Dear Negotiation Coach: Putting “fair” offers to the test

Q: I often negotiate patent disputes for my company. Resolution of a dispute can take years, and if no settlement is reached, we end up in very costly litigation. I want to be fair to the other side and reach efficient settlements, but I am frustrated when they fail to reciprocate. How can I be fair and effective when the other party is unreasonable?

A: Rest assured, you aren’t alone. Most people negotiating in the shadow of the law have this dilemma. Reasonableness on both sides reduces litigation costs and uncertainty, and resolves disputes more efficiently. But as you’ve found, when one side is reasonable and the other is not, the reasonable party often suffers. So we need a novel approach.

Reputation is one important part of the puzzle. A party that knows little about your company may think you are being weak rather than reasonable when you make fair proposals. But if you consistently act reasonably, your company’s reputation for fairness will spread, and you will become more convincing.

One underused tool that you might turn to is final-offer arbitration (FOA), also known as baseball arbitration. In FOA, each party submits its best and final offer to an arbitrator, who must select either of the two offers and not any other value. Parties cannot appeal the arbitrator’s decision.

An interesting thing happens when parties agree to use FOA: Their offers become reasonable, as they have a strong incentive to deliver the offer that the arbitrator will view as most reasonable. The logic and power of FOA is that the uncertainty it creates leads parties to reach agreement, avoiding arbitration and litigation. In Major League Baseball, for example, teams’ and players’ uncertainty about what an arbitrator might decide typically drives them to reach agreement on contract disputes.

Generally, some institution or prior contract stipulates when and how parties should use FOA, but that doesn’t have to be the case. In your situation, offering FOA to the other side may drive them to behave as reasonably as you do.

Let’s imagine that you are involved in a patent dispute in which the other side has a reasonable claim against your company. Independent experts think that the other company has a 90% chance of prevailing if the case goes to court and that the verdict would likely fall between $750,000 and $1.25 million. Best estimates are that a court case would take three years and that each party would spend about $300,000 to $400,000 in litigation costs. The other side has refused to lower its demand for $5 million. Your firm is prepared to offer $900,000 to settle immediately, but you are concerned that the other side will see this reasonable offer as a sign of weakness.

Consider the following plan. Offer $900,000. When they counter at $5 million or any other unrealistically high offer, ask whether they truly believe that their demand is fair. When they say it is, tell them that you are willing to take your $900,000 offer and their $5 million offer to FOA and have the dispute resolved within the month using expedited procedures.

If they are bluffing, this challenge creates a dilemma for them. They won’t want to go to FOA, as they know your offer is far more reasonable. As a result, they are likely to respond with a much more reasonable offer.

If they take you up on your challenge to use FOA, you should be delighted by the prospect of using a third-party strategy that favors the more reasonable party.

If, however, they refuse FOA and also make no further concession, you have a very good hint that serious negotiation is unlikely in the foreseeable future, and, despite your best efforts to be reasonable, you are quite likely to end up in court.

Max H. Bazerman
Jesse Isidor Straus Professor of Business Administration
Harvard Business School
Author of The Power of Noticing: What the Best Leaders See
(Simon & Schuster, forthcoming)