Class Action Countermeasures : Class Action Lawyers & Attorneys : McGuireWoods Law Firm : Complex Litigation, Mass Torts

Yesterday, I received my author's copy of Betting the Company: Complex Negotiation Strategies for Law & Business, which I wrote with old friend Andrew DeGuire of Johnson Controls, Inc. We've been informed that Amazon is now shipping orders (a month earlier than expected).

So today's post is a brief excerpt, to let you all know what we've been working on for the last eighteen months.

Throughout this book, we use “complex negotiations” to mean negotiations with (or among) organizations. Why? Because nego- tiations between organizations have a number of characteristics that may place them on the complex end of any spectrum. There are six characteristics of complex negotiations, each of which presents itself most visibly in negotiations between organizations.

 

* Complex negotiations amplify the effect of nonrational judgments. Individual negotiations involve nonrational components and strong personalities. For various reasons we will explain in greater depth, these nonrational judgments are more frequent (and more severe) in organizations than among individuals.
* Complex negotiations also involve multiple parties. Even if the negotiation is only one organization negotiating with another, the negotiation will likely be handled by teams, and those teams will represent constituents that must be mollified.
* Complex negotiations involve multiple issues. Negotiations over a single issue depend on the amount of bargaining power each party has. By contrast, negotiations over multiple issues provide greater opportunities for agreement (where concessions on one issue can be traded against gains on other issues) or deadlock (by providing additional areas for distrust or disagreement).
* Complex negotiations take place over an extended period of time. When negotiations take place over a course of months or years, the parties develop relationships that affect the nature of the exchange.
* Complex negotiations are heavily regulated. They occur against a background of complex rules and laws. They may also occur against a background of organizational rules.
* Complex negotiations are intercultural. Each organization has its own culture. And negotiations that cross international boundaries may involve different national cultures as well.

Of course, many of these characteristics occur even in “simple” negotiations. It is possible for negotiations between individuals to involve nonrational components, third parties, multiple issues, or culture clashes. However, as explained in greater detail later in this book, because of the ways in which members of groups interact with each other, these issues are more likely to arise in the context of negotiations between organizations.

One central irony we will discuss throughout this book is that organizations are extremely helpful with complex issues: they allow us to throw more resources at a problem; they check individual personality quirks that might lead us astray; and they allow us to add expertise on new issues when necessary. But at the same time as they solve some challenges, organizations intensify others: organizations multiply the number of people who must be satisfied with the outcome; they lengthen the time required to consummate a deal, allowing new events to intervene; they can even amplify undesirable personality traits and entrench them as corporate culture.
In short, complex negotiations mean lots of moving parts, which in turn means lots of distractions and lots of chances to knock a negotiating team off its original plan. So one of the things this book is about is how to maintain strategic focus when events are exploding around you.

While I hope the connection with class-action practice will be self-evident, this book represented a departure from the doctrinal analysis so many of us lawyers spend so much time on. I'm proud of the result, and hope some of you will find it useful.

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Fordham law professor Howard M. Erichson has a new paper up at SSRN on "The Problem of Settlement Class Actions."  Based on dicta in the Supreme Court's opinion in Amchem Products, Inc. v. Windsor, courts have taken to certifying classes for settlement purposes only without worrying about "manageability," that is, whether the case could actually be tried as a class action.

As a result, settlement class actions have long posed strategic dilemmas for plaintiffs and defendants alike. Among them:

• How much can the defendant concede without compromising its ability to defend the case if the settlement falls through? (Not as much as you think.)
• Can a settlement-only class be too cheap? (Yes.)
• How wide can the parties cast their net in releasing claims? (Not too wide.)

Professor Erichson shares many of these concerns, which is why he advocates abolishing the settlement-only class, and only allowing settlements to proceed if the class has been certified for litigation. As evidence of the need for this shift, he cites two recent--and highly controversial--settlements: In re AIG and Sullivan v. DB Investments. As he puts it

AIG and DeBeers show what happens when courts follow the Supreme Court’s dicta [in Amchem] to its logical conclusion, rather than following the concerns that animated the Court’s decision. Armed with the Supreme Court’s modest permission to treat settlement classes slightly differently than litigation classes, these courts approved settlement class actions notwithstanding issues that go to the heart of class certification – in one case, the fraud-on-the-market doctrine, and in the other, significant variations in state law.

(Emphasis added.) Erichson draws the wrong lesson, though. He thinks questionable settlements like these occur because the plaintiffs lack leverage in negotiations:

By permitting settlement class actions without plenary class certification, the Court invited defendants to use the settlement class tool to resolve widespread liability through negotiation with deleveraged would-be class counsel. Moreover, by modifying the approach endorsed by the Court of Appeals, the Supreme Court opened up the possibility of class resolutions negotiated without even the leverage of future litigation class certification.

(Emphases added.)  That conclusion seems to ignore the facts of each case. In each of these cases, a class that could not have gotten certified for trial was certified for settlement. Think hard about that for a moment. In In re AIG, the plaintiffs brought a class that could not be certified because of individualized reliance issues. It settled for $72 million. In Sullivan, the plaintiffs settled a case on behalf of a class that included many unharmed class members for $295 million. Is the problem in either case that the plaintiffs lacked leverage?

GIven his misdiagnosis of the problem, Professor Erichson's solution misses the mark. Abolishing the settlement class action will not lead to better settlements. It may, in fact, lead to worse ones. The plaintiffs' leverage in settlement negotiations comes not so much from their promise of peace as from their threat of war. Litigating class actions has grown enormously expensive, and defendants will often settle claims that are less than meritorious because the settlement is cheaper than the costs of litigation. DB Investments did not pay $295 million for the preclusion of other cases--it did so because it was facing a default judgment. And AIG likely settled its case--in which it had a very strong argument against certification--because the costs of reaching that victory were simply too high.

The problem with these settlements was not that the plaintiffs lacked the leverage to cut a good deal; indeed, the indirect purchasers in Sullivan and the investors in In re AIG did just fine. The problem is that absent class members--who are not present for the negotiation--are too often sacrificed for these deals.

There is a solution to this particular problem, but it is one that plaintiffs, judges, and academics tend not to advocate. To protect absent class members, courts just need to vigorously enforce the adequacy requirement, and intervene in poor settlements sooner. Some courts are willing to do this. But for too many, this would interfere with many plaintiffs' current business model.  That's a shame. Defendants will manage just fine, but absent class members may not.

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Today's case, Critchfield Physical Therapy, P.C. v. Techhealth, Inc., 2013 U.S. Dist. LEXIS 13440 (E.D. Mo. Feb. 1, 2013), is a short one, but it contains a valuable lesson.

Critchfield filed a class action against Techhealth. The basis of the lawsuit was not important enough for the court to mention in this opinion. What was important was that a mediation conference was scheduled in the case. A representative of Techhealth attended, as did its counsel. But on the plaintiff's side, only plaintiffs' counsel showed up. This is not an unusual arrangement in a class action: I have attended several class mediations over the years where I brought my client along, but plaintiffs' counsel (the real party in interest, as some courts acknowledge) did not.

In this case, however, the defendant demanded that the actual plaintiff show up. (A canny move, given that the plaintiff may well have different ideas of acceptable remedies--and acceptable fees--than its counsel.) When counsel refused, claiming that a representative was available by phone, the defendant shut down the mediation.

Then it moved for sanctions.

The court granted the motion. As it reasoned:

both Local Rule 6.02(B)(1) and the Order referring the case to mediation in this case required that a corporate representative of Plaintiff having authority to settle claims attend the mediation in person, unless otherwise agreed to by the parties or excused by the court. Attendance in person by the parties is not a mere technicality. It is what ensures a meaningful mediation and is the cornerstone of good faith participation. Merely "being available" by phone does not satisfy this requirement. Furthermore, the Court discerns no reason why there should be an exception for a named plaintiff in a putative class action. Such an exception would run contrary to a class representative's obligations as a representative of the class.

(Emphasis added; internal citations and quotations omitted.) The court did, however, reduce the sanctions by 30% because the defendant could have called the court during the mediation to resolve the issue, saving some costs.

So what's the takeaway? Plaintiffs are not optional in class actions, not even in settlement talks. Including the plaintiffs may well reduce costs (and fees) over time.

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As one might expect from a holiday week, last week produced few class action opinions.  On the other hand, the Economist had an excellent article on the peculiarities of bargaining with Somali pirates.  Based on two working papers in the past year, it examines "how two parties bargain when neither has good information available."  The money quote:

They found that Somali pirates pretend to be more sophisticated than they are, whereas shipowners pretend to be poorer. Nowadays both sides have an interest in a speedy resolution, since a prolonged negotiation incurs costs. For the shipowner, the cargo spoils and the ship goes unused. For the pirates, the captured crew must be fed and the ship guarded. And pirates cannot last long without a resupply of qat, which is to them as rum is to Captain Jack Sparrow. Settle too quickly, though, and one side or other is likely to get a poor deal.

(Emphases added.)  The first insight, that one side pretends to more sophistication and the other to fewer funds, may ring familiar to those involved in class action litigation.  The second doesn't translate quite as easily to the class-action context, but it does illustrate the difficulties in negotiating over longer periods of time.  Both papers (and the Economist's summary) are well worth a look.

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 So, you may have noticed that posting has been slightly sporadic lately. There have been two big reasons for this: first, my daughter was born at the end of June, and blogging must sometimes give way to taking care of her; second, I have just delivered the manuscript for Betting the Company: Complex Negotiation Strategies for Law & Business (co-written with my old friend Andrew DeGuire) to my publisher. It should be out sometime in 2013, but the crimp it put in my schedule occurred now.

So, to try to get back to my old two-a-week schedule, let me offer up three pieces of negotiating insight for class action settlements, derived from three older articles from the negotiating literature.

1. When we think people are acting spitefully, they may just be concerned with their relative rank. At least, that's the conclusion reached in Tatsuyoshi Saijo & Hideki Nakumara, The "Spite" Dilemma in Voluntary Contribution Mechanism Experiments, 39 J. Conflict Resolution 535 (1995) after the authors conducted a series of experiments on voluntary contributions. So it may behoove class action lawyers to look for ways to convince the other side that they're "winning" relative to their opponent.

2. Want to know if someone is lying in negotiations? Read Karl Aquino & Thomas E. Becker, Lying in Negotiations: How Individual & Situational Factors Influence the Use of Neutralization Strategies, 26 J. Org. Behavior 661 (2005), which offers five rhetorical strategies used by liars to make themselves feel better. Warning: these sound a lot like tactics used by both sides in a lot of heated litigation.

3. Some people like to split the difference when negotiating a compromise. That includes judges. But all "trimmers" to use Professor Cass Sunstein's term, are not alike. It may be worth your knowing whether your judge is interested in building consensus or just getting a tough case off her docket. Cass R. Sunstein, Trimming, 122 Harv. L. Rev. 1049 (2009).

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One of the unusual things about being an expat for a prolonged period of time is watching US news from the outside. Even though I have access to any number of American news outlets, being in a place where I am not surrounded by people who all share the same obsession with the 2012 Presidential race does afford some interesting perspective. And there is no question that, even from this moderate distance, American politics does look unusually polarized right now: it appears that large part of the electorate disagree so fundamentally on basic principles that agreement on anything seems unlikely.

Or is it? In an old (as in mid-1990s) article, Chicago law professor Cass Sunstein described the phenomenon of "incompletely theorized agreements." (The article is Incompletely Theorized Agreements, 108 Harv. L. Rev. 1733 (1995).) It's often used to explain "gaps" in legal rules, but it also works as a negotiation strategy between parties that disagree fundamentally.

Professor Sunstein's proposed strategy is to agree where possible on particulars, without worrying about whether one agrees on the underlying abstract principles:

"My suggestion in this Commentary is that well-functioning legal systems often tend to adopt a special strategy for producing agreement amidst pluralism. Participants in legal controversies try to produce incompletely theorized agreements on particular outcomes. They agree on the result and on relatively narrow or low-level explanations for it. They need not agree on fundamental principle. They do not offer larger or more abstract explanations than are necessary to decide the case. When they disagree on an abstraction, they move to a level of greater particularity. The distinctive feature of this account is that it emphasizes agreement on (relative) particulars rather than on (relative) abstractions."

(Emphasis added.) Professor Sunstein sees these incompletely theorized agreements resulting from democratic deliberations. He points--for example--to the Federal Sentencing Guidelines, which, while not a model of theoretical coherence, did at least make it into law. He also points out that these agreements can work for parties that have limited time or limited bandwidth with which to make a particular decision.

What Professor Sunstein does not mention is that this strategy works in reverse as well. In other words, when one is negotiating a deal where the particulars are sticking points, one can often find agreement on some of the more abstract principles at work. (This in fact is the "principled negotiation" behind Getting to Yes; it was also a strategy at the 1787 Constitutional Convention, where the delegates would often make general proposals with literal blanks where more controversial specifics might fit in.)

In other words, where possible, one should find the points of agreement, and emphasize those. When one finds oneself in a stalemate, it may be worthwhile to change the level of generality of the discussion. (If you're getting stuck on details, talk principles; if you simply cannot agree on fundamental principles, perhaps certain specific proposals will still garner agreement.)

The other advantage, in a litigation context, is that this strategy will help you test the resolve of the other side. If it is willing to agree to specific details, then agreement is possible. If not, then it may very well be the case that your counterpart is more interested in the litigation (or conflict) for its own sake than in resolving the dispute.

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 This week, one of the few sandwiched between Queen Elizabeth's Diamond Jubilee and the yearly recurrence of the Fourth of July, this expat lawyer finds his thoughts turning to the founding of the United States. In particular, what a royal mess it might have been. After all, as a document, the constitution has lasted 225 years, and--some bumps aside--still works pretty well.

And it was a document that was produced by committee, a committee of 55 members. And, as it turns out, few members of that committee were present for the entire Convention. Instead, many of them took long leaves of absence for various reasons, including attending to their actual jobs and tending to sick or dying relatives. Not only that, but the document took on a number of seriously contentious issues, including the rules for representation of different states and the question of where--if at all--slavery might be permitted.

So, given all of the challenges the Constitutional Convention faced, how did it not turn out worse?

Then-law student Dana Lansky, offers an intriguing explanation in her Harvard Negotiation Law Review article Proceeding to a Constitution: A Multi-Party Negotiation Analysis
of the Constitutional Convention of 1787: the Convention delegates were very wary of the problems that a multi-party negotiation might face, and put a number of structural solutions into place. While the article is twelve years old, but it packs in a lot of insights about the dynamics of large, chaotic negotiations.

Lansky uses James Madison's notes from the Constitutional Convention as her primary source. (So keep in mind that there may be some bias based on the fact that the primary source is one of the negotiators. In this case, I don't think the potential bias disqualifies the article, since Madison had an interest in a successfully negotiated outcome.)

Among the helpful suggestions Madison (through Lansky) offers:

• Appoint a facilitator. At the Convention, the facilitator was George Washington. (The Pennsylvania delegation were actually the ones to nominate him, which allowed everyone to rally around him.) And, as the article points out, Washington took great pains to appear impartial during the Convention. (He rightly recognized that if he were simply viewed as a partisan for Virginia, then the negotiations would likely break down.  (For class action lawyers, this is one reason why mediation is so often a good option if one is considering settlement.)
• Break into smaller groups. Or, as we often like to call them, committees. As another excellent article on the Convention notes, the Convention relied heavily on committees to expedite daily business and work out thornier issues. In fact, the use of the committee had a long pedigree, stretching back through the English Parliament at the very least. The Convention delegates used committees to break deadlocks and facilitate compromise.
• Propose packages. When you have multiple negotiators, there will inevitably be multiple issues they care about. How best to address all of them? Virginia came up with a proposal for a number of issues, then proposed them as the "Virginia Plan," which basically worked like an agenda. While others (the New Jersey delegation and Alexander Hamilton, for two) proposed alternative packages, the Virginia Plan remained front and center during the various debates.
• Do your homework. Before the Convention, James Madison did the most homework, researching issues, writing out solutions, and making educated guesses as to how other states might react. Guess who had the most influence? (And guess how the Virginia Plan was proposed so early?)
• Be as vague as you can get away with. Allows you to focus on areas of agreement, avoid areas of disagreement. Framers would actually make proposals that had blanks: e.g., "the states shall be divided into districts _______," which postponed any debate about the nature of the districts until everyone had agreed on the principle. While those blanks would have to be filled in sometime, the earlier agreements produced some commitment to later negotiation.
• Allow a reconsideration or tabling rule. Allowing people to revisit issues allowed parties to move on from impasses before they become stalemates. It also allowed for time to negotiate beneficial linkages.  (Of course, under some circumstances, allowing parties to postpone discussions might simply lead to retrenchment, or opportunities to undermine negotiations.)
• Don't forget informal talks. The Convention lasted a long time, in a place that isolated a number of the delegates from their homes. As a result, they did much of their socializing with each other. And these informal talks allowed certain issues to proceed better than they might otherwise. Sharing a drink with your counterpart, or having other time when you talk about things that are not specifically related to the substance of the negotiation, can be a great way to build trust and learn where common ground may exist.

The Constitutional Convention was hardly a perfect gathering, and the tendency to mythologize the "Founding Fathers" can be overwhelming. But it is hard to deny that, in this case, a number of the delegates went to great pains to both recognize the challenges that faced them in a large group, and to address those as best they could. The fact that the document they produced has lasted as long as it has through as many challenged as it has says something about how well these techniques can work when used by a group of serious-minded negotiators.

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Sometimes, I run across articles while researching that don't justify a full-fledged post, but that do provide a few helpful nuggets. This week, I'm having just that issue. So here are three somewhat interesting ideas, with which you can do what you will.

How to manage your negotiating team.  There's not a lot groundbreaking in the Harvard Business School reprint, but the tips are still helpful. Most helpful one for lawyers? Give everyone on your team a role, even that new associate. At best, it facilitates group loyalty and exploits previously untapped strengths.  At the very least, it can be cheap training.

Too Little Too Late: How Out-group Negotiation Strategy Drives Intergroup Relations.  This paper tests an interesting paradox. When two groups negotiate and reach a late agreement, they're happier than if they reach an earlier one. But, at the same time, the late concessions that lead to a late-stage agreement reduce trust between the two groups. The conclusions make a weird sort of sense, but should provoke unease in anyone who has to engage in repeated negotiations.

The Framing of Games and the Psychology of Strategic Choice is an interesting followup to previous research on framing and priming. The most interesting nugget from this paper? It is possible to frame some games to create guilt aversion in negotiators--that is, a desire not to let the other side down.

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 There is, in the extensive literature on negations, much discussion of the concept of "issue linkage." In fact, it gets tossed around a lot without ever getting an explicit definition. But it's a very helpful concept that arises out of the literature on international relations. And it has its roots in a 1979 article in International Organization by Robert D. Tollison and Thomas D. Willett, An economic theory of mutually advantageous issue linkages in international negotiations. As they wrote:

[B]y linking the two negotiations so that high benefitsgo to A in one area and high benefits go to B in the other, there may be a possibility to secure agreement in both negotiations in a way that brings benefits to both countries and brings the outcome much closer to the aggregate efficiency or potential welfare frontier.

(The "aggregate efficiency frontier" is the authors' term for the best outcome for the most people.) If this sounds a lot like basic horse-trading, well, that's probably because that's what it is. But, as the authors pointed out even back then, making the trading that naked "is extremely unlikely to be politically feasible." For whatever reason (we human beings don't like feeling like commodities, various bribery statutes may forbid certain kinds of trades), we don't like to make our horse-trading that naked.

So how should lawyers engage in issue linkage? There are a few ways that have worked well over the years of asking for some degree of quid pro quo without having to sound like Hannibal Lector toying with Clarice Starling. For example;

• Professional courtesy. Stripped of its cultural baggage (and make no mistake, professional courtesy is a cultural phenomenon), is a way of allowing horse-trading on small issues without making an explicit quid-pro-quo. By recasting the issue as one of "professional courtesy," one can imply to the other side that small concessions will be respected without compromising larger issue. (This works only if it's not abused.)
• Argue explicitly for linkage. Remember when I pointed out that lawyers don't argue well in negotiation because arguments often don't matter? Well, sometimes maybe they do. But it's not in convincing the other side of the overall merits of our case. It's in convincing them that the issues we seek to trade off against each other actually are connected in some way that justifies the trade.
• Explicitly unlink some issues. When you explicitly unlink an issue (like attorneys' fees) from other issues, you are actually doing two things. First, you are explicitly saying that you have unlinked one issue from the others, meaning that no other negotiations will affect it, at least formally. But secondly, you're sending an implicit signal that all others issues are considered fair game to trade off against each other.

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Years ago, I took part in a mediation for a small consumer class action--not my first, and hardly my last. In that case, the mediator did something unusual, she showed up with homemade chocolate chip cookies. The mediation did not result in a settlement, but it went pretty smoothly. Afterwards, I asked the mediator about the cookie gambit. "I find it tends to promote cooperation," she said. "No one gets too aggressive around homemade cookies."

Was she right? There's been a lot of research into the phenomenon of priming, the idea that verbal or visual cues can predispose us to act in certain ways. But can it really effect significant changes in behavior?

Back in 2004, social scientists Varda Liberman, Steven M. Samuels, and Lee Ross set out to test the effect of priming using a social-science staple: the Prisoner's Dilemma.

The Prisoner's Dilemma, for those who don't geek out over game theory, is an example of a problem from game theory. It was first developed in the 1950s as a way of explaining why individuals might choose selfish paths that led to worse outcomes than cooperation, even when they knew that cooperating would lead to better outcomes.

The story that accompanies the Prisoner's Dilemma goes like this: the police arrest two criminals, and they put them in separate interrogation rooms. The DA has enough evidence to put them each away for a year, but if she can get one of them to confess, she can put the other away for 10 years. It both confess, they will each go to jail for six years.

So each prisoner faces a choice: talk or stay quiet. If both stay quiet, they each serve only a year in jail. So what's the dilemma? Sitting alone in an interrogation room, neither prisoner knows what the other will do. What each does know is this: if he stays quiet, he winds up in prison no matter what, and he could serve ten years if his partner confesses. If he talks he might do six years, or he might do none, and he knows the other prisoner is thinking the same way. And there is no honor among thieves ...

Liberman et al. conducted a series of experiments using the Prisoner's Dilemma with both Stanford undergraduates and Israeli Defense Force pilots. But then they proceeded to do did something interesting with the game; they renamed it. For half of their test subjects, they called it "The Wall Street Game." With others, they called it "The Community Game." 

The result? The name of the game had a significant effect on players' strategies. When the Stanford students played, half of the Wall Street games resulted in mutual defections. And half of the Community games played resulted in mutual cooperation. The game was structured slightly differently for the Israeli pilots, but provided similar results. When the game was called the Bursa (Wall Street) game, 16 of the 20 participants started out by defecting. When it was called the Kommuna (Community) game, 11 of the 20 participants started out by cooperating.

One further twist in the experiment provides two more insights. In each case, the experimenters chose their subjects by going to authority figures who knew the participants. For the Stanford students, they went to resident advisors; for the pilots, they went to flight instructors. In each case, they asked the authority figures to stack the deck by giving them the people they thought were most cooperative and the ones they thought were most competitive.

Statistical analysis of the game results showed two things: (1) priming works even on people we think are predisposed to act in the opposite way, and (2) people tend to be very bad at predicting how competitive or cooperative someone will be based on personality alone.

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Barbarians at the Gate by business journalists Bryan Burrough and John Helyar is rightly considered a business classic. (It was also made into a hugely entertaining HBO film with James Garner as RJR Nabisco CEO F. Ross Johnson, Jonathan Pryce as buyout specialist Henry Kravis, and future Sen. (and Law & Order DA) Fred Thompson as American Express executive Jim Robinson.) It tells the story of how a group of executives from RJR Nabisco tried (spoiler: unsuccessfully) to buy the entire company in a leveraged buyout. It is an excellent example of business reporting, and an fascinating read. It also provides a number of lessons for those who negotiate on behalf of corporations. Among them:

Intangibles matter. Johnson's first company, Standard Brands, merged with Nabisco in part because of the fact that Ross Johnson decided he liked Nabisco Chairman Bob Schaeberle. Johnson went from "Who the f*@& is this guy?" to a merger in a matter of weeks once he met with Schaeberle. (His newfound fondness for Schaeberle, however, did not prevent Johnson from effectively ousting him once the merger had been effected.)  Similarly, back in 1956, RJ Reynolds decided against buying pharmaceutical company Warner-Lambert because one of RJR's senior vice presidents visited the Warner-Lambert chairman and learned he sailed a company-owned yacht. His reaction? "This is not for us. These are not our kind of people."

So intangibles, be they personality or corporate culture, can often make or break a deal. The same lesson applies in litigation. Plaintiffs' lawyer Jan Schlichtman famously botched a settlement negotiation in the H&R Grace litigation by throwing a settlement conference so lavish it convinced the defendants their money would be better spent fighting him than funding future conferences for other defendants.

Negotiations have costs. Throughout Barbarians at the Gate, the various parties involved in the proposed buyout worry about the fees the deal will generate.  Well, some don't worry as much as rejoice.  As an executive at Shearson (one of the investment banks) swoons when he considers the money he might make:

"Oh the fees! The upfront fees alone--for advising and money lending and a 'success fee,' maybe $200 million in all--would be a gigantic boost to Shearson's flagging earnings. And it wouldn't stop there …"

(Emphasis in original.) All complex negotiations have costs like these. In addition to just the usual costs in time, bringing outside parties in costs money. And that money must be subtracted from the bottom line of the deal. (The same holds true for litigation. Accommodating objectors (often by paying them off, sometimes by increasing the value of the settlement) costs money. So does notifying a proposed class.)

Everyone leaks information, whether they mean to or not. There are, of course, a number of direct strategic leaks in the course of the various wheelings and dealings that made up the RJR Nabisco LBO. But there were also moments when trying not to leak information wound up leaking information. For example, investment banker Jeff Beck [http://www.nytimes.com/1991/04/07/books/heard-on-the-street.html] had been pestering Johnson for months to try some kind of merger or LBO. So when Johnson was considering the LBO, he stopped taking Beck's calls. Beck immediately called Henry Kravis.

"I think it's time to do something about RJR," Beck said.
"Why is that?" Kravis wondered.
"For some reason Johnson's stopped taking my calls. He's having Jim Welch call me back. We ought to just have a meeting and make an offer."
"You're probably right," Kravis said.

Even the act of not communicating can communicate information. When the stakes are high, it is safe to assume the other side is taking back-bearings.

There are many, many more object lessons in Barbarians at the Gate. It is the perfect storm of complications in a corporate negotiation, one that contained a number of adversarial elements. As a result, it's well worth the read, for lawyers who represent corporate defendants, and for anyone who wants to see how an intensely competitive atmosphere (much like that among class-action plaintiffs) can make even the simplest proposed deal into something much, much more complicated.

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 I've written before about priming, the tendency of us humans to adopt emotional states if we are exposed to words with emotional content. But there are other psychogical effects that can influence negotiating in unseen, and unwelcome, ways. One of the most common of these is the problem of anchoring.

What is anchoring? As Dan Orr and Chris Guthrie write in their 2006 article Anchoring, Information, Expertise, and Negotiation: New Insights from Meta-Analysis, it's the tendency of any negotiation of numbers (like the price of a home) to cluster around the first number thrown out. Experiments have shown that this actually happens. And it can happen in odd ways. For example, social scientists have been able to influence a person's estimate of the value of a home in Des Moines, Iowa by showing them the median home price in the far more expensive Honolulu; or, better yet, they have influenced people's estimates of the African membership in the UN by spinning a wheel of fortune and reporting the number the arrow pointed at.

In essence, anchoring is a subset of priming, just one that focuses on numbers. Much as we can be primed by words to act in certain ways, we can also be "primed" by numbers that we see.

Like all heuristics, anchoring is often adaptive. For example, when estimating how much we will have to pay to purchase a house, it is usually reasonable for us to rely on the initial list price because it often conveys meaningful information about the actual market value of the home. Problems can arise, however, in two circumstances. First, we can get into trouble when we over-rely on an anchor. In the home purchase example, for instance, we are at risk of over-paying for the house if we are unable to adjust sufficiently away from its list price. Second, we can get into trouble if we rely on an irrelevant or uninformative anchor. If, for example, a newspaper article recounting the median home price in Honolulu influences the amount we are willing to pay for a small house in Des Moines, we are also at risk of over-paying for that home. (Likewise, if our estimate of African membership in the United Nations is influenced by the spin of a wheel of fortune, anchoring is obviously influencing our judgment in untoward ways.)

To test whether anchoring really wound up influencing actual negotiations, Guthrie and Orr performed a statistical meta-analysis on previous studies. (A meta-analysis is a method of statistical analysis that aggregates studies in the same field; performed properly, it can offer results that are more statistically sound than any individual study.) Their conclusion:

Our meta-analysis demonstrates that anchoring has a powerful influence on negotiation outcomes.

From this, they drew a few tactical recommendations. First, they leapt to the same conclusion as most do when they first hear of anchoring: bid high (or low) to start out, in order to sway your counterparty into moving their price closer to yours. Of course, most negotiators already do this, and there is only so far one can move out of a general range before it becomes obvious what one is doing, which may actually cause certain agreements to fall through.

Guthrie and Orr do identify another tactic, however, which is to use anchoring on oneself to counteract any external anchors. In other words, to the extent that one can set high explicit goals before sitting down at the table, one can counteract the anchoring effect of any opening offers at the table. (One might consider this the "I'm not going to pay a lot for this muffler" strategy.)

Guthrie and Orr also talk about the importance of using a good "outside" strategy as a way of defending against anchoring effects. What is an "outside" strategy? Basically, it's any strategy that gets the negotiator out of her own head, since that is where the anchoring effect is happening.

This outside, 'policy' approach improves decision-making by changing the dimensions of the choice-set. A good example of an outside strategy is the prevention of 'independent' auditors from working with a bank or brokerage firm for more than, say, five consecutive years. Rather than simply advising auditors to be impartial, or expecting them to be professional and direct in delivering bad news to the company responsible for their employer's financial growth, the outside strategy removes the threat to integrity by eliminating its source.

(Emphasis added.)  Simple bans are an outside strategy, as are bright-line rules. (The controversial Federal Sentencing Guidelines were an effort by Congress to either keep judges from anchoring too low, or an attempt to impose an alternative anchor.) But so is consulting an impartial third party, such as a consultant or a local expert. And it's possible that having a client back at home with high expectations also constitutes a good defense against anchoring; it's certainly something that works for a number of defense counsel.

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There is a common perception in complex litigation (not to mention litigation generally) that time favors the defendant. Defendants often counsel clients not to react too quickly: situations that may provoke a fight-or-flight response in the moment often present more strategic opportunities as they unfold. And plaintiffs tend to agree; they often complain that defendants' primary strategy is just to delay litigation for as long as possible.

But is there any basis for this assumption? After all, there are definite cases--like the motion to strike class allegations, or when plaintiffs try to change their theory late in the litigation--where defendants prefer to move faster than plaintiffs to resolve outstanding issues. So why is it that we all assume that plaintiffs want to rush while defendants want to wait?

One of the largest reasons that we assume that plaintiffs want to proceed faster than defendants is because of what economists call the time discount factor. All other things being equal, people value a gain now more than an equal gain in the future. This works in reverse, too. Most people would prefer a loss in the future more than the same loss today. (So you can see why, from the beginning, plaintiffs push for quick trials--they want their payments now, while defendants don't mind putting off losses from litigation.)

In 2007, Rutgers political science professor Jack S. Levy and PhD candidate Phillip Streich looked over the economic literature on time discounting. And what they found was that the classic account of time discounting actually understates how people treat decisions over time. As they wrote in their article Time Horizons, Discounting, and Intertemporal Choice:

The accumulation of experimental research on intertemporal choice has made it increasingly clear that the exponential discounting model that Samuelson (1937) pioneered nearly seventy years ago, which has subsequently dominated economics and economic applications in political science, does not provide a descriptively accurate model of how most people actually behave in making choices over time. Instead of discounting by a constant rate from one period to the next, people tend to discount relatively more heavily the near-term future and to discount relatively less heavily the more distant future, compared to constant-rate exponential discounting. In addition, discounting is not independent of the value of future out- comes. People have greater discount rates for less valuable outcomes than they do more valuable outcomes, and they have greater discount rates for gains than for losses. This asymmetry of losses and gains, so familiar to students of prospect theory, carries over into other manifestations of reference dependence and framing: the anticipated loss of utility of having to wait longer than expected for a future reward is greater than the anticipated gain in utility from receiving a future reward sooner than expected.

(Emphases aded.) All of these phenomena together contribute to what economists call hyperbolic discounting.  These two phenomena (sometimes called the gain-loss asymmetry and the delay-speedup asymmetry) add to the explanation of why defendants appear to prefer delay: plaintiffs value the gains they might receive less the further away they appear, and the mere fact of delay feels like a loss to them. By contrast, the defendant still anticipates that any anticipated loss will close to the amount it hurts today, and it experiences comparatively less gain from the day.

So what does this mean in complex litigation? It means that plaintiffs are in fact likelier to push hard to resolve matters quickly, even when there are sound reasons for proceeding deliberately. And that means that any attempts to slow the litigation to a manageable pace will lead to vigorous protest and strong rhetoric about "delay tactics." This may not be mere rhetoric on the part of cynical counsel; it may represent genuine frustration.

It also means that defendants have some leverage in negotiating how the litigation will proceed. Remember, all else being equal, delays are more immediately painful to plaintiffs than they are immediately helpful to defendants. So, when defendants need important concessions in other areas of the litigation (perhaps in the scope of discovery), they may be able to trade less-valuable (to them) scheduling concessions.

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We've been talking about negotiations on Wednesdays here for several months now. And while most of that discussion has focused on how to reach principled agreements, even with parties you may not like, there is no denying the fact that sometimes, people lie when negotiating. Or, at the very least, they shade the truth.

This tendency makes sense. To the extent that negotiations are an exchange of information about what agreements will provide the most value to both sides, and to the extent that we all leak information without knowing it, it is just sound strategy to try to keep some information private. There are several ways one can do this. One is to outright lie; another is simply to use accurate information to mislead.

And there are other tactics that can, under certain circumstances, succeed at reaching an agreement even if they're not commonly accepted or liked. One can use the ruse of an agreement to gain valuable information from the other side. Similarly, one can use threats or intimidation to force an agreement where one might not otherwise exist. (For example, corporate defendants--and courts--often worry that plaintiffs' lawyers use class actions to leverage small, easily resolved individual complaints into large cases that will justify large attorneys' fees by threatening bet-the-company litigation.)

So what is to keep lawyers from doing all of this? Is there any law that regulates negotiations? Well, sort of.

First of all, lawyers are not above the law itself. So laws that prohibit outright fraud or other forms of deceptive conduct that might arise in negotiation will apply equally to lawyers. But, in addition, the law governing lawyers' professional duties has evolved to regulate some of this conduct as well. The best-known of these rules is probably the ABA Guidelines on Settlement Negotiations.  And while these are not the last word on lawyers in negotiations, they do provide a good starting point.

First and foremost, the ABA Guidelines say that a lawyer cannot outright lie about a material fact.

"In the course of representing a client 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 when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6."

(ABA Guideline 4.1.) Unlike fraud, these prohibitions against misstatements do not require the other side to actually rely on the misstatement. (In other words, it is the misrepresentation itself that is a problem, not the harm it does to the other side. This makes sense; lawyers have enough PR problems without being known to condone lying.) That said, the ABA is quick to clarify that by misstatements, it does not mean all misstatements. Just the ones about provable facts.

The prohibition against making false statements of material fact or law is intended to cover only representations of fact, and not statements of opinion or those that merely reflect the speaker’s state of mind.

The Guidelines point out that this allows a certain amount of "puffing," or strategic misinformation. (As one colleague once pointed out, they allow him to react to settlement offers by talking about how angry he is, even if the offer is well within what his client has told him is acceptable.)

Moreover, a lawyer sometimes has a duty to disclose certain information, at least to correct misrepresentations by his client.

The duty to disclose may arise in at least three situations: (1) a lawyer has previously made a false statement of material fact or a partially true statement that is misleading by reason of omission; (2) a lawyer learns of a client’s prior misrepresentation of a material fact; and (3) a lawyer learns that his or her services have been used in the commission of a criminal or fraudulent act by the client, “unless such disclosure is prohibited by the ethical duty of confidentiality.”

Nor may lawyers use the settlement process "in bad faith." (ABA Guideline 4.3.1.) What does that mean?

It is not bad faith for a party to refuse to engage in settlement discussions or to refuse to settle. Settlement is not an obligation, but an alternative to litigation. The choice to pursue it to fruition should be that of the client. However, it may be impermissibly deceptive, and thus an act of bad faith, for a lawyer to obtain participation in settlement discussions or mediation or other alternative dispute resolution processes by representing that the client is genuinely interested in pursuing a settlement, when the client actually has no interest in settling the case and is interested in employing settlement discussions or alternative dispute resolution processes solely as a means of delaying proceedings or securing discovery.

Finally,

A lawyer may not attempt to obtain a settlement by extortionate means, such as by making extortionate or otherwise unlawful threats.

(ABA Guideline 4.3.2.) The ABA is quick to add that, of course, that threatening a party with a valid civil claim is permissible, as is "reminding" the party of the costs of fighting a civil claim in court. So there is some leeway for lawyers to use the threat of a lawsuit to

Now, as with any subject matter involving lawyers--who have, as a profession, never met a rule they couldn't argue around--these ethics rules are not the last word on what lawyers may (or may not) do in the service of negotiating for their clients. Like the Pirate Code, they turn out to be more of a guideline. That is one reason why the ABA Guidelines alone are 71 pages of rules and commentary, instead of a quick, bullet-point list of commandments. And, of course, the barriers to making a complaint to the appropriate licensing body can create some more space for underhanded tactics. But the ABA Guidelines do mark an important starting point. And I will be revisiting exactly what kinds of tactics have been upheld as legitimate and what have not.

Meanwhile, however, it is worth remembering that while underhanded tactics may occasionally work, they carry a heavy cost. A party that believes that it has been treated unfairly will not trust the trickster a second time. And reputations spread. Negotiators known to be dishonest or to employ underhanded tactics will find it harder to reach agreements with other parties as well; also, no one likes to be branded as untrustworthy. And it is these threats, as much as any worry about ethical sanctions, that keep many lawyers in line.

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Harvard Law Professor Robert Mnookin has written a lot about negotiation. Seriously, a lot. His most recent book, Bargaining with the Devil, is about how to negotiate long-standing conflicts with lots of bad blood. Or, as he puts it:

By "bargain" I mean attempt to make a deal--try to resolve the conflict through negotiation--rather than fighting it out. By "Devil," I mean an enemy who has intentionally harmed you in the past or appears willing to harm you in the future. Someone you don't trust. An adversary whose behavior you may even see as evil.

(Emphasis added.)  Mnookin's primary concern with "bargaining with the Devil" is that negotiating with an enemy carries with it a number of "negative traps," patterns of thought and behavior that leave the parties mired in conflict instead of actually resolving issues. He examines this issue through the lens of three primary examples: (1) Nelson Mandela's discussions with the Afrikaner government; (2) the resolution of a long-standing legal dispute between IBM and Fujitsu; and (3) a bitter labor dispute at the San Francisco Symphony Orchestra.

Among the most useful lessons Mnookin offers:

Beware of preconditions. As Mnookin points out, preconditions are often designed to deprive the other side of any leverage (by, for example, taking the only issues one side cares about off the table). As a result, they send an unequivocal signal that one side is not actually interested in negotiating through the issues. So the next time plaintiffs' counsel tells you that they're happy to talk settlement, but only on a classwide basis, save yourself the time. She's just told you she's not ready to talk yet.

Personal connections can be important. Often the mere act of dealing with a rival feels like too much of a compromise. I have certainly, in my time, dealt with clients who believed that even dignifying a class action complaint with negotiation was doing nothing more than encouraging bottom-feeding behavior. (In some cases, they were right. But in some cases, the refusal to negotiate more knee-jerk than considered.) How does one make it past this initial reluctance to negotiate? Mnookin offers the example of Nelson Mandela, who was able to secure compromises from the all-white South African government by making (and then maintaining) personal connections with individual Afrikaner leaders. Once they had a personal connection to Mandela (as well as a sense of mutual respect), they could "make concessions and yet maintain one's self-respect."

Reinforce the value of cooperation to your own side. Mnookin draws on Robert Putnam's work on two level games. He points out that in resolving a dispute, both parties usually must deal with disgruntled (and possibly polarized) constituents back home. And, as Mnookin points out, no matter how skilled the negotiator is, if her constituents do not understand the importance of compromise, then there will not be an agreement. His suggestion? Continually reinforce the benefits of any compromise with your constituents.

I have a much deeper understanding of how difficult it is to change the negotiation culture of an organization. It requires not simply initial "buy-in" but constant reinforcement. … Without this reinforcement, their natural fears--the negative traps--may reappear.

Mnookin's work is useful for class-action defendants on two levels. First, since there does tend to be some polarization and demonization between plaintiffs and defense counsel, it is useful to see what he recommends for negotiating with parties one might find deeply distasteful. Second, and every bit as important, Mnookin provides a detailed look at three extremely difficult negotiations. That alone is worth the price of the book.

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 Last week, I talked about some of the limitations of using Getting to Yes when negotiating class actions. But Getting to Yes has other limitations as well, ones well worth lawyers' consideration. For example, in his 2003 article: Panacea or Pandora's Box?: The Costs of Options in Negotiation, Vanderbilt Professor Chris Guthrie takes on the question of just how useful generating new options (or "creating value") can be in negotiation. His answer is that it's less useful than one might think.

Relying on existing experimental research, new experimental research, and "real-world" empirical evidence, the Article identifies four potential costs associated with option generation: option devaluation, context dependence (both contrast and compromise), non-compensatory decision making, and decision regret. Taken together, these "option costs" stand for the ironic proposition that negotiators who heed the option-generation prescription may be more likely than those who ignore it to enter into inferior agreements with which they may be less satisfied. In short, option generation may not be the panacea its proponents imagine, but rather a Pandora's box that can lead negotiators astray.

(Emphasis added.)  So how exactly do these four "option costs" work?

1. Option devaluation. Basically, the more options one offers, the less attractive any option will seem.

Because the process of comparison brings to mind the relative advantages and disadvantages of the options under consideration, and because each option's disadvantages are likely to loom larger than its advantages, loss aversion implies that comparisons will decrease the attractiveness of every option under consideration.

2. Context dependence. A more generalized form of his first cost, context dependence means that negotiators do not evaluate options in a vacuum; instead, they compare them against the other options they face. (See how that includes the first "option cost"?)

Psychologists have discovered, however, that people's assessments of initially considered options are often systematically influenced by the emergence of an additional, irrelevant option. People "make context-based inferences about the worth of alternatives whether or not the context provides a valid basis for such inferences."

This effect means that once there are multiple options on the table, it becomes easier to manipulate your counterpart's decisions by introducing options that--while not strictly relevant--will sway them towards options more favorable to you, either by making them seem more attractive by contrast, or by making them seem like a reasonable compromise.

3. Non-compensatory decision making. This is a way of saying that, confronted with lots of options, people do not act like rational maximizers.

When several options are available, negotiators may make decisions based not on an evaluation of all available information (compensatory decision making), but rather on the basis of a simplified decision-making process (non-compensatory decision making).

I've discussed some of these forms of decision making before.  It's worth noting that Guthrie may be underestimating their effects. Non-compensatory decision making occurs frequently, not just when one is confronted with multiple options.

4. Decision regret. What is decision regret?

For every yes there must be a no. To decide one thing always means to relinquish something else. As one therapist commented to an indecisive patient, "Decisions are very expensive, they cost you everything else." Renunciation invariably accompanies decision. One must relinquish options, often options that will never come again.

In other words, decision regret is an extreme form of buyer's remorse. The more options there are in a negotiation, the more likely the negotiator will be dissatisfied with her decision, because she will be looking back at those options she decided against with rose-colored glasses.

Guthrie's takeaway from this--and remember, he's a law professor--is that you should always involve a lawyer in negotiations that might involve multiple options.

Lawyers are more likely than others to use compensatory rules when assessing negotiation options because lawyers are among the more rational and analytical members of society. Researchers have used psychological tests like the Myers-Briggs Type Indicator (MBTI) [http://www.myersbriggs.org/my-mbti-personality-type/mbti-basics/], as well as brain-dominance testing [http://www.ipn.at/ipn.asp?BHX] instruments, to demonstrate this analytical orientation. Indeed, neuroscientists have "selected lawyers when they wished to test an occupational group that is characteristically analytical in its preferred mode of thought." This is not to say, of course, that lawyers are pure "rational actors" who are impervious to the effects of psychological "biases" in decision making; in fact, lawyers, like other novice and expert decision makers, are susceptible to such biases. However, experimental evidence suggests that lawyers are more likely than others to be able to resist these biases and make decisions rationally.

Personally, I think this may be overestimating the rationality of lawyers.  However, Guthrie's point may work better if it's made simpler--when confronted with multiple options in a negotiation, it is worth consulting a neutral, relatively objective third party. They may not be more "rational" than other human beings, but they won't be as invested in the specific decision, and that should provide the detached double-check the negotiator needs.

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Last Friday, Thomson/Reuters reporter Alison Frankel (who should be on every class-action lawyer's RSS feed) wrote about an example of a new strategy class-action defendants have developed over the past few years. That strategy? Work with the government. In this case, publishers Harper Collins and Hachette--two of the defendants in both the Justice Department's recent price-fixing complaint and a class action making the same allegations--have settled with 16 state attorneys general. Harper Collins has announced that it plans to settle with the other 34 state AGs as well if possible. Leaving aside the fact that settling with a government agency often the right thing to do when accused of wrongdoing, it also provides several immediate benefits to defending subsequent class actions.

From Frankel's piece:

For the defendants, there are obvious benefits to reaching quick settlement with state regulators rather than slogging through litigation with class action lawyers who've already sunk millions into working up the case. The AG parens patriae cases aren't subject to the same requirements as federal court class actions (although they do have to be approved by Cote, who is overseeing all of the e-books litigation). There are also no attorneys' fees for the state AGs, which means cheaper settlements for defendants. In the muni bond derivatives litigation, class counsel repeatedly argued that defendants preferred to make deals with the AGs because the private lawyers would demand bigger settlements.

Settling with state AGs (or the Justice Department, for that matter), offers two other benefits for class action defendants as well.

First, it provides an excellent superiority argument should the class action proceed. Action by government agencies is often superior to a class action, in no small part because the government can tailor the remedy as it sees fit. (More support for the fact that state AG settlements are superior: CAFA requires parties to report class-action settlements to state AGs, not the reverse.)

Second, and related, negotiating with the government undermines one of the plaintiffs' most common rhetorical justifications, that class actions are necessary for deterrence because the government cannot effectively regulate corporate misconduct. After all, if the government has already effectively regulated the conduct in question, then there is no need for a class action to "fill in the gaps." At that point, if plaintiffs' counsel is still pushing the case, it becomes clearer to the court that it's really about the fees, not the public good.

It's interesting, because this likely means that class actions as a device do have some general benefit. They encourage negotiations with appropriate government authorities. The irony is that this benefit does little, if anything, for plaintiffs' counsel.

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Anyone who writes or talks about negotiation strategy eventually has to address Getting to Yes.  It's the 800 pound gorilla in the negotiation field, and it has produced a vocabulary that, while occasionally jargony and unwieldy, is in constant use. Far more importantly, it contains some outstanding advice on how to negotiate in almost any context, even with difficult counterparties.

So, assuming that you've never read the book, what's it about? Getting to Yes advocates a method known as "principled negotiation." As the authors describe it, principled negotiation:

suggests that you look for mutual gains wherever possible, and that where your interests conflict, you should insist that the result be based on some fair standards independent of the will of either side. The method of principled negotiation is hard on the merits, soft on the people. It employs no tricks and no posturing.

In general, principled negotiation is an outstanding overall strategy, in no small part because it tends to work whether or not the other side uses it too. (And, for lawyers in particular, it has an added benefit. If you are continually referring to some fair, objective standard, then if the negotiation breaks down you are very well placed to defend your position in front of a mediator, arbitrator, or judge.)

In explaining this principle, Fisher & Ury present two primary insights that can help negotiators. Unfortunately, each also presents some specific problems in the class-action context:

BATNA - the "Best Alternative To Negotiated Agreement."

The reason you negotiate is to produce something better than the results you can obtain without negotiating. What are those results? What is the alternative? What is your BATNA--your Best Alternative To a Negotiated Agreement? That is the standard against which any proposed agreement should be measured. That is the only standard which can protect you both from accepting terms that are too unfavorable and from rejecting terms it would be in your interest to accept.

(Second emphasis added)  In business deals, the best alternative is often some agreement with someone else. In litigation, the best alternative to a negotiated agreement is litigation. And, more importantly, the best alternative for a defendant is the money it pays to the class and counsel, while plaintiff counsels' best alternative is the fees they will collect. (This is what class-action scholars call the agency problem with class actions.) The calculus is a little different than what Fisher & Ury have in mind.

"Creating value." - This is Fisher & Ury's other big insight. Their big example of it involves two children fighting over an orange:

[A]ll too often negotiators end up like the proverbial children who quarreled over an orange. After they finally agreed to divide the orange in half, the first child took one half, ate the fruit, and threw away the peel, while the other threw away the fruit and used the peel from the second half in baking a cake.

Leaving aside the fact that the authors' kids bake a heck of a lot more than I did in my youth, this kind of creating value can work extremely well in business negotiations. By taking a step back, the two sides can often agree on a division that allows each to get more value out of an agreement than they might out of just splitting the pot in two.  And there are no shortage of attempts to "create value" in class action settlements as well.  The difficulty is that Rule 23 constrains some of the creativity lawyers might exercise. This is not a bad thing. The "orange" problem that class-action lawyers are trying to solve is that the defendant does not want to pay much, but class counsel want large fees. So "creating value" in the class action context often means giving the class members something that doesn't cost much, but can be claimed as valuable enough to justify large attorneys' fees. And those are the exact agreements most likely to draw objections.

Despite these issues, Getting to Yes is still the definitive book on negotiations, and much of the advice in it (from how to evaluate your best alternatives, to how to deal with more coercive tactics from the other side) is extremely valuable. Class-action lawyers just have to make sure that in following the book's advice, they're not running up against the specific strategic problems posed by complex litigation.

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 In class actions, we have negotiations between two organizations. On one side is a corporation or firm, an organization in the truest sense. On the other is an "organization" of class members represented by one or more plaintiffs. Does this affect the way that negotiations are handled?

Almost certainly. As Professors Mark Gradstein, Shmuel Nitzan, and Jacob Paroush wrote twenty years ago in their Public Choice article, Collective Decision Making and the Limits on the Organization's Size, one reason organizations cannot grow beyond a certain size is that making decisions becomes too difficult. Or, as they put it:

Expansion confers both benefits and costs. Benefits include improvement in the organization's decisions from inclusion of another mind involved with the resolution of the problems the organization faces. The costs include a lengthening of the decision-making process which may result in an increase in the direct payment for managerial time as well as an increase in the likelihood of failure to make decisions on time.

(Emphasis added.) In other words, the larger the organization, the harder it is to make quickly when necessary.

The authors also consider how the "technology" of decision making affects how large the organization can grow. By "technology," the authors mean the rule for making decisions (say, majority rule, or representation under Rule 23). But it also makes sense that communications technology (like conference call capability, email, or some kind of social media) may influence the size of an organization.

The application to class-action negotiations should be fairly obvious. The larger the defendant, the more defense counsel will have to make sure it knows exactly who to consult at the client when working out a deal, particularly if counsel is under time pressure. But, equally important, the more diverse the class, the more the defendant will have to make sure that it's addressing all of the major interests within the class. To do otherwise may invite objections to, and ultimately rejection of any deal the parties bring before the court.

This analysis, of course, assumes a best-case for having multiple decision makers. The article does not consider whether the number of decision makers may actually decrease the quality of the decisions. Instead, they assume that adding decision makers enhances the quality of the decision, because more brains are better than fewer. For some kinds of decisions, this may well be true.  But for many other cases, too many cooks can spoil the broth.  (This is the difference between crowdsourcing and gridlock.) Of course, where that is the case, you're not really deciding between benefits and costs, just costs and more costs.

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Last week, New York Times reporter Matt Bai published a comprehensive look at the breakdown of the negotiations over extending the debt ceiling in July 2011. Congressional negotiations over debt have no direct application to negotiating class action settlements, but there are still a few lessons we can take from the article when handling any kind of complex negotiation.  Here's five:

1. In-person meetings can go a long way toward starting off negotiations. I've written before on why beginning negotiations in writing (something lawyers love to do) can be a risky strategy. But Bai's account shows how something as simple as a golf game may help break an impasse.

[President] Obama and [Speaker] Boehner had themselves started meeting furtively in the White House, in secret negotiating sessions that grew out of a much-discussed golf outing in June. Over a few drinks at the clubhouse at Andrews Air Force Base, Boehner suggested they might be able to use the impending debt crisis to achieve something ambitious and significant — not just the kind of cuts that [House Majority Leader Eric] Cantor and [Vice President] Biden were discussing, but fundamental reforms to entitlement programs and the tax code too, a sweeping modernization of the federal budget. The president agreed that they should try to get something started ...

(Emphasis added.)  Particularly when a deal may be necessary, but the parties have been locked in accusation and recrimination, meeting in person can help refocus everyone on mutual interests instead of sticking points.  You have to be a real jerk to avoid small talk and pleasantries in a situation like that; and it's surprising how far those can go toward building just a little but of necessary goodwill. 

2. Confirm all major developments in writing. According to Bai, these negotiations started with drinks at a golf course clubhouse. But they began in earnest after Obama negotiators Jack Lew and Rob Nabors confirmed this conversation in an email.

In this case, Obama’s principal negotiators — Jack Lew, then his budget director, and Rob Nabors, his top aide on legislation — sent a proposal to Boehner’s team that included $1.5 trillion in new revenue over 10 years. The White House negotiators knew this had about as much chance of happening as a meteorite falling on the Capitol, but the real question was whether Boehner was willing to go some distance toward meeting them on the revenue side of the ledger, or whether he would stick to Cantor’s hard line against any form of new taxes.

(Emphasis added.)  Negotiation theorists talk about "creating value" and "getting to yes," but we all often overlook the basic mechanics of a complex negotiation: it involves exchanging complex proposals, which is best done through writing.

3. Sometimes the hardest negotiators are your allies.  Bai's account makes much of "cryptic" early emails and "furtive" or "secret" meetings. Why? Because Speaker Boehner's political allies were not necessarily fans of the deal he was trying to put together.

Meanwhile, political pressure was building from inside Boehner’s leadership circle. Cantor, who had heard about the Obama- Boehner talks only when Biden happened to mention it, was nonplused at having been excluded and appalled that Boehner was offering more revenue. He and others pressed the speaker to drop the idea of a comprehensive deal …

(Emphasis added.)  The Republicans were not the only ones who opposed aspects of the deal. Bai also mentions that some provisions "unsettled the stomachs of some White House aides." Even the much vaunted "Gang of Six" apparently had difficulty from its more polarized members. And, much like competing plaintiffs' lawyers, the Gang of Six wound up undercutting the deal between the White House and the Speaker's office.

4. The negotiator matters.

Like in class action litigation, politics involves large teams of people who take on different tasks. Often, that means that certain members of a team earn reputations with the other side. The simplistic account of the debt negotiations (which Bai indulges at times) is that Republicans would not make a deal because they could not stand the President personally. What's more interesting is that, at least at one point, continuing the negotiations required one side changing its negotiators.

[I]t wasn’t Obama but rather one of his chief aides who Boehner had decided was the problem. For weeks leading up to the breakdown in talks, Boehner and his top lieutenants — Barry Jackson, his chief of staff, and Brett Loper, his policy aide — had been talking principally to Jack Lew and Rob Nabors at the White House. But they had become exasperated with Lew, who, in their view, talked a lot but offered few concessions. Lew, whose detailed knowledge of the budget outpaced anyone else’s in the room, always seemed to have a better idea than whatever Boehner was proposing, and these ideas seemed to Boehner like more complicated ways of describing positions they had already rejected. The problem with Lew, Boehner bluntly told the president when he called, is that he just didn’t know how to get to “yes.”
Boehner thought he had a better shot with Bill Daley, the president’s chief of staff, and Timothy Geithner, the Treasury secretary. Daley had made a point of reaching out to Boehner since joining the administration, and he was known to be a pragmatist and a dealmaker. Geithner, clearly rattled by the possibility that Treasury might default on its debt, had been issuing almost daily warnings to Congressional leaders about the mounting fear in the markets. Send me Daley and Geithner, Boehner told the president, and let’s see what we can do.

(Emphasis added.)  Similarly, Cantor's presence in a later meeting wound up undermining a later negotiating session when he directly contradicted Speaker Boehner in front of the President, clearly signaling that the Speaker might not be able to sell any deal to his party.

5. At the end of the day, the negotiations don't matter if they don't close. Like in evidence, what gets said in the negotiation often stays in the negotiation. The President and the Speaker exchanged a number of proposals; they came close to agreement on a number of broad strokes that might have broken the deadlock both sides were fighting. But once the negotiations broke down, the previous concessions didn't matter at all. Part of this is because once the negotiations break down, parties tend to revert to their more adversarial stances. (In litigation, this is an ethical necessity for a zealous advocate; in politics, it's a practical one.) And part of this is because incomplete negotiations may damage the negotiators.

Now, with another debt battle looming, the chance of resurrecting some kind of grand bargain doesn’t seem very promising. Obama and Boehner have spoken only a handful of times. The administration’s most driven dealmaker, Bill Daley, never recovered from the episode, which poisoned his relationship with Harry Reid, who blamed Daley for having kept him and other Senate leaders in the dark as the negotiations unfolded. Daley resigned in January and was replaced by Jack Lew — the guy whom Boehner and his aides tried to sideline.

In other words, it's important in the negotiation to act as honorably as you can, so that if it falls through, you can preserve your credibility--with your colleagues, with your client, and with the other side.  It's equally important because you don't know who you may face across the table next time.

Of course, all of these takeaways depend, in part, on how much one believes Bai's account as opposed to the competing stories from President Obama, Speaker Boehner, and various other news outlets. But partisan allegiances aside, many of these maneuvers ring true to those of us who have had to negotiate complex business deals or litigation settlements. Bai laments the political culture that makes this kind of negotiation so difficult. But the same problem frequently arises in other negotiations (like class actions) where parties find themselves pivoting from heated adversarial rhetoric to attempting to compromise.

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Most articles about negotiation or settlement treat conflict not just as something to be avoided, but as a complete breakdown in the negotiation process. Either conflict represents a massive miscalculation (as law-and-economics scholars have said about litigation, and international security scholars say about war), or it represents a best alternative to negotiation for one party.

But there is another option, one that Professor Robert Powell recognized back in 2004. As he discussed in his article "Bargaining and Learning While Fighting," conflict (for his area of study war, for ours litigation) can operate as an information-gathering device.

How does this differ from the standard economic model of bargaining? In the standard model, you have a buyer and a seller, and some private information (the true value of the object to the buyer). The buyer has an incentive to hide the true value, and the only real indication of the true value of the object is the buyer's willingness to keep negotiating or walk away.

In conflict, however, there's another source of private information (the distribution of power), and another way of learning about it (the fighting). Fighting will reveal some information that's not as prone to strategic manipulation. For example, actual litigation will reveal one's resolve to litigate, as well as provide some idea of the resources one has at his disposal.

The model Powell proposes is the following. There is a satisfied party (let's call them the defendant for our purposes) and a dissatisfied party (the plaintiff). The dissatisfied party registers a complaint or a threat, and the satisfied party makes an offer. The more the defendant concedes, the more likely there will be a settlement without a fight, but the worse the terms for the defendant. If the plaintiff rejects the offer, then there is conflict. But the bargaining doesn't have to end there. Instead, at the end of each round of conflict (here, those might be when motions are decided or discovery is released), each side knows a little more about the other side's capabilities, and about the likely outcome of the conflict.

Thus, the bargaining continues until the states reach agreement or until one of the states runs out of resources.

Powell goes on to explain that while, in the standard model of negotiation, there's really only one source of uncertainty (the price of the object), in negotiation that leads to conflict, there are two. One is the price (which he refers to as costs or resolve). But there's also uncertainty over the distribution of power, which will dictate who wins the conflict. (For lawyers, this can be any number of things: the state of the law, the relative talent for each firm, the resources available to each firm, even the rhetorical advantage for each position.) And, as Powell points out, this difference in types of uncertainty

suggests that crises arising out of uncertainty over costs or resolve are likely to be settled more quickly and short of large scale fighting than are crises arising out of uncertainty over the distribution of power.

Powell's conclusion requires one tweak when discussing litigation. Class-action lawyers, unlike generals, face an ethical duty to represent their clients. As a result, once a class-action lawyer files a lawsuit, he often faces additional pressure to keep the conflict going unless he can settle on terms favorable to the class. (There's likely political pressure to do this in war, but not the same worry about one's professional license.)

So, how can defendants use Powell's work to their advantage? Powell's article confirms one important feature of litigation that I have been discussion for some time: every action taken in litigation leaks information. And bargaining, even hostile bargaining between two parties locked in conflict, is primarily an exchange of information. So for litigators who continue to keep negotiation open as a strategy, it is important to watch how their opponents are actually fighting the case: doing so can provide vital information about what kinds of offers they might entertain, and which ones they are certain to reject.

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 Lawyers like text. We trust it. Whenever possible, we send emails and letters confirming agreements (or even disagreements) with the other side. And there are good reasons to favor the written word when negotiating, such as the fact that it favors deliberation rather than fast-talking.

But sometimes, text can put us at a disadvantage. As Professor Carrie Sperling argues in her article Priming Legal Negotiations Through Written Demands, demand letters--which often open any negotiation of legal dispute (and are sometimes legally required)--can actually provoke behavior that would undermine any negotiation. The difficulty arises from a phenomenon known as priming, the tendency of people to human beings are susceptible to being placed in various emotional states simply by exposure to words that reflect those states.

When a person's recent perceptions incidentally and unknowingly influence his behavior, his behavior has been "primed." For instance, when people play a word game that contains terms "relevant to the elderly," like grey, old, wrinkle, and Florida, they walk more slowly after finishing the word game than people who played a word game with "age non-specific words" like birds, tree, and book. Unbeknownst to the players with the first set of words, they were primed to conjure the "elderly" stereotype. By unconsciously priming this stereotype, the players behaved more like their perception of the stereotype, that is, they walked more slowly.

(Emphasis added.)  Why should lawyers care about this? Well, as Professor Sperling points out,

Although few studies have attempted to link the effects of priming to legal negotiations, a couple of studies are of particular importance to lawyers crafting initial demands. An early study in priming demonstrated that exposing participants to competitive words, even subliminally, led participants to play a Prisoner's Dilemma Game more competitively. The prime had particularly strong effects on participants already predisposed to competitive behavior. Therefore, demand letters delivered in a framework of competition with competitive terms may likely cause already competitive lawyers to intensify their aggressive behaviors.

(Emphasis added.)  Similarly, studies of students who have been primed with words that might encourage cooperation before negotiating a used-car purchase have resulted in the students' reaching agreement faster, and report more satisfaction with the outcome of the negotiation.

As Professor Sperling observes (and at least my experience would corroborate), many lawyers frame their demand letters by putting out a strong version of their case. For most of us, that tactic may very well prime a competitive response rather than one that seeks to reach an agreement.

Defense counsel in class actions often face two different kinds of cases. In one, the plaintiff files a class action that is clearly meritless, even if the plaintiff hasn't realized it yet. In these cases, priming may not matter that much. But in the other kind of case, a consumer may stumble across a widespread problem that the defendant has been looking to correct. In these cases, it may actually make sense to make a more conciliatory approach, one that would prime cooperation rather than competitive behavior.

But wouldn't that conciliatory approach signal there's something to the plaintiff's case? A fair question, and it would be interesting to see some studies devoted specifically to this issue. In the meantime, however, it makes sense for defense lawyers to consider the possibility that--in certain cases--being less aggressive at the beginning of the case may actually reduce the costs of litigation long-term.

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 In honor of an approaching book deadline, I'm introducing a new feature. Most Wednesdays, there will be a brief piece here on negotiation strategy, pulled from a case study or scholarly literature on negotiations. (Negotiation is an important part of a class action lawyer's life, particularly because so many cases end in settlement.) This will likely continue until the book itself is out sometime in early 2013.

So, today's question: Why do so many lawyers make arguments during settlement negotiations, if the real goal is to reach some kind of an agreement? They can't possibly think they're going to persuade the other side, can they?

This is the question Robert Condlin asks in an old Maryland Law Review article: "Cases on Both Sides": Patterns of Argument in Legal Dispute Negotiation, 44 Md. L. Rev. 65 (1985). Condlin's thesis is that when it comes to negotiation, lawyers are terrible arguers:

Negotiation argument is seen as more simplistic, chaotic, predictable, and illogical than is generally believed to be the case, partaking more of stylized dance or game-playing than of political discourse or analytical investigation. These qualities suggest that it is discounted in negotiation because it ought to be.

As Condlin observes after reviewing several transcripts of a negotiation exercise, the law students engaging in the exercise offer "little more than unsupported, self-serving conclusions." Condlin doesn't have a great explanation for this phenomenon. He blames legal education in part, since in 1985, law school focused almost entirely on doctrinal analysis. However, 28 years later, most law schools offer at least some practical courses, including courses in negotiation. (The most famous at this point is Harvard's Program on Negotiation.) And yet, most lawyers engage in the same patterns of argument as they did then.

So we could blame law schools for teaching poorly, or we could look to see whether there's some use to the shallower legal arguments used in negotiation.

And there is. Condlin himself, while he doesn't focus on it, provides two telling pieces of evidence. The first comes from one of the exercise transcripts, where a law student roleplaying a Legal Aid lawyer says:

Let me just ask you one question. How much is it worth to you to litigate this question, to determine once and for all, to get a judicial determination as to whether this regulation creates a legally protected expectation not to be transferred absent, according to Meachum, serious misconduct or other occurrences? I mean, I think you will recognize that this regulation was only promulgated to get around the whole reclassification hearing requirement, the ICC [Institutional Classification Committee] reclassification hearing requirement. This is a blatant attempt to try to circumvent that. There hasn't been any judicial determination. The Legal Aid Society would just love nothing better than a case like this, which involves the transfer from a minimum security to a maximum security, and most importantly in our case, the fact that our prisoner, our client, was not given any medical treatment for his heroin addiction in a maximum security prison. I think that the Society would like nothing better than to have a case as egregious as that to test this regulation.

(Emphases added.) The other comes from the transcript of a negotiation training video, where the lawyer says:

I'm always agreeable to resolving cases at an early stage. There really is only one issue though and that is how much your client wants to pay my client before we get this matter into court. This is the type of case, Mr. Harris, that I like to try and I want to try. I think you know why. When you have someone ripping off the public as your client has been doing and I'll have no difficulty establishing fraud in this case. I've got a client who is an indigent gal, whose husband is an invalid. First of all, I can't understand why you even sued her. You're not going to collect any money anyway and you know that. And the counterclaim is as valid a counterclaim as I've ever filed, and you know I've been successful in the past and I'll be successful in the future. And as emotional as this case is, where you knock a gal out of her job because of selling her a car which is defective. I'm absolutely convinced we're going to prevail and we're going to get a substantial judgment of compensatory damages.

(Emphasis added.) These both provide, in the course of their bluster, a primary reason lawyers may argue (and do so shallowly) during negotiations. They're previewing the arguments they'll make during any substantive motions or trial. Since most class-action negotiations take place against the not-so-implicit threat of bet-the-company litigation, providing a preview of one's best arguments may in fact make for compelling leverage in negotiation.

So why not make the arguments better? Why are they so often off-the-cuff instead of carefully researched for maximum effect? Most lawyers are loath to give away their best arguments, even if that fear is largely groundless.

What can defense lawyers take from this? First, it pays to have some sense of your argument before going into negotiation. But more importantly, negotiations can be an important tool for seeing just what plaintiffs think they have as a case.

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Negotiation consultants David Lax and James Sibelius, authors of the excellent book 3D Negotiation, have a new working paper out on what they call the "Negotiation Campaign." In it, they argue that the most successful negotiators do not consider their jobs to involve a single, big negotiation. Instead, they are engaged in a sequence of negotiations--some internal, some external--that ideally will bring about the desired big deal.

[C]onsider Boeing’s $11 billion sale of 787 Dreamliners and other planes to Air India in late 2005. A naïve understanding of this transaction might envision two monolithic entities, Boeing and Air India, hammering out the terms, overcoming a price gap and cross-cultural differences. Yet the messy reality leading to that ultimate target deal involved an extended negotiation campaign: literally dozens of individual but linked negotiations, orchestrated on several fronts, involving an array of parties over time and across borders. Negotiations on internal corporate fronts garnered support and approval from the engineering, operations, finance, and marketing divisions, as well as top executives and boards of directors. Negotiations on the external financial front involved banks, export promotion agencies, and leasing companies. And given the Indian state’s ownership stake in the airline, negotiations on the political/national front concluded with Boeing agreeing to partner with Indian manufacturers to supply a certain amount of domestic content and to create local maintenance and pilot training organizations. Successfully orchestrating these component negotiations on multiple fronts finally generated sufficient support for the record-breaking target contract.

(Emphases in original.)

This provides a useful way of looking at class-action practice. The applications for plaintiffs' counsel are obvious: they frequently sue more than one defendant, and often have to consider each defendant's general counsel's office, board of directors, and insurance companies in offering any kind of settlement package. But there are applications for defense counsel as well, because defense counsel often have to negotiate on multiple fronts.

• They must negotiate on an internal front with their clients, finding out what their strategy is, and in turn letting them know what is and is not possible. And, of course, clients are not always monolithic. There may be competing factions within a GC's office, or the GC may need to convince the CEO or other executives of the importance of various strategies.
• * Defense counsel often also has to negotiate on a regulatory front, where compromises made with attorneys general or other administrators can have consequences in later negotiations. (I've talked before about the ways in which regulatory compliance and class-action defense overlap.)
• * And, of course, defense counsel must negotiate on a litigation front with plaintiffs', often--when different counsel bring competing or overlapping lawsuits--more than one.

Or, as Lax & Sibelius put it:

While doing one deal well requires a certain set of skills, designing and executing a broader negotiation campaign calls for a more strategic approach: artfully putting a number of deals together, often on multiple fronts, to realize a larger result, typically an ultimate target agreement with sufficient support in the right quarters to make it stick. In other cases, negotiation campaigns aim to block undesirable outcomes or shore up negotiating weakness at the target table.

(Emphases in original.)

This consideration of negotiation as a campaign instead of individual engagements is not revolutionary. It's just grand strategy by another name, something the best class-action lawyers have long had to master. But Lax and Sibelius don't have to be revolutionary, they just have to be very good at explaining what they mean, and breaking it down into a series of usable steps. And that they do, quite well.

Go, read. I promise it's worth it.

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For those unfamiliar with Ronald Coase, he is the 101-year-old Nobel Laureate who laid a number of the foundations for law and economics when he published his Nature of the Firm (which explained why people would use corporate forms instead of just contracts) and Problem of Social Cost (which explained why law should seek to minimize transaction costs).

In 1988, Professor Coase turned his formidable intellect to another question that had vexed legal scholars for some time: why is blackmail illegal? As Professor Coase pointed out, the central paradox of blackmail is that it makes it illegal to threaten to do something (reveal facts that would embarrass or harm someone) that is perfectly legal to actually go out and do. In other words, if I know something embarrassing about, say Russell Jackson, it is perfectly OK for me to reveal those facts on this blog. But it is not OK for me to ask Russell to buy me an expensive dinner in exchange for not revealing those facts. Why is that?

Professor Coase's solution--no surprise--draws on his previous work about minimizing transaction costs. He starts from the principle that:

It is obviously undesirable that resources should be devoted to bargaining which produces a situation no better than it was previously.

Based on that principle, Professor Coase argued that blackmail transactions do not provide any benefit to the victim (since he is in the same state as before), but do impose a cost.

It is not difficult to understand why people feel this way. A blackmailer threatens to do something which will harm his victim unless he is paid a sum of money or receives some other benefit,and by emphasizing the unpleasant consequences for the victim of not meeting his demands (or even inventing them, as in the "Mr. A. Case"), he endeavours to extract as much as he can from him. It may be objected that this is exactly what happens in business negotiations. And this is correct. But the situations are not identical. The demands made by a businessman are constrained by the competition of other businessmen, by the fact that the party threatened is likely to have a good idea of whether the threat has to be taken seriously and by the adverse effects on future business of being difficult in negotiating. ...

Business negotiations (which may also cause anxiety) either lead to a breakdown of the negotiations or they lead to a contract. There is,at any rate, an end. But in the ordinary blackmail case there is no end. The victim, once he succumbs to the blackmailer, remains in his grip for an indefinite period.

(Emphasis added.) In other words, the real problem here is not the threat, it is the fact that there is no way for the blackmail victim to put an end to the threat. Paying once does not guarantee that

The logic of Coase's blackmail argument extends to class action defense. Let's leave aside for the moment the common argument that some class actions are no more than legalized extortion. Here are two other ways in which the argument might apply, both of which will be familiar to readers of this blog.

The Aqua Dots case: A manufacturer comes across a consumer issue. It attempts to solve that issue through voluntary action (sometimes while cooperating with government agencies). Despite its voluntary action, an entrepreneurial plaintiffs' lawyer demands to be cut in for some nominal "improvement" to the relief, plus an attorneys' fee. So the manufacturer faces the choice of paying the counsel a fee to go away, or adding the cost of litigation to the cost of remedying the problem in the first place. (Judge Easterbrook solved this by deciding that a plaintiff who would simply piggyback on a voluntary recall is not an adequate representative of the class.)

The Thorogood case: Plaintiff files a class-action lawsuit on questionable grounds. Defendant defeats it. Plaintiff files again in a new jurisdiction. Plaintiff writes a letter pointing out to the defendant that there are many jurisdictions left to file in, and defending lawsuits is costly. So the defendant faces the choice of paying plaintiff or facing multiple lawsuits until one wins. (The Supreme Court has decided this issue by encouraging courts to follow the practice of judicial comity, respecting other denials of class certification for the same subject matter. It's an open question still how successful this solution will be.)

This is why "blackmail" is a problem. It's a bargain for a promise not to do something. And that's what makes it analytically useful for class actions, because class actions can be viewed as an attempt to extract concessions in exchange for a promise not to sue, or at least a promise not to sue again.

From the defendant's standpoint, that's part of what makes them a bad deal. Signaling a willingness to bargain in that fashion just opens one up to more and more attempts to make similar deals.

Using the rhetoric of blackmail, while attractive, is unlikely to persuade some judges that there is a real problem.  But using the logic behind prohibiting blackmail makes a great deal of sense: most courts can sympathize with the fact that some litigation does not actually promote any public benefit. And, if that is the case, there are real questions as to whether the lawsuit is really worth the court's resources.

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It's no secret that most class action plaintiffs and defendants usually view each other with great suspicion from across a great divide. (I can't say all; I have a few good friends among the plaintiffs' bar, and I think quite highly of several plaintiffs' lawyers regardless of any substantive disagreements.) What may be surprising, though, is research that shows that this mutual distrust not just a paycheck-induced mental state, but a smart choice for both clients and the lawyers themselves.

At least, that's what a recent set of experiments conducted by several business professors suggests. Authored by Professors Sandy Jap, Diana Robertson, and Ryan Hamilton (this one, not this one), The Dark Side of Rapport describes two possible pitfalls for lawyers who develop rapport with the opposing side.

First, lawyers who develop rapport may be more likely to compromise their clients' interests. This is not necessarily all that surprising. Depending on the client, the lawyers may have longer-term relationships with each other. And a lawyer may justify compromising his client's interest in all kinds of ways, such as telling himself that the long-term relationship with opposing counsel will benefit future clients, or that the compromise is the only way to get the client at least some of what she wants.

Second, lawyers who develop rapport with each other may be more likely to deceive each other. At first glance, this may seem counterintuitive. If you have a rapport with someone, aren't you more likely to try to keep their trust?  Aren't we more inclined to deceive the jerk than the guy with whom we can see eye-to-eye? As it turns out, negotiators will often hide or downplay bad news in order to maintain the rapport that they have.

How did he researchers discover these issues? The experiments were built around a negotiation exercise known as the Bullard Houses case. Bullard Houses is designed for negotiation training. It pits a property seller (who absolutely does not want the property used for commercial purposes) against a hotel developer (who is trying to keep a low profile about its preferred locations). So Bullard Houses is designed to create an impasse; unless, of course, someone either lies or compromises her client's interests. The authors tweaked the conditions of the exercise in various ways to encourage rapport. (Specifically, they encouraged one group to negotiate face to face instead of by instant-messaging; they had another group engage in team-building exercises; and they "primed" a third group by having them think happy thoughts.) They then looked at how many members of each group resolved the impasse in some way. In general, conditions that encouraged rapport encouraged resolution. (The researchers also tried to prime one group with reminders about duty, ethics, and reputation. It didn't help.)

So what does this suggest for class action lawyers? The primary lesson may be to maintain a cordial distance from the other side. There's no reason to unnecessarily provoke opposing counsel, but a conscientious lawyer may remember not to get too chummy, either.

Another implication--peculiar to class actions--is that courts (and defense counsel) may need to be careful of rapport between plaintiffs' attorneys and clients. After all, rapport works both ways. And there is already some evidence that, where possible, class-action attorneys select plaintiffs that are easier to manipulate.  In a legal sense, the client's job is to represent the interests of the proposed class. But if the client is more interested in maintaining a rapport with her attorney (either because of the emotional satisfaction, or because that may be the best way to get the attorney to fight for an incentive payment), then the plaintiff may have a strong incentive to compromise the interests of class members she has never met for the interests of the attorney with whom she works.

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Mass torts have long been a problem for the American judicial system. Today, it's Vioxx, the BP oil spill, and Chinese drywall. Fifteen years ago, it was asbestos, Agent Orange, and silicone gel breast implants. Back in the 1980s and 1990s, when mass torts first threatened to overwhelm crowded dockets in various jurisdictions, the courts carefully considered whether to use class actions as a means of resolving thousands of similar tort claims.

And, at that time, Columbia University law professor (and recent Daily Show guest) John Coffee wrote an in-depth examination of the various problems and conflicts of interest that arose when courts tried to use Rule 23 to solve the mass tort problem: Class Wars: The Dilemma of the Mass Tort Class Action.

Professor Coffee began by providing an excellent working definition of a mass tort:

Mass tort litigation is characterized by several unique features: (1) a predictable evolutionary cycle during which the value and volume of individual claims starts low and then spirals upward; (2) high case interdependency so that litigated outcomes in any mass tort area quickly impact on the settlement value of other pending cases in that same field; (3) a highly concentrated plaintiffs' bar, in which individual practitioners control exceptionally large inventories of cases, sometimes totaling in the tens of thousands; and (4) a capacity to place logistical pressure on individual courts that is simply unequalled by any other form of civil litigation.

Over time, courts have progressively held that mass torts are not well-suited for class-action treatment, particularly not in the form of "settlement classes" (that is, class actions filed specifically to enforce a pre-existing settlement agreement between plaintiffs and defendants). And Professor Coffee spends much of the article discussing the difficulties that arise from doing so. The portions of his discussion that remain most relevant have to do with the conflicts of interest that arise from aggregated settlements.

On an ethical level, probably the most disquieting phenomenon about recent mass tort settlements has been the acceptance of a single attorney acting as the representative of multiple subclasses of plaintiffs. Not only have the interests of these subclasses clearly conflicted, but the class counsel has explicitly traded off the interests of subclasses against each other, obtaining substantial compensation for one subclass in return for a waiver of cash compensation by anoth- er. In such multiparty negotiations between the defendants and different subclasses of plaintiffs, even the well-meaning plaintiffs' attorney shifts inevitably from the role of an advocate and adviser for clients to the role of a philosopher king, dispensing largess among his client subjects.

While the specific cases may have changed, the fundamental dilemma remains the same, however, whether it is a class action or just a series of consolidated tort cases. Any resolution of mass torts has to accommodate (1) the plaintiffs' desire for redress of some kind, (2) the defendant's desire for global peace, and (3) the plaintiffs' attorneys' desire for fees.

And Professor Coffee discusses a number of issues that still resonate. While the explicit development of "settlement classes" has waned, defendants will still take advantage of filed class actions to try to achieve releases of larger issues through a classwide settlement. And Coffee's descriptions of inventory settlements and settling future claims are both still relevant today.

So what can modern defendants take from this article? The most useful portions have to do with objection-proofing possible settlements:

• Negotiate down attorneys' fees. It makes sense to negotiate on fees more closely than defendants have done in the past. While it doesn't matter as much to the defendant who gets paid (from a fiscal, not emotional, standpoint), courts care. And courts are beginning to eye "clear-sailing" and quick-pay provisions with greater suspicion.
• Try to give the class some cash benefit. Courts have long been suspicious of non-monetary benefits. And they're expressing their concerns more openly.
• Make sure subgroups are separately represented. In a discussion that seems especially prescient today, Professor Coffee notes that "On an ethical level, probably the most disquieting phenomenon about recent mass tort settlements has been the acceptance of a single attorney acting as the representative of multiple subclasses of plaintiffs." A defendant interested in a global settlement of certain complaints could do worse than to insist that subclasses receive separate counsel. (Among other advantages, counsel who are both zealous and ethical can help the defendant reduce payments for true nuisance claims.)

Be advised, the advice to be gleaned from Professor Coffee's article, particularly in light of current settlement case law, doesn't make for easy or cheap class settlements. But as I've said for some time now, for defendants, settling on the cheap can get really expensive.

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 "Hey man, I don't practice law. I talk on the phone." -- Richard Scruggs, on federal wiretap

This week, Class Action Countermeasures introduces another regular feature: book reviews. Once a month, I'll be reviewing a book that has some relation to class action litigation. The primary purpose of the review will be to determine what class-action lawyers can learn that will assist them in formulating class-action defense strategies. (I've done this once or twice before.) First up is The Fall of the House of Zeus: The Rise and Ruin of America's Most Powerful Trial Lawyer, by Curtis Wilkie.

The Fall of the House of Zeus tells the story of Richard Scruggs. Scruggs began his career as a trial attorney in Pascalouga, Mississippi. He became one of the most financially successful attorneys in the country by extracting huge settlements from both the asbestos and tobacco industries. And he ended his career as a felon, convicted for attempting to bribe a judge.

Early in his introduction, Wilkie describes his subject as:

a remarkable story of personal treachery, clandestine political skullduggery, enormous professional hatred within the legal community, a zealous prosecution--all with ramifications that extended to high levels in Washington.

Wilkie delivers on that promise. The book is a fascinating portrait of Mississippi backroom politics, the plaintiffs' trial bar, and a single man wrestling with the effects of sudden wealth and gradual drug addiction. While the book is definitely sympathetic towards Scruggs, it whitewashes neither the crimes he committed nor his motives for doing so.

That said, the title of the book is a misnomer: by his own admission, Scruggs was no "trial lawyer." He was first and foremost a dealmaker whose most common tactics included:

• making large campaign contributions to various judges and prosecutors in Mississippi; and
• coordinating plaintiffs' counsel on large cases, including paying a number of lawyers not to interfere with his litigation.

Scruggs arguably was not even effective in his chosen role. Some of what he did to extract large settlements was either unethical or outright illegal:

• He bought documents from whistleblowers in at least two cases. (He bought 1,500 pages from a Brown & Williamson paralegal in the tobacco litigation; and paid the Rigsby sisters to be "consultants" so he could use their documents against State Farm in Katrina-related litigation.)
• He paid hush money to lawyers and politicians (including some no-interest loans) in order to cover up some of his conduct.
• And, of course, he famously tried to bribe a judge.

As a result, the litigation tactics Wilkie does describe largely involve setting up large, profitable agreements rather than trying to establish facts in a court of law.

• Scruggs consolidated cases that linked "a few strong cases with hundreds of lesser claims" as a means of inducing settlements from large defendants.
• He used smaller cases as "discovery engines" for larger planned litigation.
• And he passed along documents he did uncover to prosecutors to fuel investigations that would maximize the pressure on defendants to settle.

Ultimately, as Wilkie tells it, Scruggs's dealmaking was his undoing. Many of his alliances split up over the division of fees. And the crime that ultimately sent him to jail--trying to bribe a judge--arose from an effort to influence litigation over one of his fee agreements.

So what can defense lawyers learn from this book? The primary lesson is that--far more than most defense lawyers--class action plaintiffs' practice involves multiple fronts. Plaintiffs who follow Scruggs's model must coordinate with local officials, other lawyers who want a share of their action, the local press, and local politicians. (This lines up with the extensive email traffic Scruggs exchanged with the Rendon Group.) Moreover, plaintiffs lawyers may not always engage in direct tactics. Scruggs extracted large settlements by doing just about everything BUT the traditional practice of law. Clearly, not every plaintiffs' lawyer will follow the Scruggs model, but as Scruggs's career--and Wilkie's account of it--show, the backroom dealmaker fills an important niche in the ecology of the plaintiffs' bar.

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NYU professors Geoffrey Miller and Gerald Rosenfeld have written an article on "intellectual hazard." Their basic point is that organizations are subject to various biases in the way they process information (what the legal scholars call "heuristic biases.") Miller and Rosenfeld are standing on the shoulders of a lot of previous scholars in this article (including Office of Information and Regulatory Affairs Administrator Cass Sunstein and Chicago professor Richard Thaler), but their article is worth pointing out for two reasons: first, it provides one of the most current attempts to classify various biases; and second, they do a good job of applying those biases to help explain the roots of the 2008 financial crisis. According to Miller and Rosenfeld, these biases can be divided into three main categories:

• Complexity bias, which stems from the human brain's need to absorb information in manageable chunks. Examples of complexity bias include oversimplification bias (the tendency to oversimplify complicated ideas or sets of facts, losing important information in the process) and authoritative bias (the tendency to accept information from experts or superiors without examining it critically).
• Incentive bias, which stems from humans' tendency to serve their own self-interest. Examples of incentive bias include herding behavior ("Everyone else at my company can't be wrong ..."), cognitive dissonance (the ability to compartmentalize conflicting information rather than resolve the conflict), and loss aversion (the tendency to spend disproportionate effort avoiding or "making up" losses).
• Asymmetry bias, which gives unequal weight to pre-formed conclusions. Examples of asymmetry bias include status quo bias (the tendency to prefer the current state of affairs), the ostrich effect (the tendency to ignore negative information), and regret aversion (the tendency to put off difficult decisions that may result in regret).

Miller and Rosenfeld's taxonomy isn't perfect. For example, their definitions of loss aversion and regret aversion seem to overlap, which may stem in part from the fact that their definition of loss aversion differs subtly from others' definitions.

Nonetheless, Miller and Rosenfeld do an excellent job of explaining why these biases will exist in large organizations, and illustrating how those biases can result in a disastrous outcome. And this is where their work becomes important to class-action defense lawyers. Because class actions tend to address large, complex legal and factual issues, heuristic biases are prevalent, both in the client defendant and the plaintiffs' bar.  Both the client defendant and the plaintiffs' lawyer tend to represent organizations that have committed to a course of action (bet-the-company litigation) with large risk and heavy uncertainty, meaning that these biases will come into play as they evaluate new information about the litigation. In particular, these biases can come into play as each side evaluates possible settlements. As a result, it is important for the defense attorney to identify which biases may be at play, and either counsel her client accordingly, or decide on a strategy that will overcome her adversary's bias.

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 Back in 2005, researchers at (among other institutions) Columbia, the University of Texas, and Microsoft began to look at certain types of new-fangled communications technology (email and instant-messaging) and wondered whether it mattered which medium one used when negotiating complicated agreements.

So they conducted an experiment. They took a bunch of business students from Stanford and Northwestern, and they told them to negotiate selling a car. They made half of the students buyers, and half sellers. They gave each pair eight issues to negotiate (including price, color, trim, and warranty specifications), and confidential instructions about how much they valued each issue. They gave half of the sellers simple arguments they could use to bluff a buyer who asked for a yellow car (coincidentally, all of them), and half more complex arguments. And they told half of the pairs to negotiate by email, and half by instant message.

The result: sellers who used instant messaging and intricate arguments enjoyed a much greater advantage than sellers under other conditions. Or, as the authors put it:

The ideal argument is one that is hard to rebut, of course, and what we have demonstrated is that an argument’s effectiveness is influenced by conversational dynamics in addition to its content. The communication medium one uses to negotiate supplies expectations about turn-taking tempo, and consequently how long one has to respond. While a simple argument was ineffective regardless of communication medium, we found that an intricate argument was effective if there were expectations of a rapid turn-taking tempo (generated by communicating with Instant Messaging), but was ineffective when there were only vague expectations about turn-taking (generated by communicating with E-mail). Thus one not only needs to craft good arguments, one also needs to be able to apply them fluently. Being at a loss for words can mean being at a loss for dollars.

In other words, conversational media (like instant messaging, telephone conversations, and face-to-face meetings) may favor fast talkers.

What does this mean for negotiation of class-action settlements? Classwide settlements already tend to involve complex issues, many of which involve the intricacies of Rule 23(e). While many lawyers pride themselves on their persuasive abilities, it may be best to use devices that disrupt conversational rhythms (like correspondence and mediation) if one wants to neutralize the effects of the other side's fast-talking.

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 Twenty-two years ago, political scientist Robert D. Putnam published an article in the journal International Organization. Titled "Diplomacy and domestic politics: the logic of two-level games," it argued that international trade negotiators have a more complicated job than most believe. Not only must they convince the negotiators across the table of the mutual benefits of their particular requests, they must also persuade their constituents back home ("behind the table") to accept the deal they ultimately work out.

Since Putnam published his article, this insight--that negotiators on behalf of organizations must negotiate both "across the table" and "behind the table"--has been cited so often it feels like just common sense. But Putnam did not limit himself to just identifying this two-level game. He also explored just how it affected the conduct of the negotiations themselves. And some of his conclusions can certainly inform how class-action lawyers negotiate class-action settlements.

For example, Putnam found that

the lower the cost of "no-agreement" to constituents, the smaller the win-set. [Ed. note: "win-set" refers to the set of agreements that could be ratified.] Recall that ratification pits the proposed agreement, not against an array of other (possibly attractive) alternatives, but only against 'no-agreement.' No-agreement often represents the status quo, although in some cases no-agreement may in fact lead to a worsening situation; that might be a reasonable description of the failed ratification of the Versailles Treaty.

(Emphasis in original.) This insight reflects one that negotiation scholars have known for a while: the better one's alternative to an agreement with the other side (sometimes referred to with the unwieldy phrase BATNA, or "Best Alternative to Negotiated Agreement"), the less likely a negotiation will succeed. Putnam also explained that

In this sense, some constituents may offer either generic opposition to, or generic support for, Level I agreements, more or less independently of the specific content of the agreement, although naturally other constituents' decisions about ratification will be closely conditioned on the specifics. The size of the win-set (and thus the negotiating room of the Level I negotiator) depends on the relative size of the "isolationist" ,forces (who oppose international cooperation in general) and the "internationalists" (who offer "all-purpose" support). All-purpose support for international agreements is probably greater in smaller, more dependent countries with more open economies, as compared to more self-sufficient countries, like the United States, for most of whose citizens the costs of no- agreement are generally lower. Ceteris paribus, more self-sufficient states with smaller win-sets should make fewer international agreements and drive harder bargains in those that they do make.

There are, of course, some important differences between trade negotiators and class-action lawyers. Class-action defense lawyers are legal agents of their clients, which means they may have less room to deviate from instructions than trade negotiators. And class-action plaintiffs' lawyers often have clients that lack the power to direct the litigation. In fact, in a class action, thethe class members often don't have a preference between "no agreement" and any agreement, because most of them aren't aware of the litigation at all. So the plaintiffs' counsel can cut whatever deal they see fit.

This is an important justification for fairness hearings on settlement. And it helps to explain why objectors have played such an important role in the development of caselaw on class-action settlements is that they have the incentive to act like an interested constituent of the plaintiffs' lawyers, rejecting deals that are no better than "no agreement" on behalf of the class.

So what can class-action defense lawyers take from this article? For those looking to ensure a lower-cost settlement process, it is worth considering not just what the plaintiffs' counsel will agree to, but what objections may get raised at the fairness hearing.

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 Class-action lawyers are no strangers to conspiracy. It forms the basis of many antitrust claims, as well as providing plaintiffs with a way of leveraging evidence against a poorer defendant into a case against defendants with deeper pockets.

Defending conspiracy class actions can be frustrating: savvy plaintiffs will often use any evidence of parallel conduct as evidence of conspiracy, and any lack of evidence as evidence of a coverup. Or, they could until the Supreme Court rendered its decision in Bell Atlantic Co. v. Twombly (as well as its companion case, Ashcroft v. Iqbal.) These two cases have provoked plenty of discussion among legal bloggers and academics. But a two-year old working paper by Cass Sunstein and Adrian Vermuele on Conspiracy Theories provides some context to the Twombly/Iqbal debate.

Sunstein and Vermuele define a conspiracy theory as

an effort to explain some event or practice by reference to the machinations of powerful people, who have also managed to conceal their role.

(Emphasis in original.) The definition, as they concede, embraces conspiracy theories that have turned out to be true (like Watergate), as well as some that are purely benign (like Santa Claus). Sunstein and Vermuele are more interested in the false, harmful theories, which

have some distinctive features, above all because of their self-sealing quality; the very arguments that give rise to them, and account for their plausibility, make it more difficult for outsiders to rebut or even to question them.

(Emphasis added.)  More specifically:

Those who accept such theories believe that the agents of the conspiracy have unusual powers, so that apparently contrary evidence can usually be shown to be a product of the conspiracy itself. Conspiracy theories display the characteristic features of a “degenerating research program” in which contrary evidence is explained away by adding epicycles and resisting falsification of key tenets.

(Emphasis added.)  So what does this have to do with Twombly? In that case, the Supreme Court required the plaintiffs to plead a conspiracy that was "plausible," and to do so using specific facts. Doing so filters out the worst aspects of a self-sealing conspiracy theory. Because the plaintiff must plead specific facts, logical contradictions in her conspiracy theory will be clearer, and those can justify dismissal. So can pleading a conspiracy with no obvious benefit to the defendant.

* * *

Today marks the end of the first year of Class Action Countermeasures. From my perspective, this experiment in blogging has been a rousing success. The blog has has gained more readers than I expected, thanks to the generosity of the legal blogosphere.  I've gotten to virtually "meet" a number of really interesting class-action bloggers.  And I got to announce my first book, on class-action stratgegy. (It makes an excellent holiday gift!)

I'm hoping for another good year in 2011. The Supreme Court seems intent on keeping class-action practice interesting.  And, despite one tragic loss, there is a thriving, diverse set of academics studying Rule 23. I also have a new project to keep me scouring SSRN and law review sites: I've contracted to co-author another book (with an old friend, Andrew Deguire).  It has the working title Complex Negotiation Strategy: A Business and Law Perspective, and should be due out in late 2012/early 2013. The blog won't change, although I may venture more into some more general strategic discussions--including a few on negotiations--on Thursdays. (I will always bring it back to class-action practice, the blog title is there for a reason.)

Anyway, I wanted to thank those of you who've been reading so far. I hope you've found this even a tenth as much fun as I have.

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When we talk about complex litigation, we usually refer to the legal issues involved in joining a large number of varied claims. But the legal debates are not the only issue that makes complex litigation so complicated; sometimes it’s just the lawyers. Because class actions involve such high stakes, they often require more than just one attorney or one law firm. On the defense side, lawyers may find themselves dealing with discovery counsel, with co-counsel, or with large client teams. And, because of differing roles, differing client agendas, or just plain old competition, those lawyers may not always work together smoothly. 

So, how can lawyers on each side best work with their co-counsel? We can glean some insight from a working paper from business professors Kristin Behfar, Ray Friedman, and Jeanne Brett.  “The Team Negotiation Challenge: Defining and Managing the Internal Challenges of Negotiating Teams” draws on open-ended interviews with a number of business executives to identify the issues that arise within teams. While the paper focuses specifically on negotiation within teams engaged in putting together a business deal, the dynamics will ring familiar to any lawyer who has ever had to coordinate a joint scheduling order, negotiate a common settlement, or file a joint brief.

Among the professors’ findings:

• Some of the largest challenges are posed by scheduling. In any large organization, simply coming up with the time to discuss issues can itself require a separate round of negotiations. (See also most lawyers’ Outlook inboxes.)
• Confusion over roles may create conflict. Not a surprising result, but still worth some attention. Among the issues the authors identify were negotiation among team members that must be ratified by separate department heads (read “each law firms’ partners).
• Personality conflicts are the greatest danger to negotiation. The authors found that teams that suffered relationship conflicts were less likely to be prepared for negotiations (since they were spending their time on the conflict instead of the substantive issues), suffered more stress and anxiety, and were more likely to escalate conflicts with the other side.
• Substantive differences make negotiation easier. One might not expect this to be the case, but it actually makes logical sense. If a team must negotiate substantive differences before presenting its public stance, it must – at least temporarily – resolve any toxic personality conflicts. (This jibes with the old saw that “Academic politics are so vicious precisely because the stakes are so small.”)

There are any number of takeaways from the article (its advice to develop nonverbal signals for “public” negotiations is particularly interesting), but the most important conclusion is one that I recognize from some of the mentors I’ve been blessed with over the years: reducing internal drama makes a litigation team more effective.

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Figueroa v. Sharper Image (S.D. Fla. 2007) provides a case study in how a rushed class settlement can go wrong. The settlement drew objections almost immediately, invited interference from lawyers pursuing competing class actions, witnessed intervention from various state Attorneys General, and even earned a judicial rebuke. What happened?

First, some background. The plaintiffs had all bought ionizing air purifiers from Sharper Image. After Consumer Reports announced there was no evidence that the purifiers did any purifying, several plaintiffs' firms filed class actions. The Figueroa plaintiffs were later filers, so Sharper Image filed a Motion to Stay and Abate, arguing the suit was a copycat that could wait until the other cases were finished. The court denied the motion after the plaintiffs added new causes of action and another defendant, so the parties conducted class-related discovery and briefed class certification.

Right before the certification hearing, the parties informed the court they had agreed to a settlement. Part of what was driving the settlement, they said, was that Sharper Image was close to bankruptcy, and could not afford a protracted trial or massive damages. The proposed settlement provided:

1. a $19 coupon,
2. a chance to buy a new purifying attachment for $7
3. some modifications to Sharper Image's advertising

It also contained an extremely broad release and a non-disparagement provision.

The court expressed misgivings, but set a date for a preliminary fairness hearing, which, remarkably, drew several objectors. (Objectors usually appear at the final fairness hearing.) The court rejected this first agreement, but preliminarily approved one that limited the release and dropped the non-disparagement provision.

Once notice went out, objectors appeared in droves. Most notably, 36 state Attorneys General – all notified pursuant to the Class Action Fairness Act – protested that the coupons did not provide real relief to the class. In response, on the last day for objections, the parties filed an amended settlement that addressed some concerns, but kept the coupons. (This eleventh-hour amendment drew further objections.)

The parties then submitted a third agreement that made the coupons transferable, and added a provision for cy pres relief. But objectors still complained that the settlement was a "reverse auction" -- where defense attorneys pick the most compliant plaintiffs' lawyers from competing class actions, and settle on unduly favorable terms, precluding the other class actions. The court rejected the settlement. While it found no evidence of collusion, it agreed that Sharper Image had conducted a reverse auction:

Sharper Image selected counsel confronted with a most precarious position, insisted upon amendments to the pleading to broaden the scope of this litigation to obtain a global peace, and then proceeded to . . . convince Class Counsel to accept highly undesirable terms to settle the case.

As a result, the settlement was “not the product of informed, arms-length negotiations between effective Class Counsel and the Defendant." The court was sending a clear message: settlements resulting from reverse auctions would not be tolerated. From a strategic standpoint, the lesson is broader: in class actions, trying too hard to settle on the cheap can get very expensive.

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