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The cost of arbitration

Friday, October, 25, 2013


The newsletter of ISBA’s Section on Alternative Dispute Resolution

October 2013, vol. 20, no. 1

The cost of arbitration


Hon. Michael S. Jordan

Tenured teacher discharge grievances in Illinois are administered by the Illinois State Board of Education (ISBE) under the Illinois School Code that provides a panel of qualified hearing officers, (arbitrators), who are screened and sometimes trained but then selected by the parties, district by school district throughout the state with the respective unions or with private counsel. A court reporter is required and the transcripts, exhibits, and award are submitted to the ISBE as well as to the parties.

For cases brought before July 1, 2012, the ISBE paid the hearing officers for their time at sessions a daily fee or honorarium and an hourly fee for study. The amounts, ($37.50 per hour for study time), were well below the typical hearing officer’s normal hourly rate as an arbitrator but the total amount budgeted and paid by the state each year for all such cases was costly, including the daily fee for actual arbitration sessions. As a result of budget cuts, due in great measure to the State of Illinois’ near insolvency, the law administering these hearings was changed so that the fees and costs would no longer be born by the State. The parties would be equally responsible for the fees and costs of the arbitrator and the transcripts. Arbitrators and court reporters could charge their published rates as the market allowed. In most instances arbitrators are now charging the parties at rates many times greater than the State had been paying.

Neither the now unemployed discharged teacher nor the financially challenged school district facing tax caps on revenues, lower state subsidies, and taxpayers upset about costs are in a position to afford these new expenses. A large school district, like Chicago, could and does pre-select a limited number of arbitrators, (about 9), who agree to a rate established by the school district, but other districts are not in such a bargaining position not being able to assure an arbitrator of other work in exchange for a reduced rate. With the State Board of Education, pursuant to state law, requiring many elements of proof to establish due process and a basis to dismiss a tenured teacher, most discharge cases take several days to arbitrate.

After several days of hearings, parties being invoiced find a sense of financial realism and attempt settlement where possible. Sometimes a justly discharged teacher may be put back to work or an unjustly discharged teacher may remain discharged but with the costs, fees and other benefits provided by the school district. The result, unlike past experience, is that fewer cases will be going to hearing. In the long run, hearing officers with fewer cases will receive less revenue even with higher rates. A fully extended hearing to air all the issues will not be as common as it should be for all. Counsel may enter into stipulations to streamline cases that must be tried depriving the hearing officer of the full flavor of the case and its issues.

Had the decision to shift the fee payments from the State to the parties been based on social policy only, one could say this act was anti-labor or an effort to downsize government, but since it is more likely that the primary motive was fiscal - merely a means for cost savings for the State during hard financial times, we can only consider that someday the process might go back to the State of Illinois paying and paying at a more reasonable rate than it did before this change; but a sense of reality suggests that change in that regard is unlikely.

The excessive cost to fully try tenured teacher discharge cases is typical of many areas where arbitration is utilized. As more and more formality is exercised in the interests of due process, costs increase. At least, with tenured teacher discharge cases there is only one arbitrator. In many other venues, the rules require three arbitrators, where the costs may triple. Since there is no one entity setting the rules for every type of case being arbitrated, no simple solution is available. In fact, many arbitrators are hired on an ad hoc basis as disputes arise. In other circumstances, arbitrators are pre-selected for panels for disputes between parties as they arise. Parties may negotiate the rates down in return for repetitive business for the arbitrator with the same parties—typically an employer and a union. Where private counsel or advocates are used, such an arrangement is somewhat problematic. Parties then look to the published rate for the arbitrator.

Any experienced advocate or arbitrator knows that increasing costs are difficult to sell to the parties and the public so a challenge exists to think out of the box to manage the costs. No solutions are offered here, but solutions are invited for the many types of disputes ending up before a single arbitrator or a panel of arbitrators!

Disputes resolved by arbitration range from employment and labor disputes, uninsured and underinsured insurance disputes, commercial disputes, and securities disputes to name only a few. Some, like the discharge of tenured teachers are administered by state agencies, some like the discipline or discharge of railroad employees go through federal agencies, and others may be administered through private or public panels such as American Arbitration Association, FINRA, Federal Mediation and Conciliation Service, and the National Mediation Board. It might appear to be impossible to control costs administered or negotiated in so many ways, but the discussion should continue.

Before closing this subject here, it is noted that the professional arbitrator is entitled to just compensation for the time spent in assuring a fair hearing and a just result considering all the evidence and the body of law pertaining to the issues. The arbitrator needs all of the skills and abilities one would seek to have in a good judge together with an adherence to a high set of moral and ethical values. Also, one should not merely suggest that mediation—rather than arbitration—is the key to reduce costs since not every case is settled in mediation and not all public sector cases may be mediated for various public policy reasons. In spite of these significant considerations, we must address the rising costs of arbitration. ¦