Switzer, 2008).
[27] Id.
[28] Id.
[29] (Haidt, 2006, p. 4-5).
[30] (Patterson, Grenny, Maxfield, McMillan, & Switzer, 2008).
[31] (Berwick, 2003).
[32] (Larsen, 1989).
[33] Telephone conversation with Richard Kidwell, Risk Manager, UPMC
Health System, November 16, 2008.
© 2009 American Health Lawyers Association
Suite 600, 1025 Connecticut Avenue NW
Washington, DC 20036-5405
Phone: 202-833-1100 Fax: 202-833-1105

Management of Technology Projects: Why Projects Fail and How to Plan For Disputes

In its seminal 1995 study, the Standish Group reported the dismal success rate of
large scale information technology (“IT”) projects. The Standish Group’s research showed that
31.1% of projects were cancelled without completion, while only 16.2% of software projects
were completed on-time and on-budget. Large companies reported even worse results as only
9% of their projects came in on-time and on-budget. Further, when projects were completed,
they often fell far short of their expectations: projects completed by the largest American
companies had only about 42% of their originally-proposed features and functions.
Although more recent studies by the Standish Group suggest improved success
records, the record hardly encourages optimism. In 1995, fully 84 percent of all projects were
found to have failed entirely or to live up to objectives. By 2000, this failure rate had
“improved” to 72 percent.

The Standish Group reports are hardly alone in reporting the dismal record of IT
project success. In 2005, KPMG International surveyed 600 organizations across 22 countries
and found that nearly half of the organizations reported at least one project failure in the past
year, and 86% of respondents reported failure to achieve 25% their targeted benefits.
Given this poor track record over an extended period of time, why have IT
suppliers seemingly failed to learn from past mistakes and why have their customers failed to
2 © Gary L. Kaplan, Esq. 2008, All Rights Reserved.

Page 2
demand greater accountability? As discussed below, the answer may lie in inherent human
characteristics that allow seemingly irrational conduct to persist in even the most sophisticated
business environments. Scientific research over the past 20 year has largely debunked the notion
that Adam Smith’s “invisible hand” assures the efficient economic transactions. Instead,
individual economic decisions commonly follow predictable, but seemingly irrational, patterns
that allow for inefficient market conditions to persist.
The good news, however, is that when an understanding of the factors that
promote irrational expectations is coupled with an understanding of circumstances that
commonly cause IT projects to fail, it is possible to develop systems for tracking project
performance and managing disputes that dramatically improve prospects for success.
The Persistence of Doomed IT Projects
Social scientists have identified, tested and explained a variety of human character
traits, or biases, that are particularly relevant to the planning and management of complex
technology (or even construction) projects.
At the outset, it is perhaps more surprising that complex IT projects ever succeed
than that they have such a high failure rate. Although there is likely a single path to project
success, there are multiple (and easy) paths to project failure. Common sources of IT project
failure include:
• Incomplete project specification
• Poor project management
• Overselling
• Personnel changes
• Technology changes

Page 3
• Poor communications between technology and business personnel
• Failure to coordinate technology with business practice/culture
• Data migration failures
• Poor software design
• Infrastructure incompatibilities
• Regulatory change
Reduced to its simplest terms, most IT project fail sufficiently to address or
account for (i) human and non-technology factors that may affect project success or failure, and
(ii) risks related to changing circumstances. In a long term IT project, it may be impossible to
predict which circumstances affecting project success will change, but it is almost certain that
important circumstances will, in fact, change.
Against this backdrop, this paper discusses the persistent failure of IT
professionals and their clients to plan for changing circumstances that may undermine project
success and suggests strategies for promoting accountability and managing inevitable disputes.

A. The Persistence of Unrealistic IT Project Plans and Agreement

Human nature encourages largely unrealistic project plans and related agreements
governing complex IT projects. Such traits include the “overconfidence” bias and illusions of
control (i.e., the tendency to overstate one’s ability to affect outcomes); the “over-optimism” bias
(i.e., the tendency to understate the likelihood of bad outcomes); the “self-serving” bias (i.e., the
tendency to evaluate facts in the light most favorable to oneself ); the “confirmation” bias (i.e.,
the tendency to filter and interpret new information in a manner that confirms one’s own
preconceptions or initial view); and the “availability” bias (i.e., the tendency to overstate the
importance of available information). These problems are magnified, moreover, because of the

Page 4
conflicting interest’s of participants in complex technology projects, which discourages
meaningful accountability.
While such biases may not apply in all IT project failures, taken together they
help explain the unfortunate persistence of overoptimistic project plans and agreements.

1. Overconfidence, Undue Optimism and Illusions of Control

Planning for IT projects may suffer from an especially pervasive characteristic of
human nature--self-deceptive overconfidence. If asked about the likelihood of project success,
the representative of an IT supplier may honestly believe that his company will have the skill and
experience to complete the project on time, on budget, and in accordance with its specifications.
Such expectations, however, are likely to be severely skewed as a result of both human nature
and self interest. For example, one study found that fully 94 percent of university professors
believe that they do a better job than their colleagues.3 Similarly, most people think that they are
more intelligent and fair-minded than average.4
Overconfidence may be closely related to irrational forces affecting decisionmaking:
individuals often believe that they have more control over outcomes than they do.
Perhaps the best example of this phenomenon is the New Jersey lottery. The lottery was a failure
when ticket purchasers were given computer-selected numbers; it became a huge success when it
was revised to permit purchasers to select their own numbers—even though the odds of winning
were the same in either case.
Similarly, attorneys and their clients—like people in other circumstances—are
prone to vastly overestimate the likelihood of positive outcomes and underestimate the likelihood
3 (Cross, 1999).
4 (Birke & Fox, 1999, p. 7).

Page 5
of negative ones. In an early study, college students rated themselves much less likely than their
peers to suffer from a drinking problem, have a heart attack, be fired from a job or divorce a few
years after getting married.5 Similarly, one review of the academic literature revealed the
following:
• Second-year M.B.A. students overestimated the number of job
offers they would receive and their starting salaries.
• Students overestimated the scores they would achieve on exams.
• Almost all the newlyweds in a U.S. study expected their marriages
to last a lifetime, even while aware of the divorce statistics.
• Professional financial analysts consistently overestimated
corporate earnings.
• Most smokers believe they are less at risk of developing smokingrelated
diseases than others who smoke.6
Similar findings of overoptimism were found in studies of trial lawyers. The authors of one
study, for example, concluded that “lawyers tended to be overconfident in general, but especially
so in cases in which they initially made highly confident predictions.”7

2. Self-Serving Bias: Confusing Fairness with Self-Interest

“However top-lofty and idealistic a man may be, he can always rationalize his right to
earn money.” –Raymond Chandler
Coupled with intrinsic over-confidence, and IT suppliers self-interest will
promote unrealistic (however honestly held) projections of project costs and benefits. Research
has shown that when a problem affects a party’s self-interest, that party’s analysis is likely to be
skewed to a far greater extent than he or she is likely to realize or admit.
Two cited studies illustrate how one’s team or position affects one’s perspective.

5 (Weinstein, 1980).
6 (Armor & Taylor, 2002).
7 (Loftus & Wagenaar, 1988).

Page 6
In a 1954 study,8 students from Princeton and Dartmouth were asked to review a film of a
football game between the two schools and to count the number of penalties by each side. The
Princeton students found that the Dartmouth team committed twice as many flagrant penalties
and three times as many mild penalties as the Princeton team. On the other hand, the Dartmouth
students found that the two teams committed an approximately equal number of penalties. The
study concluded that it was as though the two groups “saw a different game.”
Likewise, the “self-serving” bias was clearly demonstrated in a 1997 study by
Professors George Lowenstein and Linda Babcock that considered how a group of “plaintiffs”
and “defendants” evaluated a single hypothetical case.9 Specifically, Lowenstein and Babcock
asked college students who were divided into plaintiffs and defendants to evaluate a tort case in
which an injured motorcyclist sued the driver of the car that collided with him for $100,000. All
students were given the same twenty-seven-page case file and were then asked to predict how a
judge would rule and the amount that a neutral third party would consider to be a fair settlement.
The students were then given thirty minutes to negotiate a settlement and financial incentives to
resolve the matter efficiently. (Specifically, the students, who were paid for the study, would be
allocated payments based on the results of their settlement or the “court’s” ruling. In the absence
of a settlement, both parties would incur “court costs” that would reduce their payments.)
In the initial version of the study, the students were advised of their roles before
reviewing the case file. The parties’ self-serving biases were demonstrated in that the students
assigned to the plaintiff’s role predicted a judicial ruling that averaged $14,527 higher than

8 (Hastorf & Cantril, 1954).
9 (Babcock & Loewenstein, 1997).

Page 7
students assigned to the defendant’s role. Likewise, the student “plaintiffs” assessed the fair
settlement value of the case $17,709 higher than student “defendants.”
Next, Lowenstein and Babcock demonstrated that this bias was not simply a
product of the students’ assignment to a plaintiff or defendant role, but that it reflected their
skewed interpretations of the case-file: In a second round of the study, some students were
assigned to a control group that was instructed to review and assess the case file before their
designation as plaintiffs or defendants.
The second round confirmed that the students’ assigned role affected how they
first interpreted the case file: when they didn’t know which roles they would be assigned until
after they read the case and made assessments of the judge and fairness, the case “settled” 94
percent of the time. By contrast, when students knew what their roles would be before reviewing
the file, only 72 percent of the cases settled.
Finally, Lowenstein and Babcock sought to identify methods for counteracting the
self-serving bias. Simply by telling the students about the bias improved the accuracy with
which they predicted the valuations of the case to be made by the opposing party (but did not
induce them to make more accurate assessments themselves). If the students were told about the
bias and then asked to write an essay in support of their opponent’s position, the parties’ biases
actually increased—presumably because they led the students to reaffirm their commitments to
their own positions. On the other hand, Lowenstein and Babcock were able to counteract the
bias by advising the students of the bias and then instructing them to list the weaknesses in their
own case. Under this approach, the difference between the plaintiff’s and defendant’s average
assessment was reduced from $21,783 to only $4,674, and the rate of failed settlement
negotiation declined from 35 percent to 4 percent.

Page 8
Such research implies that initiating a dispute is in itself likely to affect how each
party considers the facts in dispute and to cause each side to interpret facts in the light most
favorable to its position. Although it may be possible for a third party to intervene and
counteract this bias, without a skilled mediator each party’s bias will probably just help fuel the
conflict. Worse, the self-serving bias does not stand alone in promoting skewed perceptions and
assessments of a dispute.

3. Poor Predictions in the Face of Incomplete Information

Research has shown that individuals faced with uncertainty or incomplete
information will selectively fill in details in ways that may promote conflict. Each party to an
agreement is likely to give more weight to the facts that they know or that easily come to mind
than to hold a rational view of what all the relevant facts suggest is merited. This trait has been
called the “availability heuristic.” (A “heuristic” is a mental shortcut used to evaluate complex
sets of facts.)
The forcefulness of the availability heuristic is shown by undue reliance on
anecdotal evidence or past instances of a particular event and outcome; i.e., reliance on the
erroneous belief that “because it happened before it will happen again.”
In research studies, the availability heuristic has been shown to apply not only to
incomplete information (such as when a party knows only half of the relevant events), but also to
more easily understood or accessible information. For example, psychologists Daniel Kahneman
and Amos Tversky, who wrote the seminal work on this topic,10 asked participants in a study to
estimate the number of words that begin with the letter “R” or “K” in comparison to words that
10 (Tversky & Kahneman, 1974).

Page 9
have the letter “R” or “K” in the third-letter position. Because it is far easier to recall words that
begin with “R” (rooster, roar, rusty, red) or “K” (key, kitchen, kite) than words having “R” or
“K” in the third-letter position (street, stream, ink, acknowledge), 66 percent concluded that
words that begin with “R” or “K” are more common. The reality is that words that have the
letter “R” or “K” in the third position are far more common than those beginning with those
letters.11
A more common example is to ask study participants whether more people die in
airplane crashes or car accidents. Because airplane crashes receive far more media attention,
many people erroneously believe that they are responsible for more deaths, although statistics
show that car crashes are responsible for far more fatalities.
In connection with a long term project, availability biases can create irrational
projection as to project benefits and costs. As noted above, at the outset of a project, each party
may give undue weight to readily accessible facts while ignoring the implications of the full
picture. In addition, parties are likely to underestimate the costs and stresses associated with the
project, because such negative consequences are remote from factors most commonly considered
at the outset.

4. No Way Out

Once a project goes off track, it can be difficult correct. The failure to address
project problems as they arise can lead to a cascade of additional and increasingly complex
difficulties. In the end, the project may have little in common with its original plans. Part of the
difficulty in addressing project problems in a timely manner stems from the cost of the project
11 (Kahneman & Tversky, 1982).

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itself: the further a project progresses, the more it costs, and the parties’ investment contributes
to intransigence and/or wishful thinking.
Psychologist and behavioral economists refer to this issue as the “sunk cost” bias
or “sunk cost” fallacy. In economic terms, “sunk costs” or “fixed costs” refer to investments that
have been made but cannot be directly recovered through future actions, regardless of the
success or failure of those actions. For example, if you buy a nonrefundable airline ticket to visit
your aunt Mabel, you will not be refunded the cost of the ticket if you cancel the visit.
Consequently, after the ticket has been paid for, its cost, according to economic theory, should be
irrelevant to the decision of whether or not to go ahead with the trip. If you have a fight with
Aunt Mabel and don’t want to go, the fact that you paid $1,000 for the ticket should have no
bearing on your decision, since you will not get the money back in any event.
Common experience (confirmed by research) shows, however, that people often
cannot bring themselves to ignore sunk costs when deciding future actions and will, in fact,
throw good money after bad to justify their prior mistakes. Part of the problem is analogous to
the self-interest bias: once a party has spent money on a case, the investment itself is likely to
taint his or her appraisal of the outcome. One study of this issue was made at a racetrack—
bettors on a horse race were asked to predict their horse’s chance of winning both before and
after having made a bet. Of the 141 people asked, 72 had just placed a $2 bet within the past
thirty seconds, and 69 were about to place a $2 bet in the next thirty seconds. On a scale of 1 to
7, with 7 referring to a sure winner, the people about to place a bet averaged a 3.48 rating of their
Page 11
chances for success (or a “fair chance of winning”), but people who had just finished betting
averaged a 4.81 rating (or “good chance of winning”).12
Further, people have a hard time admitting that they made a mistake. In another
study, 96 business students were divided into two groups: half were told that, as a manager, they
had made a bad R&D investment in an underperforming division of a company, while the other
half were told that the former manager of the division had made the bad R&D investment. In
both cases, the students were then asked to make a new $20 million investment (to be divided
between the underperforming division and another division). The students “responsible” for the
poor performance of the division were much more prone to invest in that division than the
nonresponsible students. On average, the “responsible” students chose to invest $12.97 million,
while the others only $9.43 million.13

B. Managing IT Project to Avoid and Contain Disputes

IT Disputes are entirely predictable. Just as preventative health care or routine
equipment maintenance can avoid far greater costs in the future, planning for disputes and
managing business relationships with the risk of disputes in mind can go a long way to
minimizing disastrous projects and costly legal battles.
Although there are a variety of methods for managing potential disputes, they
essentially rest on a single principle: project participants should strive to resolve disputes
promptly as a means of keeping small disputes small, rather than allowing them to fester and
transform themselves into corporate wars.
12 (Knox & Inkster, 1969). See also (Arkes & Blumer, 1985); (Arkes & Hutzel, The Role
of Probability of Success Estimates in the Sunk Cost Effect, 2000).
13 (Staw, 1976). See also (Whyte, 1986).

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The simple concept of containing disputes is difficult for two reasons. First, the
parties must have mechanisms in place to identify and quickly resolve problems as they arise.
Such mechanisms can, and should, be included in any complex transaction or engagement that
requires the parties to interact over a period of time—such as a construction project or software
development agreement. Second, the parties must actually deploy the mechanisms they have
agreed upon.
Perhaps surprisingly, the second requisite—use of available dispute
mechanisms—is where parties to a business arrangement often fall short. Once a project is
underway, the parties to a business arrangement often prefer to focus exclusively on moving
forward and “working things out” as they proceed with each other. Further, the individuals
implementing a project may be a completely different group of people than those who negotiated
the arrangement (and any dispute resolution mechanism). Indeed, project personnel may never
even look at the contract terms governing their relationship, preferring instead to relegate “legal
issues” to the back burner.
The problem with assuming that problems will work themselves out is that they
often do not. Further, issues or problems with complex projects seldom arise alone, but typically
arise in groups or a series. As a result, when a series of small issues are not addressed, the
project itself may take on a character that is quite distinct from the project originally
contemplated by the parties who negotiated the terms of the relationship. If the parties have not
addressed and modified their contract expectations along the way when the series of small issues
emerges as an unworkable mess, the cost of untangling the parties’ respective duties and
obligations can be extraordinary.

Page 13

1. Managing Potential Disputes with Effective Contracts

The starting point for managing potential risks is to negotiate contracts that both
clearly articulate the parties’ respective obligations and specify efficient procedures for resolving
disagreements as they arise.
In defining the parties’ obligations, an effective contract addresses the fact that
the parties may have multiple types of relationships with each other in a single transaction. For
example, when a business hires a software developer to create new inventory software, it may
need to rely on the vendor for a variety of services in addition to the software itself. The
business may, for example, require customization of the software to assure its compatibility with
other software and systems; the conversion of existing data files to allow effective operation of
the new system; the development of specialized features, functions, or interfaces; or system
maintenance and support, including periodic upgrades or enhancements to meet changing
business or regulatory requirements. Each service or component of the deal should be analyzed
separately because a misunderstanding or deficiency in any area could undermine the entire
transaction and give rise to a costly dispute.
Not only should a contract identify the different types of relationships the parties
create, it should clearly articulate their respective rights and obligations if their respective
performances fall short of expectations. In other words, the parties must address who is
responsible, and to what extent, if the goods or services delivered under the arrangement fail to
work properly, do not work at all, or are not delivered on time.
2. Managing Disputes as They Arise
Businesses frequently seek legal advice when entering into agreements and when
disputes arise. The same companies, however, often overlook the role of sound legal practice in
Page 14
monitoring and managing the implementation of their agreements. The effective management of
implementation can prevent costly disputes or improve a party’s likelihood of success should a
dispute become unavoidable. Managing problems as they arise has three main elements.
First, the parties must decide who bears responsibility for the problem. This can
be difficult. Did the problem arise because the supplier overstated the capabilities of it product?
Did the purchaser incorrectly specify its requirements? Did problems arise due to personnel
changes at either the purchaser or vendor? Or did the problem arise because external facts, such
a governmental regulations, economic conditions, or technologies, have changed.
Second, the parties should agree on a timetable for curing the defect or problem.
Third, the parties should agree on a remedy if the problem is not resolved in the
specified period. Remedies include termination of the project if the problem is critical and
modification of future fees, refunds, or other forms of consideration, such as concessions on
other projects.
All agreements regarding changes in the project or remedies for problems should
be in writing. A clear demarcation of rights and responsibilities almost certainly promotes
effective management of the project and reduces the risk of protracted disputes later on. By
contrast, failure to address significant problems can allow them to fester and grow.

3. Management of Project Disputes

(a) Escalating Negotiations

Perhaps the most common form of managing project disputes is the requirement
of escalating negotiations. Parties plan for disputes by including in their contract a requirement
that, in advance of litigation or other processes involving third parties, the parties first try to
resolve disputes through negotiation at escalating managerial levels.
Page 15
Such agreements, for example, may require each party to designate a project lead
or manager who has front line responsibility for formal communications and notices during the
course of the project. Further, the contract may specify that, prior to initiating litigation or
arbitration, a party must first bring the matter to the attention of the other party’s project manager
and then attempt to negotiate a resolution within a specified period, such as two weeks. The
contract may further require that, in the event the managers fail to negotiate a resolution, the
parties must escalate the matter to one or more higher levels of management for one or more
additional rounds of negotiation. Effective escalation requirements will, moreover, typically
require the parties to enter written amendments or change orders to formalize any negotiated
resolutions.
Escalation is perhaps most effective for managing disputes between parties that
have long standing and/or multifaceted relationships. In such cases, while front line managers
may have the best information about the specific project or dispute in question, high-level
managers may have a better understanding of the range of relationships between the parties
and/or potential tradeoffs involving matters outside the scope of the project giving rise to the
dispute. For example, offsetting cost increases on projects between the parties, with concessions
on others, may be possible.
Escalation requirements, however, are not riskless or appropriate to all business
arrangements. In some instances, such requirements may delay resolution without increasing the
likelihood of a settlement. Because of a lack of day-to-day project involvement, senior managers
may lack sufficient information or perspective about projects to fairly evaluate the dispute and,
therefore, may adopt unproductive negotiating positions.

Page 16
Further, and perhaps more significantly, an escalation provision may prevent,
rather than promote, efficient resolution of disputes because of reluctance by one or another of
the parties to involve senior managers in matters that might reflect poorly on the front line
managers themselves or others working on the project. In other words, instead of serving to
promote prompt resolution of disputes, escalation clauses sometime create incentives to sweep
problems under the rug until they grow so large that they become plainly visible.

(b) Appointment of a “Project Neutral”

In addition to bilateral processes for managing and containing disputes, it may
make sense in some instances for the parties jointly to retain a “project neutral” to mediate and
possibly even arbitrate disputes as they arise during the course of the project or business
relationship.
There are several significant benefits to the appointment of a neutral in advance of
potential business disputes. First, as noted in the prior chapter, it is likely far easier for the
parties to agree upon a neutral who has both knowledge of the subject matter of the business
relationship and a commitment to minimize dispute costs prior to the onset of conflict between
the parties. At the outset of the business relationship, both parties have incentive to minimize the
cost of potential disputes and, assuming good faith, neither is likely to have the upper hand.
Second, the appointment of a neutral in advance, and establishment of agreed
upon procedures for resolving disputes, decreases the start-up cost of seeking assistance to
resolve a dispute and, therefore, makes it more likely that the parties will act quickly to address
problems as they arise. Not only can the solution be initiated without delays for the selection of
the neutral, but it would also eliminate some of the time necessary to educate the neutral about

Page 17
the nature of the project, the terms of the contract, etc. (assuming that the neutral is provided
periodic updates on the status of the project).
(c) Controlling Dispute Costs
Despite best efforts, some disputes are unavoidable. In such cases, a party can
best manage its own potential costs of the dispute by acting quickly to prepare for litigation or
other dispute resolution processes.
A party should, for example:
• Collect relevant technical and legal documents, including all correspondence
with the other party.
• Interview project personnel.
• Prepare a chronology that describes the history of dealings between the parties.
• Fairly evaluate the strengths and weaknesses of potential claims.
• Assess potential litigation costs as part of evaluating settlement posture.
• Consider various mechanisms for resolving the dispute, including direct
negotiation, mediation, arbitration, and litigation.
In addition to evaluating the available evidence, a party to a potential dispute must
recognize that continued dealings with the other party will have legal significance. Because the
record of dealings between the parties may be murky, the manner in which the parties deal with
each other may have great significance. As a consequence, a party to a potential dispute should
identify the legal and factual basis for its position and should refrain from conduct that could be
construed as inconsistent with that position.
To mitigate damages, for example, once a decision has been made to terminate an
agreement, the termination should be done quickly to avoid the accumulation of additional
damages or business injury. The party purchasing the services should consider appointing
someone to manage all continued communication with the opposing party to avoid sending

Page 18
conflicting messages. The person in charge of such communications should work closely with
legal counsel to promote a consistent and effective legal posture for the dispute.
Finally, a party to a business dispute should coordinate its business and legal
strategies. Given the uncertainty inherent in legal proceedings involving complex matters, a
party should not rely solely on legal proceedings to resolve its strategic business concerns.

Page 19

Bibliography and Cited Works

Arkes, H., & Blumer, C. (1985). The Psychology of Sunk Cost. Organizational
Behavior and Human Decision Process, 35, 124–140.
Arkes, H., & Hutzel, L. (2000). The Role of Probability of Success Estimates in
the Sunk Cost Effect. Journal of Behavioural Decision Making, 295–306.
Armor, D. A., & Taylor, S. E. (2002). When Predictions Fail: The Dilemma of
Unrealistic Optimism. In T. Gilovich, D. W. Griffin, & D. Kahneman, Heuristics and Biases:
The Psychology of Intuitive Judgment (p. 334). Cambridge University Press.
Babcock, L., & Loewenstein, G. Explaining Bargaining Impasse: The Role of
Self-Serving Biases. Journal of Economic Perspectives, 11, 109–126.
Hastorf, A. T., & Cantril, H. (1954). They Saw a Game: A Case Study. Journal of
Abnormal and Social Psychology, 49 (1), 129–134.
Jones, E. E., & Harris, V. A. (1967). The Attribution of Attitudes. Journal of
Experimental Social Psychology, 3, 1–24.
Kahneman, D., & Tversky, A. (1982). Subjective Probability: A Judgment of
Representativeness. In D. Kahneman, P. Slovic, & A. Tversky, Judgment Bias Under
Uncertainty: Heuristics and Biases. New York: Cambridge University Press.
Knox, R., & Inkster, J. A. (1969). Postdecision Dissonance at Post Tim. Journal
of Personality and Social Psychology, 8 (4), 319–323.
Loftus, E. F., & Wagenaar, W. A. (1988). Lawyers’ Predictions of Success.
Jurimetrics, 28, 437, 450.
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Lord, C., Ross, L., & Lepper, M. R. (1979). Biased Assimilation and Attitude
Polarization: The Effects of Prior Theories on Subsequently Considered Evidence. Journal of
Personality & Social Psychology, 37 (11), 2098–2109.
Plous, S. (1991). Biases in the Assimilation of Technological Breakdowns: Do
Accidents Make Us Safer? Journal of Applied Social Psychology, 21 (13), 1058–1082.
Tversky, A., & Kahneman, D. (1974). Judgments Under Uncertainty: Heuristics
and Biases. Science, 185 (4157), 1124–1131.
Wason, P. C. (1960). On the Failure to Eliminate Hypotheses in a Conceptual

After seeing the wastefulness of litigation for many years, I encourage my clients to plan for dispute and and reduce their costs by negotiating effective agreements, mediation and arbitration. In addition to my law practice, I am an experienced mediator  and arbitrator and teach at Heinz College, Carnegie Mellon University (health law) and the George Washington University Law School (negotiations).  Please feel free to contact me, ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it or  412-246-8777), if you would like to talk about ways to negotiate effective deals and to save money by reducing the cost of wasteful business disputes.

My law practice focuses on  information technology (“IT”), intellectual property licensing, health law, e-commerce, antitrust, competition law, and commercial litigation.  I am a partner in the Pittsburgh law firm, DeForest Koscelnik Yokitis Kaplan & Berardinelli, and was previously a partner at Reed Smith LLP.  I have also worked at the U.S. International Trade Commission and law firms in Washington D.C. and Los Angeles, and I'm member of the bars of Pennsylvania, Ohio, West Virginia, District of Columbia, and California. I began my career in Los Angeles, after graduating from the University of Chicago Law School (J.D 1983) and Yale University (B.A. 1980), where I majored in economics and earned highest honors.  Economic analysis of markets, business incentives, and damages has been a substantial part of my work, as has development and review of IT projects and business relationships.

During my more than 25 years of practice, I have represented clients in cases involving antitrust law, securities law, intellectual property, commercial law and other business matters.  For example, I authored and filed Comments on behalf of Novell, Inc. in connection with the U.S. Department of Justices antitrust claims against Microsoft, Inc. I have also negotiated hundreds of licensing, outsourcing, and technology agreements for clients in healthcare, financial services, higher education, and information technology.  In 2002, I authored an Amicus Brief on behalf of Carnegie Mellon University and 37 other Private Colleges and Universities in a case before the U.S. Supreme Court, Grutter v. Bollinger and Gratz and Hamacher v. Bollinger involving race-consideration  in admission.

In addition to my book on dispute resolution, I have written and spoken about legal topics including antitrust law, health law, privacy and information technology.  My articles have appeared in the the National Law Journal, the Pittsburgh Post Gazette, publications of the American Bar Association, the American Health Lawyers Association, and the Pennsylvania Bar Association, among others. 

I live in the Squirrel Hill area of Pittsburgh with his wife and two sons, and enjoy golf, playing piano, and collecting fountain pens.  In 2008, I recorded a short CD of music by Bach, Chopin and Schubert for  friends and family.  (I've posted the CD below).

Dispute Planning

As in medicine, prevention of disputes is generally far more cost effective than efforts to resolve issues after they arise. Even when disputes cannot be prevented, effective management can prevent small disputes from growing into large ones. We are available to consult with you about projects or programs that may lead to foreseeable disputes.

The key to dispute management is simply to recognize, plan for, and respond to common areas of conflict in commercial agreements.  Although the nature of predictable disputes will vary across industries, many industries exhibit a pattern of predictable conflicts that can be managed and contained.

For example, in both information technology (“IT”) and construction , disputes over the scope of work that the vendor or contractor must complete without additional compensation are common-place, as are disputes over cost increases arising from project delays.  Most IT and construction agreements require the customer to submit written requests to modify the project.  The vendor must then, within a specified period, identify any likely cost and timing effects of the request. But many such contracts fail to establish a protocol for addressing disagreements as to whether a customer’s instructions are an increase in the scope of the project (as the vendor may contend) or simply instructions related to implementation of the project’s scope.  IT and construction contracts also frequently fail to set rules for the parties in the event of delays (and the parties’ inevitable conflicting arguments as to which party was responsible).

Contract provisions that attempt to specify procedures for changing project scope or addressing other likely areas of conflict are more important for establishing expectations and for dispute management than for their legal significance.  Obviously, even in the absence of a contract term describing procedures for “change,” the parties could modify contract terms by amendment.  The value of a protocol should not, however, be understated. One of the principal reasons IT projects fail is the inability of project personnel to document, and agree upon, changes in project responsibilities or scope.  Absent consistent and complete documentation—including terms and conditions of project modification—it can be difficult, or impossible, to evaluate the project’s success or failure (at least for the purpose of assigning responsibility).

Investigatory Arbitration and Mediation

Many business disputes can, and should be resolved, through a remarkably straight-forward and cost-effective procedure that would likely cost 70 percent less than business litigation while providing higher quality decisions. Specifically, Gary Kaplan's Executive Guide explains that many business disputes should be investigated and decided by a single Arbitrator. Instead of each party retaining an attorney to investigate the facts and law and then adversarily present a version of those interpretation of fact and law to a passive arbitratror, judge and/or jury, the parties would jointly retain an investigatory Arbitrator to conduct his or her own investigation.  In the Executive Guide, Gary Kaplan refers to this approach as investigatory mediation and arbitration or IMA.

Because IMA departs from the adversarial advocacy that underlies traditional common law means of resolving disputes, it will raise some eyebrows and doubts.  The substantial benefits and cost savings afforded by IMA, however, could provide compelling benefits to modern businesses seeking to resolve good faith disputes in a cost effective, confidential, and reasoned manner.

IMA would invariably cut dispute resolution cost dramatically by eliminating wasteful expenditures on, for example, redundant factual investigation and research, discovery disputes, trials and posturing.  In the place of duplicative procedures and posturing that do little to promote quality decisionmaking, in IMA, an  Investigatory Neutral would both investigate the facts and decide the dispute based upon applicable law. Throughout the process the Investigatory Neutral would interact with the parties to advise them of progress and preliminary conclusions. The purpose of such interactions would be to enable the parties to understanding and consider their respective risks of moving forward and thereby to encourage settlement and to encourage business or other non-traditional means of resolving the dispute.

IMA would not only reduce cost of dispute costs to a fraction of current costs, but would improve the quality of final resolution and decisions, because (i) the Investigatory Neutral would be selected based upon his or her suitability (in terms of expertise and experience) for efficient understanding and resolution of the dispute; (ii) the Investigatory Neutral would have the time, resources, and incentive to obtain a thorough understanding of the relevant facts and law; (iii) The factual record would be developed for the purpose of resolving the dispute rather than to paint a party in a particular light or posture; and (iv) the parties could interact with decisionmaker rather than simply put on a show for him or hear and then await the reviews of the parties’ performance (in the form of a verdict).

A diagram of the Executive Guide's IMA process follows:

Arbitration

Arbitration refers to the hearing and adjudication of a dispute by an impartial third party or parties (referred to as neutrals or “arbitrators”) selected and authorized by the parties to resolve their dispute. An arbitrator’s authority to decide a dispute depends entirely on the agreement of the parties. Thus, in selecting arbitration as a means for resolving disputes, the parties not only select the arbitrator (or agree upon a method for choosing an arbitrator), but also determine the scope of the disputes the arbitrator will be authorized to decide and the rules or procedures to be followed by the arbitrator in deciding a matter.

As a practical matter, the parties seldom spell out the rules to be followed by the arbitrator themselves, but instead rely upon rules developed over the years by either dispute resolution organizations, such as the American Arbitration Association, the Center for Dispute Resolution, the International Chamber of Commerce, etc., or model rules for such disputes, such as UNCITRAL. Further, businesses often decide upon an organization to administer the arbitration (i.e., to assist with the selection and management of the arbitrator and dispute process), rather than to submit a matter for ad hoc arbitration by an individual arbitrator operating independently.

The basic elements of arbitration are: (1) a third-party decision-maker chosen by the parties (2) a mechanism to ensure neutrality in the decision (3) an opportunity for the parties to be heard. and (4) a binding decision. In most arbitration cases, an agreement to arbitrate is included in a clause in the contract governing the parties. Generally, mandatory arbitration clauses are held to be enforceable.

Historically, arbitration has been considered to be faster and less expensive than litigation. Further, by permitting the parties to select the arbitrator, arbitration can provide some assurance that the decision-maker will have knowledge and/or experience related to the subject matter of the dispute and avoid the risk of an unfavorable or unsuitable judicial assignment and/or jury.