Beyond Winning

by Robert H Mnookin

  NEGOTIATING AT THE INTEREST-BASED TABLE

  Assuming that your negotiations at the net-expected-outcome table are under way, how do you switch to the interest-based table if the situation might permit turning the dispute into a deal? And once at the interest-based table, what do you do?

  Moving to the Interest-Based Table

  Inviting opposing counsel to explore the opportunity for creating value at the interest-based table can feel risky. Both sides may be reluctant to share interests once they are entrenched in litigation. The interest-based table presents a new concept that may be difficult for some lawyers and clients to accept: that dispute resolution may be an opportunity to find value-creating trades as well as a time for waging war.

  For this reason, we advise lawyers interested in moving to the interest-based table to deliver three explicit messages to their counterparts. First, looking for trades may be good for both sides. Moving to the interest-based table may strengthen the parties’ relationship, facilitate value-creating deals, and ease distributive tensions at the net-expected-outcome table. Second, looking for trades does not require or imply a ceasefire. Litigation can continue, and a party need not disclose information at the interest-based table that he feels will undermine his position at the net-expected-outcome table. Finally, discussing interests does not signal weakness. Indeed, a willingness to broaden the scope of negotiations can be framed as a sign of strength and confidence.

  Searching for Trades

  If the other side is willing to try to convert your dispute into a deal, you must first negotiate a process. If you have thought carefully about the other side’s interests and come up with options that meet those interests, you may be tempted to unveil all your ideas at once, as in: “I know what you really want, and I’ve got the solution that gives you what you want.” This is a dangerous tendency, and it is unlikely to work. Even if you have guessed right about the other side’s interests, he is likely to reject what you propose, either because he has not been given an opportunity to speak for himself or because of reactive devaluation.

  Instead, jointly explore what each side cares about and why, and what each side hopes the lawsuit will accomplish. Think broadly—don’t just include obvious interests related to the lawsuit, such as “settle quickly” or “receive fair compensation.” Also consider interests beyond the scope of the litigation. If two businesses are involved, what are their general business interests? To sell more product? Attract more customers? Expand geographically? Specialize in some area? Reduce costs? What are the interests of the individuals who run those businesses? What synergies exist? Can one side provide the other side with goods or services in a mutually advantageous way? What differences exist between the parties in resources, capabilities, and preferences? How can they trade on those differences?

  In some cases, the parties may have important interests beyond the dollar amount of damages at issue. A defendant in an employment discrimination suit may worry about its reputation. Plaintiffs bringing a civil rights complaint against a police department may be interested in an admission of wrongdoing and changing police practices and policies in the future. The seller in a long-term supply contract may have an interest in establishing a more flexible delivery schedule in order to respond to market changes.

  Also consider involving clients more at the interest-based table than at the net-expected-outcome table. Of course, if an attorney is accustomed to negotiations that focus on assessing the net expected outcome of litigation, she may not be comfortable with having her clients play an active role at the bargaining table. Relinquishing control can be difficult. But as we have noted, clients often understand their interests and the relative priorities among those interests better than their lawyers do, and they can often be very helpful at the interest-based table.

  Finally, consider involving nonparties in searching for trades. The tendency in legal dispute resolution is to focus only on those people or institutions that are named parties in the litigation and to forget that each side has many other relationships that may be affected by the lawsuit. Adding some of these players at the interest-based table can be helpful. If, for example, a building owner and a general contractor are having a dispute over payment, they might bring in an official from the lending institution underwriting the project to assist with their negotiation. If they find a value-creating trade that requires additional lending, this official will be indispensable to making their creative solution possible. Similarly, in a dispute among coauthors over copyright issues, it may be helpful to bring in a representative of the publisher. As the frame of the negotiation widens, outside parties may be essential to devising sophisticated trades.

  Managing Potential Conflicts between the Two Tables

  Negotiations at the net-expected-outcome table do not always go smoothly. One or both parties may become hostile or be unable to sustain a problem-solving stance. In such cases, net-expected-outcome negotiations may adversely impact the relationship between the parties and prevent them from looking for trades. How can you prevent this?

  First, discuss this danger early. Be explicit about the possibility that tension at the net-expected-outcome table may poison the atmosphere at the interest-based table. Repeat this discussion throughout the negotiations at the net-expected-outcome table if necessary. If things get heated, a problem-solving lawyer or client should try to confine conflicts at the net-expected-outcome table so that they do not spill over into discussions at the interest-based table.

  Second, it may help to separate the two tables in both time and space. You might first engage in a thorough net-expected-outcome negotiation, take a break, and then proceed to the interest-based table. If the break is long enough, hot tempers at the net-expected-outcome table may cool, making interest-based negotiation possible. Or you may want to have the two types of negotiation occur in different rooms, to help distance them in each side’s thinking.

  Third, try dividing responsibility for negotiating at the two tables between lawyers and clients: the lawyers work at the net-expected-outcome table and the clients at the interest-based table. Where there is such a clear division of labor, the negotiations can proceed along both tracks simultaneously.

  Fourth, consider rules for information exchange between the tables. These rules should be designed to keep information learned at the two tables separate. This technique works best in complex cases in which many players are involved and in which different players are negotiating at each table. In such instances, a screen can be set up between the different teams of negotiators so that neither table is aware of what the other is doing until the process is virtually complete.

  An Example: Digital v. Intel

  The October 1997 settlement of a patent infringement suit brought by Digital Equipment Corporation against Intel illustrates how a dispute can sometimes turn into a deal-making opportunity through interest-based negotiations. The dispute is noteworthy both for the substantial sums at stake and for the creativity shown—principally by the clients—in resolving the lawsuit.

  In May 1997, to the surprise of industry analysts, Digital filed a patent infringement suit against Intel, the world’s leading computer chip maker. Intel was a key supplier of chips for Digital’s line of personal computers and had a reputation for vigorously defending its intellectual property. Digital alleged that Intel, in developing its Pentium microprocessors, had misappropriated technology related to Digital’s Alpha microprocessor.12 The Pentium chips were bringing Intel nearly $20 billion in sales per year. In two days, Intel’s stock price fell, as analysts estimated that Digital’s claims, if meritorious, could be worth billions of dollars.13

  The dispute between the two companies escalated rapidly. As Digital chairman Robert B. Palmer later said dryly, speaking of his firm’s decision to sue, “I didn’t expect it to improve our relationship.”14 Just over two week later, Intel filed its own lawsuit seeking the return of documents provided to Digital under nondisclosure agreements that contained informatio
n that Digital needed to produce computers running Intel’s newest microprocessor.15 The new Digital computers were due to be shipped in early 1998, but without those documents Digital’s assembly line would screech to a halt. Intel also informed Digital that it would not renew the company’s long-term supply contract for Intel’s Pentium, Pentium Pro, and Pentium II processors once the contract expired in the third quarter of 1997 and that Intel would terminate all informal technological cooperation between the two firms.16 This was highly distressing news to Digital, which depended heavily on access to Pentium chips. In fiscal year 1997, Digital sold $2.2 billion of personal computers wired for Intel chips, more than a quarter of its total product sales for that year.17

  Within a month of the original suit, Intel retaliated by claiming that Digital’s Alpha microprocessor had misappropriated Intel technology.18 In turn, Digital claimed that Intel was using monopoly power to demand return of technical information about its chips, a not-so-veiled accusation that Intel was possibly violating antitrust laws.19

  Most industry and legal analysts believed that, no matter how strong Digital’s initial claim was, no court would ever grant its request for an injunction prohibiting Intel from selling Pentium chips. As to the merits of Digital’s claims, there was widespread disagreement. Digital’s legal and technical teams both concluded that Intel had violated the patents.20 These teams also suggested that a suit would bring pressure on Intel from the Federal Trade Commission, which had previously investigated Intel for possible antitrust violations. In addition, at least in the eyes of some industry analysts, the fact that one of the nation’s leading patent attorneys, Herbert Schwartz, had agreed to represent Digital signaled that Digital’s case had some merit.21 Moreover, according to press accounts, Digital president Ronald Palmer firmly believed that Intel patent infringement was the main reason for the commercial failure of the Alpha chip, the development of which he had presided over and which he had championed for years. In the end, Digital’s board of directors, though worried about Intel’s reaction, decided the case had enough merit to pursue.22

  Box 18

  On Intel’s side, The Wall Street Journal reported that “some in the Intel camp feared Digital’s claims might have some merit.”23 Most legal and industry analysts dismissed Intel’s counterclaims as groundless but noted that they would prolong the litigation. At the very least, Intel knew it was facing a real possibility that a court would find infringement and impose damages in the hundreds of millions of dollars. That said, however, any money judgment ordered by a court was a long way off. The Pentium chip might be obsolete by that time, which would cap Digital’s damages; the value of any payment would be reduced by the time value of money; and an antagonistic relationship would very much hurt Digital’s personal computer sales in the future. The risks and opportunities of litigation, taken all together, are shown in Box 18.

  Box 19

  The parties had other important interests at stake. Digital was concerned about direct competition from a new high-end chip designed in a joint venture between Intel and Hewlett-Packard. This new chip—codenamed the Merced—was scheduled for release in 1998 and would compete with Digital’s Alpha chip.24 The Alpha chip had garnered only modest sales since its inception; indeed, for the past several years, the semiconductor processing plant at which the Alpha chip was manufactured had lost $100 million, and Digital had to spend roughly $250 million per year to upgrade the facility, which ran at between one-half and two-thirds capacity. Digital also was interested in receiving priority discounts on all Intel chips in order to boost the competitiveness of its PC sales.

  Intel, of course, was eager to limit the distractions of litigation and to eliminate possible future competition between the Alpha and Merced. Intel also wanted to boost its performance in the non-PC portable markets, where it had been historically weak because its chips tended to generate too much heat. The parties’ interests outside the scope of their litigation are shown in Box 19.

  This is where things stood when a settlement that Intel’s chief operating officer described as “win-win” was announced in October 1997.25 The agreement capitalized on both sides’ interests. Intel agreed to purchase the plant at which the Alpha chip was made for $700 million, to license the Alpha chip from Digital for roughly $200 million over four years, and to produce the chip for Digital for seven years.26 In addition, Intel agreed to provide Digital with discounts on all Intel chips, which analysts estimated to be worth $100 million over seven years.

  On the other side, Intel acquired a state-of-the-art semiconductor facility for less than half the $1.5 billion it would cost to purchase a new facility, and it also acquired all of Digital’s non-Alpha chips business, including rights to the StrongARM, a well-regarded processor used in hand-held computers and cellular phones. Moreover, Digital announced that it would work with Intel to make Digital’s Unix operating system compatible with the Merced chip, which amounted to an implicit endorsement of Merced. Although Alpha would still be produced for seven more years, in the long run the Merced chip would not have a serious competitor.27

  CONCLUSION

  What can we learn from this settlement? First, by being willing to sit down at the interest-based table, both parties obtained results that were better than the net expected outcome at trial. Even had Digital won a money judgment for $500 million, it would not have received most-favored-nation status from Intel or been able to sell its Alpha chip plant. And it would most likely have lost additional money as the litigation went on because of Intel’s decision to cut Digital off from future use of Pentium chips. As for Intel, it eliminated a small but not insubstantial risk of liability in the hundreds of millions of dollars and at the same time acquired a new plant and new technology, while offering Digital discounts on the full range of Pentium chips—the same kind of deal it had already struck with a few other PC makers.

  Second, the parties’ innovative settlement was not something a court could have ordered. The only issues in play at the net-expected-outcome table were whether Intel had violated Digital’s patents and what damages would be awarded if liability were found. Thus, by negotiating at the interest-based table, the parties addressed concerns that could not be met by focusing merely on the net expected outcome of litigation.

  Third, the example illustrates that value creation at the interest-based table can occur alongside highly assertive behavior in net-expected-out-come negotiations. From the beginning, both parties waged war at the net-expected-outcome table, no holds barred. For example, The Wall Street Journal reported that Digital had spent many months “figuring out how to surprise Intel [and had] calculated that by filing suit in federal court in Worcester, [Massachusetts,] not . . . far from [Digital’s] headquarters, it might get a sympathetic jury as well as a court with a relatively small caseload.”28 Intel, for its part, filed a countersuit in California, far from Digital’s base of operations, and another suit in Oregon. Digital moved to strike some of Intel’s claims as untimely; Intel moved for summary judgment on its California claims;29 and both sides hired leading patent attorneys and made public statements reflecting their intent to fight the case to the end.30

  Fourth, the example reaffirms the importance of getting clients involved in interest-based negotiations. In fact, it is unclear whether the lawyers in charge of the litigation were involved substantively in any of the interest-based talks. Settlement was initially broached at a dinner among a number of directors from both companies.31 When Intel directors learned that Digital might be interested in selling the Alpha chip, the discussions were referred to Digital president Robert Palmer and to Intel’s chief operating officer, Craig Barrett.32 In June 1997 Palmer and Barrett met to discuss settlement and hammered out preliminary terms; the final agreement was negotiated by the two men and their chief financial officers. The lawyers were kept apprised of the process, but the clients basically took matters into their own hands at the interest-based table.

  Finally, the example illustrates how litigant
s can create value by exploring options that are totally unrelated to the issues involved in their legal dispute. As we have said, there is no guarantee that an interest-based negotiation will prove fruitful. But the parties may leave a great deal of value on the table if they fail to try it.

  10

  Advice for Making Deals

  Peter French, age 42, is a vice president of the agrochemical division of a large national company. He has just been offered a new job as executive vice president and chief operating officer (COO) of Montero West Corporation, a moderately sized and publicly traded bioengineering and life sciences company based in Denver, Colorado. Montero West produces agrochemicals, including pesticides and herbicides, as well as genetically engineered seeds, specialty crops, and some pharmaceuticals.

  Three months ago Peter was contacted by a headhunter who arranged for him to meet the president and chief executive officer at Montero West, Henry Phills, and a search committee of Montero board members. The Phills family controls a majority of the outstanding shares of Montero West, which was founded by Henry’s grandfather. Peter is being considered for second-in-command, with broad day-to-day operating responsibilities. Henry, who is now 60 years old, expects to retire at age 65. Although Peter has been told that there can be no guarantees, Henry and the board have suggested to Peter that when Henry retires Peter would be the prime candidate for CEO.