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The blurry lines of negotiation ethics: when "puffing" becomes misrepresentation

In-house counsel may unknowingly break the law

Assume that you are conducting negotiations on a supply contract with a customer. You and your business partner are engaged with your in-house counterpart and her business partner. During a break in the negotiations, your partner tells you that important cost data developed and used by the customer to establish its position on price is incorrect and permits your company to extract a higher price. Your partner mockingly states that the error is obvious but wants to make sure that you do not tip the customer off to their error.

When you rejoin the meeting, the customer’s in-house counsel innocently states, “Unless I’m missing something, this looks like a win-win result.” Quickly, your partner interjects that the deal looks good to him. The customer’s in-house counsel looks to you for your confirmation. Your partner readies his leg under the table for a swift kick in the event that you even pause. How do you respond?

There are two reasons the ethics of negotiation are particularly challenging for in-house counsel: First, the conduct rules are not well understood. And second, your business partners may not feel obligated to live up to your code of conduct.

As a general rule, a lawyer is required to be truthful when dealing with others on a client’s behalf. Rule 4.1 of the Model Rules of Professional Conduct provides that in the course of representing a client, a lawyer “shall not knowingly: (a) make a false statement of a material fact or law to a third person.” As the commentary to the Rule makes clear, a misrepresentation occurs when a lawyer incorporates or affirms a statement by another person that the lawyer knows to be false. A misrepresentation also includes misleading statements and omissions that are the equivalent of affirmative false statements.

This concept becomes tricky in a negotiation context when lawyers are untruthful with each other. Not all untruths, however, are equal. Posturing or “puffing” during negotiations is not a breach of the Rules. Specifically, statements regarding a party’s negotiating goals or its willingness to compromise are not seen as actionable misrepresentations of fact but ethically harmless negotiation tactics. As the commentary to the Rule provides: “Whether a particular statement should be regarded as one of fact can depend on the circumstances. Under generally accepted conventions in negotiation, certain types of statements ordinarily are not taken as statements of material fact. Estimates of price or value placed on the subject of a transaction and a party’s intentions as to an acceptable settlement of a claim are ordinarily in this category.”

This seems to be an attempt to distinguish between statements regarding how a counter-party values a claim (not a violation) and statements about facts material to the claim (a violation).

Examples are better counselors. A lawyer is puffing when he insists that his client will not settle a matter for $200 when he knows the client is willing to accept as little as $150. However, a lawyer misrepresented a fact when he states that he does not have any authority to settle a matter when the client has in fact provided settlement authority up to $1,000. Similarly, stating that your client will only listen to offers that are more than $50 million for the sale of his business when you know he will listen to all offers is likely puffery.  

You are not alone in struggling with this topic. The absence of a clear line between puffing and misrepresentation has resulted in a considerable body of ethics decisions and commentary. The annotated version of the Rules contains a thorough reference list. As always, don’t forget to check your state rules and decisions as well.

Give me your thoughts on how you would handle the negotiation scenario set forth above. I will sample the responses (without attribution) in part two.

Brian Martin is SVP and general counsel of KLA-Tencor Corp. Send your comments and best ethics practices to him at insideethics@gmail.com.

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