LEVERAGE IN CONTRACT AND OTHER NEGOTIATIONS

IVAN HOFFMAN, B.A., J.D.



        The term “leverage” refers to the principle of using a small advantage (or in negotiating terms, even merely a perceived advantage) to gain a much larger benefit.  The ancient Greek scientist Archimedes said, in 230 BC: “Give me a lever long enough and a place to stand, and I will move the world.” Picture a person standing on the ground trying to move a large boulder.  By placing a pivot such as a stone between the person and the boulder and inserting a long stick (the lever) over the stone and under the boulder in the correct position, the power of the person to move the boulder increases geometrically.  That person is then using leverage to achieve the result.  There is of course math behind the principle but that is not what I wish to discuss.

        What I wish to discuss is how to recognize leverage within the context of negotiating agreements, legal settlements or other business and legal matters.  Since I practice intellectual property law, I will discuss these concepts within that arena.  And within that context, there are always at least 2 parties: the money party and the creative party.  Both parts of the deal are equally important and both parties bring an equal amount to the table.  I emphasize the idea of equality since, by definition, the agreement that is reached reflects what one party is willing to give up and the other party willing to pay for what the first party is willing to give up.  Thus whatever agreement is made is presumably because each party gets or gives what it agreed to get or give in the transaction.  In most instances, agreements are made by willing parties.  Thus agreements are expressions of equilibrium.

        Having said the above, it is also clear that negotiating agreements involves more than merely accepting these principles.  The parity that is an agreement does not always equate to each side having maximized its respective value.  As indicated, often one or both parties wish to make it appear that they bring more value to that table than does the other party.  And often as well, one or both parties fail to recognize their respective value.  This article takes neither “side” but merely is about each side being able to recognize some of the elements of their particular leverage and how those elements can play themselves out within the agreement.

        Creativity can be any form of creativity, from writing, to artistry, web design, music and such.  Money refers not only actual cash money but often marketing and distribution as well.  Often having one side without the other can be useless and thus the equilibrium of having both.  The trick of course is to both know your own value, be willing to advance your own value and then in turn convince the other side of your value.

In General

        Despite the resultant equilibrium, clearly there are situations in which the sides may in fact be in unequal bargaining positions.  In such an instance, the principles here continue to apply but require even greater skills on the part of the “lesser” party to advance his, her or its interests to achieve as good a deal as possible even given that lack of equal value.  Sometimes such lack of equality stems simply from one side not understanding their true value to the deal and allowing itself to believe it has the short end of that leverage stick.    If one party has failed to recognize and advance its value, the fault therefore lies only with that said party.  The other party is not to blame for your failure to use your assets.  Deal making is about expressing, within a business context, your responsibility to yourself.  (Read “Private Laws”)

        Many parties seem to approach negotiations as the victim of the other party.  Such parties, no matter what side they are on, talk about deals as though they were carved into stone (which they may have been in Archimedes’ time) even before the negotiations are begun.  The money party may phrase that idea in terms of offering a “standard contract” and the creative party may thus be cowed into believing that such a concept is sacrosanct, never to be disturbed, even though the creative party may be in a much better position to exploit its actual or perceived leverage.  (Read “Standard Contracts”)

        A word about perceived value.  Value is often what the other side believes your value to be.  What one party may not value at all, another may find to be of significant value.  Often such disparities depend on the position of the said other side.  It is thus up to each party to maximize his, her or its perceived value.  The creative side must understand that not only is all creativity unique, but the creator must have marketed itself so that the other side perceives that there is no other creator on the planet that can do the particular work.  To the same effect is the mandate to the money side.  Money (including marketing, distribution and the like) can often be seen as commodities and thus fungible, where one company is essentially the same as another.  Such is not generally so but can be seen as being so and thus it is up to the money side to do the same kind of marketing so that it is perceived by the creator that its “money” is unique.

        In the end of course the best deals are made by those who can afford to say “No.”  This means that you have to be able to walk away from a deal before you can make a good deal.  This is the ultimate leverage.  If you desperately need the deal, you may be willing to give up nearly anything and in some instances everything, just to have the deal.  I have written that all negotiations, no matter whether in business or personal relationships, are made on the basis of a simple formula: “W3M.”  That formula is the shorthand of “Who Wants Who More.”  (For a fuller explanation of this concept, read “Controlling the Agenda”)

Kinds of Leverage

        To be more specific, I would break down the kinds of leverage that may exist within a negotiation into 3 general categories, although there are likely to be many other categories and elements and this list is not intended to be exhaustive:

• money and its contractual opposite, creativity;
• legal rights; and
• contract provisions.
        They are almost always intertwined and not discrete.

        Money vs. Creativity:  It is often said that the party controlling the money controls the agenda (see “Controlling the Agenda” mentioned above.)  In general, if the creative party does not know the value of being creative, then this said theory may actually prevail.  Often as not, the creative party is in a financially less secure place and thus the money party has enormous leverage over the deal.  The terms of the deal then become the terms dictated (a carefully chosen word) by the money party.  When the creative party seeks to negotiate better terms, the response from money is almost always “We don’t do that for anyone.”

        On the other hand, if the creative party knows his or her value, whether actual, marketplace value or only perceived value, the leverage can switch, either completely in favor of the creative party or substantially so.  When the creative party knows its value, the response from the money side can go from “We don’t do that for anyone” to “We don’t do that for anyone…else.”  Keep in mind that all creativity is unique.  But it takes a unique creator to recognize the inherent value in such uniqueness and to know how to leverage the same.

        Legal Rights.  In the intellectual property business, rights start out belonging to the creator of the property (other than in a bona fide employment relationship.  Read the several articles on my site dealing with “works made for hire.”  Click on “Articles For Writers and Publishers.”)  Thus, going into the negotiation, the presumption is that the creator owns what the money wants and the money owns what the creator wants.  Given the premise of the United States copyright law as stated above, this gives the creator the initial leverage (but only if the creator believes it does).

        But these rights can be made more valuable and used more like leverage if they are registered rights such as rights of copyright and trademark.  The law provides for significantly greater rights and remedies in the case of registered rights than in the case of non-registered rights.  Read “Do I Need to Register My Copyrights?” and “Should I Register My Trademarks?”

        If the creator or other owner is the owner of registered copyrights or trademarks, should there be any dispute as to ownership rights, or in the event of any claims of infringement, dilution etc., the fact of timely registration can create significant leverage.  For example, this leverage can exist in the form of not having to prove actual damages for copyright infringement since the act of timely registration can provide for both statutory damages and attorneys fees.  Thus, the alleged infringer can be leveraged into a settlement since that infringer may realize that the owner may prevail in any litigation and the damages could be substantial even without proof of actual loss, and that infringer may have to pay the owner’s attorneys fees.  On the other hand, if the owner has not registered its copyrights, then the alleged infringer may have the leverage since the burden of proof not only of the fact of infringement but as to actual damages rests on the shoulders of the owner.  These are often very hard to prove and thus the alleged infringer merely has to sit back and wait for the owner to proceed legally.  The leverage thus shifts.

        To a similar degree, owning registered trademarks can create significant leverage since the fact of timely registration can create a presumption of validity and, assuming appropriate application is made after the statutory period of time, can create an “incontestability” of the mark.  Further, the act of timely registration creates at the very least constructive knowledge about the existence of the rights of the trademark owner.  Read, for example, “Constructive Knowledge in UDRP Actions.”

        Thus the act of timely registration of intellectual property can make a significant difference in terms of leverage.  And yet I am constantly amazed at how often parties do not register their intellectual property.

        Contract Provisions.  Often negotiations take place when there has been some form of dispute about the relationship and the parties attempt to settle that dispute by making a new deal or clarifying the current deal.

        One of the very important legal positions that relate to leverage is the issue about “burden of proof.”  Burden of proof refers to the requirement imposed on one party to produce proof of the existence of certain facts necessary to prevail in a litigation.  That party thus has the affirmative obligation to move forward while the responding party need do nothing but wait the outcome of that proof.   In fact of course, both the claiming and responding parties should be always looking 3 or more steps down the legal path and preparing for the same.

        And this issue applies even if there is no litigation but merely comes up within the context of the above renegotiation or clarification.  There are certain “buzz word” provisions that appear in contracts that are very important pivot points, which are points that turn the leverage in one or another direction.

        For example, when a contract speaks in terms of “reasonable,” “discretion,” rights of approval and similar vague and uncertain concepts, these are almost always such pivot points.  For instance, if the creative side has given the money side the right to do something subject to acting “reasonably,” that switches the leverage to the money side since no one on the face of the planet is likely to know what that term means or agree to any particular definition of the term and thus money makes its decision and it is up to creativity to argue that such decision was not “reasonable.”  Thus, in this example, creativity has the burden of proof and the leverage has shifted to the money party.

        To the same effect is the operation of the word “discretion.”  The party having the right to act within its discretion controls the agenda over that point and ultimately over possibly over the entire negotiation.  And this is true whether or not the term “discretion” is further modified by phrases such as “reasonable,” “commercially reasonable” or similar modifiers.

        Thus, depending on which side you are to the transaction, such words and other words can be valuable or deleterious to your position and can make the difference between whether you have or do not have the leverage in or control the agenda to the negotiation, litigation etc.   Indeed, there may be contract provisions that then come into play when there is such a disagreement and generally those contract provisions can be quite unfavorable to the party without leverage.

        Keep in mind that there are no “good” points or “bad” points in agreements.  Those are subjective terms imposed on an objective process.  What is “good” or “bad” clearly depends on your position within the negotiation. Clearly there are points that are favorable or unfavorable to a given party but often it takes a longer range view, a view coming from an understanding of the full legal and business impact of such points to understand their true nature.  Often parties do not understand the said full impact of particular provisions and that is where the experience of an attorney can be helpful.

Conclusion

        The above issues are certainly not the only issues that present themselves in terms of leverage within a negotiation, litigation or the like and as I indicated, this article is not intended to be exhaustive of all such issues. By definition, none of the foregoing are bright line rules.  Each negotiation takes on a character all its own and presents itself with new “wrinkles” in the leverage game.  There are subtleties, nuances and tactics that are involved.  Underneath it all, the exercise of leverage is about believing or not believing in oneself or at least making the other party believe in your belief.  And exercising your responsibility to yourself, whether you are a creator or the money party.

        Contract negotiation is an art form.  Indeed, the way you learn these ideas is through experience in making deals and learning about the psychology of the deal making process.  Merely copying forms from some book, the Internet or otherwise is almost always a useless act unless it is accompanied by the foundational knowledge and skills about what the agreement actually says and means.

        And how to use your position as leverage in the deal.

Copyright © 2003 Ivan Hoffman.  All Rights Reserved.

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This article is not legal advice and is not intended as legal advice.  This article is intended to provide only general, non-specific legal information.  This article is not intended to cover all the issues related to the topic discussed.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This article is based on United States law.  You should consult with an attorney familiar with the issues and the laws of your country.  This article does not create any attorney client relationship and is not a solicitation. 

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No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used without the express written approval of the author.


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