May|June 2004




IN 1995, CHARLES BROFMAN was representing a company that had been slapped with a personal-damage claim from an auto collision. He happened to be friends with the plaintiff's attorney. But when they talked damages, they were a million dollars apart. "He made a demand that was just in the sky," Brofman said with a laugh. "And I told him, 'Well, I'm not making an offer to a man that stupid.' "

So for weeks they bickered away, neither willing to budge, getting nowhere. Then the friend came up with an ingeniously simple idea: Each lawyer would write down his secret bottom-line number—the real amount he'd be willing to settle for. They'd hand the slips of paper to a court clerk, who would give the lawyers a thumbs-up if they were within $5,000 of each other. When Brofman and his friend did this and the clerk looked at the numbers, he found they were only $1,000 apart. They split the difference and settled "in a manner of seconds," Brofman said.

Which is when Brofman figured out the problem with his profession. Sure, lawyers try to get the best deals for their clients. But they also overinvest in the part of the hard-nosed negotiator, letting their egos get in the way of deals. Brofman realized that he had in hand a solution. He quit his law job and founded Cybersettle, an Internet company that uses double-blind bidding to help parties find a middle ground.

Launched in 1998, Cybersettle has handled 85,000 claims collectively worth over half a billion dollars, 60 percent of which were settled within two months. Both defense and plaintiffs' lawyers swear by the bidding system's utility: It has been used by 30 major insurance carriers and endorsed by the Trial Lawyers Association of America. In February, the New York City comptroller's office began using the service to process claims filed by angry residents against the city over everything from parking tickets to disability rights.

Cybersettle is useful mostly for small-potatoes claims; the tobacco industry isn't going to settle billion-dollar liability suits by logging onto a website. But the genius of Cybersettle is that it largely removes ego from the legal process. When lawyers aren't involved in dramatic face-to-face negotiations or phone calls, they are, Brofman said, far less likely to indulge in games of chicken. "I used to have lawyers say, 'Well, I can negotiate better.' I'd say to someone, 'How do you know that?' And he'd say, 'Oh, because the guy was offering me eight, and now he's offering me nine!' I say, for all you know, he had a reserve of 15! You don't know. You have no idea what he's got."

Brofman is right: Academics observe that Cybersettle-style techniques have performed better than human-based negotiations in simple disputes. "When the only thing that's in dispute is money, blind bidding can work really well," said Ethan Katsh, a professor at the University of Massachusetts. Until now, few people used blind bidding because there was no practical way to do it. You can't pass secret pieces of paper back and forth if you're in a bicoastal dispute. When the Internet erased geography as a factor in negotiation, it made blind bidding much more viable.

Brofman looks like a lawyer's version of the movie mogul Harvey Weinstein: He's a burly guy with short curly hair who is wearing a black t-shirt the afternoon I visit him in his office. Unprompted, he recites the patent number he received for the Cybersettle method. ("It's 6,330,551. I should play that number on the lottery.") He pulls me over to his laptop to show me a demo of how Cybersettle works. Loading the company website, he assumes the role of a lawyer for an aggrieved party. The insurance carrier he's filed against has already input three secret figures into the system—a low figure, a middle one, and the highest it would be willing to pay.

Brofman starts off with an initial demand of $20,000. It's too high: "We're sorry," the software tells him, "but your case did not settle this round." He goes down to $15,000 for his second demand. Still too high.

"Round three," he says. "Now I gotta get real. So I'm gonna say $8,275." Bingo: This time his bid overlaps with the highest amount the carrier is willing to pay, and the software splits the difference between the two. The case is settled for $8,638.

"Five minutes or less," Brofman says, closing up the laptop.

Real negotiations through his company take longer, but apparently not much. Brofman said that once a lawyer has placed an opening bid, 91 percent of the time the other party responds within 11 minutes. Speed is precisely what makes Cybersettle so attractive to many insurance carriers, because every time their lawyers have to write another letter or field another phone call, the companies lose money. When Cybersettle commissioned a study of its business, Andersen Consulting found that the company's process reduced attorney costs by an average of $700 per case—a small but meaningful amount for claims in the $5,000 to $10,000 range. The savings drew the attention of the City of New York, said Michael Aaronson of the office of the comptroller. "It really helps us avoid telephone tag," Aaronson added. "That's one of our real time drains." Plaintiffs' lawyers, too, prefer speed, because they're working for contingency fees: The less time they spend, the better their per-hour rate.

Even when the parties using Cybersettle fail to agree on a number, the bidding process seems to help them. After striking out on the website, the parties frequently call each other, Brofman said. He thinks that after doing the mental work of calculating three bids, it's easier to focus on closing a deal.

Online services for dispute resolution are also a good match for online businesses. Another major player in the business, SquareTrade, handles 3,000 disputes a day. Many of them are between eBay buyers and sellers. Say you buy an IBM computer from someone and then get shipped a model different from the one you ordered. SquareTrade will send you and the seller a simple online form in which you lay out your respective positions. Forty percent of the disputes the company handles are resolved in this way. If you and the seller can't agree, the company assigns one of its 200 mediators to work with you. Auction sites like eBay defray the cost because their businesses depend on people trusting their service—and unresolved misunderstandings break that trust.

The story of double-blind bidding can't be entirely win-win, though. A case study of Cybersettle in its early days found that while the service was successful, it was causing a sense of dislocation. Many insurance adjusters "consider negotiating with attorneys to be the 'fun part' of their jobs," as Cybersettle's vice president of marketing put it. Without the verbal strutting and sparring, they feel like paper-pushers.