Negotiaiton Strategies: Using Game Theory and Decision Tree Analysis to Determine An Optimum Settlement Strategy in An Environmental Toxic Tort Case

34 Coquito Court, Menlo Park • California 94028 • Phone 650.854.1914 • www.litigationriskmanagement.com • [email protected]

LitigationRisk Management

Institute

Bruce Beron, Ph.D., President

Negotiation Strategies:Achieving Your ObjectivesToxic Tort Case Study


Institute© Bruce Beron 2014 Negot Strat Toxic Tort

Representative Assignments have included:Securities law class actions against a Big Four accounting firmA series of related cases against a builder of nuclear power plants with potential damages greater than $10BA multi-venue, multiple patent intellectual property Armageddon between two international petrochemical companies with multi-billion dollar consequencesHigh stakes patent battle between two major telecomm companiesExpert witness in the Tribune bankruptcy regarding the fairness of a proposed settlement

The Litigation Risk Management Institute has been advising Fortune 500 clients on settlement valuation, settlement strategy, and litigation strategy for 30 years.

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We enable our clients to achieve the best possible negotiation outcomes.

We provide a process to help you:• Identify and assess negotiation risks• Know whether your current Negotiation Strategy will fail in

time to change it• Execute the most effective strategy

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Our approach has been particularly effective with with politicians and government agencies as well as in a wide range of other negotiations and policy issues.

Corporate Advisory Contracts Legal

SettlementsLegislative & Regulatory

Policy

Acquisitions LicensingEnvironmental /

Toxic TortsBanking Reform

Privatization Joint Venture Relations

Product Liability Return Rates for Utilities

Mergers Procurement /

Sales

Patent Infringement

Currency Devaluation

Industry Consolidation

Government Contracts &

BiddingSecurities Class

ActionsForeign Landing

Rights

This methodology has also been applied to a broad spectrum of national and international public policy issues.

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Effective Negotiation Strategy is a four step process.

Problem Framing and

Issue Definition

Data Assessment Analysis

Strategy Development and Execution

Define goalsIssues for negotiationIdentify stakeholders

Influence/relative clout

Salience/focus

Currentnegotiatingposition

Identify negotiation risksIdentify opportunities

Choose initial strategy

Refine strategy as negotiation proceeds

A more detailed description of the process and inputs is available on request.

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What do you want to get out of the negotiation?What are the possible components of value?What are the consequences of getting what you want?

“Be careful what you ask for — you might get it.”

Problem Framing and

Issue Definition


Strategy Development

and Execution

The first step is to know what your goals are.

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What is the maximum you should be willing to pay or the minimum you should be willing to accept?

It is the value to you of what you are buying or selling.In litigation it is the expected net present value of the trial outcome and the related business consequences.

Plus expected litigation costs if you are a defendant, minus, if you are a plaintiff.

Include a risk premium when appropriate.

Problem Framing and

Issue Definition



and Execution

You should establish a Reservation Price before commencing negotiations.

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• Decision Tree Analysis is the best way to answer these questions. • Should be done before starting negotiations

• Do enough analysis to adequately determine your Reservation Price.• Decision Tree Analysis strikes a proper balance between:

• Paralysis by Analysis• Extinction by Instinct

Problem Framing and

Issue Definition



and Execution

Because of uncertainty and complexity, the answers to these questions are almost never clear.

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Case Study: Resolving litigation claiming Natural Resource Damage

The client’s plant leaked toxic pollutants and contaminated neighboring properties owned by some very influential people.

The influential people pressured the Governor and U.S. Senators to force the Company to pay for a cleanup.State authorities then sued for alleged Natural Resource Damage.Several environmental groups were also very active in trying to get the Company to clean up.

The client knew it would have to address the problem, but had several concerns:

What kind of cleanup would be required?How could they alter the community’s views of the Company?But, most importantly, how much money would the Company have to pay for the cleanup?

Problem Framing and

Issue Definition



and Execution

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The stakeholders were a broad, diverse group.

There were over 50 Stakeholders, including:State OfficialsFederal OfficialsLocal Individuals and GroupsEnvironmental GroupsNational and Local Media

Key Government Decision Makers:U.S. SenatorSecretary of the InteriorGovernor

Problem Framing and

Issue Definition


Strategy Developmen

t and Execution

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We need three quantitative assessments for each stakeholder.

Influence is the maximum control that a Stakeholder can exert if fully focused on this negotiation issue.

Salience is the extent to which Stakeholders choose to focus their Influence on this issue.

Position is the specific outcome that Stakeholders currently advocate for each issue.

• This is not where they want to end up, or what they think they can get, but their currently stated or implied position.

Problem Framing and

Issue Definition



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The data collection process is straight-forward and efficient.

The client was concerned that they did not have sufficient information.• This is typical of most clients.• In fact, clients almost always have better information than

they think they do. Where clients lack data we use a range of possible inputs.

Problem Framing and

Issue Definition



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The data set shows the differences between the Company and the Governor.

Positions in $ Millions. Partial data set

Problem Framing and

Issue Definition



Stakeholder Influence $mm Position SalienceUS Senator A 100 15 5Secretary of the Interior 85 7.5 20New York Times 60 150 5Governor 45 67.5 30Local Utility Company 40 0.75 40US Senator B 35 7.5 10Company 20 0.75 85Local Media A 20 75 50National Wildlife Federation 20 135 15Earth Justice 20 150 10US Fish &Wildlife Regional 15 45 55Influential Affected Landowner 10 60 80Local Media B 7 120 60Prominent Local Businessman 7 0.75 20State Attorney General Office 5 45 70US Fish & Wildlife Hardliner 5 150 70US Congressman 5 7.5 30State Development Office 5 0.75 50Environmental Justice Activists 4 120 25State Environmental Commission 4 45 70Landowner Plaintiff 4 15 35

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The data are entered into a proprietary model that uses game theory and decision analysis to predict round by round changes in stakeholder positions.

In each round, each stakeholder’s position is modified based on interactions among all the stakeholders. The process is repeated until there is an acceptable agreement or it is clear that an agreement cannot be reached.

Problem Framing and

Issue Definition



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Problem Framing and

Issue Definition



The client wanted to start with a lowball offer of $750K and negotiate up.

The Company considered disavowing responsibility, but realized it could not do so and still continue its local operation.The Governor was under political pressure from several directions and had to take a strong stance. His initial demand was $68M.Hardline stakeholders, primarily the environmentalists and the NY Times, advocated a $120-$150 million settlement.

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Base case: The client’s offer of $750k leads to a $65-$70 million settlement.

Problem Framing and

Issue Definition



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According to the Model:

The settlement will be shaped by the Governor, whose responses, will be political, not purely economic, as the client had thought. The Company’s low initial offer suggests that it knows it will eventually pay a much higher price to resolve the case.

It will be seen by others as a sign of weakness, not strength.With a low offer, the Governor will see no need to compromise with the Company and offend the politically influential hardliners.

Problem Framing and

Issue Definition



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The base case is a stepping-stone to develop a better alternative.

The Company cannot reduce the Governor’s settlement demand.

It needs to increase its leverage and reduce the influence of the hardliners.

Problem Framing and

Issue Definition



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The model determines the outcomes for different possible Negotiation Strategies.

Once we have determined what positions, saliences and proposals are under our control, we can shape the best combinations into executable strategies.There are many possible strategies to consider.Some are simply labeled, others are more complex.

Good cop/bad copWhat, me worry?Let’s get it done — now!

Problem Framing and

Issue Definition



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An alternative Negotiation Strategy saved the Company more than $15M.

An initial offer of $10M makes little difference.A much higher starting position between $35M and $40M is much more favorable.

At this level the Company shows serious interest in settling, but when it holds firm, signals strength.This strategy increases the Company’s leverage and weakens the influence of the hard-line elements on the Governor. The hardline elements now appear unreasonable.

Problem Framing and

Issue Definition



and Execution

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An initial $35-40M offer will result in a $50M settlement.

Note: Settlement is likely in bargaining round 6.

Problem Framing and

Issue Definition



and Execution

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Starting with a lowball offer is not always best! It is very difficult to intuit the best Negotiation Strategy.

!Company Offer! ! Ultimate Settlement

!Base Case ($750K) ! ! $65-$70M!

Company starts at $10M! ! $66-$69M

!Company firm at $35-40M! ! $50M

Savings by using new strategy! $15-$20M

Problem Framing and

Issue Definition



and Execution

The best strategy results in a 25-30% reduction in settlement costs. Text

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It has a 25-year history of accurately modelling the outcomes of negotiations.

Subject Area ! Accuracy

US government evaluation! Over 90%

Journalistic evaluation! 92%!

Evaluation by academics! Over 90%

*References available on request.

The approach has a proven* track record.

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This process delivers practical answers to the key questions in high-stakes negotiations.

Should we be making side proposals?• Who on our side, should make what proposal, to which of our opponents, at

what point in the negotiation?

Who on the other side is bluffing, and who is the best person to call their bluff?

How aggressive an opening position should we take?

Who should be at the table?

Should we present a unified position or imply internal differences?

Problem Framing and

Issue Definition



and Execution

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Clients are consistently amazed with the results.

Senior CIA Official: The model “has resulted in accurate predictions in 90% of the situations in which it has been utilized.”

U.S. Defense Department Official:“Of all quantitative political forecasting methodologies of which I am aware, the expected utility work is the most useful to policy makers because it has the power to predict specific policies, their nuances, and ways in which they might be changed.”

U.S. CEO: “I will reserve a page in the Book of Prophets for it.”

This approach has been featured in:

The Financial Times, The Economist, The Independent, US News and World Reports, International Herald Tribune, The Economist, .......

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We would propose to start with a trial project.

The first step is to choose an issue to be negotiated.The issue should be current and of consequence.

The negotiation team and stakeholders should recognize the importance of the issue and be willing to consider a new approach to their negotiation.On the first issue for a new client:

We will collect data and present the initial results. If you choose not to proceed at that point, then your only cost would be our travel related expenses.

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Step One: ! Review Issues! 2-4 hour meetingStep Two: ! Collect Data! 1/2 day meetingStep Three: ! Presentation of Initial Results! 2 hour meeting

! and Initial Strategy Development! ! Usually available in 3-10 days

Step Four: ! Refinement & Execution! 2 hour meetings ! of Negotiation Strategy. as needed

Developing a Negotiation Strategy requires surprisingly little time.

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We enable our clients to achieve the best possible negotiation outcomes.

We provide a process to help you:• Identify and assess negotiation risks• Know whether your current Negotiation Strategy will fail in

time to change it• Execute the most effective strategy

This process has saved companies $100’s of millions.

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Negotiaiton Strategies: Using Game Theory and Decision Tree Analysis to Determine An Optimum Settlement Strategy in An Environmental Toxic Tort Case

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