Web-based Dispute Resolution Systems Gain Traction as Court Delays and Low Value Disputes Surge

15
May
2012

Christy Burke

Courtroom showdowns make for great movie scenes, but To Kill a Mockingbird’s Atticus Finch would be shocked to hear that the courts are only resolving a fraction of today’s legal disputes.  A growing number of cases are being resolved by online tools, and sometimes lawyers and judges are not even involved.  Impartial web-based systems apply computation, algorithms and cryptographic technology to bring about resolution quickly and inexpensively.

A growing stable of private sector companies are beginning to compete with the judicial system for “customers” and are also changing the face of traditional Alternate Dispute Resolution or ADR, which has typically included mediation, arbitration and other alternatives to the courts.

Not only are approaches to justice and negotiation changing, but some of these new systems like those provided by Fair Outcomes, are actually prompting lawyers and their customers to be more honest about the value of a case and their realistic objectives from the outset, providing disincentives to lie, bully and posture.  Utopian though it may sound, this is actually becoming a reality.  Atticus would be happy to hear that, at least!

A potential paradigm shift is in the making here, but what is motivating parties to look outside traditional courts, mediation and arbitration and flock to the web for resolving their disputes?  In short, overburdened courts, lean economic times, cost, and convenience all figure into the mix.

Pared Down Courts Cannot Keep Up
Many courts in the US and abroad are sagging under the weight of overflowing caseloads while budget cuts slash their resources – a double negative.   Take California for example.

According to a March 20th article in Law & Industry Daily, California Chief Justice Tani G. Contil-Sakauye noted in her State of the Judiciary address to lawmakers that the California judicial branch has had one-quarter of its budget cut since 2008.  The approximate $653 million in cuts has closed dozens of courtrooms and resulted in layoffs and reduced business hours.  To complicate matters further, the volume of California Superior Court filings topped 10 million last year for the second year in a row.  Heavy caseloads and fewer resources will certainly cause what Contil-Sakauye refers to as “worrisome and potentially dangerous delays in the resolution of cases” in the California courts.

If courts cannot handle their caseloads in a timely fashion, more cases are likely to settle or turn to alternate means like face-to-face mediation and arbitration, unless the parties patiently wait their turn for their day in court.  The other option is for parties to look to web-based systems for relief, and this is happening for sure, and not only in California.  This positions technology to become a competitor to the courts, or at least a regular complement to fill in the holes the judicial system cannot cover.

Canadian lawyer and consultant Jordan Furlong of Edge International recently spoke with Canada’s chief judges, warning them of the steady advance of technology-driven dispute resolution and the burgeoning private legal market, which effectively provides competition to the courts.  Furlong says, “There are so many ways to resolve disputes beyond going to the courts or face-to-face negotiation, mediation or arbitration, particularly the technology-powered options that can provide faster, cheaper and sometimes better results.”

Furlong notes that another reason for the rise of internet-based dispute resolution tools is a proliferation of low value cross-border cases, particularly over e-commerce oriented transactions, which are not appropriate or attractive for lawyers due to their low yield potential.   He explains, “These are disputes that will never see a lawyer’s desk – they’re too small for the court system, but they’re not considered small by the parties involved in the disputes.  Online dispute resolution technology taps into this latent market, providing recourse for parties that don’t want to pay lawyers’ fees to settle their cases.”

David Bilinsky of Thoughtful Legal Management, who closely follows Online Dispute Resolution (ODR) issues, explains that global organizations are highly interested in online solutions and how to leverage them.  In fact, the United Nations Commission on International Trade Law (UNCITRAL) has hosted a permanent working group on ODR since 2010 that is developing rules to support a global system for resolving cross-border consumer complaints. This working group, consisting of UN member states and members of civil society, is looking at ways to implement ODR mechanisms to handle transnational consumer disputes using ODR tools.  This system would seek to craft a new way to resolve international consumer disputes.

In Bilinsky’s opinion, “The future of ODR in both national and international law depends on the judicial systems’ acceptance of it.  If judicial systems ignore ODR, I think businesses and individuals will just start to informally use it anyway.  Justice systems should seek to incorporate ODR as a formal alternative method to resolve disputes.  Fortunately, there is a worldwide discussion going on now of how to do this the best way.”

ODR is not a new concept, though what is new is that it is becoming more frequently used by legal parties because of its ability to resolve small cases quickly, cheaply and easily.  Online juggernauts like eBay and PayPal have been resolving millions of online disputes each year for many years, operating completely independently of the legal or courts system using specific ODR technology.  It is only a matter of time before other businesses, governments and consumers figure out how ODR can help them.

Colin Rule of Modria is an online dispute resolution expert who built the systems that eBay and PayPal have used to resolve more than 60 million disputes over the years.   Modria, an acronym for Modular Online Dispute Resolution, has been built to serve as an online justice system.  90% of the cases are resolved using the technology alone, and 10% of the cases require involvement of a “human neutral,” says Rule.

According to Rule, “Right now the internet creates many more disputes than it solves.  People are pursuing cases – just not million dollar ones.  The field is opening up for ODR, with even international institutions embracing it.  In fact, the EU is building its own system to be completed by 2016.”

The million dollar question (literally) is whether lawyers and legal IT will still have a role with these disputes or whether the automation will exclude them.  Rule notes that lawyers and legal IT are both crucial to this process, because they are in the best position to understand the need for new solutions.  “We have spoken with law firms interested in using Modria for their matters, particularly commercial arbitration.  They want to employ a hybrid approach that combines face-to-face legal services with our technology.”

Another benefit is that online dispute resolution is generally much more affordable than hiring a lawyer or mediator.  Rule is working with internet-based intermediaries to provide services at a very low cost.  Subscribers can pay a monthly fee or can fund the dispute resolution out of filing fees, which makes the price very reasonable.

Low cost is great, but how about no cost?  Rule is partnering with the aforementioned Fair Outcomes that offers its Fair Buy-Sell online process completely free of charge.  Attorney James F. Ring, who is CEO of Fair Outcomes, bases his systems on game theory and strategic analysis.

Though Ring’s systems do resolve online disputes, he differentiates them from many other ODR systems.  He remarks, “Our systems are not grounded in conventional ADR methods.  Instead, they involve an entirely different approach based on work done by game theorists and strategic analysts.  Unlike ADR and ODR, Fair Outcomes’ systems have features that negate any incentive for either party to use the system to posture, and also allow the system to be initiated and used productively by one party without the other party’s cooperation or consent.”

Ring gives the example of “cake cutting” to prove his point.  Imagine that two children, John and Jane, are dividing a cake into two pieces.  If John cuts the cake then Jane chooses the piece she wants first.  When he cuts, John has every reason to divide the cake evenly based on what he values so that it won’t matter which piece Jane chooses.  Basically, in this scenario, John has an incentive to be fair and to be honest about what he values most from the beginning.  If he cuts the cake unevenly, Jane will surely choose the better piece.

Fair Buy-Sell is a simple web-based interface meant for joint owners of property (business partners, joint venturers, shareholders, married couples, etc.) who want to bring their joint ownership to an end for some reason.

Let’s say a divorcing couple is fighting over what will become of their jointly-owned house.  With Fair Buy-Sell, the wife logs into the website and enters in a dollar amount that she’s willing to buy or sell at, thereby committing to buying or selling at that number if the husband responds.  Then, without seeing the actual number the wife has entered, the husband logs in and enters his price, also demonstrating his commitment to make a deal.

The party that proposed the higher price becomes the buyer, but the Fair Buy-Sell system sets the sale price at the midpoint of two numbers, so the sale price is always at least equal to and, in most cases, more favorable to each party than what each had originally proposed.  The dispute is solved in a matter of minutes with no lawyers or screaming matches, a relatively painless process.   Like John cutting the cake, the initiating party is incented to make a reasonable proposal and, by using the system, the opposing party is deprived of incentive or excuse for failing to be equally reasonable and compliant.  The company offers several other systems that work in similar ways for other kinds of claims.

In addition to the game-theoretic and other solutions mentioned above, there are a wide variety of more traditional ODR tools on the market, including CyberSettle and The Mediation Room.  In October 2011, the Wall Street Journal’s Vanessa O’Connell wrote an article about General Electric’s oil and gas division testing CyberSettle in its Italian offices to reduce time and money spent on lawyers for simple disputes.  The system was only used to handle disagreements of about $65,000 value or less.

The City of New York also used CyberSettle to settle more than 4,000 personal injury claims.  New York City comptroller John C. Liu eventually discontinued use of the system, though, saying that in-house claims adjusters negotiating by phone could do the work less expensively.  Liu also pointed out that ODR systems such as CyberSettle have their place but also their limits.  Referring to the City of New York’s experienced with CyberSettle, he said, “If someone is checking for account balances, perhaps a computer or phone system could more quickly give that information, but for a more complicated, interactive function, such as claims settlement, or settlement of any kind of dispute, it shouldn’t be surprising that a computer is not up to the task.”

Automated systems are in many cases more cost-effective, time-efficient and sensible especially for smaller, cross-border cases that lawyers don’t want anyway.  And since these systems are becoming more intelligent and capable, legal and IT professionals would be well advised examine them and incorporate them as options for certain types of cases.

Online approaches to dispute resolution are clearly here to stay, and are increasingly seen as legitimate by the likes of the UN and EU, but they are not going to replace the need for lawyers or legal IT.  Perhaps they are like Atticus’ fabled neighbor, Boo Radley, seemingly a menacing threat but actually turning out to be a harmless - and somewhat helpful - resource after all.