“At GE, Robo-Lawyers,” Wall Street Journal article, Oct. 10, 2011:
Can a computer solve legal disputes? General Electric Co. thinks so.
The company’s oil-and-gas division is testing online dispute resolution with a simple goal: Reduce the time and money the company might otherwise spend on lawyers.
The GE unit, which provides equipment and services to oil companies and construction firms, is requiring thousands of suppliers to agree to cybersettlements in simple disputes.
The approach is being tested mostly in Italy to resolve disagreements over no more than €50,000, or about $65,000.
“There’s a concern that commercial arbitration is costing too much,” says David W. Rivkin, a partner at Debevoise & Plimpton LLP, who specializes in large international commercial arbitrations.
GE says the cost to pursue a €10,000 claim through typical arbitration could ultimately cost each side at least €10,000, making it hardly cost-effective.
The company’s system involves blind bidding online to see if the parties agree on a settlement amount. If that that doesn’t pan out, an arbitrator rules, but communicates only online and without a hearing.
“We get a large number of claims that are simply about money and they can take up a lot of attorney time and costs,” says Kenneth S. Resnick, general counsel of GE Oil & Gas, which is based in Florence. “This allows a cheap—and, most important, fast—way of solving them.”
GE says 15 disputes over claims for €136,000 total were settled in a three-month look at the cybersettlement process this year. The company has faced resistance from employees and suppliers skeptical that their claims will get a fair shake. Another possible hitch: The system doesn’t allow claimants a way to vent.
“Some people file claims because they see dollar signs. But many people who file claims are just totally upset and feel a sense of injustice,” says New York City Comptroller John Liu, who last year axed a similar online dispute-resolution approach in the city.
“I can’t get my arms around the lack of a human element,” says Sanford Ring, general counsel of Hino Motors Manufacturing U.S.A. Inc., a Toyota Motor Corp. truck subsidiary. Without testimony or face-to-face interaction, it can be difficult to evaluate the credibility of either side of a business dispute, he says. “The credibility aspect is very important.”
Nonetheless, GE is looking to use the system more broadly, including for disputes involving customers, as well as suppliers, Mr. Resnick says.
The complex, global GE Oil & Gas operation, with more than $7.5 billion in revenue last year, has thousands of possible “microdisputes” annually, says Michael McIlwrath, a senior litigation counsel for the unit. In theory, there’s no reason why the automated process couldn’t be used for disputes regarding larger amounts, he says. The alternative, he adds, is that thousands of claims and invoices just sit on the books until they get attention.
GE’s process begins with automated online double-blind bidding. After a claimant pays a $500 filing fee, the supplier and GE upload relevant documents, which the opposing side can read.
The parties also enter three settlement figures—in ascending or descending order, depending on whether the party would be paying or getting paid—that would be acceptable. The figures aren’t disclosed to the opposing side. If an offer and demand in any round overlap, a settlement is reached. The $500 fee is then split equally.
Robert C. Ballou, the chief executive of Cybersettle Inc., whose technology is used by GE and was adopted by New York City, says that for parties using a three-round online negotiation process, the overall settlement rate is 65%. That is consistent with research on litigation in general, which shows that the majority of cases will settle before they reach the courtroom, GE says. Cybersettle is paid a fee for each dispute handled.
In GE’s cybersettlement process, if no settlement is reached through automated bidding, the dispute gets bumped to online arbitration for an additional $1,000 paid by the claimant. GE asked the International Centre for Dispute Resolution, a division of the not-for-profit American Arbitration Association, to design the overall online process. The center found engineers to arbitrate cases.
A single engineer reviews the documents that were uploaded, determines a winner and tells the center, which communicates with both sides online—no lawyers, witnesses or hearing dates.
In one example, GE sought a refund for 48 tubes the company said were defective. The dispute didn’t settle on the system initially and went to an engineer for online arbitration. GE won €3,160: €3,036 for defective materials and the rest to cover some of the fees it paid. GE declines to identify the vendor.
The company is closely monitoring the results of the program and says it is too soon to tell whether cybersettlement will catch on or how much money, if any, GE or its suppliers will save. The supplier disputes negotiated or arbitrated online so far have been resolved in less than 80 days, GE says.
“If you go to some of our bigger customers and say, ‘We’re going to put an online dispute-resolution clause into our agreement,’ they look at you like you’re crazy,” GE’s Mr. Resnick says.
New York for several years used a Cybersettle process to settle small personal-injury and property-damage claims. The city’s comptroller at the time said that by 2009, the system allowed the city to settle more than 4,000 personal-injury claims at an average cost of $11,662 each, compared with $23,379 achieved through litigation.
But Mr. Liu, who took office last year, concluded that the same work could be done less expensively with an in-house staff of claims adjusters who negotiated by phone. The city is now saving the $600,000 a year that it paid to Cybersettle, his office says.
“If someone is checking for account balances, perhaps a computer or phone system could more quickly give that information,” he says. “But for a more complicated, interactive function, such as claims settlement—or settlement of any kind of dispute—it shouldn’t be that surprising that a computer is not up to the task.”