Wednesday, August 31, 2011

How Litigators Negotiate

I've been working on a case lately with a corporate lawyer, and we've been trading war stories about various negotiations in which we have participated. Most of the deals that this corporate attorney negotiates are deals for buying or selling properties or companies, but he has also been involved in some negotiations to settle lawsuits. He can't believe the difference. He is astounded that a plaintiff might start off a settlement negotiation in a litigated case by demanding, say, $2 million, while the defendant offers $25,000 for the same case. He can't believe that litigators make such off the wall opening bids, and are thereby forced, if they want to settle, to make tremendous concessions from their opening numbers. To him, it all seems like a ridiculous game, and calls into question the credibility of the negotiators for both sides. Litigators, however, know that this pattern is common.

In a business negotiation, parties are probably more likely to start the negotiations closer together, and are therefore forced to move proportionately less. This makes sense when you consider that when you are buying a business or a piece of property, both sides should walk in with a pretty good idea of its value. You can look at an appraisal. You can look at a business's profit and loss statement. In a lawsuit, on the other hand, the defendant may legitimately feel that the case is worth absolutely nothing, while the plaintiff feels it is worth millions. That is because there may be a real possibility of either a defense verdict, or a multi-million dollar verdict, in the same case.

I wonder whether the culture of litigation also contributes to some of the game-playing that is so astonishing to corporate lawyers. Do parties in litigation just like to posture more? Have they developed a different style of negotiation that lends itself to making grossly overvalued demands, and paltry offers, just to mess with the minds of their adversaries? Because even though a claim in litigation might be more difficult to value than a piece of property, both sides interested in settling a lawsuit should still be able to arrive at an approximation of the probabilities of winning and losing, and a realistic range of possible outcomes. It just seems to take more work to get to that point in litigated disputes.

Of course, it would be an over-generalization to characterize all business negotiators as reasonable, and all litigators as posturers.  There are plenty of people in the corporate world who approach negotiations with a lot of swagger, and who start off with wildly off-the-mark numbers to try to gain some advantage. (See my prior post on the subject of anchoring.) And there are plenty of litigators who believe in presenting a reasonable number in a settlement negotiation to let the other side know that they are very serious about their number, and they are not likely to move very much. Both approaches can work in either context. My point is more about the clash of expectations when a negotiator who favors one style meets a negotiator with the opposite style. 

If you walk into a negotiation to settle a lawsuit with the expectation that both sides should start with numbers that bear some relation to reality, you may encounter frustration and delays. You might think it makes sense to offer a number that is close to the actual value of the case, and not move very much from that position. You might think that offering a number that is highly skewed in your own direction is a waste of time, and would reflect badly on your credibility. But if you do that, you run the risk that the other side perceives your initial offer or demand as something much further from the ultimate outcome than you do, and expects much more movement than you are prepared to make. To make the negotiation work in that scenario, you have to make the other side understand that your initial offer was not intended as an expression of your most optimistic forecast of the case. It has to be conveyed with the appropriate message about your intentions and seriousness. Otherwise, closing the deal may prove elusive.

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