LEGAL

NEGOTIATION


DISCUSSION QUESTIONS AND PROBLEMS - 1

1. The Associate. Wang, a third-year graduate student of Fudan Law School,
has a meeting this afternoon with the small law firm of Li & Zhang to discuss the
possibility of his joining the firm as an associate. He currently has two job offers:
one from Firm A for RMB 174,000 per year and one from Firm B for RMB 183,000
per year. He considers jobs with all three firms equally attractive, and all would
provide roughly the same fringe benefits. Li & Zhang needs to hire only one new
associate this year. They are indifferent between Wang and Liu, a student from
another law school of Jiaoda. The firm knows that Liu has an offer of RMB 255,000
from Firm C, and would be unlikely to accept an offer from Li & Zhang for less
money than this. The firm’s third choice is a student named He, who is bright but
abrasive and might offend clients. He has indicated he would work for Li & Zhang
for RMB 225,000 per year.

Going into the negotiations, what are Wang’s alternatives to a negotiated
agreement"? What is his BATNA? What is his reservation price? What is Li &
Zhang’s BATNA? What is its reservation price? What is the bargaining zone?

2. The Slippery Banana. Amy slipped on a banana at a local FamilyMart
(“FamilyMart”) and suffered a broken leg. She has since filed a lawsuit against
FamilyMark. She would like to be compensated for her injuries, but she is very
fearful that FamilyMart will accuse her of being clumsy should the case go to trial.
Amy’s attorney and FamilyMart’ attorney agree on the following possible
outcomes if the case goes to trial:

50 percent chance: Judge finds FamilyMart not negligent- Amy recovers RMB 0.
25 percent chance: Judge finds FamilyMart negligent- Amy recovers RMB 20,000.
25 percent chance: Judge finds FamilyMart negligent- Amy recovers RMB 40,000.

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Amy’s attorney, a sole practitioner, would charge RMB 5,000 for taking the case to
trial. FamilyMart’ more expensive corporate law firm would charge RMB20,000 in
fees for taking the case to trial.

Amy and FamilyMart, along with their attorneys, plan to meet to discuss
settlement. What are Amy’s alternatives, BATNA, and reservation price? What are
FamilyMart’ alternatives, BATNA, and reservation price? What is the bargaining
zone?

3. The Venture Capitalist. Gil Bates represents a venture capitalist firm that
invests in biotech startup companies. When he evaluates potential investments,
he is equally interested in two features: the expected profit of the investment and
the amount of control his firm will have over the startup company (i.e.,
representation on the startup company’s board of directors). Currently, he is in
the process of evaluating ten companies, and he has $1 million to invest in a single
one of the ten. To date, he has met with two companies.

“Genetico,” which seeks to patent new gene therapies, is a gamble. If things go well,
the shares of stock Genetico would give Gil in return for a $1 million investment
will return $5 million (in current dollars)- however, the company might never
secure a patent, in which case all the shares will be worthless. (Gil thinks the
chances of the two outcomes are roughly 50/50.) Genetico has offered Gil three of
five seats on its board of directors if Gil will fund it.

“Olympia Products” already has a patent for a hair replacement drug, and FDA
approval is imminent. Consequently, it is somewhat less risky. The number of
shares it is offering in return for a $1 million investment will return between $2
million and $3 million (in current dollars), depending on how popular the drug
becomes. Olympia will give Gil only two of five seats on its board of directors in
return for funding.

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Today Gil has a meeting with “Cardiotech”, which hopes to market a new type of
artificial-heart valve. The valve is promising, but it has yet to be considered for
FDA approval. Cardiotech has told Gil that if no deal is reached today, it will
accept venture financing from another company and will no longer be interested
in making a deal with Gil’s firm.

Gil has not had time to evaluate the other seven companies yet. One or more of
them might provide better opportunities than Genetico, Olympia Products, or
Cardiotech. Then again, they might not.

What reservation prices do you recommend that Gil establish before going into
today’s negotiations with Cardiotech? How do you justify your recommendation?