Beyond Winning

by Robert H Mnookin

  This is precisely what happens in some legal disputes. The party that believes it can absorb costs better, or impose more costs on the other side, or both, attempts to use this leverage in the distributive aspects of the bargain. This is a rational strategic move when the other party has limited resources and will be forced to capitulate. But often it leads to irrational stalemates and protracted conflict, and both sides ultimately lose.

  INFLUENCING PERCEPTIONS OF WILLPOWER: “WE’LL FIGHT TO THE BITTER END”

  Because of the dynamic nature of litigation, both parties to a legal dispute often wonder about the strength of will on the other side. How committed is the other side to pursuing the litigation? Is the other side bluffing, or will it really press forward if it doesn’t receive a more favorable settlement offer?

  Barbara Tuchman has observed that “an offer of peace terms by one belligerent will always give an impression of a weakening of purpose and will to victory. The other party, sensing weakness, will be less disposed to accept terms. This is one reason why ending a war is always more difficult than starting one.”12 As with war, so with litigation. Lawyers are often reluctant to initiate settlement talks. Each side waits for the other to blink, for neither side wants their move to create an inference that they think their own case is weak. Jeffrey Rubin relates a wonderful example of this dynamic that occurred in a world champion chess match between Bobby Fischer and Boris Spassky.

  As one of the early games in the match was drawing near a close, it became clear that neither Fischer nor Spassky had even the slightest chance of winning. Each had been reduced to a king and pawn, and neither had the board position necessary to queen his pawn. Yet, despite the clear inevitability of a draw, neither player gave even the slightest sign of relenting. The two great chess experts stubbornly refused to show any awareness of each other’s presence in the room, not to mention across the board . . . The moves dragged on, the referee apparently becoming increasingly impatient about the behavior of the two players, whose game was so obviously headed for a draw.

  Why would neither propose the compromise solution under these circumstances? Apparently because to do so would have been to signal less self-assurance than was shown by one’s adversary, thereby possibly weakening one’s position in the games that were to come.13

  Both sides felt stuck. Although both would benefit from a compromise, neither wanted to be the first to propose it.

  “We’ll fight to the bitter end” is a common litigation battle cry, even though both sides know that settlement at some point is likely. Litigants often want to appear willing to spend what it takes, wait as long as it takes, and suffer as much as it takes in order to win. By sending such signals, each hopes that the other will reassess its estimate of the likelihood of success at trial and thus reevaluate what it is willing to pay or receive in settlement.

  This is not all shadowboxing. A party may have several good reasons to doubt the other side’s willpower. Perhaps the client on the other side is not really willing to go to court and would rather settle the case quickly and be done with it. Does he have the stomach for litigation, or will he fold on the courthouse steps? If the other client’s resolve seems weak, a party may be encouraged to press forward with litigation in hopes of intimidating the other client into settling on the cheap. Other reasons to press ahead may center on the attorney. “Mary Beth doesn’t really want to try this case,” a litigator might muse about his adversary. “She’s never had trial experience in a matter like this. And it’s summer time. She’ll want an August vacation. And she’s up for partner in her firm soon, so she won’t want to risk a big loss in court. We can press ahead, and eventually she’ll make concessions to avoid going to court.” In Tom’s case, the hotel might think, “Jennifer is working on a contingency fee. She has already incurred a lot of expenses. Eventually she’ll want to settle this case rather than risk receiving nothing in court. We should hold out.”

  PREPARING FOR A TRIAL THAT NEVER TAKES PLACE: “WE’LL SEE YOU IN COURT”

  In litigation it can sometimes seem as if each side is frantically preparing for a trial that will never take place. One side drafts a complaint, files motions, takes depositions, goes through document production and discovery, prepares for trial—all with full knowledge that it will probably settle the case. And each side knows this. It is like an arms race: each side builds up an arsenal, hoping never to use it. Each needs the arsenal to signal a readiness for battle. But each would also benefit if both sides could agree to reduce the weapons stockpile. The problem is that neither side wants to disarm first.

  Sometimes the threat of litigation, or its actual initiation, is necessary to bring a recalcitrant party to the negotiating table. Similarly, the use of formal discovery may prompt essential disclosures. At the same time, once initiated, litigation often takes on a life of its own. Even if two parties share the same expectations about the value of proceeding to court, they might never discover that convergence because each side is so busy trying to out-maneuver the other. Each party might begin by stating an extreme position in order to signal great confidence and strength of will. The parties are likely then to make litigation moves to shape each other’s perception of the value of going to court, while continuing to huff and bluff about their own assessment of that value. Their behavior will tend to be more radical and antagonizing than candid, in order to secure any possible distributive advantage. And in the process they are unlikely to discover that their expectations about the litigation alternative are similar.

  Because each party wants to appear confident to preserve the credibility of their threat to litigate, each side faces a dilemma: Should I be the first to disclose my true assessment of my case? Lawyers and clients in litigation fear that unilateral disclosure risks exploitation. “If I admit the weaknesses in my case, they’ll take advantage of those honest assessments without acknowledging the holes in their own argument.” Neither side wants to look weak to the other. To admit doubt about one’s case seems tantamount to handing money to the other side. As a result, each side holds its cards close to the chest, blathers loudly about the strength of its hand, and possibly bets more on the outcome than its case was worth to begin with.

  One of the causes of this behavior is what Jeffrey Rubin has called “over-commitment and entrapment.”14 To illustrate this phenomenon, consider an ingenious game called “The Dollar Auction.”15

  We now play the game for $20 as follows: A $20 bill is auctioned off to the highest bidder, where the initial bid has to be at least $1 and the increments must also be in dollar amounts. The twist in the game is that the second-highest bidder is also required to pay the auctioneer the amount of his bid, even though that bidder receives nothing in return. For example, if the high bid is $15, the winner gets a $20 bill for $15, netting $5 profit. If the second-highest bid is $14, however, that bidder pays the auctioneer but gets nothing.

  We’ve played this game with hundreds of lawyers, law students, and executives. The opening bid is often for a small amount—two or three dollars. In almost all cases, however, a competition ensues and the bids escalate. By the time the bidding gets above $10, there are typically only two bidders left, and the auctioneer knows that he’s in the money. But to the amazement of the audience, the bidding typically climbs above $20. Consider the predicament where one person has bid $20 and the other $19. The low bidder figures “I’m better off winning at $21 (for a net loss of $1) than being the second-highest bidder (for a loss of $19).” But as soon as he bids $21, the tables are turned, and the other bidder, using the same reasoning, may raise the bid again.

  We have sold a $20 bill for as much as $150, and we’ve never seen an auctioneer lose money. The game poses some striking analogies to litigation. If no fee-shifting mechanism is in place, each litigant pays her own legal fees regardless of who wins the case, just as each bidder must pay her final bid regardless of whether she wins the $20 bill or not. Like bidders in the auction game, each litigant may try to outspend the ot
her to improve her chances of winning. And, as in the auction game, litigants can become trapped in a competitive dynamic where they don’t want to lose, even if winning no longer pays.

  INCENTIVE PROBLEMS IN THE LAWYER-CLIENT RELATIONSHIP: “YOU CAN’T PAY THE RENT WITH ONE-THIRD OF AN APOLOGY”

  The principal-agent relationship can make it harder to settle lawsuits and harder to create value in cases that do settle. To find value-creating trades, an attorney needs to know his client’s interests, resources, and capabilities. Many litigators don’t think to ask for or learn about these things. Instead, a lawyer’s conversation with her client may focus exclusively on the opportunities and risks of litigation.

  As we noted in Chapter 3, exchanging information can be expensive. Because a lawyer can pursue litigation without much information about his client’s interests, it may not seem necessary to either a lawyer or his client to spend time talking through these basic building blocks of value creation. But without this information, the lawyer’s hands will be tied at the negotiating table. The lawyer likely will focus on distributive bargaining about the expected value of going to court rather than on finding ways to make trades to meet the interests of both sides.

  In addition, a lawyer’s fee arrangement may create the wrong kind of incentive. Clients sometimes complain that their cases won’t settle—or settle late—because their lawyers benefit financially by spending more time on the matter. What is a transaction cost for a client is often income for a lawyer. Large corporate law firms typically litigate on an hourly basis. Whether consciously or unconsciously, attorneys may do unnecessary legal research, file too many motions, take too many depositions, or otherwise raise transaction costs for their own benefit. Not all such behavior is venal. Out of a legitimate desire to gain a competitive advantage for his client and to reduce uncertainty by leaving no stone unturned, a litigator paid by the hour may see each additional investment of time and effort as worthwhile. Nevertheless, when there are hourly fee lawyers on both sides of a dispute, the risks of protracted conflict are great, especially if both clients have deep pockets and the stakes are high.

  In tort cases, where the plaintiff’s lawyer works on a contingency fee basis while the defense attorney is paid by the hour, the two attorneys’ incentives are quite different. Whereas the plaintiff’s attorney may be motivated to complete the litigation quickly and at low cost in order to maximize his return on his time investment, the defense lawyer may have an incentive to drag the litigation out as long as possible to increase his own fees. Sometimes the defendant heartily approves of this foot-dragging in hopes of exploiting the weakness inherent in the contingency fee structure to pressure the plaintiff’s attorney into settling at low cost. And some clients take the position that they would rather pay their lawyer than the other side.

  Contingency fees also can dissuade lawyers from seeking certain kinds of value-creating trades and cause cases to drag on longer than they otherwise might. As one plaintiff’s attorney told us, “You can’t pay the rent with one-third of an apology.” Jennifer, for example, might not reap much reward if Tom drops his suit because he and the hotel have agreed to move his laundry services in-house. Her contingency arrangement with Tom anticipates a cash settlement of his dispute. Given this, what incentive does she have to search for such a resolution?

  Principal-agent problems within a client’s organization may also inhibit settlement. The manager responsible for a case may want vindication to protect his own career. Or a manager in charge of a given office or division may want to delay settlement until after he has transferred so that it will not be on his watch. Such buck-passing is equally common when government agencies are accused of wrongdoing. When no one within an agency wants to stick his neck out and accept responsibility, the government may end up taking a very tough negotiating stance.

  The Value-Creating Opportunities

  As our exploration of the distributive challenges demonstrates, when two lawyers negotiate over the expected value of going to court, they often behave as though a dollar more for one is a dollar less for the other. Sometimes this is true. But there are value-creating opportunities in dispute resolution, even if the negotiations focus entirely on determining the net expected outcome of litigation. Resolving legal disputes is not a purely distributive activity.

  REDUCING TRANSACTION COSTS

  In addition to managing the litigation process, problem-solving lawyers help their clients manage the negotiation process in a way that minimizes transaction costs. They become process architects. This notion is not intuitive. Much popular thinking about negotiation focuses on the substance of a settlement—the terms and conditions, dollars and cents, who gets what and when—rather than on the process by which disputes are resolved. Yet in every negotiation, parties participate in some kind of process. Lawyers can help design a process in which a dispute can be resolved in a value-creating way and at lower cost to the parties.

  For example, much has been written about the inefficiency and high cost of discovery. To reduce these costs, various attempts have been made to promote expedited information exchange, by which parties turn over critical information to each other, without the need for discovery. The Federal Rules of Civil Procedure were recently modified to mandate disclosure (without a discovery request) of documents and witnesses relevant to “disputed facts alleged with particularity in the pleadings.”16 Quite apart from what the rules may require, the parties to a dispute can, by agreement, reciprocally trade information without protracted interrogatories, depositions, and document requests.

  As process architects, lawyers can also explore alternative forums for dispute resolution. Formal litigation in a courtroom is one method of dispute resolution, but many other possibilities—including mediation, arbitration, or a minitrial—may lead to a fair outcome with less delay and lower transaction costs. And within each of these options, there are opportunities for creative process design. We have found that to the extent lawyers ever do think about process design, they often see their choice as deciding between various alternative process options, such as mediation versus litigation. But sometimes customizing a dispute-resolution process may be even more beneficial. For example, neutral experts can be used to reduce technical or legal uncertainties to a more manageable level, or mediation and arbitration can be combined.17

  We do not suggest that lawyers should discard entirely the option of litigation or the traditional discovery processes that go with it. For alternative processes to work, lawyers must be confident that using them will not naively sacrifice their clients’ needs and interests. This means that lawyers will inevitably incorporate process design in and around existing dispute resolution mechanisms, tailoring the mix of procedures to the particular client.

  TRADING ON DIFFERENCES

  In addition to saving transaction costs, settlements can create value by trading on differences in risk or time preferences. Even though a court might award lump-sum monetary damages, lawyers sometimes trade on these differences through structured payments. For example, a settlement might provide for a monthly payment for the life of the plaintiff.

  Through a settlement, the parties can often do things that a court would never order. For example, a doctor’s apology to a patient may mean a great deal and go some distance in repairing the relationship.18 The parties might also find trades that have little or no relation to the issues at stake in the original dispute. For example, two public utility companies were involved in litigation over the terms of a long-term contract in which one corporation was selling power to the other. By broadening the scope of settlement discussions, the parties found a variety of trades and joint activities—unrelated to the dispute—that created a great deal of value and made it easier to resolve the lawsuit as well. Dispute resolution can be used as a catalyst for making new deals that go beyond the original litigation.

  To return to Tom’s case against the Big Apple Hotel, Tom has long thought that Big Apple’s practice of contracting mont
h by month for laundry services makes no sense, and that if he had a few large and dedicated customers who arranged for one- or two-year contracts, he could lower the cost of providing services. He has also tossed around the idea of operating laundry facilities inside the hotels, to eliminate the time and expense of picking up and delivering the linens. Although there would be an initial investment of capital to buy and install laundry machines, Tom thinks that in the long run he could save the hotels money by managing staff on-site.

  Are Tom and the hotel likely to discuss this business idea in the course of negotiations over a tort claim? Not very. Jennifer might not know anything about Tom’s business idea. Although she knows his narrow financial interest in being compensated for his injuries, she may not have considered his broader financial interest in doing business with the hotel in the future. How important is the Big Apple Hotel to Tom’s business? What would the effect of litigation be on his relationship with the hotel? And can Tom and the hotel explore the possibility of future, creative business deals if they are also litigating about Tom’s injuries? Most often litigating lawyers would not even consider talking about such ideas, nor would they advise their clients to do so. And yet such a trade would broaden the scope of the negotiation and bring to the table resources and capabilities that the parties could exploit.