This brief essay, written for a symposium on The Emerging Interdisciplinary Cannon of Negotiation, describes three categories of rules which comprise the law of bargaining. First, common law limitations govern virtually all negotiators: the doctrines of fraud and misrepresentation limit the extent to which negotiators may deceive, and the doctrine of duress limits the extent to which bargainers can use superior bargaining power to coerce agreement. Second, context-specific laws sometimes circumscribe negotiating behavior in specific settings when general rules are less restrictive. Third, the conduct of certain negotiators is constrained by professional or organizational regulations inapplicable to the general public. These categories are discussed in turn. The final section of the essay reflects on constraints on negotiator behavior in the absence of law

Korobkin, Russell

Moffitt, Michael

Welsh, Nancy A.

English

Texas A&M University School of Law

Texas A&M University School of LawTexas A&M Law ScholarshipFaculty Scholarship2004The Law of BargainingRussell KorobkinMichael MoffittNancy A. WelshTexas A&M University School of Law, nwelsh@law.tamu.eduFollow this and additional works at: https://scholarship.law.tamu.edu/facscholarPart of the Dispute Resolution and Arbitration CommonsThis Article is brought to you for free and open access by Texas A&M Law Scholarship. It has been accepted for inclusion in Faculty Scholarship by anauthorized administrator of Texas A&M Law Scholarship. For more information, please contact aretteen@law.tamu.edu.Recommended CitationRussell Korobkin, Michael Moffitt & Nancy A. Welsh, The Law of Bargaining, 87 Marquette L. Rev. 839 (2004).Available at: https://scholarship.law.tamu.edu/facscholar/955THE LAW OF BARGAININGRUSSELL KOROBKIN,* MICHAEL MOFFITT,** & NANCY WELSHtNegotiation is often compared to poker. This analogy is apt in two relatedrespects. First, poker players and negotiators both sometimes perceiveopportunities to deceive or exploit their counterparts in ways that produce adistributive advantage. Indeed, lies, bluffs, false signals, and manipulationoccupy a significant place in the repertoires of some negotiators. Second, theability of both negotiators and poker players to deceive and exploit isconstrained by rules governing behavior. This brief essay surveys the ways inwhich law constrains such behavior on the part of negotiators.At least three categories of rules comprise the law of bargaining. First,common law limitations govern virtually all negotiators: the doctrines of fraudand misrepresentation limit the extent to which negotiators may deceive, andthe doctrine of duress limits the extent to which bargainers can use superiorbargaining power to coerce agreement. Second, context-specific lawssometimes circumscribe negotiating behavior in specific settings whengeneral rules are less restrictive. Third, the conduct of certain negotiators isconstrained by professional or organizational regulations inapplicable to thegeneral public. These categories are discussed in turn. The final section ofthis essay reflects on constraints on negotiator behavior in the absence of law.I. COMMON LAW LIMITS ON BARGAINING BEHAVIORWhen a negotiated agreement results from false statements made duringthe bargaining process, the common law of tort and contract sometimes holdsnegotiators liable for damages or makes their resulting agreements subject torescission. The common law does not, however, amount to a blanketprohibition of all lying. Instead, the common law principles are subject to thecaveats that false statements must be material, the opposing negotiator mustrely on the false statements, and such reliance must be justified. Whetherreliance is justified depends on the type of statement at issue and theProfessor of Law, UCLA.Assistant Professor of Law, University of Oregon.Associate Professor of Law, The Dickinson School of Law of The Pennsylvania State University.J.D. Harvard Law School; B.A., magna cum laude, Allegheny College.1. See generally RESTATEMENT (SECOND) OF TORTS § 525 (1986); RESTATEMENT (SECOND)OF CONTRACTS § 164 (1982).MARQUETTE LA W REVIEWstatement's specificity. A seller's specific false claim ("this car gets eightymiles per gallon gas mileage") is actionable, but his more general claim ("thiscar gets good gas mileage") is probably not, because the latter statement isacknowledged as the type of "puffing" or "sales talk" on which no reasonablebuyer would rely.While it is often said that misrepresentations of fact are actionable butmisrepresentations of opinion are not, this statement is not strictly accurate.Statements of opinions can be false, either because the speaker does notactually have the claimed opinion ("I think this Hyundai is the best car built inthe world today") or because the statement implies facts that are untrue ("Ithink this Hyundai gets the best gas mileage of any car"). But statements ofopinion are less likely to induce justified reliance than are statements ofspecific facts, especially when they are very general, such as a claim that anitem is one of "good quality."2Whether reliance on a statement of fact or opinion is justified dependssignificantly on the context of the negotiation and whether the speaker hasaccess to information that the recipient does not. A seller "aggressively"promoting his product whose stated opinions imply facts that are not true isless likely to find himself in legal difficulty if the veracity of his claims areeasily investigated by an equally knowledgeable buyer than if his customer isa consumer unable to evaluate the factual basis of the claims. 3 The case forliability is stronger still when the negotiator holds himself out as beingparticularly knowledgeable about the subject matter that the expressedopinion concerns.4 Whether a false statement can be insulated from liabilityby a subsequent disclaimer depends on the strength and clarity of thedisclaimer, as well as on the nature of the false statement. Again, the standardis whether the reasonable recipient of the information in total would rely onthe statement at issue when deciding whether to enter into an agreement. 5It is universally recognized that a negotiator's false statements concerninghow valuable an agreement is to her or the maximum she is willing to give upor exchange in order to seal an agreement (the negotiator's "reservationpoint," or "bottom line") are not actionable, again on the ground that suchfalse statements are common and no reasonable negotiator would rely upon2. See Royal Bus. Machs., Inc. v. Lorraine Corp., 633 F.2d 34, 42 (7th Cir. 1980) (calling suchstatements "'puffing' to be expected in any sales transaction").3. See, e.g., Vulcan Metals Co. v. Simmons Mfg. Co., 248 F. 853 (2d Cir. 1918).4. See Pacesetter Homes v. Brodkin, 85 Cal. Rptr. 39, 43 (Ct. App. 1970).5. See, e.g., In re Trump, 7 F.3d 357, 369 (3d Cir. 1993) (finding that repeated warnings of riskmeant that "no reasonable investor could believe anything but that the ... bonds represented a ratherrisky, speculative investment," despite other optimistic claims about the financial stability of theissuer).[87:839LA W OF BARGAININGthem. So an insurance adjuster who claimed that $900 was "all he could pay"to settle a claim is not liable for fraud, even if the statement was false.6 Thelaw is less settled regarding the status of false statements concerning theexistence of outside alternatives for a negotiator. A false claim of an offerfrom a third party is relevant because it implies a strong reservation point, so anegotiator might logically argue that such a claim is no more actionable than aclaim as to the reservation point itself. But courts have occasionally ruled thatfalse claims of a specific outside offer are actionable, on the ground that theyare material to the negotiation and that the speaker has access to informationthat cannot be easily verified by the listener's independent investigation.7The most inscrutable area of the law of deception concerns when anegotiator may be held legally liable for failing to disclose information thatmight weaken his bargaining position (rather than affirmatively asserting afalse claim). The traditional laissez-faire rule of caveat emptor eroded in thetwentieth century, with courts placing greater disclosure responsibility onnegotiators. It is clear that any affirmative action taken to conceal a fact,including the statement of a "half-truth" that implies a false fact, will betreated as if it were an affirmative false statement. Beyond this point,however, the law becomes murky. Although the general rule is probably stillthat negotiators have no general disclosure obligation, some courts requirebargainers (especially sellers) to disclose known material facts not easilydiscovered by the other party.8Just as the law places some limits on the use of deceptive behavior to seala bargain, so too does it place some limits upon negotiators' ability to usesuperior bargaining power to coerce acquiescence with their demands. Ingeneral, negotiators may threaten to withhold their goods and services fromthose who will not agree to their terms. Courts can invoke the doctrine ofduress, however, to protect parties who are the victims of a threat that is"improper" and have "no reasonable alternative" but to acquiesce to the otherparty's demand, 9 such as when one party procures an agreement through thethreat of violence,10 or through the threat to breach a prior agreement after6. Morta v. Korea Ins. Corp., 840 F.2d 1452, 1456 (9th Cir. 1988).7. See, e.g., Kabatchnick v. Hanover-Elm Bldg. Corp., 103 N.E.2d 692 (Mass. 1952) (falselyclaiming a "bona fide offer from one Melvin Levine ... of $10,000 per year"); Beavers v.Lamplighters Realty, 556 P.2d 1328 (Okla. 1976) (falsely claiming a prospective buyer was willingto pay the asking price for a house and would be delivering a check that same day).8. See, e.g., Weintraub v. Krobatsch, 317 A.2d 68 (N.J. 1974) (sellers must disclose knowninsect infestation of house).9. See RESTATEMENT (SECOND) OF CONTRACTS § 175(1) (1982).10. See, e.g., Rubenstein v. Rubenstein, 120 A.2d II (N.J. 1956); RESTATEMENT (SECOND) OFCONTRACTS § 176(1)(a) (1981).2004]MARQUETTE LA WREVIEWusing the relationship created by that agreement to place the victim in aposition in which breach would cause noncompensable damage." Judicialintervention is most likely when the bargaining parties' relationship was notarms-length. For example, the common law provides the defense of undueinfluence to negotiators who can show that they were dependent upon andthus vulnerable to the other, dominant negotiator. 1II. CONTEXT-SPECIFIC REGULATION OF NEGOTIATORS' BEHAVIORBeyond the general common law constraints on negotiators' behavior, thelaw imposes particularized parameters on bargainers engaged in negotiationsin some specific contexts. For example, labor law places a number ofprocedural restrictions on negotiating behavior. Compared with theircounterparts in non-unionized settings, employers, employees, and theirrepresentatives involved in collective bargaining all have considerable limitson their ability to adopt certain approaches to negotiating the terms andconditions of employment.While federal and state laws proscribe a range of behaviors in collectivebargaining contexts, the most vivid encapsulation of these requirements is theduty imposed on both sides by the National Labor Relations Act to bargain in"good faith."' 3  The concept of "good faith" bargaining lacks clearparameters, but a "totality of conduct" standard 4 has given way to a list ofproscribed behaviors, such as disengaging from the negotiations andpresenting take-it-or-leave-it offers.'5In other contexts, the law imposes affirmative duties of disclosure ratherthan attempting to define the parameters of negotiation behavior. Forexample, in residential real estate transactions in many states, sellers have alegal obligation to disclose a range of information even if the buyer does notrequest it.' 6 Supplanting the baseline principle of caveat emptor, many stateshave judged that real estate transactions require different foundationalprinciples.Finally, in certain bargaining contexts that seem unusually prone toexploitation, the law provides paternalistic protection for potential victims.For example, certain legal disputes involving seamen on the high seas and11. See, e.g., Austin Instruments, Inc. v. Loral Corp., 272 N.E.2d 533 (N.Y. 1971).12. See RESTATEMENT (SECOND) OF CONTRACTS § 177 (1979).13. See 29 U.S.C. § 158(d) (2003).14. NLRB v. Katz, 369 U.S. 736 (1962).15. Compare NLRB v. Gen. Elec. Co., 418 F.2d 736 (2d Cir. 1969), with Logemann Bros., 298NLRB 1018 (1990).16. See, e.g., WIS. STAT. § 709.02 (2001-2002).[87:839LA W OF BARGAININGtheir employers require judicial approval, because of the perceived powerimbalance between seamen and ship owners.17 Similarly, most jurisdictionsrequire court ratification of divorce agreements.18 To protect principal partieswith little ability to monitor their agents, settlements of class action' 9 andshareholder derivative suits 2° also require a judicial finding of fairness.Rather than judicial oversight, many jurisdictions give consumers in certainvulnerable contexts the self-help remedy of unilaterally rescinding anagreement within several days of acceptance, such as when they accept abargain proposed by telemarketers or door-to-door salespersons. 21 Finally, thelaw sometimes establishes alternative dispute resolution mechanisms forcontexts frequently characterized by dissatisfaction with negotiatedagreements. For example, lemon laws anticipate that some percentage ofnegotiations over used car purchases will result in unhappy consumers. Instates with lemon laws, consumers who are dissatisfied with their purchaseneed not establish one of the traditional bases for rescinding a contract orceasing performance (for example fraud, duress, or material breach). Instead,consumers have a streamlined system for demonstrating eligibility for thelaws' protections after the fact.22III. PROFESSIONAL AND ORGANIZATIONAL CONSTRAINTS ON BARGAININGBEHAVIORSome negotiators operate not only within the legal constraints applicableto the general public, but also within the parameters of professional ororganizational codes of conduct. These parameters can provide another layerof substantive constraints on negotiating behavior (in addition to thoseprovided by generally applicable law), additional or enhanced enforcementmechanisms, or both.As an example, attorneys are subject not only to generally applicable legalconstraints on negotiating behavior but also to the administrative regulationsof their state bar associations, which generally reflect the American Bar17. See Castillo v. Spiliada Mar. Corp., 937 F.2d 240, 243 (5th Cir. 1991) ("[S]eamen haveenjoyed a special status in our judicial system [because] they occupy a unique position. A seamanisolated on a ship on the high seas is often vulnerable to the exploitation of his employer.").18. See, e.g., Drawdy v. Drawdy, 268 S.E.2d 30 (S.C. 1980) ("[I]t is incumbent on the familycourt... to satisfy itself that the agreement is a fair contractual end of the parties' marital claims.").19. See, e.g., Mars Steel Corp. v. Cont'l Ill. Nat'l Bank, 834 F.2d 677 (7th Cir. 1987).20. See, e.g., United States v. City of Miami, 614 F.2d 1322, 1331 (5th Cir. 1980).21. See, e.g., HAW. REV. STAT. § 48lp (2001) (option to cancel telemarketer-induced sales); 16C.F.R. § 429.1 (2003) (cooling-offperiod for door-to-door sales).22. See, e.g., OR. REV. STAT. § 646.315-.375 (2001); OHIO REV. CODE ANN. § 1345.71-.78(Anderson 2001).2004]MARQUETTE LA W REVIEWAssociation's Model Rules of Professional Conduct. Model Rule 4.1(a)provides that "[i]n the course of representing a client a lawyer shall notknowingly... make a false statement of material fact or law to a thirdperson., 23 The commentary to the rule suggests that the scope of the ruleroughly parallels the common law. For example, estimates of "price or value"are not considered material,24 thus permitting lawyers in general to "puff' aswell as lie outright about their reservation prices. One important difference,however, between the administrative law governing lawyer-negotiators andthe common law governing all bargainers is the absence of the requirementsof reliance and damages in the regulatory context. To sustain a tort orcontract action, the victim must actually suffer harm. Although punishmentfor transgressions in bargaining outside of the doors of the courthouse is arelatively rare occurrence, lawyers can face disciplinary action for makingmaterial misrepresentations even if no legally cognizable damage results.IV. NEGOTIATIONS BEYOND LAW'S REACHNot all negotiations take place in a context in which legal structures canconstrain the behavior of negotiators. Some negotiations are conducted insuch a private forum that law serves at most a minimal function. Spouses'negotiations about the division of household tasks, child rearing philosophies,and appropriate toilet seat protocols may take place largely beyond the reachof the law. The law has only minimal impact on other negotiations because ofunlikely enforcement prospects. The black market thrives on the wings ofvibrant negotiation, yet the law provides few behavioral boundaries in thosenegotiations. Similarly, the law of nations includes an expectation that partieswill negotiate terms of treaties. No consistent, enforceable legal structureexists, however, to give force to any constraints on the negotiating behavior ofthose states. Finally, in some negotiations, the product of the bargainprecludes any obvious remedies-even in cases when one of the partiesexceeded expected boundaries of behavior. If two businesses deceive eachother in crafting the terms of a joint venture, the law informs how the damagefrom their conduct may be remedied. If, however, two legislators deceiveeach other in negotiations over the terms of a new piece of legislation, noobvious bases for legal rescission or damages exist.In these contexts, the threat of extra-legal penalties (in addition, of course,to personal ethical commitments) may constrain negotiators' behavior. Forexample, in many of the circumstances described above, an aggrievednegotiator may impose a reputational sanction on the transgressor by23. MODEL RULES OF PROF'L CONDUCT R. 4.1(a) (2004).24. Id. R. 4.1 cmt. 2.[87:8392004] LA W OF BARGAINING 845revealing the allegedly inappropriate behavior. Many parties will behavedifferently in a bargaining session they believe to be entirely private than innegotiations that take place within the shadow of a threat to disclose.Although the prospect of publicity is different in structure from legal sanction,it nevertheless holds some promise of altering the negotiating behavior ofthose who are beyond the reach of the formal law of bargaining.

The Law of Bargaining

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The Law of Bargaining

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