State certification would mostly impact independent neutrals

Should there be more regulation of alternate dispute resolution? Would new red tape drive more independent neutrals into larger ADR firms?

These are the questions being asked as lawmakers debate approval of a government certification program.

“I’ve never been a supporter of any of the various governmental certification efforts I’ve seen over the past 30 years,” Berkeley based arbitrator and mediator Ron Kelly wrote in an email Wednesday. “They’ve always appeared to present additional barriers to entry into the field and invitations to consolidate market share in the larger providers.”

Kelly was responding to a bill Sen. Tom Umberg, D-Santa Ana, introduced in March. SB 940 would create a voluntary certification program for neutrals administered by the California State Bar, with specific requirements for qualification. Umberg said in an interview that the bill was inspired by accusations that disgraced attorney Tom Girardi co-opted neutrals in his effort to hide that he was stealing from clients. (Girardi has been disbarred and charged criminally but has not been convicted.)

SB 940 is scheduled to be heard on April 30 in the Senate Judiciary Committee, which Umberg chairs.

The alternative dispute resolution industry has come a long way in recent decades. Thirty years ago, it wasn’t unusual for a retired judge to start their own business, often without dedicated office space, seeking clients through advertising in legal papers. That kind of neutral still exists. But the space is increasingly dominated by large, professionally run companies with staff who manage the cases.

“There actually are quite a few new and much smaller providers trying to get a piece of the ADR pie,” Cliff Palefsky, a plaintiffs’ attorney with McGuinn Hillsman & Palefsky in San Francisco and an outspoken critic of forced arbitration contracts, wrote in an email. “But [American Arbitration Association] and JAMS really dominate the national market, which is where most companies go, especially if they have employees in different states.”

There are also several large California players including ADR Services, Alternative Resolution Centers, Judicate West and Signature Resolution. But no one knows exactly how many neutrals are active in the state. Umberg said he made the certification under SB 940 voluntary because there is no requirement that a neutral be a member of the bar or have a law degree.

“I know big firms get the press, but I would not want to jump to conclusions without good data,” Kelly said. “My understanding of the field is that there are a large number of ADR practitioners who handle their own cases without involving a neutral administering organization.”

“Arbitration has been common in the U.S. for a century now. I know that when the American Arbitration Association tried a while back to estimate the number of arbitrators who administered their own cases ad hoc their best estimate was 80%,” he added.

The large firms have been on a hiring spree in the years since the COVID-19 pandemic began, frequently affiliating with prominent retired judges and attorneys.

Rosemarie Drohan, executive vice president of business development for Judicate West, noted that members of her panels are all independent contractors — a standard arrangement in the industry. But they are also exclusive.

“They typically work with one company,” Drohan said in an email. “It used to be 20-30 years ago that they did work for multiple providers and did work on their own, but that has become challenging with stricter disclosure requirements, so it makes sense to work with one provider or be completely independent.”

The profession also has seen some splintering between arbitration and mediation.

“There has been a slight shift to neutrals conducting mediations only and not serving as an arbitrator,” Drohan said. “For decades most of our neutrals conducted both arbitrations and mediations, and many still do. In the last 10 years, mediation has become more popular, and more types of disputes have evolved to using mediation so generally there’s a lot more mediation opportunities.”

Arbitration requires the infrastructure of a large company. “There are no neutrals that handle arbitrations on their own,” said Dario Higuchi, CEO of Signature Resolution. “They do it through an organization.”

He added, “The database management is a big deal. Ongoing disclosures are already a big task, it’s hard to do it on your own. If you drop the ball, your award can be vacated.”