Final Offer Arbitration [1]

The purpose of any mandated Final Offer Arbitration (FOA) process is to facilitate prompt settlements, not to have a lot of hearings.  The main mechanism of FOA is its ultimate threat that if arbitration hearings become necessary, each party will win or lose everything in dispute.  There will be no compromise between the proposals of the parties.  Early hearing dates are established.  The parties must move quickly to last stage settlement discussions or proceed to an arbitration hearing at which one party will gain a total win and the other will suffer a complete loss.

FOA has been used successfully in baseball salary arbitration. While there are numerous fundamental differences between baseball and communications, the communications sector has advantages:

  • First, the regulator serves as the all-powerful referee between disputants, and has the rule-making authority to amend or even abolish any process found to be deficient.  In baseball, there is no rule-making referee and it is often difficult to produce constructive changes through collective bargaining.
  • Second, proceedings before a regulator proceed with considerations of the “public interest”.  “Public interest” as an element in decision-making serves as a meaningful protection against extreme and unduly harsh results.  Of course, Baseball cases involve private disputes and “public interest” is not a factor.

FOA has many variations.  In basic terms, both parties make simultaneous offers before knowing what the other proposes.  Then, the decision-maker(s) selects the offer determined to be more reasonable.  The decision-maker(s) can’t compromise by reaching an in-between result.

FOA can be a harsh process and parties should not be forced into it unless there are sufficient protections to assure fairness and to limit excessive consequences.  Precision in result is sacrificed in FOA to encourage prompt settlements.  In moderation, that might be a fair trade-off, but only with caution.

It is beneficial to industries and the public to have processes in place which encourage prompt and fair settlements.  The benefits of FOA may outweigh the occasional wind-falls bestowed on a “winner” and the penalties imposed on a “loser”, even when the actual merits of the dispute would dictate a resolution more toward the middle.  However, the artificiality of FOA awards also demands that the process include safeguards: for both parties – the loser as well the winner; for the arbitrators; and for the public:

  • The process should be reviewed periodically and amended or abolished if it is found to be defective.  Industries should not be locked into a system which is difficult to improve.  That includes providing ongoing guidance to arbitrators and the parties regarding how certain issues should be handled.  As the system matures, events and issues will require institutional resolution. 
  • FOA awards should be limited in time – approximately one year.  (This is part of the Baseball process.)
  • Parties should have at least one opportunity to change their offers.  Any change must reduce the amount in dispute.  The purpose is to protect both parties from being locked into early offers in the event of changed circumstances after submission.  It is usually beneficial when the parties narrow their disputes. 
  • Mid-point analysis should be prohibited or limited as a basis for argument and decision.  Parties should be required to support the reasonableness of their specific submissions and to challenge the reasonableness of the other side’s position.
  • As part of their rulings, arbitrators should be permitted to identify offers which are considered “clearly unreasonable” or “contrary to public interest”, even if they are found to be “better” (or less defective) than the opposing offer. 

The regulator should retain the right to reject all offers if they are “clearly unreasonable” or “contrary to public interest”.

Mandated, FOA is best suited for disputes involving amounts of money or the appropriate method for calculating money.  The more issues there are, the more complex the case becomes, and complexity increases both the risk of error and the potential for undue harshness in a ruling against the losing party.  In our immediate context, an ideal type of case would involve the determination of access fees for one year or for some other limited period determined in advance to be “commercially reasonable”.  Limiting the issues in this manner also tends to assure that comparable offers will be submitted. 

Of course, specific evaluation criteria should be established and made known to the arbitrators and the parties.  The criteria should be broad enough to permit consideration of anything commercially reasonable that would be considered by willing buyers and sellers on equal bargaining footing: e.g., cost of access and providing the required service. Certainly, public interest should be referenced.

Arbitrators should not participate in attempting to settle cases.  Their jobs are to hear cases and decide disputes.  Encouraging settlements certainly is a proper function for other staff members, but not the fact-finders.  When fact-finders attempt to engage in the settlement aspects, there is a risk that cases won’t proceed expeditiously.  Leave settlements to others.

[1] The above is drawn from a report prepared for the CRTC by Samuel J Reich and published in November 2009  http://www.crtc.gc.ca/eng/publications/reports/reich09.htm

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