Alternative strategies for litigation battles.

A full jury trial may not always be the best way to resolve disputes. Kay O. Wilburn, JD, adjunct professor, and Lowell S. Broom, CPA, DBA, associate professor of accounting, University of Alabama at Birmingham, describe CPAs' options.

The potential for litigation is a reality of professional life that CPAs cannot avoid. Even when a practitioner wins a legal battle, the high cost of legal fees, increased professional liability insurance premiums and negative publicity are a dismal reality. There must be a better way to deal with problems between CPAs and their clients.

In fact, there is. Parties in many business disputes have found that various alternative dispute resolution (ADR) techniques can reduce or eliminate many of the negative consequences of formal litigation.

The accounting profession, in recognizing the potential benefits of ADR, has participated in the creation of an Accounting Advisory Group within the American Arbitration Association (AAA) to focus on ADR use. (The AAA, despite its name, is involved in providing all types of ADR services.) The accounting group--headed by Robert L. May, formerly of Arthur Andersen & Co. and a past American Institute of CPAs board chairman--comprises professionals with legal and accounting expertise. Also, accountant members of the American Bankruptcy Institute, an organization of attorneys, accountants and other bankruptcy specialists, have endorsed the AAA's endeavor to develop ADR procedures for bankruptcy cases. Indeed, it is time for CPAs to assess what role ADR can play in handling professional litigation.

There are a number of available ADR techniques, each with its own potential benefits.

MEDIATION-- A REDISCOVERED TREASURE

While mediation has been around for some time, many businesses are beginning to use this process to resolve acute litigation problems earlier and more satisfactorily. With mediation, a neutral third party, the mediator, guides the disputants to an agreement. A mediator is not merely a passive participant; rather, he or she attempts to get the parties off the adversarial track and onto a path toward conflict resolution.

Traditional negotiation and litigation processes tend to polarize the respective parties' positions, with the opposing attorneys sometimes acting as advocates of their respective clients' legal rights. With mediation, the mediator focuses on the parties' needs, encouraging them to explore innovative solutions. The process is private and avoids all (or a significant portion) of the negative publicity of protracted litigation.

While the rules applying to mediation vary among jurisdictions, the process itself is much the same everywhere and is quite informal and flexible. Before a mediation session, the mediator may ask each party for written synopses of its position. The parties, along with their attorneys and representatives from any insurance company involved, then meet with the mediator and summarize the facts and issues. This informal summary offers a clear advantage over a formal trial because the parties are allowed to tell their stories uninterrupted. The mediator then typically meets privately and in confidence with each party, encouraging each to convey his or her real interests and concerns openly, not merely to rehash legal positions.

The mediator thus can better assist each party in analyzing the risks involved in going to trial. This "reality testing" is a significant benefit of the mediation process. Potential litigants need to realize that few cases are ironclad and there always is a risk of losing. In a trial, control is snatched from the parties and placed in the hands of a judge or jury. Many judges and attorneys alike agree that the verdict rendered may not be nearly as just an outcome as a freely negotiated resolution.

Mediation can help preserve existing relationships, which is particularly important in fee disputes. Both the CPA firm and its client typically prefer to maintain the business relationship. Mediation can resolve a conflict even before a lawsuit is filed and can address a number of issues at once.

With mediation, the parties are limited only by their imaginations in devising a solution. The mediator can offer settlement options but can't impose a settlement, since the process is not binding. As a result, most parties consider mediation more palatable than a binding, court-imposed decision.

Mediation can be beneficial when the dispute involves complex issues that are not familiar to a judge or jury. For example, a firm's audit client--company X--defaults on a loan and the lender sues the auditor, alleging the CPA firm negligently (or fraudulently) allowed company X's management to overvalue its business and inaccurately present the company in a favorable financial position.

There are a number of legal issues, including

* Whether the auditor acted negligently or even fraudulently in handling the audit.

* The extent of privity required to hold an auditor, engaged in wrongdoing, liable to a third party. (The particular jurisdiction's privity requirement must be examined.)

* Whether company X acted fraudulently in providing information to the auditor or perhaps invented sales transactions to create a strong financial picture--a scheme the auditor may not uncover, even when he or she follows prudent auditing procedures.

Other issues can involve the analysis of complex financial schemes and technical compliance standards such as generally accepted auditing standards and generally accepted accounting principles. The complexity of issues makes a case more difficult to convey effectively to a judge or jury, which increases the uncertainty of the outcome. Also, the more difficult the issues, the more time is required to educate jurors, which translates into higher litigation costs.

Mediation, however, has been used to resolve complex cases involving multiple parties even when the attorneys did not believe a resolution was possible. For example, a $14 million claim (including a $7 million claim involving antitrust violations subject to treble damages) brought by a medical laboratory against two hospitals was settled after two days of mediation. The disputants had been entangled in litigation for three years (Dispute Resolution Times, fall 1993). Further, if the parties agree to mediate early on, there is a better chance the process can reduce abusive discovery practices, again curtailing costs.

One potential drawback of mediation is the possibility that if the process does not resolve the conflict, the overall litigation cost will increase. Granted, mediation doesn't resolve all cases, but it typically is completed in less than a day. Even if an agreement is not reached immediately, many cases are finally settled due to mediation. Further, if mediation is not attempted, there still are attorneys' costs with no guarantee of settlement through their efforts. Many conclude that the potential benefits of mediation outweigh the possible risks.

SUMMARY JURY TRIAL-- A GLIMPSE INTO JURORS' MINDS

The summary jury trial is an appropriate ADR method when one or more of the parties have no desire to compromise but, instead, demand to be heard before a jury. It is not open to the public, so some privacy can be maintained.

A summary jury trial is an abbreviated presentation of the case by the attorneys before a judge and jury. Each attorney gives the jury a summary of what witnesses are available and what each will say. In contrast to an actual trial, the parties typically agree beforehand that the jury's decision will be advisory and not binding. The participants retain the right to a full trial, but the opinion of a panel of jurors tends to serve as a reality check and encourages settlement because the parties get a better idea of the possible outcome. Further, the attorneys often agree that after the jury gives its "verdict," each attorney can interview the jurors to determine their thoughts about the case.

The summary jury trial has been employed successfully to settle cases involving legal or technical complexities or multiple parties. Accordingly, it is appropriate in cases addressing an auditor's potential liability to investors under federal securities laws, the Racketeer Influenced and Corrupt Organizations Act and common law rules of fraud.

While it is not uncommon for a full trial jury to come back with close to the same verdict as a summary jury trial, this is not always so. In some cases, when summary jury trials involve two separate panels of six jurors hearing the same summary, one panel has found for the plaintiffs and the second for the defendants. Even in these cases, however, the parties still tend to settle because of the obvious risk and uncertainty of a full trial. Again, the bottom line is that a summary jury trial can provide insights into how a jury might view the litigants' case and, as a result, can assist in resolving a dispute without the risk and expense of a traditional trial.

OTHER ADR TECHNIQUES

Other ADR techniques include

* Minitrials. Both sides of the case are presented to the disputants' top officers or partners (other than those directly involved in the dispute). This gives both parties a more clearly defined picture of each side's strengths and weaknesses.

* Early neutral evaluations. Attorneys for both sides, with litigants present, present their positions to a neutral attorney experienced in the particular field at issue. The neutral evaluator asks questions and then offers a nonbinding written assessment of the case.

* Private judging. A judge (usually retired) is hired to hear both sides of the issue and render a decision. The process generally is binding but is not subject to the delays of the normal court system. It is permitted only in some jurisdictions.

A PROVEN SOLUTION

CPAs' use of ADR is not a pioneering experiment only for the brave at heart. On the contrary, ADR has been employed successfully in the business arena to resolve virtually all types of disputes. Although it can't eliminate lawsuits against CPAs, it does provide sensible alternatives to protracted litigation and is less costly in terms of the time and money involved. ADR options are important tactical weapons against expanding liability exposure.

Many organizations provide information and assistance on ADR. The American Bar Association and most state bar associations created their own committees or sections to educate the bench, the bar and the public about ADR. These organizations can provide information on ADR rules unique to a particular jurisdiction and may have rosters of neutral parties qualified to provide ADR services. Other nonprofit membership organizations include the AAA, the Society of Professionals in Dispute Resolution, the National Institute for Dispute Resolution and the Center for Public Resources (see the sidebar, page 78, for their addresses and telephone numbers). These and other not-for-profit and for-profit organizations can provide guidance on incorporating ADR into a firm's litigation management program.

Firms' legal counsel should be able to offer comprehensive assessments of how they can make optimum use of ADR in their own litigation. But practitioners themselves should have a good knowledge of ADR to ensure that this option gets a proper evaluation and is not rejected because of an attorney's lack of understanding of the process. Just as a medical patient should be adequately apprised of alternatives to surgery, the CPA should be keenly aware of alternatives to litigation.

EXECUTIVE SUMMARY

* ALTERNATIVE DISPUTE resolution (ADR) techniques can reduce or completely eliminate many of the negative consequences of formal litigation.

* ADR IS APPEALING because even in a successful legal battle, there can be high legal fees, increased professional liability insurance premiums and negative publicity.

* THE DIFFERENT TYPES of ADR include mediation, in which a neutral third party guides litigants to an agreement, and summary jury trials, in which juries offer nonbinding verdicts on cases.

For more information...

These organizations can be contacted for further information on alternative dispute resolution:

  American Bar Association
  750 North Lakeshore Drive
  Chicago, Illinois 60611
  Phone: [phone]

  American Arbitration
    Association
  140 West 51st Street
  New York, New York 10020
  Phone: [phone]

  Society of Professionals
    in Dispute Resolution
  815 15th Street, N.W.
  Suite 530
  Washington, D.C. 20005
  Phone: [phone]

  National Institute
    for Dispute Resolution
  1726 M Street, N .W.
  Suite 500
  Washington, D.C. 20036
  Phone: [phone]

  Center for Public Resources
  366 Madison Avenue
  New York, New York 10017
  Phone: [phone]