One of the most difficult jobs of an advocate is making a strong opening offer that generates a reasonable counter-offer. There are no standard formulas, so how is a strong and realistic opening offer calculated? In the context of litigation, when should an opening offer be conveyed? Conventional wisdom is to open with an extreme offer to test the other party and to explore their flexibility. Unfortunately, if the opening offer is perceived as extreme, it can lead to an early breakdown in negotiations. Another piece of conventional wisdom is to make a "throwaway" offer without any reasonable expectation of launching a productive negotiation and for the primary purpose of probing the other party's willingness to negotiate in a certain range. In 26 years of mediating litigated cases, throwaway offers have been the source of many early stalemates or, at the very least, extensive time devoted to bringing the opening offer into a reasonable range. In the worst cases, throwaway offers can poison an entire negotiation by negatively influencing all remaining counter-offers, including final offers.
Opening a Negotiation
A case must be strategically positioned before meaningful negotiation can take place. An invitation to negotiate can be perceived as premature if there are significant gaps in information about liability and damages. Negotiation can be viewed as too late if the parties have waited too long, costs have become prohibitive, or the parties have become entrenched in their positions.
As a general rule, a case is ready for negotiation when the parties have sufficient information to realistically evaluate liability and damages. Negotiation often is initiated after the first round of written discovery and the depositions of the parties, perhaps with some additional independent investigation. Negotiation, especially in small to medium-sized cases, can be too late if experts have been designated, consulted, or deposed.
Advocates, generally, should not present a demand package without first opening a discussion of the topic of negotiation. Conversely, leverage should not be given away by committing to negotiation and asking opposing counsel if they agree. Instead, the prospects of negotiation can be put on the table for discussion by asking, "This case might be a good candidate for negotiation--what do you think?" This approach opens a discussion about negotiation without making a pre-commitment or putting the proposal on the chopping block for opposing counsel to reject.
Who Goes First
In litigated cases, the norm is for plaintiff (or cross-complainant) to open negotiations. In commercial negotiations, such as price negotiations, there is no similar convention and may involve a number of considerations, including financial issues, strategic positioning in the marketplace, and internal company priorities. If a party opens price negotiations, one advantage is that they can "set the stage" and attempt to influence the direction of the negotiation. If a party goes second, they can strategically respond.
Setting an Anchor
An "anchor" is a well-documented psychological phenomenon defined as an opening number or set of terms that is perceived as reasonable by the other party, thereby setting a parameter for the negotiation. There is a wealth of research supporting the proposition that an anchor--rather than an extreme or throwaway offer--will positively influence a counter-offer. If the opposing party perceives an opening offer as "in the ballpark," it is likely they will work within the range that is set by the opening offer. If an opening offer fails to set an anchor, there is an increased chance there will be no counter-offer and an advocate will receive an equally extreme counter-offer or they will be placed in the uncomfortable position of being asked to make a double move to jump-start the negotiation.
What offers are perceived as realistic? They should be reasonable, but ambitious. In other words, opening offers should leave room to move, but also stretch the settlement value of a case.
How can an advocate set the amount of an opening offer that has an anchoring effect? For starters, each case must be assessed based upon the facts and applicable law. But that is only the beginning. Each client's personal and business interests must be identified to determine the extent to which they wish to assert their legal rights and the way it will affect their short-term and long-range interests. Venue of a case is an important factor--even cases in downtown San Diego may have different values than North County, East County or South County. Individual characteristics of the parties must be carefully assessed. The overall jury appeal of a case also must be evaluated.
For attorneys without a firm understanding of case values for a particular jurisdiction, it is possible to consult experienced local attorneys. In addition, there are a number of valuable online databases, including Verdicts and Settlements (LexisNexis) that describe jury verdicts and settlements from various jurisdictions. Online databases can be highly valuable in evaluating the local value of a case. However, if information from a database is used in formulating an opening offer, it is critical to make sure that the cases relied upon are substantially similar to the advocate's pending case.
Setting a realistic opening offer that generates a positive response is one of the many concrete, identifiable skills of an effective negotiator. Opening negotiations with a discussion of the pros and cons of the process, observing conventions about who goes first, and, most importantly, setting an anchor, will help a new attorney be a strong negotiator.
Gregg F. Relyea, Esq. is a full-time mediator with more than 3,000 mediations of litigated cases. Before entering the mediation field, Mr. Relyea litigated general civil cases on the defense and plaintiff's side as a partner at Higgs, Fletcher & Mack. He served as a panelist at Judicial Arbitration and Mediation Services (JAMS) for 5 years, after which he became a private, independent mediator handling general civil cases. Mr. Relyea teaches Negotiation, Mediation, and Alternative Dispute Resolution at the University of San Diego School of Law, California Western School of Law, and University of California, San Diego (UCSD). He has extensive experience training lawyers and judges in mediation and is available for corporate training, private training, and individual training. firstname.lastname@example.org