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GUITY!

Being a lawyer at Motorola Inc. is tough these days. While attorneys at other companies might churn out lawsuits against customers or suppliers with the push of a button, Motorola's 100 in-house lawyers must seek all possible alternatives to landing in court: arbitration, mediation, even private judges who settle disputes for a fee. After all this, Motorola lawyers who still want to go to trial must fill out a form estimating legal costs, likely damages, and chances of victory. "The form is so onerous that they gladly work out an alternative settlement rather than screw around with that form," says General Counsel Richard H. Weise, the architect of Motorola's resolution program.

If that sounds like an unproductive use of an attorney's time, think again. Since starting the program in 1984, alternative dispute-resolution techniques have slashed Motorola's litigation costs by as much as 75%. "It's that dramatic an impact," Weise says.

`LOST OPPORTUNITY.' Motorola's obsession with finding new ways to settle disputes isn't typical. But it is rapidly becoming so. After years of mounting frustration, disdain for the U.S. legal system is now so intense that corporations are taking the law into their own hands. From General Mills to General Motors, companies are fighting their battles privately, through such innovative techniques as rent-a-judge services and minitrials. Pacific Gas & Electric Co. even pays for its opponents to sit down with a mediator. "What's worse than the money wasted on the court system is the lost opportunity to find solutions," says Howard V. Golub, PG&E's general counsel. "Our energies should not be spent on recreational litigation."

The legal revolt among corporations is only one facet in an unprecedented rethinking of the U.S. civil justice system. Every branch of government is pushing some package of legal reform. Congress is overseeing "advisory committees" in every federal court to try to speed up cases and cut costs. Judges are overhauling the federal rules of civil procedure. Even the White House is responding to the business backlash. Through the President's Council on Competitiveness, the Bush Administration is promoting an array of probusiness reforms, including such controversial measures as forcing losers to pay the victors' legal bills. The debate has inflamed the passions of everyone from defense lawyer Alan Dershowitz to legal scholars such as RAND researcher Deborah Hensler to lawyer and best-selling author Scott Turow.

Even the tort system, where injured parties sue for damages, stands a better chance of being reined in. Congress is again mulling a uniform product-liability law to replace the patchwork of state laws and make it tougher for plaintiffs to win damages. States are tightening up on punitive damages and pain-and-suffering awards. And they're finding faster and cheaper ways to resolve medical malpractice suits, such as by compensating injured patients regardless of whether the doctor is at fault. "There's a very strong popular revolt over excessive lawyering, excessive delays, and excessive costs," says Martin F. Connor, president of the American Tort Reform Assn. "When you add it all up, it's impressive."

OVERBALANCED SCALES? Yet many worry that a headlong rush for legal reform could do more harm than good. Some of the proposals threaten the cornerstones of the U.S. legal system: an abundance of individual rights and open access to courts. Critics fear that by making it tougher to sue, limiting access to evidence before trial, and even penalizing those who lose, reformers may be pushing the pendulum too far in the other direction. The critical question is how to make the legal system more efficient and less costly while safeguarding individual liberties. "A broad statement that going to court is evil is very destructive to our democratic process," says Pamela Gilbert, legislative director for Ralph Nader's Congress Watch. "We should take pride in our legal system."

But even Gilbert agrees that parts of the system are breaking down. America's legal bills are going through the courthouse roof. Last year, law firms grossed more than $100 billion, estimates a Commerce Dept. report. That doesn't include what companies spend on their own legal departments--and what they must pay to resolve suits. Since 1971, the number of attorneys has almost tripled, to 780,000--far more per capita than in Britain or Japan (table). "The prime beneficiaries of the legal system are lawyers, not victims and not society as a whole," says Ralph Warner, co-founder of Nolo Press Inc., a Berkeley (Calif.) publisher of legal self-help books.

The overloaded courts are only making matters worse. Since 1960, the number of civil suits in federal courts has soared 300%, even after dropping from a peak in 1985. In the state courts, civil suits have jumped by more than 4 million in the past six years (table). And that's on top of an exploding backlog of criminal actions that push business cases to the back of the line. "You can't divorce the civil courts from the criminal courts," says Sol Wachtler, chief judge of the State of New York. "There are delays because of the clog in criminal cases."

DRAINING. Executives fear the U.S. legal system is crippling America's ability to compete in the global marketplace. A BUSINESS WEEK/Harris Poll of top executives at corporations drawn from the BUSINESS WEEK 1000 (page 66) found that 62% of those surveyed believe the U.S. civil justice system significantly hampers the ability of American companies to compete with Japanese and European rivals. A striking 83% of those polled say the fear of lawsuits has more impact on decision-making within their company today than it did 10 years ago. "The American economy can no longer afford this process," says Ronald L. Davis, assistant general counsel at Dow Chemical Co. "The system's inefficiencies are eating away at our industrial base." He says Dow Chemical spends "in excess" of $100 million a year on legal services and liability insurance.

Just how much litigation drains the economy is a matter of fierce debate. Vice-President Dan Quayle claims that Americans spend more than $80 billion a year on direct litigation costs and higher insurance premiums. Indirect costs, including the expense of avoiding liability, he says, reach $300 billion annually--about 1.8% of the nation's $5.7 trillion gross domestic product. But legal scholars such as Marc S. Galanter, a professor at the University of Wisconsin's school of law, attack those figures as "the product of casual speculation." Instead, he cites a 1986 study by RAND's Institute for Civil Justice. It put the cost of the U.S. tort system--including court expenses, legal fees, and the value of lost work--at between $51 billion and $58 billion.

Whatever the tab, America's companies are fed up with watching their legal bills erode profits. Some are locked in unproductive court brawls with rivals. Four-year-old Cyrix Corp., a Richardson (Tex.) semiconductor maker, has been battling Intel Corp. In December, 1990, Cyrix filed an antitrust suit accusing Intel of an anticompetitive campaign to keep Cyrix co-processors out of the market. A month later, Intel sued Cyrix for patent infringement. While the judge has yet to rule in that case, Intel just filed another patent-infringement suit against Cyrix in response to reports that Cyrix was about to introduce a chip that mimics Intel's top-of-the-line 486 microprocessor. The Cyrix chip was introduced on Mar. 30 (page 95).

SUE CITY. Other companies, meantime, are shunning domestic markets out of fear of product-liability suits. Biomet Inc. sells spinal implants for back problems virtually all over the world--with one glaring exception. "We don't feel confident in the U.S. with such a product," says Dane A. Miller, CEO of the Warsaw (Ind.) orthopedics company. "Our legal system in America is totally out of control."

Countries such as Britain and Japan hold down costs by making it more difficult to sue and harder to win. In the U.S., each side in a lawsuit usually pays its own legal costs, regardless of the outcome. But Britain and other countries force losers to pay the winners' fees as a way to discourage frivolous suits. American companies spend as much as 80% of their legal bills on discovery, which lets parties review an opponent's evidence before trial. In Japan, discovery doesn't exist (page 64).

The hallmarks of the U.S. legal system--jury trials, contingency fees, and punitive damages--encourage the "I'll sue" mentality. Dow Chemical gets hit with some 2,000 new product-liability claims in the U.S. every year, but only about 20 such claims are filed against it in the rest of the world, says Davis. He notes that while many European countries have adopted broad U.S.-style product-liability laws, many lack such things as contingency fees, discovery, and jury trials. The Midland (Mich.) chemical maker spends an average of $250,000 just to get to trial. Says Davis: "Even when we win, we don't win."

Many executives say they settle even frivolous suits to avoid the legal fees. Others settle, they say, to escape the long-shot risk of punitive damages. The claims are "used to extort money," says Robert W. Pommerville, general counsel of Beverly Enterprises Inc., a leader in the nursing home industry. Pommerville says it takes "a real gutsy individual" to go to trial on punitive-damages claims, because juries are so unpredictable.

But settling can bring its own headaches. In 1984, Alan F. Shugart, CEO of Seagate Technology, was accused in a class action of artificially inflating the stock price. Attorneys for the Scotts Valley (Calif.) disk-drive maker persuaded him to settle in 1991, for $9 million, he says. Two subsequent suits were filed in 1988 and 1991, which copied the class action verbatim--from the wording of the charges to the misspellings. Both suits are still pending in the courts.Now, Shugart goes on the offensive at any hint of a lawsuit. Last year, for example, the company laid off an undisclosed number of employees. When a group of them joined with a coalition of labor unions and sued for insufficient notice, Seagate publicly threatened to countersue, clearly stating it would fight to recover court costs as well as punitive damages on the grounds that the labor unions' suit was frivolous. The coalition later withdrew the case.

HUGE SAVINGS. Rather than get caught up in the system, corporations are dropping out. Already, some 600 top corporations have signed a pledge drafted by New York's Center for Public Resources, a nonprofit group that promotes alternatives to litigation. The pledge states that the signers will consider negotiation and other forms of "alternative dispute resolution" before running to court against other signers. Last year, for the first time, law firms nationwide made a similar pledge, and almost 800 firms have signed on. The Center found that avoiding court saved 142 companies more than $100 million in legal costs for disputes concluded in 1990.

General Mills Inc. has long required a commitment to alternative dispute resolution on all contracts it signs--cutting legal costs for contract disputes to a bare minimum, says General Counsel Clifford L. Whitehill. Now, the Minneapolis food company is moving toward requiring a similar commitment from employees. But the company's best single experience with such techniques occurred in 1987. On the verge of going to court with a supplier, Whitehill says, both sides agreed to argue their case before the CEOs of both companies. After six days of arguments, the parties agreed that General Mills would get a $45 million settlement.

Other companies are devising formal systems to settle routine disputes. In mid-1990, General Motors Corp. hired Endispute Inc., based in Washington, D. C., to set up systems in each of its divisions for resolving dealer disputes. The systems range from nonbinding, voluntary mediation at Cadillac to binding arbitration at Chevrolet, Pontiac, Oldsmobile, and GMC Trucks, and were written into the dealers' five-year franchise agreement. William Coulter of Phoenix' Coulter Cadillac just mediated a dispute with GM auditors over a warranty issue. Both sides argued their case before a GM executive, a dealer, and an Endispute staffer. They settled in a day, at a cost of $3,000 to GM and about $1,500 to Coulter. Says Coulter: "The process was fair."

For Motorola, the process of staying out of court starts early. Its lawyers worldwide learn how to counsel executives within the company on avoiding conflicts by focusing on better contracts, improved product quality, and truthful salesmanship. The law department also follows Motorola's total quality management program to eliminate wasteful labor and expensive errors. "Cutting legal costs is like reducing the cycle time in manufacturing," says Weise, the general counsel. "Our goal is to reduce the'dispute cycle'--the time between the event that causes the dispute and the resolution."

There's more to Motorola's legal program than just staying out of court. The company rides herd on its outside lawyers to deliver quality service at the lowest possible cost. In a radical break with tradition, Motorola also refuses to pay for lawyers' travel, meals, and other incidentals. Instead, the law firms must figure such expenses into their hourly billing rate. Motorola forces the lawyers to follow a strict script that outlines a step-by-step procedure for resolving disputes. "They really bristle, because they're not used to that kind of participation by a client," Weise says. "Some outside counsel just can't do it."

Yet even companies that support such techniques remain skeptical that the new procedures will make a dent in the amount of litigation. Alternative dispute resolution works only when both parties agree to it, they say. A small company may be muscled into court by a larger rival with more resources. Other companies insist on trials to achieve public vindication. And individuals and their lawyers may be unwilling to step outside the system. Abandoning a trial "would do away with punitive and compensatory damages," says FMC Corp. General Counsel Patrick J. Head. "That's where the big scores have been."

It may not be that way for very much longer. More than 1,200 courts across the country are offering various alternatives to trials. In Texas, a court can order a case to mediation. In Colorado, lawyers who fail to tell clients about alternative dispute resolution now can be disciplined for breaching their ethical duties. And in California, some overworked judges refer cases to a private settlement company, Judicial Arbitration & Mediation Services Inc., based in Orange County (page 63).

Many courts are offering alternatives to trials right in the courthouse or other neutral sites. The federal court for the Northern District of California in San Francisco sends up to 300 cases a year through a settlement program known as "early neutral evaluation." Under it, the parties meet with a volunteer attorney who is an expert in the disputed subject matter. He sizes up the cases, gives his opinion, and then asks whether the parties want to work out a deal. An early study found up to 40% of these cases settled on the spot. Such programs are redefining the role of courts. "In the future, instead of walking into a building called a courthouse, you might walk into the Dispute Resolution Center," says Scott H. Bice, Dean of the University of Southern California's Law Center.

LOSERS WEEPERS. The debate over legal reform in Washington can only speed up these changes. Last year, President Bush signed an executive order to rein in the vast swarm of government lawyers--the largest group of lawyers litigating in the federal courts. And Vice-President Quayle delivered a scathing, widely publicized speech to the American Bar Assn., blasting lawyers for the nation's lack of competitiveness. In February, the White House unveiled a bill that draws from Quayle's 50-point agenda. The bill promotes such things as alternatives to litigation and the English Rule, which forces losers to pay the winners' legal fees.

While the bar blasted Quayle's lawyer-bashing rhetoric, it's taking his proposals seriously. "We ought to be extremely grateful to Dan Quayle for just getting this issue on the table," says Talbot S. D'Alemberte, president of the ABA. In February, it released a report supporting many of Quayle's proposals but criticizing him for ignoring the "broader and more significant problems of our justice system"--judicial funding and inadequate access for the poor.

Others have their own visions for the future. HALT, An Organization of Americans for Legal Reform, is pushing out-of-court alternatives to tort litigation, such as no-fault auto insurance and workers' compensation. Its aim is to ensure fair and prompt compensation for victims and more predictabilty for defendants. Advisory committees in each of the 94 federal courts, meantime, are experimenting with improving the litigation process, including making discovery voluntary. They're also forcing judges to be managers as well as decision-makers. "The greatest single forward step would be to have district court judges set schedules and require lawyers to live up to them," says former Supreme Court Justice Lewis F. Powell Jr.

Companies and judges are wise to put a premium on negotiation rather than on fighting until the end. But that's only the beginning. More attention must also be paid to state and federal courts so that they can run more efficiently. And Congress cannot continue to pass federal criminal laws that inundate court dockets without also quickly filling judicial vacancies. As of Mar. 31, there were 120 vacant federal judgeships, or about 14% of the federal bench.

CHEAP AND DIRTY? Alternatives to trials such as arbitration and mediation should help lighten the courts' burdens, but certain safeguards are needed. Now, proceedings are held in private without regard to whether a public interest or important legal question is at stake. And the resolution business is largely unregulated: Anyone with a business card or stationery can set up shop.

Instead, standards must be established so that mediators are qualified. The proceedings must also be open to the public--and the press. Alternative justice shouldn't become just another way to avoid disclosure of health and safety dangers. And some disputes involving novel or constitutional issues must remain in the public courts. Private dispute resolution can only follow the law, not set new precedents.

What's good in the legal system must be protected. As lawmakers, attorneys, and executives wrestle with legal reform, they must ensure that individual rights are not sacrificed in pursuit of swifter and more economical justice.Michele Galen in New York, with Alice Cuneo in San Francisco, David Greising in Chicago, and bureau reports


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