Bluffing is at the heart of any competitive
activity involving limited information, such as a negotiation.1 Advocates
during a negotiation often seek to mislead their adversaries. They want
their opponents to reach conclusions that may be contrary to the truth.
The purpose of the bluff is to undermine an adversary's confidence in
his or her case.2 Relying on a misunderstanding, an adversary may concede
ground and unnecessarily increase or reduce its offer. Negotiators, like
poker players, count the results they achieved through a well-played bluff
as among their greatest victories.
Attorneys must consider the applicable laws and ethical rules when they
seek to employ the tactic of bluffing in their negotiations. California
law treats litigation and nonlitigation negotiations differently. Persons
involved in litigation are broadly protected by statute from tort liability--even
for fraud and perjury3--but no similar immunity applies in a nonlitigation
Civil Code Section 47(b)(2), the litigation privilege, protects parties
in litigation from subsequent tort liability for any statements made during
litigation except those that give rise to a claim of malicious prosecution.
According to the court in Flatley v. Mauro:
"The principal purpose of [Civil Code Section 47(b)] is to afford litigants
and witnesses...the utmost freedom of access to the courts without fear
of being harassed subsequently by derivative tort actions." Additionally,
the privilege promotes effective judicial proceedings by encouraging
"open channels of communication and the presentation of evidence" without
the external threat of liability...and "by encouraging attorneys to
zealously protect their clients' interests....Finally, in immunizing
participants from liability for torts arising from communications made
during judicial proceedings, the law places upon litigants the burden
of exposing during trial the bias of witnesses and the falsity of evidence,
thereby enhancing the finality of judgments and avoiding the unending
roundelay of litigation, an evil far worse than an occasional unfair
Using the authority of the litigation privilege, courts have denied parties
the right to bring a derivative tort action when:
• A witness committed perjury or perjury was suborned.5
• An attorney misrepresented his client's insurance policy limits to reduce
the settlement amount.6
• Parties forged a will and submitted it for probate.7
• An attorney with a conflict of interest allegedly defamed one client
to enhance the settlement prospects of another client.8
• A bank wrongfully reported suspicious activity to the police.9
These cases underscore the absolute nature of the privilege, which bars
all tort recovery for statements made during the litigation except for
claims of malicious prosecution.10 The privilege even applies to "statements
made prior to the filing of a lawsuit, whether in preparation for anticipated
litigation or to investigate the feasibility of filing a lawsuit."11
The Section 47(b) privilege applies only to "communicative acts" and
not to "noncommunicative conduct." In Kimmel v. Goland,12 the court upheld
an action for the illegal recording of confidential telephone conversations
during a lawsuit:
Implicit in the Ribas [v. Clark] decision was the distinction between
injury allegedly arising from communicative acts, i.e., the attorney's
testimony, and injury resulting from noncommunicative conduct, i.e.,
the invasion of privacy resulting from the attorney's eavesdropping.
This distinction has traditionally served as a threshold issue in determining
the applicability of section 47[b](2).13
Only one case has imposed liability for statements made during litigation.
Shafer v. Berger Kahn, Shafton, Moss, Figler, Simon & Gladstone14 arose
from a claim against a construction contractor for fraud and negligence.
The contractor's carrier reserved its rights because of the allegations
of intentional and willful conduct. When the contractor sought independent
counsel, the carrier withdrew its reservation so the contractor would
not need its own counsel. The arbitration panel in the underlying case
found the insured contractor liable for fraud, but the carrier refused
to fully indemnify. The carrier instead contended, through its coverage
counsel, that the finding of fraud precluded full indemnity for the claimants
under the policy. When the claimants discovered they were entitled to
full indemnity by reason of the withdrawal of the carrier's reservation,
they sued the carrier and the law firm that misrepresented the carrier's
position to them.
The Shafer court concluded that "the litigation privilege does not shield
[the defendant attorney] from liability for fraud because his alleged
misrepresentations were made to a party standing in the shoes of an insured,
and the application of the litigation privilege in this case would be
inconsistent with the purpose of [Insurance Code] section 11580."15 That
statute states that when a claimant obtains a judgment against an insured
for, among other things, property damage, then the claimant may sue the
insurer directly on the policy to recover on the judgment.16
In finding this exception to the litigation privilege, the Shafer court
stands alone. The court first reasoned that lawyers may be liable for
fraud to third parties.17 But each of the California cases it discussed
involved business negotiations, not settlement negotiations, and thus
were unprotected by the litigation privilege. To repair this deficiency,
the court relied on the Restatement (Third) of the Law Governing Lawyers,
an Iowa Supreme Court case, and a case from the U.S. Court of Appeals
for the Second Circuit that applied New York law.18
The court then concluded that Insurance Code Section 11580 supersedes
the litigation privilege:
Counsel retained by an insurer has an obligation to be truthful in
describing insurance coverage to a third party beneficiary. The litigation
privilege is not a license to deceive an injured party who steps into
the shoes of the insured....Section 11580 grants an injured party the
right to file suit in order to recover under the insurance policy. Coverage
counsel may not commit fraud in an attempt to defeat that right. And
to the extent there is a conflict between an injured party's rights
under section 11580 and coverage counsel's reliance on the litigation
privilege (Civ. Code, §47, subd. (b)), the rights of the injured party
prevail as they arise under the more specific of the two statutes.19
Thus, the Shafer holding, even if adopted by other courts, probably has
no application outside the specific context of Insurance Code Section
11580 or a similar statute.20
Mediated settlement negotiations enjoy additional protection. According
to the mediation confidentiality provisions of the California Evidence
Code, "No evidence of anything said...in the course of, or pursuant to,
a mediation or a mediation consultation is admissible or subject to discovery...."21
Courts have upheld mediation confidentiality as inviolate. For example,
in Foxgate Homeowners' Association v. Bramalea California, Inc., the court
held "that there are no exceptions to the confidentiality of mediation
communications or to the statutory limits on the content of mediator's
reports. Neither a mediator nor a party may reveal communications made
Notwithstanding this broad language, the court in Simmons v. Ghaderi23
found an exception. It did so for testimony about an oral settlement agreement
purportedly reached at mediation on which the defendant tried to renege.
Because the defendant and her attorney litigated the efficacy of the purported
agreement for 15 months--and they described in declaration testimony and
stipulations what happened at the mediation--the court carved out what
it felt was a narrow but appropriate exception: "We simply hold that once
a party voluntarily declares certain facts to be true, stipulates that
she does not dispute them and extensively litigates the legal effect of
such facts, she is estopped to later claim that the court must disregard
those facts based upon a belated assertion of mediation confidentiality."24
This case was granted review in December 2006. That same month, the California
Supreme Court reaffirmed its "disapprov[al]" of "judicially crafted exception[s]"
to the mediation confidentiality statutes, with specific mention of its
decisions in Foxgate and Rojas.25 The supreme court has yet to resolve
whether conduct establishing estoppel can create an exception to the statutes.
When a lawyer's activities fall outside the litigation arena and the
protection of the litigation privilege, California law permits tort recovery
for wrongful advocate conduct. As the court of appeal noted in Cicone
v. URS Corporation:
In California it is well established that an attorney may not, with
impunity, either conspire with a client to defraud or injure a third
person or engage in intentional tortious conduct toward a third person....
Thus, the case law is clear that a duty is owed by an attorney not
to defraud another, even if that other is an attorney negotiating at
As for jurisdictions other than California, the Shafer court observed
that "cases from twenty-eight states hold that ‘[a]n attorney can be
liable to a nonclient, even an adversary in litigation, for fraud or deceit.'"27
That is also the rule of the Restatement (Third) of the Law Governing
Lawyers: "[I]n general, a lawyer who makes a fraudulent misrepresentation
is subject to liability to the injured person when the other elements
of the tort are established...."28 This rule "applies equally to statements
made to a sophisticated person, such as to a lawyer representing another
client, as well as to an unsophisticated person."29 Moreover, according
to the Restatement, "Misrepresentation is not part of proper legal assistance;
vigorous argument often is. Thus, lawyers are civilly liable to clients
and nonclients for fraudulent misrepresentation, but are not liable for
such conduct as using legally innocuous hyperbole or proper argument in
Of course, what distinguishes "fraudulent misrepresentation" from "legally
innocuous hyperbole" is not always clear. The American Bar Association,
in its Formal Opinion 06-439 adopted in 2006, attempts to answer this
question. Nevertheless, advocates in California should shield themselves
whenever possible under the litigation privilege by documenting some connection
between their negotiations and pending or anticipated litigation.
The California Rules of Professional Conduct generally do not address
the ethics of negotiation behavior in either a litigation or nonlitigation
setting.31 However, this year the State Bar promulgated its California
Attorney Guidelines of Civility and Professionalism,32 which address the
topic directly. According to Rule 18(c) of the guidelines:
An attorney should avoid negotiating tactics that are abusive; that
are not made in good faith; that threaten inappropriate legal action;
that are not true; that set arbitrary deadlines; that are intended solely
to gain an unfair advantage or take unfair advantage of a superior bargaining
position; or that do not accurately reflect the client's wishes or previous
The California Attorney Guidelines are voluntary and aspirational. They
fail to define what an "abusive" or "not...in good faith" or "untrue"
negotiating tactic is--all the more surprising given the purposes of negotiating
tactics. In the poker game that is negotiation, advocates have two kinds
of chips: substantive chips, based on the merits of their position, and
procedural chips. Negotiation tactics are procedural chips; they involve
one side extracting from the other side a price or a concession regardless
of the merits of the case.
As one example, an advocate may schedule a negotiation in the late afternoon,
knowing the parties are unlikely to reach a conclusion before the end
of the day. Is this practice the setting of an "arbitrary deadline?"
Negotiating tactics that "are not true" raise different questions. Must
the advocate know a statement is false? What if the falsehood applies
only to immaterial matters? And what constitutes an "unfair advantage?"
The guidelines, by not answering these questions, are unhelpful.
ABA ethics opinions and the ABA Model Rules of Professional Conduct offer
some direction on the subject of ethics in negotiations. California lawyers
may look to both for direction and analysis when state law and ethics
rules lack guidance. The ABA materials cannot be cited as controlling
authority, but they are illuminating.
ABA Formal Opinion 06-43934 in particular addresses what may or may not
be said in negotiations. The opinion addresses the "Lawyer's Obligation
of Truthfulness When Representing a Client in Negotiation: Application
to Caucused Mediation." It reviews cases from many jurisdictions as well
as the ABA Model Rules of Professional Conduct35 and prior ABA formal
opinions to conclude that "a lawyer representing a client may not make
a false statement of material fact to a third person" in any negotiation,
including what the opinion refers to as a caucused mediation.36
ABA Formal Opinion 06-439 interprets ABA Model Rule 4.1(a). According
to Model Rule 4.1, Truthfulness in Statements to Others:
In the course of representing a client a lawyer shall not knowingly:
(a) make a false statement of material fact or law to a third person;
(b) fail to disclose a material fact when disclosure is necessary to
avoid assisting a criminal or fraudulent act by a client, unless disclosure
is prohibited by Rule 1.6.
The opinion states that Model Rule 4.1(a) "does not cover false statements
made unknowingly, that concern immaterial matters, or that relate to neither
fact nor law."37 Also, the opinion expressly notes that it does not apply
to mere posturing or exaggeration: "Statements regarding a party's negotiating
goals or its willingness to compromise, as well as statements that can
fairly be characterized as negotiation ‘puffing,' ordinarily are not considered
‘false statements of material fact' within the meaning of the Model Rules."38
The opinion identifies specific statements that do not constitute a false
statement of material fact:
• Understating one's willingness to make concessions regarding the elements
of a settlement or its dollar amount, or to gain leverage over the other
• Exaggerating one's strengths and minimizing weaknesses.
• Making estimates of price or value.
• Declaring one's intentions regarding an acceptable settlement.
• Not disclosing the existence of a principal (except when nondisclosure
would constitute fraud).39
• Nondisclosure by a lawyer of the existence of an insurance policy--unless
the disclosure is required by law.40
• Failure of a lawyer to correct the other party's misunderstanding, based
on information from third parties, of the finances of the lawyer's client.41
The opinion notes that it is consonant with the Restatement (Third) of
the Law Governing Lawyers, which describes the specific statements as
"nonactionable hyperbole" or merely a "reflection of the state of mind
of the speaker."42 The opinion also concludes that these statements "are
generally not considered material facts subject to Rule 4.1,"43 provided
that these statements do not violate other Model Rules "if made in bad
faith and without any intention to seek a compromise [citing Model Rules
3.2 and 4.4(a)]."44
The opinion cites prior ABA formal opinions to conclude that:
• A party's actual bottom line and an agent's actual settlement authority
are material facts.45
• A lawyer has no obligation to inform the other side that the statute
of limitations has run but cannot affirmatively misrepresent the facts
regarding the claim.46
• In a pending personal injury claim, a lawyer cannot misrepresent the
fact of the plaintiff's death ("a material fact"), but must disclose it
"promptly" to the court and the opposing party.47
The opinion cites some non-California cases that sanctioned lawyers,
or overturned settlements, or afforded grounds for an action against the
lawyers.48 Courts took these actions when the lawyers made a false statement
of material fact or an implicit misrepresentation by failing to be truthful.
The situations in which these actions took place were varied:
• A lawyer affirmatively misrepresented insurance policy limits.49
• Defense counsel failed to disclose material adverse facts about the
plaintiff's medical condition.50
• The defendant law firm in a malpractice action was permitted an equitable
indemnity claim against opposing counsel in the underlying case in which
misrepresentations were made during negotiations.51
• A buyer's fraudulent misrepresentation claim was sustained against seller's
counsel for misrepresenting facts during a real estate negotiation.52
• A lawyer settled a personal injury case without disclosing to the other
side that the client had died.53
The opinion explicitly applies to negotiations conducted in mediation.
In observing the peculiarities of mediated negotiations, the opinion observes
that sometimes counsel may need to exercise a greater degree of truthfulness
than the opinion itself requires to help the mediator achieve settlement:
"[I]n extreme cases, a failure to be forthcoming, even though not in violation
of Rule 4.1(a), could constitute a violation of the lawyer's duty to provide
competent representation under Model Rule 1.1."54
While the opinion provides reasonable guidance in the situations it enumerates,
it concludes with a caveat that leaves room for lawyers to avoid its strictures:
[W]hether in direct negotiations or a caucused mediation, care must
be taken by the lawyer to ensure that communications regarding the client's
position, which otherwise would not be considered statements "of fact,"
are not conveyed in language that converts them, even inadvertently,
into false factual representations. For example, even though a client's
Board of Directors has authorized a higher settlement figure, a lawyer
may state in the negotiation that the client does not wish to settle
for more than $50. However, it would not be permissible for the lawyer
to state that the Board had formally disapproved any settlement for
more than $50, when authority in fact had been granted to settle for
a higher sum.55
The converse also may be true: A factual statement may be converted into
a mere statement of position by careful phrasing. Thus, with this language,
ABA Formal Opinion 06-439 provides advocates with the room they need to
achieve their negotiating goals without violating the ethical rules propounded
by the opinion.
Many competitive negotiating tactics involve bluffing. Competitive tactics
are designed to undermine an adversary's confidence through intimidation,
distraction, and diversion. Most settlement negotiations begin with competitive
tactics as each side seeks to bludgeon the other into making concessions.
Deliberately misleading the other side through bluffing is an integral
part of the process.
ABA Formal Opinion 06-439 instructs attorneys to phrase their bluff to
avoid making a "false statement of material fact." Using that direction
as a foundation for conducting a negotiation, attorneys can consider using
a variety of tactics employing bluffing:
Alternatives to settlement. An attorney may inform his
or her adversaries that the attorney's client has better choices than
settlement. The side that cares more about settling starts with a weaker
negotiation position. The attorney who is nonchalant about settling may
bait the other side into concessions to keep the attorney at the bargaining
The attorney with the better BATNA (Best Alternative to a Negotiated
Agreement) will have more chips with which to negotiate. But bluffing
may be used if the situation is unclear, or one side has an objectively
The March 2006 Blackberry settlement provides an example.56 In that case,
NTP, Inc., a patent holding company, claimed Research in Motion, Ltd.,
the makers of the Blackberry handheld e-mail device, infringed several
of its patents. RIM reduced NTP's settlement demands by two related "alternative
to settlement" tactics. First, while the case was pending in U.S. District
Court, RIM sought to have the Patent and Trademark Office invalidate NTP's
patents. Invalidation would have defeated NTP's lawsuit--an alternative
to settlement. Second, as another alternative, RIM claimed to have designed
a "work around" that would not have required the use of the allegedly
Each of these alternatives reduced the settlement value of NTP's case.
But there was a bluffing element to them, since it was unclear whether
RIM's pursuit of either would be successful. Neither raised an ethical
question, however, because both parties knew of the uncertainties.
Hypothetically, if RIM was certain its work around was technologically
unfeasible, yet persisted in negotiations by relying on the work around
as a viable alternative, RIM would have crossed the line established by
ABA Formal Opinion 06-439. RIM would have had no real alternative despite
its claims to the contrary--a knowing misstatement of a material fact.
ABA Formal Opinion 06-439 itself anticipates this situation. It states
that a party acts ethically when it continues to negotiate for a license
of technology even though it has already designed a new product without
the allegedly infringing patents.57
Anything but that. An attorney may find his or her adversary's
offer acceptable, but the attorney wants more and responds that the offer
is insufficient. The attorney hopes his or her adversary will increase
(or decrease) the offer or otherwise grant further concessions before
the attorney wrests an agreement from the adversary. An attorney who employs
the "anything but that" tactic can gain concessions each time he or she
refuses the adversary's offer.
Ethically, this tactic presents little problem. The attorney employing
the tactic is not making any factual statements at all, so there is no
issue of truthfulness or falsity. This tactic thus falls within the opinion's
caveats about "posturing," willingness to compromise, and statements about
one's negotiating position.
Done deal. A party may take some action and present
it to the other side as a "done deal." An example is when a plaintiff
in a multiparty litigation opens the negotiation by unexpectedly stating
that a codefendant has already settled on confidential terms to which
the other defendant is not entitled.
If this statement is true, there is no problem. But what if a settlement
has not been finalized, or the plaintiff misstates the scope of the settlement
(such as, "It's in the seven figures, but I can't tell you how much because
of confidentiality")? The first statement may not be considered material,
since defense counsel should not have relied on it without first checking
with the allegedly settling codefendant.58 The second statement may be
unethical if false and intentionally stated to mislead defense counsel
into settling for an amount suggested by the statement.59
Irrational behavior. Sometimes an attorney decides to
act irrationally not only to distract and unnerve but also to undermine
his or her adversary's confidence. Attorneys generally prefer rational
approaches to negotiation. Irrational behavior can unsettle even an experienced
History provides an example. In 1960, when Nikita Khrushchev was the
head of the Soviet Union, he appeared at the United Nations General Assembly
and repeatedly caused disruptions by shouting from his seat. He even took
off his shoe and began banging it on the table. When the Cuban missile
crisis developed the next year, Khrushchev's seemingly irrational behavior
magnified President John F. Kennedy's sense of risk when he ordered the
naval blockade of Cuba.
Bullying or tantrum-throwing may fall within the California Attorney
Guidelines suggestion to avoid "abusive" negotiation tactics. Engaging
in these actions is certainly neither "civil" nor "professional." However,
there appear to be no legal or ethical proscriptions against this behavior.
Limited authority. An attorney may claim to lack authority
to settle at a specified amount and ask his or her adversary to reduce
the offer to the attorney's authorized limits. Parties typically use this
tactic after a tentative settlement has been reached. An attorney may
call his or her principal to "confirm" the deal only to "discover" that
the attorney cannot settle at the agreed amount. The attorney then requests
his or her adversary to reduce the settlement amount to one that corresponds
to the limits authorized by the principal.
Claiming an authority that is in fact nonexistent may fall within the
ABA Formal Opinion 06-439's proscription if doing so would constitute
fraud.60 It would also violate California law if the statement occurs
in a business negotiation.61 But agreeing to a settlement subject to a
principal's approval is ethical, since an attorney who does this is not
making false representations about his or her authority.
In practice, parties often move higher (or lower) in their offers than
they anticipated at the commencement of the negotiations. As long as attorneys
do not claim a false limit to their authority, they should encounter no
Limited time. Parties sometimes seek to artificially
constrain the time limits of the negotiation. Their aim is to make the
opposing side move at a quicker pace than they are comfortable with--and
this in turn may induce negotiating mistakes. Thus, a party may schedule
the negotiation late in the day when everyone wants to go home.
Attorneys do not need a reason to limit the duration of a negotiation
("my daughter's birthday," "I have a hearing," "I have to catch a plane").
But what if an attorney does state a reason, especially one that is false?
It seems unlikely that this type of statement would be deemed material
for purposes of ABA Formal Opinion 06-439, even if it is a knowingly false
statement of fact. Thus, in most instances, use of the "limited time"
tactic would not be deemed unethical by the opinion.
However, the California Attorney Guidelines specifically identify this
tactic as unacceptable.62 Each advocate must make his or her own choice
whether to comply.
Poor me. Some negotiators act like they have no background
or training in negotiation and ask the other side for help. They seek
sympathy and hope their adversary will be more reasonable than he or she
intended. This tactic can be especially effective when the adversary is
younger and apparently less experienced than the negotiator seeking assistance.
The bluff here is the misrepresentation regarding the negotiator's actual
level of experience. However, even if this bluff constitutes a misstatement
of fact (assuming one's experience is a fact), it does not appear to be
material and is the type of tactic one expects to find in negotiation.
Advocates often ask mediators to recommend their next offer. Sometimes
they use this tactic to lessen pressure on themselves and to learn about
the other side's position. The mediator can never be sure whether the
advocate is bluffing about his or her need for the mediator's opinion.
But the "poor me" tactic most likely does not cross the ethical line.
Straw man. This tactic involves an attorney demanding
agreement on Issue 1, which the attorney's adversary cares about the most.
The attorney then creates a deadlock but "reluctantly" concedes Issue
1 to gain agreement on Issue 2--the one the attorney cares about most--and
maybe Issues 3 and 4 as well.
The "straw man" tactic can be effective, as the following example, loosely
based on an actual mediation, demonstrates. The plaintiffs in a shareholder
derivative suit claimed that the defendant, the corporate chairman and
majority shareholder, siphoned $3 million from the corporation by creating
shell subsidiaries that paid director fees to the defendant. The plaintiffs
concluded that they most wanted the defendant to relinquish his shares
and resign all his positions. They wanted this result more than they wanted
money damages, which the corporation could easily obtain.
But the plaintiffs started their negotiation by asking for a large amount
of money--and reasonably so given the real threat of punitive damages.
Only when the parties deadlocked over money did the plaintiffs raise a
buyout option. The defendant, faced with paying money or relinquishing
his shares, left the corporation.
This tactic raises no legal or ethical issues. The California Attorney
Guidelines might consider this tactic "abusive" or one that takes "unfair
advantage" of a "superior bargaining position." Again, given the voluntary
nature of the guidelines, these determinations are ones that each advocate
Use of power. Parties may not only threaten to use their
power but also sometimes actually use it. Many risk management strategies
suggest that a show of toughness produces a higher settlement rate but
at lower amounts. Parties should proceed with caution, because a threat
is more dangerous than its execution. The threat creates doubt and, hence,
concessions--but once implemented, the attorney wielding the threat has
limited the choices of his or her adversary, making it easier for the
adversary to respond.
For example, in an unfair competition case, the defendant may threaten
to change product features that the plaintiff claims the defendant stole
from the plaintiff. The defendant would then have a lawful product selling
for less than the plaintiff's. In this situation, the plaintiff usually
will settle rather than risk the threat's execution and receive nothing.
This tactic may possibly run afoul of the California Attorney Guidelines
but raises no other legal or ethical issues.
California law protects negotiation advocates from tort liability for
all types of fraudulent, misleading, and even perjurious statements made
while negotiating a settlement in pending or anticipated litigation. Outside
the litigation context, however, California law does not protect negotiation
advocates from liability for their statements. Most other states will
impose liability on advocates for their fraudulent statements without
distinguishing between statements made in a litigation or nonlitigation
The ABA Model Rules, as analyzed in formal opinions, conclude that negotiation
advocates have the duty not to make "false statements of material fact."
Puffing, posturing, and misleading the other side on such matters as a
party's settlement intentions or estimates of value do not fall within
As an ethical guide, the ABA formulation is a good one for negotiators
to follow. But for California attorneys whose behavior falls outside the
ABA rule, there likely will be little consequence.