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A Primer on Advanced Dispute Resolution Techniques — Baseball Arbitration & Conditional Offers

Jeff Abrams, Abrams Mediation & Negotiation, Inc.
Dallas, Texas

www.abramsmediation.com - jeff@abramsmediation.com

In this article, I review a common mediator tool -- the Conditional Offer -- and recommend its use by negotiators.  First, we meet a more exotic ADR procedure -- Baseball Arbitration.  To get started, “Buy me some peanuts and Cracker Jack.”

Baseball Arbitration

The parties were entrenched in their positions.  It was a significant case, with very high damage claims, a sophisticated investor, and diametrically opposed versions of critical facts.  Credibility was on the line.  A full-day mediation and hours of mediator follow-up brought the parties closer to settlement, but a significant gap still remained.  A mediator’s proposal was considered, but the distance seemed too far to bridge.  We turned to the major leagues of advanced mediation techniques – Baseball Arbitration, a moniker adopted from its use in Major League Baseball salary disputes.

With involvement of the neutral, the parties began to negotiate the terms of a new ADR procedure, one in which the parties agreed to be bound by the result. This is how it unfolded.

Scope of the Engagement

The parties took an active role in the design of a streamlined binding arbitration process.  We asked ourselves:

The parties agreed that a single day would be reserved for the arbitration.  Each side would get two hours to present the case-in-chief, followed by one hour for rebuttal. Testimony could be proffered or live, with the arbitrator ascribing whatever weight he deemed appropriate.   Exhibits would be specified in advance, in accordance with an agreed-upon schedule. 

Brackets as the Ticket Price of Admission

To reduce risk for both sides (upside and downside), each agreed to negotiated high/low brackets for participating in the process.  For example, a final award would be no less than $250K and no greater than $1.5MM.  Each side knew that at the end of the process, they would submit a sealed proposed award that had to be within that bracket or the arbitrator would automatically reject the award (the other side winning by default).

Playing Baseball

The day proceeded as planned, with some deviation as permitted by the arbitrator. The arbitrator was free to ask questions at any time, of any witness, expert, or counsel.  At the close of evidence and within one hour after closing arguments, each party submitted a confidential proposed award in a sealed envelope.  By agreement, the proposed awards could be no greater and no less than the brackets established by the parties (in the example, not more than $1.5MM and not less than $250K).  The baseball arbitrator had to select one of the two proposed awards and could not independently substitute his judgment for the amount.  In this case, I did not open the sealed envelopes until deciding what my award would be if not constrained by the process.  Having written down “my number,” I opened the envelopes and selected the proposed award that was closer to that number.

A sample form of Agreement for Baseball Arbitration is attached. . Much more detail is contained in the agreement.

When do we use Baseball Arbitration?

Baseball Arbitration is appropriate when:

Both sides must make highly focused and effective presentations to the Baseball Arbitrator.  The “pitch” is the proposed award.  There is tremendous incentive to make a reasonable proposed award so it will be compelling to the arbitrator.  The arbitrator can only choose between the two awards offered by the parties.  An unrealistic proposed award (excessively high or low, given the testimony) stands the chance of being rejected by the arbitrator, leaving him/her no choice but to select the other award.  

Variations on the Theme

Night Baseball:  Night Baseball, played in the dark, is where the parties agree not to disclose the high/low brackets to the arbitrator(s) and, upon final award, to substitute the high or low number, whichever is closer to the panel’s decision.  For example, the parties do not tell the arbitrator(s) that the high/low is 150/50.  If the arbitrator returns a 25 award, the number is adjusted to 50 because 25 is closer to 50 than to 150.  If the arbitrator returns a 250 award, the number is adjusted to 150 because it is the closer number.  

Undisclosed High/Low: In this situation the arbitrator makes a final determination, but by contract the parties agree that if the award is less than the undisclosed floor, the floor is the adjusted amount to be paid.  Conversely, if the award is greater than the undisclosed ceiling, the ceiling is the maximum amount to be paid.  Same scenario as in Night Baseball (see above) with a definite undisclosed floor and ceiling, except that if the arbitrator picks a number within range (say, 75), that is the final number.

Fully Disclosed High/Low: The arbitrator is told about the High (the ceiling) and the Low (the floor).  The arbitrator must select a number within that range.  The process offers the same upside and downside protection, but affords more discretion to the arbitrator.  He/she can select any number within the range, not just one of the two proposed awards as in Baseball Arbitration. 

MEDALOA:  No, not mediation in Hawaii, but Mediation and Last Offer Arbitration (“MEDALOA”) which begins with a mediation and ends with last offer (binding) arbitration if not settled.  The arbitrator selects one of the last proposals (last bid/last ask) as the final award. 

Conditional Offers

A conditional offer is an invitation to narrow or condense the negotiating range.  It extends an offer that is expressly conditioned on the other side moving to particular point. For example, the parties are at 100K and 10K.  X is willing to reduce the demand from 100K to 80K if the other side (Y) moves from 10K to 40K.  If Y moves to 40K, then X’s number is 80K.  If Y does not satisfy the condition, “80K” is not “on the table.”  

A conditional move accelerates the pace of negotiations, bridging the gap to narrow the settlement range.  It accomplishes rapid movement in a single caucus.  It suggests a settlement range to the other side.  While not always the end number, it is important to observe the midpoint (in this case, 60K is midway between 40K and 80K).  Sometimes the negotiator specifically disclaims that he/she is “targeting the midpoint.”  

Here are some possible responses:

Some parties resist the conditional offer approach because they do not want to be told how to negotiate and where the next move should be.  An alternate (better) paradigm is that conditional offers send valuable information about possible highs, lows, and midpoints, The mediator can begin to sense where the case will ultimately settle by watching the various conditional offers/responses.  In fact, some negotiations proceed entirely with such conditional moves, where no unequivocal numbers are set forth until the mediator senses that the range has been narrowed sufficiently to set a final number proposal.

Conditional moves are an excellent way to send information, project ranges, test numbers, and really move the negotiations.  With the guidance of an experienced mediator, the conditional offer process can be a useful tool in your kit.

Jeff Abrams is a national securities mediator, arbitrator, and trainer in the field of mediation and conflict resolution.  He has been a lawyer since 1980, an active mediator since 1986, a mediation trainer since 1988, and an arbitrator since 1990 (serving as Chair on FINRA panels).  He was instrumental in writing the landmark 1987 Texas ADR legislation, and training the first mediators for the NASDR (now FINRA) mediation program, the first Dallas Bar mediation panel, and the first mediation program instituted by the United States Bankruptcy Court for the Southern District of New York. Jeff is a frequent and popular speaker on ADR. Jeff brings a rational perspective to securities mediation. With over 25 years of mediation experience, Jeff brings the unique skills necessary to resolve the most difficult case.  He travels nationwide for mediation work, with offices based in Texas and Washington.