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The year was 1992, and James W. Durham, general counsel of the Philadelphia Electric Co., was still grappling with a case he’d inherited three years earlier. It had all the elements of a litigation nightmare. A nuclear power plant had been shut down by federal regulators after his company’s control room operators had been found asleep on the job. The plaintiffs were three utilities with which his company had a continuing partnership, the claims totaled $300 million, attorneys’ fees had been mounting for nearly four years and the last thing he needed was an expensive trial and more bad publicity. Durham had been imploring the companies to try mediation and, 10 weeks before their trial date, they finally did. It took all of two days. The settlement totaled $131 million — with no trial, no appeals and no admission of liability. Durham still recalls the moment fondly: “When it was all said and done, the mediation cost less than the postage bill had been for the litigation.” To many people back then, alternative dispute resolution (ADR) was still something of a novelty. That was why Durham had trouble convincing the companies to give it a try. But by 1997, when David B. Lipsky and Ronald L. Seeber, two Cornell University professors, surveyed the Fortune 1000, 87 percent of the companies responding had used mediation at least once during the previous three years and 80 percent had used arbitration. Today, most of the organizations that collect ADR data report substantial increases in recent years. For example, of the cases filed between 1996 and 2000 with the American Arbitration Association, mediations and arbitrations combined almost tripled. In the wake of the U.S. Supreme Court’s ruling in March 2001 that mandatory arbitration clauses in employment contracts are legal ( Circuit City Stores v. Adams, No. 99-1379), many in the field, including the Cornell professors, expect the numbers to explode. From their own widely cited research, Lipsky and Seeber conclude that roughly 10 percent of the Fortune 1000 dislike ADR and rarely use it. Another 80 percent are in what Lipsky calls an experimental mode: “There’s a lot of benchmarking going on — companies looking at each other and trying to figure out what to do.” But he and Seeber were most intrigued by the remaining 10 percent that had institutionalized ADR by implementing conflict-management systems. This surprised the professors, who decided to zoom in from the wide-angle approach of their first study for close-ups. The pair spent 18 months examining 19 companies from the Fortune 1000. In their study, which will be published later this year in a New York University labor law book, they will explain why companies made the leap. CASE STUDY One company they studied was Durham’s. Philadelphia Electric is now part of Chicago-based Exelon Corp., and Durham retired in March 2001, but the system remains. The legal department was different when he arrived in 1988. Nearly all legal work was done by outside firms that had little incentive to contain costs, Durham recalls. The in-house department consisted of six or seven lawyers who mostly assisted the hired hands. His mandate was to change that. As president of the Oregon State Bar, Durham had created its first dispute resolution committee, and he was determined to introduce ADR to his new department. Even as he was hiring, he was grooming his staff, emphasizing from the first interviews his vision of lawyers as “problem solvers.” Within three years he had 25 lawyers handling their own cases. With 200 pending at any given time, Durham’s goal was to “recalibrate the litigators to think about early evaluation” and, when appropriate, prompt settlement. At Philadelphia Electric, a utility company, most cases were predictable: slip-and-falls, crashes into utility poles. As long as the claims were legitimate, he favored settling immediately: “It’s important to be able to say, ‘We screwed up.’ Everybody makes mistakes. The important thing is how you resolve them after they’re done.” Yet, Durham discovered, the vast majority of company disputes weren’t even in his domain. Appliances damaged by power surges, for instance, passed through the claims department, which processed thousands each year. So Durham successfully lobbied to have them folded under his umbrella. To maintain public trust, Durham felt it was especially important to quickly resolve claims filed by customers. The best way to do that, he reasoned, was to allow adjusters to settle on the spot, so he literally put checkbooks in their hands. The result: Adjusters processed more claims more quickly and the average settlement cost dropped. “So everybody won,” he says. HANDLING EMPLOYMENT DISPUTES When it was appropriate, Durham didn’t shy away from litigating. Each year, the company was hit with employee discrimination claims, most of which Durham deemed meritless. He “basically won them all” he says. Yet, he also recognized that these cases revealed a problem. Amicably resolving disputes with employees was as important as doing so with customers, and that wasn’t likely to happen in court. Durham believes this was a driving force behind the company’s most ambitious ADR initiative of all: the development of a system to resolve employment disputes without having to go to court. Another factor was the need to change the relationship between workers and managers as the company braced for competition after deregulation. This was the human resources department’s concern when it created a system in 1993. Here’s how it works: If a dispute involves a legally protected right, like the right not to be discriminated against, employees can opt for internal or external mediation or voluntary, binding arbitration, according to Ellen Wolf, director of employee dispute resolution. The company will even reimburse employees for up to $2,500 in legal fees. When protected legal issues aren’t involved, such as discipline for unauthorized absences, employees dissatisfied with a supervisor’s decision may request a binding hearing before a peer review panel. Panels comprise three peers, a manager and a supervisor, none involved in the conflict and all volunteers with special training. Panels aren’t authorized to change policies, procedures, performance ratings or salaries, Wolf says. They judge whether supervisors’ decisions were consistent with existing policies. Sometimes the stakes couldn’t be higher: They can reinstate a fired worker or restore back pay. But the system had problems. TOO ADVERSARIAL When Wolf was hired, in 1995, she found a system that was used but a process that was adversarial. Panelists themselves complained that many conflicts could have been resolved earlier by a simple conversation, Wolf recalls. She assembled a team of a dozen employees from different levels and divisions, put together focus groups, and the result was a new option, part of a program called People*Solve. Before hearings, employees embroiled in disputes may now meet with trained peer coaches who prepare workers for conversations with their supervisors. In 2000, 92 percent of the cases brought to the coaches were resolved, which meant 40 percent fewer panels than in 1999, according to Wolf. Employment lawsuits and cases brought by the U.S. Equal Employment Opportunity Commission were reduced 44 percent over the same period. ANOTHER BOOSTER Another company the Cornell professors studied was FMC Corp., a leading producer of chemicals and machinery. Like Durham, General Counsel Stephen F. Gates was already an ADR booster when he arrived. He had seen it succeed at Amoco, where he had worked for 23 years, the last five as GC. Early resolution of disputes had saved more than just time and money. Distraction was a hidden cost of litigation, which often took on a life of its own. While he didn’t find any real proponents at FMC, he found a sophisticated, 20-lawyer legal department that “was very receptive to ADR. “The real knack in ADR is finding or inventing the right format for the particular dispute,” Gates says. If two parties disagree about the correct reading of a contract, the best solution may be hiring a decision-maker. Where the issues are purely financial and the range of differences narrow, he’s found negotiation will often suffice. For example, lawsuits on behalf of people injured or killed operating FMC construction cranes are most often resolved through settlement discussions. On the other hand, Gates has enjoyed some of his greatest success with mediation — sometimes under unlikely circumstances. When he suggested mediating a case in which FMC was accused of selling defective Bradley fighting vehicles to the U.S. Army, the case had been litigated for 14 years. FMC had already lost in court. A judge had reduced the jury’s $380 million verdict to $87 million, boosted to $110 million with interest and legal fees. Still, both sides were appealing, so Gates suggested mediation. In two days, they settled for $80 million. Gates hasn’t yet formalized a system at FMC, as he did at Amoco, because he’s only been on the job a year. “It’s on the agenda,” he says. In the meantime, the tools and the mind-set are there, and he believes they are already practicing it. What do the companies that have implemented conflict management systems have in common? That was one question the Cornell professors set out to answer. Many companies had a crisis, usually in the form of a large lawsuit, Lipsky says. Some had smaller suits that rolled in regularly. Virtually all the companies had a James Durham or a Stephen Gates. AN ARDENT ADR ADVOCATE “There’s always someone who is an ardent advocate for ADR,” Lipsky says. When the champion is a lower-level employee, he continues, the company may take an ad hoc approach. When a company adopts an integrated system, the champion is usually an executive. Conversely, the pair also found common features among the skeptics. “A lot of CEOs are saying, ‘What’s the real business case?’ ” notes Seeber. Without an ADR champion or a litigation crisis, the issue may be off a company’s radar screen, or it may have emerged all too visibly in a bad experience. The professors speak of the need for institutionalization to ensure a system’s survival. If a company’s system is built by a champion on whom it depends, the system may collapse after the champion leaves. That is the test that determines whether the corporate culture has truly changed. FMC will face the test this fall, when the company splits in two and Gates becomes a consultant to both but general counsel to neither. He has confidence that both companies will retain the same approach, he says. Exelon is already in the post-Durham era. Durham believes ADR concepts are accepted by the people and built into the contracts. Besides, he says, he doesn’t have time to worry. He’s too busy pursuing the new role he’s fashioned since he “retired.” “I’m on the other side of the table now,” he declares. “I’m a mediator.”

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