October 11, 2012

Joe Plaintiff and Sarah Defendant get together to negotiate about the settlement of a law suit. Joe Plaintiff is authorized to accept anything over $100,000, while Sarah Defendant is authorized to pay up to $130,000. They thus have a $30,000 ZOPA (Zone of Potential Agreement). They exchange pleasantries, explore the relevant facts and legal issues, and set forth their opening positions. Joe Plaintiff indicates that it will take $160,000 to resolve the case, while Sarah Defendant says that she cannot go a penny over $70,000. They are pleased that they have begun their interaction successfully, yet they have both begun with bold faced lies. Have they committed an ethical violation? Model Rule 4.1 expressly indicates that no lawyer shall knowingly misrepresent material law or fact. What can be clearer: a lawyer may not lie. When is a lie not a lie? When it is by a lawyer! Comment 2 to Rule 4.1 acknowledges that in the negotiation setting there are different expectations. “Under generally accepted conventions in negotiation, certain types of statements ordinarily are not taken as statements of material fact. Estimates of price or value placed on the subject of a transaction and a party’s intentions as to an acceptable settlement of a claim are ordinarily in this category . . .” As a result, attorneys may over- or under-state the value of items being exchanged, and they may misrepresent their side’s actual settlement intentions. While most legal negotiators accept these distinctions, it is ironic that only two things are truly material when parties negotiate: (1) how much does each side value particular items; and (2) how much of each must you provide to induce them to reach agreement.

Puffing and embellishment regarding party values and settlement intentions are commonplace and acceptable to most lawyers, but anything beyond such matters is wholly improper if relevant to the interaction. If I am trying to sell my client’s business for $50 million, I can clearly demand $65 million and indicate that anything less would be unacceptable. Can I indicate that I have another offer, when I do not have one? I believe the answer is no, because this concerns a material fact. If I have another offer for $45 million, can I state that I have a $50 million offer? I again think the answer is no. Could I truthfully indicate that I have another offer, and suggest that you will have to pay $55 million to buy the firm? The answer is probably yes, since I have not misrepresented the offer I have received. If you ask me what the actual offer is, I could reply that it is confidential and refuse to disclose it.

The best way to determine whether a potential misrepresentation is acceptable puffery or unacceptable mendacity is to ask if your opponent did this to you, would you consider is proper. If not, it would be wrong for you to do it. Lawyers must appreciate the fact that reputations for honesty are critical when parties negotiate. So much is done orally based on a literal or figurative handshake. If someone is caught lying about what they may not ethically misrepresent, they will lose their reputation for honesty and find it difficult to deal with others in the future.