Many disputes and deals involve not two parties but several. Any time multiple plaintiffs bring suit, or a single plaintiff sues more than one defendant, a legal dispute has become multiparty. Thus, even the simplest tort accident cases usually involve more than two parties—a plaintiff, a defendant, and at least one insurance company. Similarly, any time more than two parties enter a contract or strike a deal, multiparty effects kick in. The two most common effects are coalitions and holdout problems.
Coalitions
When three or more parties negotiate, coalitions become possible. The classic coalitional problem debated in negotiation literature involves three parties (we’ll call them Avery, Butler, and Collins) and the following triangular bargaining structure:4
• If Avery and Butler agree on a particular issue or choice of action, they can exploit Collins, but Collins has the ability to buy off or entice Avery away from a deal with Butler.
• If Butler and Collins agree, they can exploit Avery, but Avery can buy off Butler.
• If Collins and Avery agree, they can exploit Butler, but Butler can buy off Collins.
Thus, each party circles around the other two, seeking a side deal with one or the other but worrying that the other two will reach an agreement excluding that party.
For example, imagine that three corporations are considering a joint venture, in which the three would create gains of $100 million that they would split three ways. As the future partners discuss their plans, each may also consider the possibility of doing a deal with only one of the other two. Thus, imagine that if Atlas and Banks join forces but exclude Capital, they could create gains of $60 million which they would split only two ways. Depending on what Banks expects to get in a three-way split, Banks may offer to give Atlas $45 million of the two-way split, keeping only $15 million for itself, because Banks knows that in a three-way deal it will get only $10 million and Atlas only $30 million. Atlas and Banks thus might consider their two-way deal superior to a three-way deal with Capital. Capital, of course, may have plans of its own. If it can lure either Atlas or Banks away from their two-way deal, then Capital may end up in a two-way deal that leaves either Atlas or Banks out in the cold. Alternatively, Capital might be able to entice both Atlas and Banks into the three-way deal by renegotiating its terms.
In coalition situations, parties may constantly question their alliances, and coalitions may be unstable. In deal-making, long-term coalitions may be difficult to maintain because a firm’s opportunities and interests may change over time. Parties may want to maintain the freedom to choose new deal partners in the future. In dispute resolution, coalition dynamics arise across the table (between plaintiffs and defendants) and behind the table (between and among the individuals on one side or the other).
The history of the tobacco litigation in the United States provides another example of coalition formation.5 The tobacco industry has faced lawsuits for decades, usually based on the legal theory that smoking caused cancer and had killed or injured a plaintiff or group of plaintiffs. Until recently, however, the industry had never paid a penny in damages as a result of these suits. Litigation was sporadic and piecemeal, and the tobacco industry had long formed a strong defense coalition that consistently overpowered individual plaintiffs and their attorneys. The defendants had designated “liaison counsel” that handled joint filings and coordinated defense efforts, and for over thirty years a Committee of Counsel, made up of the top in-house lawyers in the industry, had met regularly to discuss industry matters and plan litigation.6
But in the early 1990s, two different groups of plaintiffs’ lawyers formed new coalitions to pursue two novel legal theories against big tobacco.7 First, a Mississippi lawyer, Michael Lewis, came up with the idea of suing the tobacco companies on behalf of the states to recover Medicaid payments made as a result of treating smokers’ illnesses. Lewis began building a coalition of plaintiffs’ attorneys and state attorneys general to pursue these claims. At roughly the same time, another group of high-powered plaintiffs’ attorneys, led by lawyer Wendell Gauthier, began building a coalition around a second theory: that the tobacco companies could be liable for causing addiction, even if, as had been shown repeatedly in various losing lawsuits, the industry seemingly could beat claims for wrongful death or personal injury. Gauthier began a national class action on behalf of all addicted smokers—the Castano litigation—and tried to unite previously distinct factions within the plaintiffs’ bar.8 He eventually persuaded over sixty law firms to join Castano. Each contributed at least $100,000, and a headquarters was established in New Orleans. Because they were scattered in nineteen different states, the lawyers formed committees to handle various tasks such as dealing with the press, handling discovery, and choosing witnesses. For the first time, the tobacco coalition faced two powerful counterparts.
As a result of these new attacks, the long-standing coalition among the tobacco companies began to weaken. First, several key individuals—mostly scientific researchers—from within the industry began to leak information and documents to the press or to the plaintiffs’ coalition.9 Then, in March 1996, the Liggett Company—the smallest of the big five tobacco companies—agreed to settle both the Medicaid claims and the class-action claims against it in return for paying 5 percent of its pretax income for twenty-five years, up to $50 million per year, for smoking cessation programs and to reimburse part of the states’ expenses for treating smokers.
Although in May 1996 the Castano class was decertified by the 5th Circuit Court of Appeals,10 the Castano lawyers immediately filed a bevy of state class actions. Moreover, in August 1996 a jury in Jacksonville, Florida, returned a $750,000 verdict against Brown and Williamson Tobacco Corporation for causing lung cancer in an individual plaintiff, Mr. Grady Carter, adding momentum to the cause.11 And the Medicaid cases continued, with more and more states filing claims against the industry. By the end of 1996, about twenty states had sued the industry, with more to follow. And in March 1997 Liggett expanded its original settlement. It agreed to include these states, to acknowledge that smoking is addictive and causes cancer, and, perhaps most importantly, to turn over thousands of industry documents detailing the workings of the tobacco companies.12
Shortly thereafter, in June 1997, the states’ attorneys general reached a $368 billion settlement with the industry, subject to congressional approval. But once again, coalition dynamics kicked in, as some of the states splintered off, making it hard to hold the deal together. In July 1997 Mississippi left the states’ coalition and settled its claims with the industry independently, rather than wait for federal approval of the $368 billion deal.13 Three other states—Florida, Minnesota, and Texas—followed. And some of these settlements were on very favorable terms for the individual states.
Ultimately, Congress foundered in its attempts to pass national tobacco legislation, and in November 1998 forty-six states reached a second settlement with the tobacco industry for $206 billion.14 Although the saga continues—fights over legal fees erupted shortly thereafter, and the Clinton administration filed a still-pending suit on behalf of the United States to recover its spending on smoking-related ailments—the history of the tobacco litigation underscores the importance of coalition dynamics in multiparty disputes.15
Holdouts
In addition to permitting coalitions, adding parties can create holdout problems. The classic example comes from the world of real estate transactions. Imagine that you are a developer who wants to build a large apartment complex in downtown Boston. You need to purchase five separate plots of land from five individual owners. You approach the owners individually and successfully negotiate four land sales for reasonable prices. But when you approach the fifth landowner, she demands a much greater payment for her land than the other four did. Why? Because that landowner can hold out for more money by denying you your ability to proceed with the apartment complex. Your apartment complex is so close to becoming a reality that you can almost smell the bricks and mortar, but wi
thout that fifth parcel, your project will never get off the ground.
It can be difficult to deal with situations in which one of many parties has the ability to hold up a complete agreement or solution to a problem. A real estate developer may go to great lengths to hide the fact that he is buying up many contiguous parcels of land. Developers frequently involve lawyers in such deals to protect the identity of the true purchaser.
The strategic issues that holdout problems present are fascinating, complex, and very challenging. Consider the following real-life problem. A very large American bank was sued by five foreign banks, each represented by separate counsel, in a consolidated federal court lawsuit where the plaintiffs claimed the defendant had not lived up to its fiduciary responsibilities as an indenture trustee. After months of litigation, at the suggestion of a mediator, the defendant was about to make a settlement offer that it seemed reasonably clear might be acceptable to four of the plaintiffs. It was unclear whether it would be acceptable to the fifth plaintiff. Once the offer was made, each plaintiff would have 72 hours to indicate in writing to the mediator whether it accepted the offer or not.
The following strategic issue arose. Should the large defendant announce in advance that it would settle only if all five accepted? The defendant told the mediator privately that its inclination was to condition the settlement offer on all five accepting and announce this requirement when the offer was put on the table. After all, it didn’t want to pay out large sums to four plaintiffs and still have to litigate against the fifth. On the other hand, it would not as a matter of principle pay the fifth plaintiff more.
The mediator understood why the defendant might want to accept only if all five of the plaintiffs settled. But the mediator advised that the defendant should instead state to the plaintiffs that it might or might not settle with less than all and that it would decide this question only after seeing which plaintiffs had accepted. Why?
The mediator urged the defendant to consider the incentives created by the different rules. A unanimity rule would put a recalcitrant plaintiff in the position to hold out for more than its pro-rata share in a negotiation behind the table with the other plaintiffs. Unless the defendant thought the other plaintiffs would pay off the holdout, or that the holdout would back down in a game of chicken with the other plaintiffs, the result would simply be no deal for the defendant. But by avoiding any announcement of a unanimity requirement in advance, and reserving its right to decide later, the defendant would put maximum pressure on the recalcitrant plaintiff to accept the deal. A sole rejecting plaintiff would run the risk that the defendant would settle with the other four, meaning that that plaintiff alone would have to litigate the case against the giant defendant. This would be a very undesirable outcome for a single plaintiff, because it would have to pay all of the costs to prosecute the case, not simply a fraction.
The bank followed the mediator’s advice, and all five plaintiffs accepted the defendant’s proposed settlement offer.
Some Legal Examples Involving Multiparty Bargaining
Consider briefly the complicated systems that can be created even in a negotiation that is largely conducted between two opposing sides. On either side of a legal negotiation, at least four basic structures can be in place: a client and a lawyer; multiple clients with one lawyer; one client with multiple lawyers; and multiple clients each with their own lawyer.
In a products liability case brought by a single plaintiff using a single attorney, that plaintiff may sue one defendant, who may retain one attorney or firm of attorneys to defend it. Alternatively, that defendant may employ multiple attorneys to conduct its defense. Or the plaintiff may sue multiple defendants—the manufacturer of the product, the distributor of the product, and the store in which the plaintiff purchased the product—who may choose to conduct a joint defense by turning over their defenses to one legal advisor, perhaps the manufacturer’s counsel. Finally, the plaintiff might sue multiple defendants, and they might each retain their own counsel independently. Beyond these permutations, of course, one can imagine a huge number of others. Consider some of the following legal examples, and the ways in which multiparty coalition and holdout problems can play out in the legal domain.
A TWO-PLAINTIFFS ONE-DEFENDANT ACCIDENT CASE
To the extent that the two plaintiffs—and their lawyers—cooperate in forming a coalition against the defendant, they may be able to share information and resources and perhaps unearth damaging information about the defendant’s actions that will lead him to settle or to lose in court. At the same time, however, either plaintiff may form a coalition with the defendant instead. If one of the plaintiffs has a better case against the defendant on the legal merits, for example, the defendant might be willing to settle early and independently with that plaintiff at a premium, thereby eliminating the evidence he brings to bear on the case and permitting the defendant to settle with the second plaintiff for much less.
The two plaintiffs in this situation—or any two clients on the same side of a legal negotiation—soon discover that they cannot avoid an internal negotiation over strategy, and like any other negotiation theirs will have distributive issues and value-creating opportunities. Lawyers and clients in this situation constantly must worry about the incentives to defect that their supposed allies face, and about whether those allies will betray their alliance for distributive gain. Such litigation is, in other words, very similar to the Avery-Butler-Collins triangular pattern we discussed above.
Coalition dynamics also raise strategic problems for the defendant. Should the defendant settle both claims simultaneously and treat them as a joint problem? Or should the defendant try to settle one or the other, to split the plaintiffs’ coalition? If the latter, which should the defendant negotiate first, the stronger claim or the weaker? Both strategies have advantages and disadvantages. If the defendant settles the stronger case first, that plaintiff’s evidence drops from the dispute and the other plaintiff may be forced to settle for less. On the other hand, paying the stronger plaintiff a premium to settle first may set a precedent which encourages the second plaintiff to expect similar compensation. By settling with the weaker plaintiff first, the defendant could set a precedent that anchors negotiations with the stronger plaintiff at an arbitrarily low figure. The disadvantage to approaching the weaker plaintiff first, however, is that this risks paying a greater amount of compensation overall, given that the defendant’s settlement with the weaker plaintiff may be for more than is necessary and there is no guarantee that such anchoring will seriously influence the stronger plaintiff.
A ONE-PLAINTIFF TWO-DEFENDANTS BUSINESS CASE
Similar coalition problems arise when one plaintiff sues two defendants. Consider a case in which a business plaintiff—Acme—sues two other corporations—Bridgeway and Concord—for breach of contract. What will happen next? Although in some ways allied in their fight against Acme, Bridgeway and Concord could turn around and sue each other. Thus, our triangular pattern reemerges. Although Bridgeway and Concord in theory could cooperate to form a coalition against Acme, each may have individual incentives that ultimately will make it more attractive to ally with Acme against their co-defendant. Settlement can thus be reached in any of a number of ways: all three parties may settle jointly, or one of the defendants may settle individually with Acme. Each will worry constantly about whether the others are reaching an exclusive agreement.
A COMPLEX SUPERFUND CASE
The problems created by coalitions and holdouts can become extreme in complex litigation. In Superfund litigation, for example, the government—through the Environmental Protection Agency and the Justice Department—seeks to collect funds from Principally Responsible Parties (PRPs) who are legally liable for a designated Superfund site. Often there are dozens, and sometimes hundreds, of PRPs involved in litigation over a given site.
In a relatively simple world, one would imagine that most of the litigation and negotiation would be between the government on one side a
nd the PRPs as a group on the other. The government, of course, would be trying to lay responsibility on the PRPs, and the PRPs would be trying to evade that liability. In the real world, that dynamic is only one part of Superfund litigation. Much additional time, effort, and expense are spent on intra-PRP litigation and negotiation. PRPs constantly jockey to minimize their own liability by foisting liability on other PRPs in the pool. Moreover, the PRPs also share a common interest in getting additional PRPs into the pool to minimize each individual PRP’s responsibility. Thus, in some sense the existing PRPs have incentives to cooperate with the government vis-à-vis potential PRPs not yet in the pool.
The situation creates complex coalition problems. At one level, the PRPs may form a coalition, or several, to defend against the government’s allegations. At another, the PRPs may fight among themselves over how liability will be allocated, and in the process coalitions will form. These fights may or may not lead some PRPs eventually to ally with the government, which may favor a given intra-PRP allocation. Moreover, the PRPs may ally with the government to get new PRPs into the mix. All in all, it is a highly unstable and distributive environment.
IMPLICATIONS FOR THE LAWYER’S ROLE
These examples show that the lawyer’s role is often very complex. Januslike, the lawyer faces both the client and the other side, but sometimes neither is a single, unified entity. Sometimes there are multiple clients behind the lawyer, each with her own interests, priorities, and resources. Thus, the negotiation that the lawyer must conduct behind the table can be much more complicated than what we described in Part III, which assumed only a single individual as a client. Moreover, the lawyer may face not a single lawyer on the other side but multiple lawyers. These multiple lawyers may represent one client or many. They may act in concert or independently. They may send uniform or contradictory messages and may behave consistently or inconsistently.
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