.„_ CRPY F &) n CANADIAN TRANSPORTATION RESEARCH LE GROUPE DE REDIERCHES SUR LES TRANSPORTS AU CANADi

21st ANNUAL MEETINL

PROCEEDINGS

VANCOUVER, B.C. MAY 1986

A 313

FINAL OFFER ARBITRATION: HARD-HITTING ADVICE TO CANADIAN TRANSPORTANTS

Richara Lande Donald T. Weckstein

For so many years, transportation researchers have carried with them the uneasy feeling that their families do not really understand what their jobs entail. We mutter phrases like "cross-subsidy" and "market contestability" to the inquiring eyes of our children, all the while knowing that the roles of policemen, rock stars and bus drivers are much more comprehensible. The days of local anonymity are over. The tonic which will put glamour into our profession has been found. It is deregulation.

People's Express and Laker's Airbus started making transportation exciting to the public and the stigma of unexplained careers began to disappear as the prospect of cheap airfares aroused everyone's interest. But the inclusion of final-offer arbitration as one of the elements to be contained in the new Canadian transportation law may well advance us yet another notch into the same league as , where this institution has existed for some time.

What do we know about the arbitration process which is being envisaged by Minister Mazankowski's policy advisors?

1) Confidential contracts will not be subject to arbitration.

2) There will be approximately 8 criteria from which the arbitrators are to base their decisions.

3) The disincentives for a shipper to go to arbitration would be the obligation of shipping his product at the railway's proposed rate for a year and the knowledge that he could have had a lower rate had he accepted the railway's confidential contract offer during negotiations. 314

4) Arbitration will take no longer than 90 days, and permit no appeal.

However, there are some very important questions about this arbitration format which must be discussed.

1) Since 1/3 of the Canadian railway freight revenues derive from U.S. traffic, how are American shippers to make use of arbitration without being compelled to break international through rates into proportionals at the border?

2) Doesn't the exclusion of confidential contracts from arbitration limit its potential to domestic rate disputes? In other words, won't the eventual publication of the arbitrator's final decision drive international shippers away?

3) What is the role of precedent, either from previously published rates or from other arbitration decisions, to play in the arbitrator's decision? How is inconsistency to be avoided?

4) What would happen if the shipper's final offer was for a different volume or number of routes than the railway's offer? Is the arbitrator supposed to determine his own jurisdiction?

5) Since no evidence other than that exchanged during railway-shipper negotiations will be acceptable before the arbitrator, will the results not be to formalize negotiations in consequence, and advantage those who bring rail-cost consultants' reports, other arbitration decisions, etc. into the negotiation process at its inception?

6) How will the shipper choose between an arbitration proceeding and an expedited section 23 NTA appeal?

7) Will the concept of "market dominance" which has been developed in the U.S. (Ex Parte 320 sub. 3) to include product and geographic competition, replace the Canadian terminology for "captive shipper"? 315

8) What will be the penalty in the event the arbitration exceeds its duration of 90 days? (The ICC has taken an average of 18 months to reach a decision on market dominance, whereas the statutory delay is 90 days).

This article will investigate the final arbitration process as it is used in U.S. professional baseball currently with a view towards uncovering any structural weaknesses which have arisen there. 3 16

FINAL OFFER ARBITRATION

The concept of final offer arbitration is generally accredited to Prof. Carl Stevens who in 1966 proposed this form of compulsory "interest" arbitration as operating as a strike substitute, compatible with collective bargaining.1

The distinction between an "interest" dispute and a "rights" dispute was explained by Dr. A.W.R. Carruthers, past president, Institute for Research on Public Policy:

"A rights dispute conventionally describes a case in which a party claims he has a legal right which another party has infringed. The term is used in contrast to the term interest dispute, in which each party is seeking to convert a mere interest into a legal right which can then claim the protection of the system. Grievances are archtypical rights disputes. Disputes over the negotiation of a collective agreement, and which conventionally lead to the right to strike, are archtypical interest disputes. They are both, generically, labor disputes; yet they are different as chalk and cheese."2

Final-offer arbitration is therefore a form of compulsory interest arbitration when the parties must resort to formal impasse procedures. Two studies of the Canadian Public Service Staff Relation Act (PSSRA) were done covering the eight rounds of settlements by Treasury Board units of 500 or more employees for which the arbitration mode was selected, from the inception of the Statute in 1968 through 1979.3

In the 1968 round, 82.9% of the settlements were achieved without resort to formal impasse procedures. However in subsequent rounds, voluntary settlements were reached only in 74.5%, 56.4% and 46.2% of the negotiations, respectively. The cases which required settlement by arbitration, steadily increased. Thus, bargaining seemed to have become ancillary to arbitration.

In the next tour rounds, the cases requiring settlements by arbitration were 32%, 60%, 45% and 60% . 317

respectively. Thus, the general trend toward greater reliance on arbitration points to the conclusion that compulsory interest arbitration may well give rise to a "chilling effect" to the free collective bargaining process.

With few exceptions, interest arbitration has not been widely employed in the private sector. One major exception has been the use of "final-offer" arbitration to determine individual salaries of players.

Unlike collective bargaining in most other industries, the Major League Baseball Players Association and the Players Relations Committee of the Major League Baseball Club Owners negotiate a minimum salary rather than actual salaries to be paid to the player-employees. Each player is then free to attempt to negotiate his season's salary with the club employing him. For the first time, in the 1973 master agreement; interest arbitration was made available for determination of the salaries of eligible players (employed more than two years) who could not reach agreement with their clubs.5

As one of the originally selected baseball arbitrators, Tom Roberts, has stated:

"Major league baseball salary arbitration is different.... No other form of arbitration compares to baseball salary arbitration in substance, format, and the criteria imposed upon the neutral."6

The process works as follows: The eligible player or, in certain circumstances, the club may file for arbitration if agreement is not reached on the player's salary for the next season. All arbitrations are scheduled prior to the February opening of . Arbitrators are chosen from a previously agreed upon panel and sit as a sole neutral. The arbitrator must choose either the club's or the Player's submitted offer and fills that in on two. copies of previously executed contracts complete in every detail except for the salary. The Arbitrator may not choose a third or in between figure, and there is no further bargaining between the parties after the arbitrator's award has been made. The parties are encouraged to continue bargaining up to the time of the arbitration, however, and frequently do settle during the period between filing for arbitration and the hearing. 318

The figure submitted to the arbitrator need not be the same as the last offer which that party made to the other party in bargaining. Indeed, the arbitrator is not permitted to be told the amount of such last offers. In 1980, Cubs' Bruce Sutter, according to information published in the Los Angeles Times.7 had sought $400,000 from the Club while their last offer was $350,000. Apparently thinking he had little to lose (only a mere $50,000 that they were apart in bargaining), Sutter submitted a bid for $700,000 to the arbitrator. The arbitrator selected Sutter's figure rather than that of the Club: Sutter got a windfall; Baseball salary arbitration almost came to an end.

The actual decision is made by the arbitrator subjectively determining a figure he thinks appropriate based on the submitted evidence and then choosing the bid of the player or club which comes closer to his figure. Thus, in 1981. Ted St. Antoine thought that Ed Farmer of the was worth $400.000 for the season. The Club submitted an offer of $300.000 and Farmer a bid for $495.000, which being $5000 closer to the arbitrator's estimate. was awarded. When Farmer had a poor 1981 season. St. Antoine had to acknowledge his disappointment and noted that maybe Farmer was getting compensated for a superlative 1980 season.8

Having awards come back to publically haunt the arbitrator is one of the unique aspects of baseball salary arbitration. After one pitcher won a king's ransom from Arbitrator Roberts and performed miserably in his first Spring training appearance, a Los Angeles newspaper sports page headline asked:

"What do you suppose Tom Roberts is thinking now?"

Baseball salary arbitration is also different regarding the criteria which the arbitrator may, and may not, consider. The Arbitrator considers the player's contributions to the club during the prior season including his overall performance, special qualities of leadership and public appeal: the length and consistency of his career contributions, his prior compensation record, any physical or mental defects, the recent performance of the club including its league standing and attendance, and comparative baseball salaries. In this last regard the arbitrator receives, in strict confidence, a tabulation of every major league player's salary for the past season, broken down by years of major league service. The arbitrator is also supplied with performance averages 319

for every major league player, and the parties spend a good deal of time explaining - or attempting to explain away - the importance of batting, fielding, and earned-run averages, as well as won-loss percentages, number of extra-base hits, slugging percentages, etc. For arbitrators who would rather play with statistics than words in collective bargaining contracts, baseball salary arbitration presents ideal working conditions.

Matters which the arbitrator may not consider include the financial position of the club or player; offers made by either party prior to the arbitration; the parties' cost of presentation including attorney and representatives' fees; salaries paid in other sports or occupations; and testimonials, press comments or similar materials except recognized annual player awards for playing excellence. This last prohibited category has given rise to difficult line drawing, and contentiousness over innovative evidence of performance including video-tapes not previously screened or approved by the other party.

Each party is given an hour for initial presentation and a half-hour for rebuttal and summation, although the arbitrator may extend the time for good cause such as lengthy cross-examination of witnesses. Party representation typically includes attorneys and/or agents for the player, the club, the Players Association, the Leagues Player Relations Committee, and statisticians for both sides.

The arbitrator may render a bench decision but is to make every effort to issue an award within twenty- four hours, which in practice is usually done by telephone with the filled in contract thereafter mailed to the league president. There is no written Opinion or stated rationale.

How has the system worked? It has accomplished one of the principal purposes of "final-offer arbitration". Serious bargaining is engaged in by the Parties in attempts to avoid having the arbitrator determine the salary issue. In the first year of available arbitration, 1974, only 10.8% of the 500 Players eligible for arbitration filed for it, and almost half of those cases were settled before award. In 1975, only 3.2% of the eligible players had their salaries settled by an arbitration award. The procedure was not available in 1976 and 1977, and in 1978 and 1979, 9.3% and 12.7% respectively, of eligible players carried through the process to award. 320

In 1983. 88 cases were filed, and of those, 58 of 66% were settled prior to award.

In the first three years of usage, the clubs prevailed more often, 61% to 38% of the 54 arbitrations, perhaps, according to Arbitrator Peter Seitz, because the clubs were better prepared and made more impressive presentations than most of the players.9 More recently, however, both sides presentations have become more professional and the players' arbitration-batting averages have improved. In 1979, they won 57% of the 14 arbitrations, and while winning only 13 awards versus the clubs' 17 in 1983, the players' victories included a modest raise for 20 year old Fernando Valenzuela from $350,000 to one million bucks! (The club had reportedly offered $750,000). Overall, from 1974 through 1983, players have won 45.5% of the 167 arbitration awards as against the clubs' 55%. Thus, the process does not seem to have unduly favored either side.

Despite these statistics, management representative more often express dissatisfaction with salary arbitration. General Manager Hank Peters was quoted by USA Today (May 18, 1983, p. C-1) as saying that "there seems to be no rhyme10 or reason to the awards, and they become precedent- setting awards which affect every club in baseball. People with no real understanding of the game are making decisions that affect it profoundly." Yet, it may be recalled that the parties themselves prohibit the arbitrator from writing an opinion and giving a reason, let alone, attempting a rhyme, to support the award. And the selection of the arbitrators on the panel is made by the parties, who apparently prever persons with national stature as arbitrators and a reputation for neutrality while opinions differ among the parties as to the importance of knowledge of baseba11.11 Concern has also been expressed by representatives of the clubs with less limited means that some very high salary awards would impose unfair financial hardships. But again, the parties have stipulated that the arbitrator may not consider the financial position of either the club or the player.

While the availability of salary arbitration probably has increased the bargaining power of the players, not all management representatives are unhappy with the system. Arthur Rutkowsky interviewed Attorney Jim Garner of the Cleveland, Ohio firm that represented the National League. Garner felt that the arbitration process had been useful in encouraging the parties to evaluate their figures to make sure 321

-reasonable bids were given to the arbitrator and that this process has encouraged more realistic bargaining.

Not surprisingly, arbitrators such as Roberts and Seitz, who have experience with the process, find it working satisfactorily. In conclusion, baseball salary arbitration, appears to have made more hits than errors, and most of the latter can be avoided in the future by collective bargaining of the parties to revise and improve the system rather than to scrap it. .122

1 (Stevens, Is Compulsory Arbitration Compatible with Bargaining 5 Ind. Rel. 38 (1966)0

2 (Feuille and Long, Final Offer Arbitration: Sudden Death in Eugene 27 Ind. & Lab. Rel. Rev. 186 (1974).

3 Carruthers, A.W.R., The Cuckoo's Egg in the Mare's Nest - Arbitration of Interest Disputes in Public - Service collective Bargaining: Problems of Principle, Policy and Process, Proceedings of the National Academy of Arbitrator, 1977, page 15.

4 Rutkowski, Arthur, D. - report to A.B.C. section of Labour & Employment Law 1985 Committee on Arbitration Law of Collective Bargaining.

5 Ibid

6 (T. Roberts, Arbitrating in Baseball, Proceedings of the National Academy of Arbitrators 173 (BNA, 1983).

7 Feb. 16, 1980, p. C-3, Col. 1.

8 Sports Illustrated. v. 56, No. 4, p. 46, Feb. 1, 1982.

9 29 Arbitration J. 98 (1974).

10 may 18, 1983, p. C-1.

11 T. Roberts, supra, at 176.

Richard Lande is a transportation lawyer who teaches at Concordia University in Montreal.

Don Weckstein is an arbitrator and former team of San Diego Law School.