Baseball-style arbitration is a promising tool that encourages parties to reach an amicable resolution of their disputes. Although increasing in popularity, agreements to participate in a baseball-style arbitration often fail to spell out the ground-rules. Nevertheless, by agreeing that an arbitration, under the AAA or ICDR rules, “shall take place as a ‘final offer,’ ‘baseball,’ or ‘last best offer’ arbitration,” a party may unwittingly be subject to the Baseball Arbitration Supplementary Rules. Thus, familiarity with the Baseball Arbitration Supplementary Rules at the outset of a dispute is necessary to develop a successful settlement and arbitration strategy.
The Emergence of Baseball-Style Arbitration
The scene is all too common. The parties and their counsel are sitting in their respective conference rooms while a seasoned mediator attempts to resolve a fiercely contested dispute through shuttle-diplomacy. After exchanging several offers and counteroffers, the parties draw lines in the sand and submit their final, “best” offers. However, a significant gap remains between the parties, and the frustrated decision-makers see no way out of the deadlock. While next steps typically include handshakes, threats to see each other “in court” and swift exits, parties are increasingly turning to baseball-style arbitration—which gets its name from its use in Major League Baseball salary disputes—to avoid the familiar stalemate.
In both traditional and baseball-style arbitration, the arbitrator resolves a dispute by issuing an award after hearing the testimony and reviewing the evidence submitted by the parties. However, in a traditional arbitration, the arbitrator may choose to adopt the claimant’s position, the respondent’s position, or a compromise between the two positions. By contrast, in a baseball-style arbitration, the arbitrator is constrained to adopt the position of one party or the other, and cannot reach a compromise in the middle.
While the thought of tying the arbitrator’s hands may seem unduly risky, the risk that makes baseball-style arbitration so perilous is also its principal benefit. For example, in a baseball-style arbitration, the parties are incentivized to take reasonable and justifiable positions or risk having their offer summarily rejected by the arbitrator. Moreover, because a baseball-style arbitration restricts the arbitrator’s discretion to the parties’ final positions, the parties may not rely on the prospect of the arbitrator issuing a compromise award that “splits the baby.” Thus, by forcing the parties to closely examine the real merits and value of the case, and by increasing the consequences of failing to reach a negotiated settlement, baseball-style arbitration attempts to bring the parties closer to an amicable resolution.
The ICDR and AAA’s Baseball Arbitration Supplementary Rules
Although the theory and rationale are straightforward, the particulars of a baseball-style arbitration are often absent from the parties’ agreement. Questions include when and how many settlement offers are exchanged before submitting final offers? Is the arbitrator permitted to review the final offers before the close of the hearing? Are the parties entitled to amend their final offers and, if so, when? If the dispute involves multiple transactions and claims, may the parties submit multiple offers, or a single, aggregate offer?
Through the Final Offer Arbitration Supplementary Rules (the “Supplementary Rules”), the International Centre for Dispute Resolution (“ICDR”) and the American Arbitration Association (“AAA”) established default rules that apply to a baseball-style arbitration otherwise subject to the ICDR or AAA rules. For example, the Supplementary Rules provide the following mechanics for a baseball-style arbitration:
- Settlement Offers: The parties are required to exchange first settlement offers within 45 days after the commencement of the arbitration, and second settlement offers not fewer than 45 days before the arbitration hearing.
- Final Offers: The parties must exchange final offers to each other and the arbitrator at least two weeks before commencement of the arbitration hearing. The arbitrator may only review the final offers once the hearing has been closed.
- Scope of Final Offers: The parties’ final offer “shall be a single monetary amount that includes all breaches, controversies and claims arising out of or relating to the contract or transaction between the parties to the arbitration, including without limitation all affirmative claims, defenses, setoffs/offsets, counterclaims and/or cross-claims that are at issue in the arbitration.”
- Amendments to Offers: No amendments to the final offers are permitted absent an agreement to the contrary.
- Award: The arbitrator must issue a reasoned award stating the rationale for selecting one party’s final offer over that of the other party.
While the Supplementary Rules do not address all possible issues in a baseball-style arbitration, they fundamentally change the arbitration process. As such, prior to entering an agreement calling for a baseball-style arbitration, the parties should familiarize themselves with the Supplementary Rules and decide whether the rules should be specifically modified by negotiation and agreement. Furthermore, assuming the Supplementary Rules apply, the parties must consider their implications in crafting a settlement and arbitration strategy that maximizes the benefits of a baseball-style arbitration.
In sum, baseball-style arbitration is a promising tool that encourages parties to reach an amicable resolution of their disputes. Although increasing in popularity, agreements to participate in a baseball-style arbitration often fail to spell out the ground-rules. Nevertheless, by agreeing that an arbitration, under the AAA or ICDR rules, “shall take place as a ‘final offer,’ ‘baseball,’ or ‘last best offer’ arbitration,” a party may unwittingly be subject to the Supplementary Rules. Thus, familiarity with the Supplementary Rules at the outset of a dispute is necessary to develop a successful settlement and arbitration strategy.
Client Alert 2015-035