Beyond Winning

by Robert H Mnookin

  Figure 13

  Further along the continuum, a seller could mislead a buyer more affirmatively without actually telling a lie. “I love this car,” you might say. “It’s been a great car. Except for ordinary maintenance, I have never had to spend a dollar on repairs. These Toyotas are really built to last, and this car has only 95,000 miles.” Like President Bill Clinton’s infamous attempt to parse the term “sexual relations,” such comments, although arguably technically accurate, together present a very misleading picture.3

  Finally, of course, you might lie outright. “Is there anything wrong with your car,” the buyer asks. “Nope,” you say. “Absolutely nothing. Runs like a charm. And there are no signs of trouble.”

  The Rules of Professional Conduct and the Law of Fraud

  In legal negotiation, lawyers and clients must consider two key constraints on lying and nondisclosure: the codes of professional conduct and the law of fraud.

  LYING

  The professional canons address lying and misrepresentation directly. Here we focus primarily on the American Bar Association’s Model Rules of Professional Conduct.4 Model Rule 4.1 states that a lawyer shall not knowingly

  (a) make a false statement of material fact or law to a third person; or

  (b) fail to disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6.

  Thus, a lawyer cannot say that an automobile has 35,000 miles on it if the car really has 135,000 miles. Nor can an attorney claim that his client’s business is economically sound if the lawyer knows that the client is insolvent or has used illegal accounting methods to doctor his books. And a lawyer must not make claims about the law of the relevant jurisdiction if the lawyer knows them to be false.

  Rule 4.1 does not bar, however, all false statements of fact or law. Instead, it prevents an attorney from lying about material facts or law. Under the Rules, materiality depends on the circumstances. The Comment to Rule 4.1 states that “under generally accepted conventions in negotiation, certain types of statements ordinarily are not taken as statements of material fact.” The Comment articulates two nonmaterial types of statements. First, “estimates of price or value placed on the subject of a transaction” are considered nonmaterial. Thus, for example, bluffing that you are very confident of prevailing at trial is permitted. Similarly, if a lawyer were selling his client’s car in the above example, he could bluff about the car’s value: “Sure, I think the car is worth at least $10,000.” Second, “a party’s intentions as to an acceptable settlement of a claim” are not covered by Rule 4.1’s prohibition. Therefore, the rules seem to suggest that an attorney could state “my client won’t take a penny less than $100,000,” even if he knows she will, because a party’s intentions are nonmaterial.

  The scope of Rule 4.1 is further narrowed because an attorney is only forbidden from misrepresenting facts or law. This may not, for example, bar an attorney from misrepresenting an opinion. Thus, an attorney might permissibly say, “I think the plaintiff will have serious medical difficulties in the future, worth at least $150,000,” even if he thinks it isn’t true. But an attorney may not say “Dr. Jones, our expert witness, thinks that the plaintiff will have serious medical difficulties in the future” unless Dr. Jones is in fact prepared to testify to that effect. As a result, seasoned attorneys know to watch carefully for qualifiers such as “in my opinion” or “in my view.” Such language may signal that the lawyer is searching to sanitize what otherwise would be a material misrepresentation.

  Certain common types of lies are barred by Rule 4.1, however. For example, in our view a lie about your alternative in a deal-making transaction is a false statement of material fact. Thus, a lawyer who asserts “My client won’t accept less than $1,000,000 for his property because he has another offer on the table for that amount” would probably violate Rule 4.1 if no such offer existed. (Such lying might also be considered fraud.) The same lawyer could, however, say “My client won’t accept less than $1,000,000” or even “$1,000,000 is a fair price for the property,” even if these statements were false, because these would not be considered material.

  NONDISCLOSURE

  Both Rule 4.1 and the law of fraud impose affirmative obligations to disclose material information in limited circumstances. As to disclosure of relevant law, Rule 4.1 imposes no duty to disclose. Whereas section 4.1(a) prohibits making a false statement about the law, section 4.1(b) applies only to a failure to disclose material facts. Imagine, for example, that you have engaged in settlement negotiations about a legal dispute for several weeks. You represent the defendant, and you expect to settle the case today for $50,000. You’ve based that figure in part on the applicable law in your state concerning how damages should be measured. Just before heading into today’s negotiation, however, your legal assistant hands you a copy of a case decided late yesterday afternoon by the state’s highest court. The case substantially changes the relevant law, making it much more likely that your client would be held liable for $200,000 or even $250,000. What do the Rules require you to do with this information in today’s final negotiation?

  If opposing counsel does not ask questions that require you to represent what the relevant law is, Rule 4.1 suggests that you have no duty to inform counsel of the change. So long as you do not make an affirmative misrepresentation, you do not violate the Rules by staying quiet. Lawyers do have affirmative duties to disclose relevant law in more formal legal proceedings, however. Before a judge, for example, Model Rule 3.3(a)(3) obligates a lawyer to disclose controlling authorities, even if they are harmful to the lawyer’s legal position.

  As to nondisclosure of material facts, Rule 4.1(b) does require a lawyer to reveal a “material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6.” Thus, for example, if a client seeking $20,000 for medical expenses told you that in fact his expenses were only $5,000 and that a friend had forged medical bills for the extra $15,000, a failure to disclose that information likely would result in the client defrauding the defendant. At the same time, Rule 4.1(b) conditions the duty to disclose on first satisfying the lawyer’s duty under Rule 1.6 to keep client confidences.5 Model Rule 1.6(a) states that a “lawyer shall not reveal information relating to representation of a client unless the client consents after consultation, except for disclosures that are impliedly authorized in order to carry out the representation.” Rule 1.6(b) qualifies Rule 1.6(a) by permitting a lawyer to reveal information to the extent that either the lawyer reasonably believes it necessary to prevent the client from committing a criminal act that the lawyer believes is likely to result in imminent death or substantial bodily harm, or the lawyer needs to reveal the information to establish a claim or defense in a controversy between the lawyer and the client. But for most legal negotiations these two exceptions rarely apply.

  Therefore, information obtained from a client in confidence may not be disclosed to the other side in a negotiation even if it might be disclosable under Rule 4.1. Instead, the lawyer would be forced to withdraw from representation if he were unable to convince the client to disclose the information voluntarily.6 Under the Rules, a lawyer can sometimes choose to make a “noisy withdrawal,” severing the lawyer-client relationship while disaffirming any document or opinion he previously authored in the course of the representation. A noisy withdrawal plainly signals that the client may be acting unethically.

  In addition, Rule 4.1(b) is only as strong as the law of fraud. In other words, it requires lawyers to act only to avoid crime or fraud by the client. Traditionally, very few types of nondisclosure constituted fraud. In Laidlaw v. Organ,7 the classic statement of nondisclosure law, the Supreme Court of the United States held that in general there is no duty to disclose even material information that you know an opposing negotiator would find important to the underlying transactio
n. The case involved the sale of tobacco following the cessation of the War of 1812. The buyer, Organ, knew that the war had ended; the seller, Laidlaw, did not. Organ knew that the price of tobacco would jump when the news of the war’s end circulated. Nevertheless, the Court found that he had no duty to disclose this information to Laidlaw, even though Organ knew that Laidlaw was misinformed. This rule—“buyer beware”—has long been seen as the standard in American law. Although in some contexts, such as residential real estate transactions and transactions implicating environmental or securities law, this rule has been modified by statute or regulation, it still applies broadly.8

  Keeping quiet is not permissible in all cases, however. Fraud law imposes affirmative duties to disclose in some circumstances. First, “buyer beware” does not apply when the parties are in a fiduciary relationship. Lawyers and clients, trustees and beneficiaries, executors and beneficiaries, and others in such relationships must disclose important information even if no one asks for it. In many states, courts have begun to define more transactions as fiduciary in nature, including some banking and franchisor-franchisee transactions. A lawyer must therefore be familiar with her jurisdiction’s approach to fiduciary relationships in the business contexts in which she works.

  Second, if a nondisclosing party makes a partial disclosure that may mislead the other side, the nondisclosing party may run afoul of the law. A lawyer, for example, may have information that his client’s business is facing a potential loss in the current fiscal year. At first, the lawyer may keep quiet about profits, knowing that he doesn’t want to discuss the expected loss and that if he can avoid the topic he’ll be better off. But if the lawyer mentions that the business is making big profits on one product (say, its speech recognition software) and leaves out the losses on another (say, its internet hosting services), he has likely committed fraud. The buyer of the client’s business would probably assume that the lawyer has given a complete picture of current profits, based on the lawyer’s partial—and misleading—disclosure.

  Third, in some states, fraud law imposes a broader duty on sellers than on buyers. In California, for example, a homeowner must make substantial disclosures of what he knows about a property’s condition.9 He must disclose termite infestation or other problems with the home that might either dissuade a buyer or reduce the purchase price. On the other hand, a buyer is not required to disclose to the seller that he expects to strike oil on the property.10

  COMMON ETHICAL QUESTIONS

  The rules of professional responsibility and the law of fraud provide only a floor: negotiating lawyers may comply with the rules and still mislead others through shrewd omissions and the tactical use of language. Of course, pragmatic considerations and personal morals may nonetheless constrain a lawyer from behaving in these ways. Such deception, even if not sanctionable, may be costly. Being misleading may damage one’s reputation and make it more difficult to do business in the future. In addition to these pragmatic concerns, such conduct may offend your personal moral code. Whether Christian, Buddhist, communitarian, Kantian, or utilitarian, many lawyers appropriately bring more demanding ethical principles to their negotiations than the rules may require.

  In our view, a reputation for integrity and honesty is a professional’s greatest asset. And the personal benefits of defining and following your moral convictions over time easily outweigh the supposed costs of acting ethically in a given negotiation. But attorneys committed to behaving honorably and ensuring that their conduct complies with the rules face difficult challenges because they must negotiate within a system of relationships. What if your client pressures you to do something unethical? What if the other side is lying? Here we address some of the most common questions that lawyers raise about negotiation ethics.

  What If My Client Wants Me to Mislead the Other Side?

  Sometimes clients want their lawyers to lie, shade the truth, or withhold material information. Obviously, if a client proposes that you violate the codes of professional conduct or commit fraud, you should refuse and try to convince your client to take another approach. If the client rejects your counsel, you should withdraw. But what about cases that are less clear-cut, such as where the client asks you to do something that is not a clear violation of the rules but nevertheless makes you uncomfortable on professional or ethical grounds? What should you do then?

  There are good reasons for a client to hire a reputable lawyer and then take advantage of the lawyer’s reputation. To some extent, the profession permits clients to avoid tough ethical dilemmas. Imagine that Ed Burgess is about to negotiate a severance package with his employer, Mr. Jenks, who wants him to retire three years before Ed reaches age 65 and his current employment contract expires. There are no severance provisions. Ed would like to receive severance equal to a substantial portion of his current salary for the three-year period, and he would then expect to receive the full pension that he would have received had he worked until age 65. In arguing for the salary, Ed knows that Mr. Jenks will assume that Ed will have a hard time finding a new job; the market is tight and there aren’t a lot of positions available in the area. Jenks is therefore likely to be fairly generous with Ed. In his last discussion with his boss, Ed talked at length about the hardships his family would have to endure if the company refused to pay a substantial yearly stipend.

  Ed hasn’t talked to Jenks in several weeks. He has, however, just received an offer from a competing firm for a good position as a senior analyst and advisor. Ed could earn approximately 75 percent of his previous salary, and he expects to accept this job after his severance package is negotiated. Ed knows that if he personally negotiates with Jenks, he will feel internal moral pressure to disclose this information, even if Jenks doesn’t ask about his financial status. What might Ed do if he wants to squeeze Jenks for a large severance package? Hire a lawyer. Even if Ed discloses the investment advisor offer to his attorney, his lawyer cannot disclose that information to Jenks without authorization. A failure to disclose would probably not constitute fraud. (Of course, if Jenks asked Ed’s lawyer directly about a competing offer, the lawyer would have to answer truthfully or not at all.)

  One might question whether it is ethical for Ed to use an attorney in such a strategic manner. But he may prefer avoiding the more direct personal dilemmas raised in a face-to-face discussion with Jenks. Ed may even choose not to give his attorney this information at all. If he keeps the information completely private, then he may be able to avoid even discussing whether he has some sort of moral obligation to disclose.

  SEEK TO UNDERSTAND THE CLIENT’S CHOICE

  If a client is asking you to mislead the other side, the first step, as always, is to try to understand why. In what ways does this request make sense for the client? Put yourself in her shoes. If you were the client, would you propose the same thing that she’s proposing?

  By identifying the incentives that motivate your client to ask you to mislead the other side, you may be able to relate better to the client as you talk about his request. The key is to learn why the client thinks you should manipulate the truth. What does he see as the advantages? What does he see as the risks? What are the client’s concerns? By listening and demonstrating understanding, you can often draw out the client to talk about the underlying choice of strategy.

  RAISE YOUR CONCERNS EXPLICITLY

  Lawyers also must learn to discuss ethical dilemmas explicitly. You can find yourself in a very uncomfortable situation if neither you nor your client is willing to discuss ethical conflicts. Learning to have such conversations productively is a critical skill.

  If your client asks you to mislead the other side, you should negotiate with her and try to help her understand your views. You must explain that you don’t want to violate established rules of professional responsibility, and that you don’t want to do something that isn’t in your client’s best interests. You don’t want to go against your personal beliefs, and you don’t want to do something that hurts your reputation
. By explaining your interests and perspective—while continuing to demonstrate understanding for the client’s views—you can begin a conversation about the dilemma you face.

  Ed’s lawyer, for example, would want to explain that in the face of questioning by Mr. Jenks he would either have to tell the truth about a competing offer or refuse to answer a direct question. “That would probably give away the issue right there,” Ed might say. “Couldn’t you just say ‘No, he has no other offers’?” “No,” his lawyer might explain. “I can’t lie about a material piece of information like that. And I’ve got to tell you, it would probably amount to fraud. Given that sooner or later he’s going to find out whether you’re working again, lying about it could cause serious problems later.”

  REMEMBER THAT YOUR REPUTATION IS A VALUABLE ASSET

  Clients sometimes want to use a lawyer’s reputation for honesty as a cover for their own unethical behavior. If a lawyer is known for telling the truth, this reputation can be a perfect smokescreen for throwing the other side off track. If your client persuades you to lie, however, he may take advantage of your reputation for his own short-term gain, disregarding the long-term effect on your career and well-being.

  We learned of a recent example in a divorce case. After discovering that his wife had hired an attorney, the husband hired an outstanding family lawyer—known in his community as an honorable problem-solver. The two lawyers had done many divorce cases together in the past and had built up a great deal of trust. Ordinarily they did not rely on formal discovery procedures, choosing instead to exchange information informally. This saved their clients a great deal of time and money.