Negotiation Strategies: Using Game Theory and Decision Tree Analysis to Determine An Optimum Litigation Settlement Strategy

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 ObjectivesLitigation Settlement Case Study


Institute© Bruce Beron 2014 Negot Start Lit

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

• Representative Assignments have included:• Securities law class actions against a Big Four accounting firm• A series of related cases against a builder of nuclear power plants with

potential damages greater than $10B• A multi-venue, multiple patent intellectual property armageddon between

two international petrochemical companies with multi-billion dollar consequences

• A high stakes patent battle between two major telecomm companies• Expert witness in the Tribune bankruptcy regarding the fairness of a

proposed settlement

2



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 to get you the best possible outcome

3



Our approach has been particularly effective with litigation settlements 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.

4



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.

Effective Negotiation Strategy is a four step process.

5



The first step is to know what your goals are.

• 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

6



• 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.

You should establish a Reservation Price before commencing negotiations.

Problem Framing and

Issue Definition



and Execution

7



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

• Decision Tree Analysis is the best way to answer these questions — before starting negotiations

• Do just enough analysis to 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

8



Inside and outside counsel agreed that damage findings would exceed $300M dollars, and a settlement would cost at least $200M.

Case Study: Settling a commercial litigation claim.

• The client, an auditor, was being sued by a consortium of banks that had lent money to Cobalt’s management for an LBO.

• At the request of management, the auditor had prepared an internal use only report on the financial state of the company, which was favorable at that time.

• Management showed the report to the lead bank with the understanding that it was not to be shared with others.

• The lead bank subsequently shared the document with other banks in the process of forming the consortium.

• After the LBO, Cobalt tanked and the banks sued the auditor for $650M, the full loan amount.

Problem Framing and

Issue Definition


Strategy Developmen

t and Execution

This case has been disguised for confidentiality.

9



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



10



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



11



The explicit influence assessments show that the lead bank did not have as much influence over the other banks as the client had intuitively believed.

Problem Framing and

Issue Definition



12



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



13



The model predicted a settlement of $225M if the client had proceeded normally.

Problem Framing and

Issue Definition



14



The model determines the outcomes for alternative 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 cop

• What, me worry?

• Let’s get it done — now!

Problem Framing and

Issue Definition



15



A winning strategy was developed that had two major elements.

• The lead bank had to be isolated from the other banks.

• Filing a cross-complaint made them a codefendant.

• The client and its law firm had to be perceived as not focused on settling — low salience.

• Senior management ignored the case, both publicly and internally .

• The law firm did not return phone calls, postponed meetings at the last minute and appeared perfectly willing to go to trial.

• The negotiation team acted as if they had independent settlement authority.

Problem Framing and

Issue Definition



and Execution

16



The negotiation played out exactly as the model predicted, and the case was settled for $40M, $185M less than anyone had thought possible.

Problem Framing and

Issue Definition



and Execution

17



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%

The approach has a proven* track record.

*References available on request.

18



The 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

19



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, New York Times Magazine, .......

20



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.

21



Developing a Negotiation Strategy requires surprisingly little time.

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

22



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 to get you the best

possible outcome

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

23

Negotiation Strategies: Using Game Theory and Decision Tree Analysis to Determine An Optimum Litigation Settlement Strategy

Law

litigation strategy

effective negotiation

effective strategy

current negotiation

request of management

decision tree analysis

expected litigation

step process