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Improving Regulatory Systems

Recommendations and Actions

REG06: Encourage Alternative Dispute Resolution When Enforcing Regulations

BACKGROUND

Disputes constantly arise when agencies enforce regulations. Enforcing regulations and encouraging compliance with regulatory requirements in the least costly, least adversarial, and most effective way are crucial to ensuring that the policies underlying regulations are implemented.

Enforcement of regulations often requires substantial litigation. Adjudication--the resolution of disputes before agency administrative law judges or in federal court--is often lengthy, expensive, and highly contentious.[Endnote 1] Ultimate outcomes are frequently unsatisfactory and may undercut future efforts to ensure effective compliance by creating an atmosphere of antagonism and distrust. In the long run, encouraging compliance is likely to be more effective than litigating over enforcement.

Current enforcement dispute resolution systems tend to emphasize litigation, and there are times when this emphasis is proper. Regulated entities must understand that they must comply with regulations or face sanctions. Successful litigation by the government may serve as a deterrent to future wrongdoing. Ensuring regulatory compliance is, after all, a federal law enforcement role.

However, the fact is that a high percentage of enforcement disputes are ultimately resolved not through litigation but through settlement negotiations.[Endnote 2] There are a variety of reasons for this, including inadequate resources to pursue all cases through the full litigation process, and insufficient or questionable evidence in particular cases. Moreover, in some situations, the remedies available through the adjudicatory process (be it at the administrative level or in court) may not provide the optimal practical solutions. Negotiated settlements often occur, however, only after substantial adversarial maneuvering, or at the proverbial "courthouse steps."

NEED FOR CHANGE

Various alternatives to litigation and administrative adjudication can be useful in resolving a significant number of enforcement disputes earlier, with fewer resources, and with better results than might otherwise occur. Alternative means of dispute resolution (ADR) can be an alternative to litigation, and it can also serve as an improved way to handle negotiated resolutions. Because ADR processes are designed to develop consensual solutions to disputes, they should reduce contentiousness and may result in relationships between the regulators and the regulated that are more cooperative and more conducive to future voluntary compliance.

These alternatives encompass a collection of techniques designed to help disputing parties resolve their conflicts in mutually acceptable ways.[Endnote 3] Although the scope of what constitutes ADR varies depending on who is using the term, it is generally considered to include dispute resolution systems where a neutral third party, or "neutral," helps parties resolve their dispute.

ADR has become increasingly popular as a way to help resolve the wide variety of disputes involving individuals, businesses, and governments. Although some variations of ADR have been around for centuries, in recent time, court backlogs have served as an impetus for wider consideration of ADR techniques. Courts (both federal and state) provide ADR programs to litigants.[Endnote 4] For decades, labor and management have used ADR to resolve disputes. Private industry has begun to look to ADR as a way to prevent disputes from escalating and absorbing large amounts of resources.[Endnote 5] Community-based programs and family mediation programs have used ADR processes to address interpersonal disputes. An increasing number of states have incorporated the use of ADR into courts and agencies. As President Clinton said (while Governor of Arkansas), "[One] thing we need, in every state, is an alternative dispute resolution mechanism that would encourage people to look for a way, short of litigation, to resolve their disputes."6

ADR comes in a variety of forms. Some, like mediation, are fairly well-known. Others, such as minitrials, are less familiar. The more common types of ADR include:

--mediation,

--early neutral evaluation,

--factfinding,

--settlement judges,

--minitrials, and

--arbitration.[Endnote 7]

ADR is generally an appropriate dispute resolution mechanism when the dispute is one in which the parties might be willing to accept a negotiated settlement.[Endnote 8] Because ADR processes are inherently flexible, and can be designed to meet the needs of the disputing parties, they should be considered in a wide variety of cases.

THE ADMINISTRATIVE DISPUTE RESOLUTION ACT. The Administrative Dispute Resolution Act of 1990 (ADR Act) governs agency use of ADR in non-rulemaking disputes.[Endnote 9] It reflects Congress' interest in and recognition of the potential benefits of ADR, and it authorizes and encourages the innovative use of ADR by providing a flexible framework that agencies can adapt to their own needs.

The Act requires relatively little, but authorizes much. It requires each federal agency to develop a policy for using ADR. It directs agencies to review their types of disputes, how they are currently resolved, and whether ADR might be useful. The Act also requires that each agency appoint a senior official as a "dispute resolution specialist" to serve as the coordinator and point person for agency ADR activities. These requirements are aimed at ensuring that agencies make educated and thoughtful decisions about ADR.

The Act amended the Administrative Procedure Act to provide express authority to use ADR where the disputants agree to use it. It provides new authority for federal agencies to enter into binding arbitration, with some limitations. It provides statutory protection for confidentiality of ADR processes, and contains provisions relating to the acquisition of dispute resolution "neutrals."

Unfortunately, however, agency compliance with the ADR Act has been inconsistent. Despite clear success stories (see below), some agencies have vacancies in the dispute resolution specialist positions mandated by the Act or have not appointed to the post an official with sufficient rank.[Endnote 10]

FEDERAL AGENCY USE OF ADR. Over the last decade, some federal agencies have begun to give serious attention to the use of ADR. ADR has been used by several agencies in enforcement cases and other regulatory proceedings. Agencies have also used ADR in resolving contract, personnel and Equal Employment Opportunity disputes. A wide range of agencies--from the Environmental Protection Agency (EPA) and the Departments of Labor and Health and Human Services to the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation--have used ADR. Others--like the U.S. Air Force and the Internal Revenue Service--are in the planning stages for significant ADR programs.[Endnote 11]

Some of the results of the use of ADR to date have been impressive. The Department of Labor last year ran a pilot program in one of its regional offices using mediation to resolve enforcement cases involving the workplace, including cases involving the Occupational Safety and Health Administration (OSHA) and wage and hour regulations. The Department's evaluation of the program demonstrated that both agency and industry parties were quite satisfied with the use of ADR, and that in many cases, the mediated resolution was quicker and better than either face-to-face negotiation or litigation.[Endnote 12] The Department has recently decided to expand the program to all of its regions.[Endnote 13] The Farmers Home Administration found that it saved millions of dollars using mediation to avoid foreclosures in farmer-lender disputes.[Endnote 14] The FDIC saved over $400,000 in litigation costs from a small pilot mediation program involving creditor claims arising from failed banks.[Endnote 15] EPA has had significant successes using mediation to resolve Superfund hazardous waste cleanup proceedings.[Endnote 16]

To maintain momentum, a new Presidential directive on ADR is needed. The only existing executive order on ADR, Executive Order 12778, is not specific enough to provide useful guidance to the agencies.[Endnote 17] The directive should not only be linked to the ADR Act's provisions, but it also should address other approaches to encouraging agency use of ADR, including increased budgetary incentives, personnel appraisal incentives, and streamlined procurement of outside neutrals.

BUDGETARY INCENTIVES. Although the goals of ADR include the conservation of resources in the long run, it is important that the Office of Management and Budget (OMB) provide agencies with budgetary incentives to use ADR. This has at least two aspects: ensuring that the resources necessary to develop ADR systems are available, and ensuring that budget incentives over the long term do not undercut ADR use, but rather reward the consensual resolution of disputes and discourage the creation of large adjudicatory backlogs.

First, some resources are necessary to develop and implement an ADR program. While over the long run, ADR should provide savings to both the government and the private sector, seed money and personnel resources are often needed to get agency systems up and running. Thus, at least in the early implementation stages, some specific budget for ADR implementation may be necessary.

Second, the criteria for increasing agency budgets often provide skewed incentives. For example, providing additional resources to an agency with a large adjudicatory backlog might remove the incentive to reduce that backlog. Moreover, the savings from using ADR may not be felt by the same component of the agency to which the costs accrue.

PERSONNEL INCENTIVES.

The ADR Act requires that the dispute resolution specialist and other agency personnel be provided training in ADR.[Endnote 18] This is crucial. Although ADR concepts are not extremely complicated, those who would use ADR, as well as those deciding whether and when to use it, need to understand how to participate effectively in these processes, understand their benefits, and know when it is appropriate to use them.

Performance evaluation criteria also must provide the appropriate incentives to encourage agency personnel to use ADR and resolve disputes consensually. For example, some agencies give credit in individual performance appraisals for the number of cases opened, but not for the number of cases resolved or the efficiency and effectiveness of resolution. This should be altered so that both types of numbers are important.

HIRING OF NEUTRALS.

Current contracting processes for obtaining a neutral can be extremely cumbersome. Neutrals are potentially available from a variety of sources. ACUS, for example, has a roster of neutrals from which agencies can select.[Endnote 19]

However, getting a candidate from the roster does not obviate the need for a system to hire and arrange to pay (if necessary) for the neutral's services. Depending on the amount of money involved, a more or less complicated competitive bidding system may be required. This process is frequently incompatible with the short time frames that may be necessary to use ADR effectively.

It is important that agency personnel interested in using ADR have access to neutrals in a timely fashion. Depending on whether the neutral is someone from the same agency, a different agency, or outside the government, mechanisms (including ones for sharing of neutrals among agencies) should be established to ensure ready availability. Agencies also have been and should be encouraged to continue training their personnel in mediation and related ADR techniques, so that they can make use of neutrals from their own and other agencies to help resolve disputes more quickly and less expensively.

ACTION

1. Increase use of alternative means of dispute resolution. (2)

The President, through directive, should strongly encourage agencies to use ADR.[Endnote 20] Governor Clinton recognized the need for every state to use ADR processes to avoid needless litigation; President Clinton should take the opportunity to apply that dictum to every federal agency.[Endnote 21]

Presidential support of ADR is necessary to avoid budget incentives that undercut ADR use, to train agency staff in ADR, to structure performance appraisals to reward proper use of ADR, and to make it easier to hire neutrals in a timely fashion. Such support would let agency personnel know that they should take the dictates of the ADR Act of 1990 seriously, without infringing on agencies' discretion to decide when to use ADR. Presidential leadership on this issue is a low-cost but highly effective way to engender long-term and widespread acceptance of the view that resolving disputes through ADR is not only appropriate, it is, in many cases, preferable.

CROSS-REFERENCES TO OTHER NPR ACCOMPANYING REPORTS

Department of Labor, DOL04: Expand the Use of Alternative Dispute Resolution by the Department of Labor.

Reinventing Human Resource Management, HRM08: Improve Processes and Procedures Established to Provide Workplace Due Process for Employees.

ENDNOTES

1. Agencies have varying enforcement authorities. Many enforcement statutes permit agencies to bring enforcement proceedings before agency "administrative law judges" (with judicial review on the administrative record in federal court). Other agencies must seek enforcement (with the aid of the Department of Justice) in federal district court. In either case, litigation costs and delays can be a concern.

2. See, for example, Edles and Nelson, Federal Regulatory Process: Agency Practices and Procedures, 2d ed. (Prentice Hall Law and Business looseleaf), p. 119. "The administrative process at most agencies could not operate if all cases had to be pursued to final, formal decisions."

3. See Administrative Conference of the U.S., Recommendation 86-3, "Agency Use of Alternative Means of Dispute Resolution," 1 C.F.R. 305.86-3 (1993); Harter, Philip J., "Points on a Continuum: Dispute Resolution Procedures and the Administrative Process," Administrative Law Journal, Vol. 1, No. 1 (1986) p. 141.

4. For example, the United States District Court for the District of Columbia has an alternative means of dispute resolution (ADR) program at both the trial and appellate levels. Finkelstein and Stanley, "The Federal Angle," Washington Lawyer (May/June 1992) p. 33. State and local courts in many states, including California, New Jersey, and Florida have set up ADR programs. Telephone interview with Diana Farthing- Capowich, Program Manager, State Justice Institute, August 12, 1993.

5. Companies in the insurance, automotive, and electronics industries are among those using ADR processes to resolve disputes. See Center for Public Resources, Mainstreaming: Corporate Strategies For Systematic ADR Use, Practical Guide Series, looseleaf (New York, undated), Section E.

6. "Bush vs. Clinton: The Candidates Debate," Reader's Digest (October 1992), p. 61.

7. In mediation, a trained neutral third party helps disputants negotiate a mutually agreeable settlement. A mediator, by talking with each side, together and separately, can often help parties come to agreement by helping them develop options and explore acceptable settlements. The mediator does not have the power to decide a dispute; rather, the parties must agree to any resolution themselves. Mediation is often a component of other ADR processes. In early neutral evaluation, a neutral factfinder, often one with substantive expertise, evaluates the relative merits of the parties' cases. After hearing an informal presentation of the highlights of parties' cases or positions, the neutral provides a nonbinding evaluation. This should give parties a more objective perspective on the strengths and weaknesses of their cases, thereby making further negotiations more likely to be productive.

In factfinding, neutrals determine disputed facts. This can be particularly useful where disagreements about the need for or meaning of data are impeding resolution of a dispute, or where the disputed facts are highly technical and would be better resolved by experts. Factfinding usually involves an informal presentation by each side of its case, whereupon the neutral provides an advisory opinion on the disputed facts, which can be used by the parties as a basis for further negotiation.

A settlement judge serves essentially as a mediator or neutral evaluator in cases pending before a tribunal. The settlement judge is usually a second judge from the same body as the presiding judge. In some cases, a settlement judge may give an informal advisory opinion. See Administrative Conference of the United States, Recommendation 88-5, "Agency Use of Settlement Judges," 1 C.F.R. 305.88-5; Joseph, Daniel and Michelle Gilbert, "Breaking the Settlement Ice: The Use of Settlement Judges in Administrative Proceedings," Administrative Law Journal, vol. 3, no. 3 (1989), p. 571.

A minitrial is not really a trial, but a structured settlement process in which the disputants agree on a procedure for presenting their cases in a highly abbreviated form (usually no more than a few hours or a few days) to senior officials for each side who possess settlement authority. This process allows those officials to see first hand how their case, and that of the other parties, play out; this can serve as a basis for more fruitful negotiations. Often a neutral presides over the hearing, and may subsequently mediate the dispute or help parties evaluate their cases.

Arbitration is a relatively formal process, in which parties jointly select the decisionmaker(s), to whom they turn over the decisionmaking. The arbitrator(s), after hearing each side's case using procedures agreed on in advance by the parties, issues a decision. The standards for decision may also have been agreed on in advance by the parties. The arbitrator's decision may be nonbinding (in which case the process resembles neutral evaluation), or if the parties agree, it may be binding. See ACUS Recommendation 87-5, "Arbitration in Federal Programs," 1 C.F.R. 305.87-5 (1993); Administrative Conference of the United States, Agency Arbitration, Studies in Administrative Law and Procedure 88-1 (1988) (discussing constitutional and statutory issues). Current law contains limitations on the use of binding arbitration by federal agencies. See section 4 of ADR Act, codified at 5 U.S.C.A. 571- 583 (1993 Supp.).

8. For example, litigation is necessary if a party needs to establish a judicial precedent. If there is a fundamental principle at stake that a party is absolutely unwilling to negotiate, ADR is likely to be unsuccessful. However, since most cases do settle eventually, it is important for parties to assess carefully whether an issue really is non-negotiable. If the costs of ADR would exceed the costs of resolution through other means, then other means should generally be used. Where a public record of the proceeding is needed, ADR may be inappropriate (although this concern may be accommodated by agreement of the parties). If a program requires complete uniformity of outcome, then individualized resolutions by the parties might not satisfy that need.

9. 5 U.S.C.A. 571-583 (1993 Supp.).

10. Conversations with staff of the Administrative Conference of the United States. See also, letter from Leonard L. Riskin, Professor of Law, University of Missouri-Columbia, to Senator Christopher Bond, July 5, 1993, commenting that "notwithstanding the passage of the [ADR Act] in 1990, some agencies have show[n] great reluctance to employ alternative methods of dispute resolution," p. 2.

11. See U.S. Air Force, Secretarial Memorandum re Implementation of the Administrative Dispute Resolution Act of 1990, January 12, 1993; letter to Brian C. Griffin, Chairman of ACUS, from David A. Mader, Assistant Commissioner, Internal Revenue Service, July 15, 1993.

12. U.S. Department of Labor, Report to the Secretary of Labor on the Philadelphia ADR Pilot Project (October 14, 1992), p. 52.

13. Conversation with Department of Labor officials.

14. Riskin, Leonard L., The Farmer-Lender Mediation Program: Implementation by the Farmers Home Administration, Report to ACUS (November 1991), p. 18. (FmHA reports net savings to states in fiscal year 1989 as between $18 and $37 million and net savings to the federal government as between $6.6 and $14.8 million.)

15. Federal Deposit Insurance Corporation (FDIC) staff paper, "Summary of FDIC ADR Creditor Claims Pilot Project," April 1993. ("$410,475 in legal fees and expenses avoided.")

16. Environmental Protection Agency, Superfund Enforcement Mediation, Regional Pilot Project Results (October 1991); and EPA, "Superfund Enforcement Mediation Case Studies" (April 1992).

17. Executive Order No. 12778, Civil Justice Reform (October 23, 1991), Federal Register 55195 (October 25, 1991). Although the Order supports ADR training and notes that ADR can be appropriate in litigation involving the United States and its agencies, it lacks guidance or specifics on how ADR techniques can and should be employed. Moreover, EO 12778's provisions relating to ADR primarily address ADR use in court litigation. The Order's mention of administrative proceedings (section 3) is limited to a citation to an Administrative Conference of the United States (ACUS) Recommendation on case management that includes a short section encouraging ADR use. ACUS, Recommendation 86-7, "Case Management as a Tool for Improving Agency Adjudication," 1 C.F.R. 305.86-7. This is especially weak given the opportunities presented by the Administrative Dispute Resolution Act, which is designed to facilitate ADR use at the agency level.

18. Pub. L. 101-552, 3(c); codified at 5 U.S.C.A. 571 (1993 Supp.).

19. 5 U.S.C.A. 573(c) (1993 Supp.).

20. The executive order should address the use of ADR broadly, rather than limiting it to the regulatory context.

21. See note 6 above and accompanying text.

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