My first semester of law school, our torts professor explained to the class that we were training for a career in which we would essentially become nothing more than very expensive transaction costs. I’m pretty sure her intention with this comment was to cut short a circuitous and unproductive discussion that had developed about the cheapest-cost-avoider and economic efficiency. I think she just wanted to move onto the next case. But the comment has stuck with me.
I was reminded of it again recently when I came across a Wall Street Journal article entitled: “At GE, Robo-Lawyers: Oil-and-Gas Unit Tests Online Resolution to Control Costs.” The article considers a software system called CyberSettle that allows parties to submit settlement bids into a double-blind program. If the bids come within a certain range in any of the rounds, the case settles for that amount. If the bids fail to match up in any round, the dispute gets bumped to online mediation. A facilitator uses the uploaded documents from each party to work out a compromise, without revealing the other party’s numbers. The settlement rate for CyberSettle clients is 65%.
CyberSettle is not a new service. The company’s patents date back to 1998 and some of its biggest clients have been using it in some capacity for many years. The service is used not only by General Electric, but also Wal-Mart and several other corporations and insurance companies. Until recently, New York City used it as well. Additionally, CyberSettle enjoys a strategic partnership with the American Arbitration Association, which allows customers to begin settlement talks using the CyberSettle platform and then, if that fails to resolve the dispute, the parties can seamlessly transition to traditional AAA services.
The appeal of an online dispute resolution (ODR) program such as CyberSettle is clear. It is an opportunity to limit the expensive transaction costs that come with using counsel to settle a dispute. Where the claim is small, attorney’s fees can otherwise easily out price the amount at issue.
Criticism of ODR is concentrated on the challenges of removing the human element from the settlement process. Some claimants will want the cathartic experience of airing grievances in addition to monetary compensation. Other claimants, especially larger and more sophisticated corporations, would rather engage their own counsel than use a website. Additionally, at least one big former client of CyberSettle found that the system was not cost-effective. This year New York City stopped using the software for small personal-injury and property-damage claims, with a purported projected savings of $600,000 annually. Comptroller John Liu found that the same work could be done in house with claims adjusters who negotiated by phone. (It should be noted, however, that these numbers appear to be politically charged and controversial, seeing as the previous Comptroller claimed that use of CyberSettle saved the city $33.4 million from 2004 through 2008.) Regardless, there is a warranted debate about the usefulness of the program.
While ODR may not be right for every kind of dispute, it does appear to fit a particular segment of legal fights very well. The way GE is currently using the service is for small claims with suppliers. GE Oil and Gas only uses Cybersettle for claims under €50,000, for what the company calls “micro-disputes,” and only in Italy. This GE unit now writes an ODR requirement into contracts with many of their Italian industrial suppliers.
ODR works well for this category of claims because these disputes are less likely to have the same emotional attachment as personal injury claims and often involve smaller companies with less sophisticated legal counsel. In these situations it serves both the bigger corporation and the smaller supplier well to use an automated system with less transaction costs, at least as a first attempt at settlement. Indeed, the International Centre for Dispute Resolution launched a program in September suggesting that ODR is a particularly good way of dealing with supplier and manufacturer disputes.
In an economic atmosphere that encourages companies to cut costs wherever possible, it makes eminent sense that executives would look to expensive legal fees as an area worth addressing. But how far will ODR expand? Should ODR be limited to certain kinds of disputes? What do you think?