When you are in the midst of your next negotiation, you may be:  1) wishing that you had made a stronger opening and thinking about how tough the negotiator across the table is, or 2) fixated on how thirsty you are and longing for a little bit of sunlight in your cramped meeting room.  If you are concentrating on 2), you are thinking about your environment, and you are distracted from the heart of the negotiation.  Ideally, the negotiating environment supports the negotiation process.  Today’s post discusses how to set up a productive environment and also how to skew the environment to favor your side.

Paris Peace Accords—a Table for Adversarial Negotiations

In January 1973, the Paris Peace Accords were signed with the goal of ending the Vietnam War and establishing peace in Vietnam.  There were four parties at the table for the negotiation:  North Vietnam, South Vietnam, the communist forces in South Vietnam (PRG), and the United States.  There are two stories about the negotiation environment.  The more well-known story is that of the shape of the negotiation table [1].  In the photo above, you may notice that there is a large round table with two smaller rectangular tables to the left and right.  This configuration of the three negotiation tables accommodated the various needs of the parties to recognize or not recognize the status of the different parties in the talks, and establishing this table shape required much negotiation.

The less well-known story of the Paris Peace Accords is that the actual negotiation took place secretly between Henry Kissinger for the United States and Le Duc Tho for the North Vietnamese government at a house in the suburbs of Paris.  The table shape at the real negotiation was rectangular with the United States on one side and North Vietnam on the other side, something like this diagram:

This is the classic negotiation table.  The rectangular table has some advantages:  1) lots of room to place papers and other resources between the parties for easy access, 2) equal status for both sides—it’s very well designed for negotiations involving two parties, 3) a feeling of solidarity among representatives of one side, 4) the easy ability to make side comments to one’s own team, and 5) if things get heated, the table also functions as something of a protective barrier.  But, a rectangular table has one big disadvantage, it emphasizes that there is a dispute at hand—the two parties begin and end the negotiation glaring across the no man’s land of the negotiation table—this arrangement can support posturing rather than resolution of differences.

2012 G8 Summit—a Table for Problem Solving

In May 2012, the G8 leaders met at Camp David, MD to discuss global and economic issues.  At the table seen above were:  United States President Barak Obama, French President François Hollande, Canadian Prime Minister Stephen Harper, Italian Prime Minister Mario Monti, Japanese Prime Minister Yoshihiko Noda, President of the European Commission José Manuel Barroso, President of the European Council Herman Van Rompuy, German Chancellor Angela Merkel, Russian Prime Minister Dmitry Medvedev, and British Prime Minister David Cameron.  This is a different type of negotiation—a problem solving forum based on long-term mutual relationships and alliances between the participating countries and authorities.  Some features of this bargaining environment include:  1) informality—in general sessions which occur at Camp David are conducted in shirt sleeves, rather than in suits, 2) collegiality—the participants know each other and generally like each other, and 3) commonality—many of the issues discussed by the participants have single solutions which benefit all the G8 members (or, in the case of tough issues, have downsides which bite all the countries equally).  The participants are seated around a circular table (emphasizing equality, rather than hierarchy).  In the photo, they are participating in side conversations, though presumably some portions of the summit were more formal and structured.  Support staff surrounds the main table—presumably a live audio feed permits transcript preparation and participation of other staff in separate areas of Camp David.

Camp David Accords—a Chance to Decompress

From 5 to 17 September 1978, Egypt and Israel met with United States mediation at Camp David to negotiate peace between these two long-time adversaries.  The initial four days had not gone as well as President Jimmy Carter had wanted.  In a reversal of their plan, Carter and the Americans stepped out of the role of mediation and put together an American-backed peace proposal on Day 5.  Then, to remind the participants of what was at stake, Carter organized a field trip on the morning of Day 6—the negotiators visited the site of the pivotal and bloody American Civil War battlefield at Gettysburg (the unspoken message was:  if you don’t sort this out, more people could die in Egypt and Israel like they did at Gettysburg).

It was a bold and non-traditional move by Carter (virtually every aspect of the Camp David negotiations was), and it seems to have had the needed effect of allowing some time away and an opportunity for the participants to reflect prior to returning to the hard adversarial negotiations before them.  By September 17, they had agreed on a groundbreaking peace agreement.  Carter had relatively little control of the Egyptian and Israeli bargaining positions and behavior during the summit, but he did control substantially the environment, and he used that control skillfully.

Jeane Kirkpatrick—Make Them Come to You

Jeane Kirkpatrick was an American academic, Cold War strategist, and the 16^th United States Ambassador to the United Nations.  In the mid-1980s, literary agent Irving Lazar thought he could create a million-dollar book deal for Ambassador Kirkpatrick after her appointment as ambassador ended, but there was one catch—she did not want to “hawk” her book [2].  So, she refused to meet with publishers.  Given that publishers were used to actually meeting the author to whom they were offering a fat advance, this created a problem, but Lazar came up with an ingenious solution.

Lazar had a posh apartment on the east side of Central Park.  He was able to get Kirkpatrick to commit three hours to meeting publishers, and he set up the meetings at his apartment.  After an hourlong meeting, Lazar threw out the first publisher and invited in the second.  At the end of the day, Lazar had an $850,000 book deal for Kirkpatrick.  Lazar recounts that the Kirkpatrick negotiation changed the way that he did business, ”After that, when I had a major client, I settled him or her in my living room and had the publishers in.”  He called it the “home team advantage.”

Lazar was in effect running an informal bidding war among the publishers that the publishers probably sensed, even if they didn’t pass the rival bidders in the hallway of Lazar’s apartment building.  Taking absolute control of the negotiation environment is a way of demonstrating physically which party has the stronger bargaining position—seizing the environment is a show of force.

Issues to Think About

Environment is a grab bag—essentially everything about a negotiation that isn’t rules, strategy, or behavior is environment.  Here are some environmental considerations to bear in mind:

• Layout:  Above are two options for room layout around the same rectangular negotiation table.  In the lefthand layout, the table is surrounded closely by the walls of the room.  In this room, participants are unlikely to stand up, except to leave the room.  In the righthand layout, the table is adjoined by a sideboard with refreshments, there is generous space to walk about, and there is a balcony with sliding glass doors on the right.  Participants in the negotiation may engage each other at the table, standing together in the room, while getting refreshments from the sideboard, or on the balcony.  The righthand layout will lead to a higher quality of interaction.
• Food and Drink/Hospitality:  Many of the stories about the former President of Syria Hafez al-Assad as a negotiator focus on how uncomfortable he tried to make the other side.  His thinking seems to have been that if the other side was uncomfortable, they might give up and concede aspects of the negotiation.  I am not going to insist that he was wrong, perhaps his experience showed him that his methods worked.  What I will say is that there is strong data that kindness helps in human interactions.  The practice of giving gifts seems to create a psychological need for reciprocity.  This effect is so strong that many hospitals have guidelines against receipt of gifts by doctors from pharmaceutical representatives—the thinking is that even small gifts can alter prescribing patterns in healthcare professionals.  This phenomenon may be worthy of reflection during planning for food and drinks, lodging, and other considerations associated with a negotiation.
• Support Services:  Consider whether the negotiation will require:  administrative staff, audiovisual equipment, transcription services, computers, additional rooms for breakout sessions, communication with other sites or home offices, transportation for the participants, etc.
• Agenda:  The traditional agenda for a business negotiation is:  facility tour, lunch, negotiation, wrap-up.  Other types of negotiations have their own rhythm and pace.  What is the best negotiation agenda for the topic at hand?
• Product:  What is the product of the negotiation to be?  Typically, a short written document memorializes the results (a diplomatic communiqué, a letter of intent, etc.).  How will this be produced and signed?  How much time is required in writing—can some aspects be pre-written with key information filled in at the end of the negotiation?

Breaking the Spell of Environment

We have talked about how to set up the environment to be neutral or to be skewed to your team’s benefit.  But, we don’t always control the environment—what do we do if the environment is wrong somehow or is tilted against us?  Here are some ideas:

• Make sure you are in the right place:  We talked about the Paris Peace Accords at the beginning of this post.  The South Vietnamese side was in a bad position—the United States representative Henry Kissinger was negotiating secretly with the North Vietnamese without the South Vietnamese side present.  You do not want to be in the South Vietnamese position.  So, try to be absolutely sure that there is not another separate behind-the-scenes bargaining session undermining your side’s position.
• If the environment is wrong, fix it:  Figure out what is wrong, then make a change.  Move the table, bring a computer in and gather everyone around it, take everyone out to lunch or dinner together, turn up the heat or turn on the A/C, get someone to bring in a blueprint or a whiteboard—whatever it takes to get the negotiation moving in the way you need it to go.

There’s a great scene in the HBO series Winning Time which gets at the environment problem.  Earvin “Magic” Johnson and his father are having lunch with Jack Kent Cooke and Jerry Buss.  Cooke has sold the Los Angeles Lakers to Buss, but the deal is not completed.  During the lunch, Cooke wants to show how powerful he is by upstaging Magic Johnson at every turn, but he only succeeds in antagonizing Johnson and his father.  Jerry Buss sees things going sideways, and as the lunch ends, he says, “I’m going to walk you fellas out.”  Presumably, he tells Johnson to ignore Cooke—because as we know, Buss succeeded in signing Johnson and launching the Laker dynasty—something he could not have done without the generational talent that was Magic.  The lesson is:  if you see your deal going sideways because of the environment, you have to step up and change the environment.

[1] Herdeg, K.  Die Geschmückte Formel:  Harvard:  Das Bauhaus -Erbe Und Sein Amerikanischer Verfall, Friedr. Vieweg & Sohn, Braunschwig (1988).

[2] Lazar, I.  Swifty:  My Life and Good Times, Simon & Schuster (1995).

Disclaimer:  DiscussingTerms^TM provides commentary on topics related to negotiation.  The content on this website does not constitute strategic, legal, or financial advice.  Consult an appropriately skilled professional, such as a corporate board member, lawyer, or investment counselor, prior to undertaking any action related to the topics discussed on DiscussingTerms.com.

The post <strong>Negotiation Tip:  Establish the Right Environment</strong> appeared first on discussingterms.com.

In today’s post, DiscussingTerms addresses how patent litigation is settled—using the example of biosimilar pharmaceuticals.  Biosimilars are the generic versions of expensive injectable medications like Remicade, Enbrel, and Humira.  Biologics and biosimilars are a rapidly growing segment of pharmaceuticals, so there is a lot at stake financially and medically.  The focus of this post is on how settlements are valued and how a zone of possible agreement between the parties involved in patent litigation can be established.

Background

Here is a quick introduction to biosimilar litigation:

• In 2009, the Biologics Price Competition and Innovation Act (BPCIA) was passed into law to create an approval pathway for generic versions of biological drugs (“biosimilars;” generic versions of medicines like Remicade, Enbrel, and Humira).  The reason that a separate approval process was required is that biological drugs are much more complicated to manufacture than small molecule drugs (like antihypertensives and antibiotics).
• Within the BPCIA are provisions which require the “patent dance”—disclosure of the biosimilar drug manufacturing process by the biosimilar manufacturer to the initial manufacturer (“innovator”).  This allows the innovator to consider whether any patents held by the innovator have been violated by the biosimilar drug manufacturer.  The reason it is called a “dance” is that there are several rounds of communication back and forth (like a dance).  If any areas of dispute cannot be resolved, litigation may follow.

This form of negotiation is a classic adversarial or competitive negotiation.  Demands, threats, and the use of power (through the courts) are expected in this negotiation.  The goal for each side is a “win”—the innovator wants to block the biosimilar from entering the market, and the biosimilar manufacturer wants to launch their drug as soon as possible to take market share from the innovator.

In these negotiations, accommodative behavior may rarely come into play (if by chance the two companies involved have other projects that they are working on together and want to preserve their relationship as a way of maximizing the return from the other activities that involve them); however, the norm in this type of negotiation is competition.

Assessing Risk, Cost, and Profit

Many business processes such as litigation [1] and option pricing [2] involve some degree of risk combined with possible costs or profits.  Such processes can be represented as trees of probability and value.  As an example, consider this tree describing the possible outcomes of BPCIA patent litigation over pegfilgrastim in 2020:

This tree structure considers the possibility that a purely hypothetical pegfilgrastim patent case was brought in 2020.  Though the tree is hypothetical, the values in the tree were estimated using real market and litigation data, as will be seen below.  Consider the following aspects of the tree:

• Structure:  The tree structure assumes that a case is brought by a plaintiff (i.e., innovator pharmaceutical company) against a defendant (i.e., biosimilar pharmaceutical company) for patent infringement in manufacture of pegfilgrastim.  The possible outcomes of this litigation are a verdict for the plaintiff or for the defendant (the two lefthand branches of the tree), and if the verdict is for the plaintiff, a range of possible penalties may apply (the two righthand branches of the tree).
• Probabilities and Penalties for Defendant:  To be as realistic as possible using publicly available data, DiscussingTerms developed a database of US district court BPCIA litigation [3].  In the database, ten cases were pursued all the way to a trial outcome, with seven determinations for the defendant and three for the plaintiff.  Using this data, the chance of a verdict for the plaintiff is 30% (versus 70% for the defendant).  In the case of a verdict for the plaintiff, 3 cases provided example penalties (two cases for patent infringement of Enbrel resulted in 9-year delays to the market when patent protection was upheld, and one case for patent infringement of Epogen resulted in a $70M penalty).  Assessing what the penalties might be imposed is case specific, these values from cases other than pegfilgrastim were used in the tree structure above purely as examples.  Of course, each litigation team would spend time creating a tree specific to their case.

• Rewards for Defendant:  Having considered the possible penalties, what about the rewards?  Pegfilgrastim is a biologic used primarily in supportive care of chemotherapy patients to boost their immune cell level.  Market projections for North America starting in 2020 are shown above [4].  Assuming that early entry into this market would lead to 50% market share and late entry would lead to 10% market share, the revenues for these two scenarios are shown in 4^th and 6^th columns.  The net present value (NPV) in 2020 for an early entry can be calculated at $4.7B (a late entry would yield $931M in value).  In the tree above, a late entry was assumed, so value for a verdict to the defendant is shown in the tree as $931M. (Note: Back in the day, entry date was part of the negotiation between a pharmaceutical innovator and a generic. The FTC now guards against such “pay for delay” agreements. The reason to consider early versus late entry here is that clinical and CMC considerations limit how quickly a biosimilar makes it to the market. It is worth examining whether and how entry date affects this type of negotiation. See the table of expected outcomes below for a comparison.)
• Value to the Defendant:  The value to the defendant is the weighted average of the possible outcomes:  (30% x 67% x $0)+ (30% x 33% x ($931M-$70M))+ (70% x $931M) which equals $737M.  This value exists as a purely theoretical amount—if the litigation is pressed to conclusion, the biosimilar company will receive one specific value ($0, $861M, or $931) depending on the verdict.  The ultimate value hangs in the air like the fate of Schrödinger’s cat.

• Value to the Plaintiff:  The tree looks different to the plaintiff (see 2^nd tree shown just above).  The probabilities of this 2^nd tree remain the same as those in the 1^st tree, but the outcome values differ.  If the defendant prevails, then the plaintiff receives nothing, so that branch is valued at $0.  A verdict for the plaintiff contains a 33% chance of a $70M judgement to the defendant.  A 9-year delay (67% change if there is a verdict for plaintiff) takes the defendant out of the North American market for pegfilgrastim, so the innovator may receive the value that would have been provided to the biosimilar company ($931M) if the innovative product is able to capture those sales.  The weighted average for this tree is:  (30% x 67% x $931M)+ (30% x 33% x ($70M))+ (70% x $0) which equals $194M.

The Negotiation

Litigation under BPCIA is an example of a multiparty negotiation (involving innovator company, biosimilar company, legislature, courts, insurance companies, doctors, and patients).  However, there are three parties with the most immediate sway in this type of negotiation (the two pharmaceutical companies and the courts).  Their positions are as follows:

• Courts:  The courts enforce guardrails on the negotiation.  The BPCIA mandates the patent dance, and both companies are required to negotiate in good faith during this process.  Failure to abide by the patent dance process can lead to penalties.  Also, the courts have found that certain types of settlements are anticompetitive and violate antitrust principles (see:  FTC v. Actavis, Inc., 570 U.S. 136 (2013)).  So-called “pay-for-delay” agreements, in which the innovator pays a generic or biosimilar company to stay out of the market, can be challenged by the FTC under these principles.
• Defendant:  The biosimilar company’s primary goal is to avoid achieving a $0 value.  To prevent this disastrous outcome, they would be willing to concede some value, but how much?  We’ll see below.
• Plaintiff:  The innovator faces a decline in revenue due to erosion of the price for pegfilgrastim and the entry of competitors taking market share.  Through this negotiation process, the innovator hopes to salvage some revenue from this product line which is reaching the end of its product lifetime for the innovator.  How much value might they be looking for?  Again, we’ll see below.

The zone of possible agreement (ZOPA) is a range of settlement values that satisfy both parties.  In this case, the settlement involves direct cash payments or a share of future revenue, but it cannot involve a pay for delay agreement.  What range might satisfy both parties?  Consider the following table:

In this table, the case of late entry into the North American market (10% share) is shown at the top of each entry; the case of early entry (50% share) is shown at the bottom of each entry in parentheses.  Both parties wish to avoid their worst outcome.  In each case (late entry and early entry), if the biosimilar company is willing to concede the difference between its best outcome and its expected outcome, the freed cash satisfies the innovator’s expected outcome.

Other factors will also come into play:  the relative strength or weakness of the patent infringement case, the bargaining position of the biosimilar company (are they short of cash or deep pocketed), the number other biosimilar products and their expected launch dates, etc.  However, this analysis does indicate that a zone of possible agreement between the two parties may exist.

Conclusions

Creation of a case-specific model of value which builds in the most relevant data on risk and potential cost and profit can be a useful tool of negotiation preparation.  These types of models help the negotiation team think several moves ahead in the bargaining process, as well as allowing the team to put themselves in the place of their adversary.

Some other issues to bear in mind include:

• Framing:  Whether a particular outcome is framed as gain or loss has strong psychological effect on humans.  Craver goes into this topic in some detail [1].  In considering a settlement, the litigant is well advised to consider emotional factors which influence their point of view.
• Hidden Costs:  It is important to consider all of the costs within this type of negotiation:  litigation costs, impact of the litigation on public perception (does the uncertainty of litigation frighten potential business partners or investors?), opportunity costs (do the rigors of preparation for a trial distract from other business activities?), etc..

All of these issues come into the decision of when and how to settle; however, as some wise person once said, “There’s always a number.”

[1] Craver, C.  Effective Legal Negotiation and Settlement, Carolina Academic Press (2020).

[2] Metrick, A.  Venture Capital and the Finance of Innovation, John Wiley & Sons, New York (2010).

[3] US District Court BPCIA Litigation, DiscussingTerms, December (2022):

[4] Research and Markets.  Global $4,037 Million Pegfilgrastim Biosimilars Markets, Analysis & Forecasts, 2015-2020, 2025F, 2030F, www.globenewswire.com/fr/news-release/2022/03/16/2404168/28124/en/Global-4-037-Million-Pegfilgrastim-Biosimilars-Markets-Analysis-Forecasts-2015-2020-2025F-2030F.html

Disclaimer:  DiscussingTerms^TM provides commentary on topics related to negotiation.  The content on this website does not constitute strategic, legal, or financial advice.  Consult an appropriately skilled professional, such as a corporate board member, lawyer, or investment counselor, prior to undertaking any action related to the topics discussed on DiscussingTerms.com.

The post <strong>Negotiating a Settlement:  Biosimilar Pharmaceuticals</strong> appeared first on discussingterms.com.

Today’s post is about the pricing of tickets for concerts, sporting events, and theatrical shows.  Everyone enjoys a good concert, but how did we arrive at a system that is at once so convenient and so expensive?

As recently as the mid-1970s, another different, but equally complex system existed.  Tony Dokoupil writes about it in his book The Last Pirate which tells the life story of his marijuana dealer father.  His father’s cover for his pot distribution business was working as a delivery driver for a concert ticket distributor.  “In a pre-digital world, you needed an advance man, someone to deliver paper tickets to all the places you could buy concert tickets in those days.  That meant record stores, but also restaurants, bars, clothing stores.  He left home each week with a satchel of tickets and returned with a satchel of cash.”

Back then, the streams of tickets and money were paper.  Today, the tickets and the money are largely electronic, but the same cast of characters was involved:  artists, venues, promoters, ticket distributors, brokers (“scalpers”), and buyers.  Because a lot of the deals are struck behind closed doors, it is not so obvious that a negotiation is going on, yet this is definitely a marketplace.  In this post, we wander around this interesting bazaar.

Parties

If you want a picture of all the parties involved in this multiparty negotiation [1], a good place to look is a figure originally generated by the attorney of the band R.E.M. in 1994 [2].  The occasion for generation of this schematic was a Congressional hearing about ticket pricing for concerts, athletic events, and theater shows [3].  DiscussingTerms has updated the figure and modified it to include flows of cash and tickets:

The figure attempts to lay out the complex relationships between the parties involved in a musical concert.  Cash flows are depicted in green (payments) and red (rebates (aka, “kick-backs”)).  Ticket flows are shown in black.  They include:

• Artist:  Artists such as Bruce Springsteen, Bad Bunny, and Beyoncé maintain contracts with their support staff (business manager, agent, personal manager, attorney, and tour manager).  They contract with other teams exclusively for the tour (personnel, production, transportation, and insurance).  And, they have separate revenue generating operations (merchandise and record distribution) that result in non-ticket cash flows to the artist and, in the cased of record distribution and promotion, involve rebates to the record label.
• Venue:  The auditorium, stadium, or other venue (think Red Rocks Amphitheatre) receives revenue from onsite services (parking, food, etc.), contracted fees from promoter, and rebates from the ticket distributor.  The venue frequently signs an exclusive deal with a promoter and/or a ticket distributor.  With these long-term contracts in place, venues generally have little leeway to negotiate contracts to bring in artists on their own.
• Promoter:  The promoter (think Live Nation) provides support services and insurance for the concert.  Historically, the promoter has fronted money for the event and provided publicity (“promotion”) of the event.  On the diagram, the “promotion” bubble is assigned to the ticket distributor because these distributors do a lot of promotion.  Promotion by the ticket distributor is a kind of rebate (or “kick-back”) from the ticket distributor to the promoter—reducing or eliminating one of the promoter’s expenses.
• Ticket Distributor:  The ticket distributor (think Ticketmaster) is at the center of many of the arrows in the figure.  The distributor makes payment to artist for the artist’s share of gate (green arrow), provides and allocation of tickets to the artist for distribution or sale by artist (black arrow), and gives a rebate to the artist from the fee charged by the distributor (red arrow).  The distributor also gives rebates to the promoter and the venue from the fee charged by the distributor (red arrows).  The distributor sells tickets to the ticket buyers (black arrow) and is paid by the buyers (green arrow).
• Secondary Distributors and Brokers:  Secondary distributors (think StubHub) and brokers are responsible for a vast secondary ticket market that includes tickets from:  1) fans who decide not to go to a show after paying for their tickets, 2) bots and other purchasers who never intended to attend the event, 3) the artists themselves and others who have received allocations of tickets as payment in kind from the ticket distributor.
• Ticket Buyers:  Ticket buyers include a range of types:  working class fans who are spending a big chunk of their entertainment budget, executives who are taking clients out to build a relationship for a business deal, straw purchasers who work on the behalf of brokers, and others.

The Negotiation

As noted above, ticket prices are the result of a multiparty negotiation.  Some features of this negotiation are:

• Volume:  Ticket sales is a huge international business.  Ticketmaster sold 115 million tickets in 2019.  Because of the tremendous volume of ticket sales, even small fees generate huge amounts of revenue.
• Rebates:  Rebates by the ticket distributor are a critical part of the negotiation over ticket prices.  For the venue and the promoter, the rebate from the ticket distributor can be the difference between profit and loss.  Budnick and Baron’s book Ticket Masters has an imaginary dialog that makes this clear [3]:

“So with Ticketron you now have a seventy-five cent service charge.”

“That’s true.”

“If you sign with us, it’s going to be a dollar and a half.”

“That’s terrible. Why would I want to do that?”

“Because you’re going to get a half dollar back.”

“Sounds great to me. Where do I sign?

• Competition:  It is an article of faith in America that competition leads to lower prices; however, because of the complex set of relationships in the event industry, competition and low prices may not be so closely coupled with regard to tickets.  Consider the case of two competing ticket distributors.  The first distributor offers rebates of $X to the artist, $Y to the promoter, and $Z to the venue.  The second ticket distributor increases its proposed distribution fee during its negotiation and uses the increase to double its rebates to the artist, promoter, and venue.  In many circumstances, the second ticket distributor will win the negotiation, leading to higher cost for the ticket buyer.
• Artists:  Artists are in an interesting and conflicted position.  For example, listen to an interview with Bruce Springsteen [4]:  “What I do is a very simple thing. I tell my guys, ‘Go out and see what everybody else is doing. Let’s charge a little less.’  That’s generally the directions.”  That sounds pretty good, but then Springsteen says, “This time I told them, ‘Hey, we’re 73 years old. The guys are there. I want to do what everybody else is doing, my peers.’  So that’s what happened.”  That is The Boss admitting that he went for the dollars this time around.  In comparison, what kind of position is a young band on their first major tour in to challenge rebates and ticket pricing?
• Buyers:  Tickets aren’t just about entertainment; they are also about social capital.  In Ticket Masters, a ticket broker recalled a story about football tickets [3], “I’d sell Super Bowl tickets ten months before the game.  Football season hadn’t even started, and we sold them to Merrill Lynch, Coca-Cola, Pepsi-Cola.  We had all the big accounts because they knew we could get the tickets.  So, they might say, ‘Get me 200 tickets between the thirty-yard lines at $4,000 apiece.’”  As seen in this story, a portion of the buyers are driving ticket inflation by demonstrating a willingness to pay more than retail for tickets.  This is one part of the reason that average ticket prices have risen well ahead of the Consumer Price Index (CPI) for decades.
• Front Row:  Not all the tickets are sold to the general public.  Many of the best seats are sold on the secondary market at substantially inflated prices.  These tickets are too good to go out the door at retail price.  Everyone gets a cut of these sales (the artists, brokers, ticket distributor, venue, and promoter) with the eventual buyers footing the bill through inflated price of admission for the event.
• Vertical Integration:  Vertical integration has become a significant part of the concert industry.  Live Nation manages artists (chiefly headliners), owns some venues and contracts long-term with other venues, promotes tours, and distributes tickets through Ticketmaster.  The process of vertical integration creates the conditions for self-dealing, a conflict of interest that can harm the positions of other parties within a negotiation.

Outcome of the Negotiation

Having considered the process of negotiation for ticket prices, let’s think about the outcome of the negotiation.  Currently, the average price of a concert ticket is $87.  As noted above, ticket prices have been rising faster than the CPI for decades.  That is the ticket buyer’s reality, but what about the ticket seller’s reality?

In 2010, Live Nation and Ticketmaster merged.  The two companies had complementary strengths.  Live Nation had depth in relationships with venues (owning or having long-term deals with many amphitheaters and stadiums), as well as having strong operations in promotion and management.  Ticketmaster was of course the heavy weight champion of ticket distribution.  Live Nation made a case for the merger saying that, as a company, it carried a lot of overhead, and it was in difficult financial straits.  This can be seen if we plot the value of Live Nation stock versus the S&P 500 index.  Over the period 2006 to 2010, the S&P 500 lost about 12% due to the Subprime Mortgage Crisis.  Over the same time period, Live Nation stock lost about 60%:

Clearly, that is the kind of adverse performance that drove Live Nation to think, “How can we improve this company as an investment (or we will be bought and broken up or simply go bankrupt)?”  Since the Ticketmaster merger in 2010, Live Nation’s financial performance has improved substantially:

In spite of the Covid-19 crisis, the S&P 500 went up 245%.  Over the same period, Live Nation went up 692%.  The gain in value of Live Nation was almost 3x that of the S&P 500.  So, acquiring Ticketmaster ended up being a pretty good deal for Live Nation’s investors.

Conclusions

Clearly, this is a complex issue.  There have been highly publicized Congressional hearings twice in the recent past (related to the Pearl Jam versus Ticketmaster litigation and to the Live Nation/Ticketmaster merger).  Ticket distributors regularly say that they are paid to play the part of the bad guy, absorbing negative publicity that would otherwise fall on promoters, venues, brokers, and artists.  And, they occasionally seem to relish the role.

Overpriced concert tickets do not generate the kind of social harm caused by other kinds of inflated prices (for example, patients who cannot afford health insurance or students who do not have access to high-quality schools).  After all, no one is forced to buy Bad Bunny concert tickets.  Of course, that is not a strong argument against government action on ticket pricing; however, if Federal regulators do act, they will need to take into account the complicated relationships of the event industry.  As seen in this post, the outcome of federal action may be difficult to predict or even counterintuitive in result.

[1] For a quick reminder of some of the elements of multiparty negotiations, see:  Gallant, S.R.  “Detroit’s Bankruptcy,” DiscussingTerms, December 10 (2022); https://discussingterms.com/2022/12/10/detroits-bankruptcy/

[2] “Pearl Jam’s Antitrust Complaint:  Questions About Concert, Sports, and Theater Ticket Handling Charges and Other Practices,” Hearing Before the Information, Justice, Transportation, and Agriculture Subcommittee, June 30 (1994).

[3] Budnick, D. and Baron J.  Ticket Masters:  The Rise of the Concert Industry and How the Public Got Scalped, ECW Press (2011).

[4] Aniftos, R.  “Bruce Springsteen Opens Up About Ticketmaster’s Dynamic Pricing: ‘Ticket Buying Has Gotten Very Confusing’,” Billboard, November 18 (2022).

Disclaimer:  DiscussingTerms^TM provides commentary on topics related to negotiation.  The content on this website does not constitute strategic, legal, or financial advice.  Consult an appropriately skilled professional, such as a corporate board member, lawyer, or investment counselor, prior to undertaking any action related to the topics discussed on DiscussingTerms.com.

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Today’s post takes on Detroit’s 2013 bankruptcy.  Bankruptcy is a classic type of multiparty negotiation.  From the point of view of scope, Detroit’s bankruptcy settlement is fascinating, with billions of dollars at stake, negotiated in the glare of national media.  Most remarkably, the negotiation was successful.  The parties were able to come to terms in which every creditor agreed to the deal.

Background

Detroit is located on the shores of Lake St. Clair and the Detroit River, across from Windsor Canada.  Historically, it has been a major manufacturing center for the United States.  However, over a period of 6 decades, from the 1950s to the early 2000s, Detroit fell on increasingly hard times, leading ultimately to bankruptcy in 2013.  Detroit’s bankruptcy did not have just one cause, it had many.  Some of the causes of bankruptcy included:

• Growth of Suburbs:  In the Post World War 2 era, many Americans moved out of crowded cities to suburbs.  This population movement can be summarized in the following table.  From 1950 to 1980, Detroit City loses 0.7 million people, as the metro region gains 1.0 million people.  This represents a loss of some of Detroit’s best educated and most talented workers.

• Loss of Employment:  As population shifted to suburbs, businesses moved from Detroit to the surrounding suburbs, reducing the tax base.
• Shrinking Tax Base:  At the time of the bankruptcy (2013), Detroit had four sources of tax revenue [1]:  1) Property taxes peaked in dollar value at about $1B in the late 1950s.  Even though tax rates had increased since the late 1950s, the absolute yield of property tax dollars had shrunk to less than $250M.  The causes of the loss in revenue were movement of businesses out of Detroit City and degradation of the housing stock within the city.  2) An income tax was initiated in 1962 to capture revenue from workers who commuted into the city.  In 2000, the income tax brought in about $500M, but it shrunk over the following years, bringing in only half that amount in 2012.  3) A utility tax brought in a small amount of revenue (less than $100M).  4) A tax on gambling brought in about $250M at the time of the bankruptcy—without this tax, the budget simply would not balance.
• Poor Management and Outright Corruption:  Mayor Coleman Young, who held office for two decades starting in 1974, recognized that Detroit’s government needed to shrink in line with its reduced population and tax revenue.  His administration cut jobs and programs, allowing Detroit’s debt to drop from $3.3B in 1974 to $1.4B in 1985.  But, starting in 1985, Detroit’s debt increased in an exponential fashion.  The following table lists the level of debt at the end of each mayoral administration.  Clearly, debt was becoming a serious problem in the Archer administration.  Instead, of addressing the problem, the Kilpatrick administration used a shell corporation structure to add $1.44B of debt [1]:

By 2012, it was clear something needed to be done.  The city’s debt had ballooned to $18.5B (more than double what it was at the end of the Kilpatrick administration).  Clearly, Detroit was no longer in control of its debt—the debt was in control of Detroit.  83% of the budget was devoted to police, fire, retiree healthcare, pension contributions, and debt service.  Only 17% of the budget was available for all the other functions of government. Of the $204M budgeted for discretionary items in 2012, $121M was deficit spending, piling more debt onto the city.

Multiparty Negotiations

Bankruptcy is an example of a multiparty negotiation.  Often a multiparty negotiation is conceptualized using a Venn diagram:

Each party is envisioned as possessing a circle within which it will be satisfied by the outcome of the negotiation.  In the simplest representation of this idea, negotiation consists of finding the area in which all parties are satisfied by the outcome (i.e., the red hatched region).  However, several aspects of multiparty negotiations make them unique and risky:

• Initial Marker:  From the point of view of a mediator, it may be tempting to set a marker for one party at a time.  The multiparty negotiation then becomes a succession of two-party negotiations between individual parties and the mediator.  The disadvantage of this approach is that the mediator may not be familiar with the zone of satisfaction for each party.  Because of this lack of knowledge, the mediator may set an initial marker outside the zone of possible agreement (e.g., the red dot in the diagram below).  If that happens, the mediator is stuck with two bad options:  1) go back to the first party to extract additional concessions or 2) face the possibility that some of the parties will not sign onto the final agreement willingly.

• Coalitions:  In a multiparty negotiation, groups of parties may find it strategically advantageous to band together to attempt to extract concessions from the mediator or from the other parties.
• Zone of Possible Agreement:  The Venn diagrams above are depicted with a red hatched area in which it is possible to satisfy all the parties (i.e., the zone of possible agreement).  However, it is possible that such a zone does not exist.  It may only be possible to satisfy a portion of the parties with any practical solution.
• Information Sharing:  In a multiparty negotiation, it is likely that some parties will share information with certain parties while excluding other parties from that information.  Similarly, side negotiations and trade-offs are possible.

Municipal Bankruptcy

In any negotiation, it is important to ask, “What are the rules of this negotiation?” because the rules shape the zone of possible agreement often as much as the needs and desires of the parties shape it.  In the case of municipal bankruptcy, the laws implicitly recognize that people who live within a municipality are entirely dependent on the government for services like police, fire protection, schooling, and public transportation.  Chapter 9 bankruptcy looks to preserve viable local government at the same time it tries to protect the rights of creditors.

Governmental bankruptcies are rare events in the United States.  On average, two or three municipalities declare Chapter 9 bankruptcy each year.  These are usually cities and towns, not larger entities (Orange County, California’s 1994 bankruptcy and Jefferson County, Alabama’s 2011 bankruptcy being exceptions).  The procedures for Chapter 9 bankruptcy include:

• State Law:  To file for bankruptcy, a municipality must exist within a state that authorizes government entities to access Chapter 9.  Many states either fail to authorize municipal bankruptcy or create conditions too restrictive to make it practical.
• Insolvency:  A municipality must demonstrate insolvency (i.e., that its debts are larger than it resources to pay).
• Good Faith Bargaining:  A municipality must have attempted to resolve its debts with its creditors prior to filing for bankruptcy.
• Authority Under Bankruptcy:  Chapter 9 (municipal) bankruptcy is different that Chapter 11 (corporate) bankruptcy.  In corporate bankruptcy, the court’s powers are broad and substantial.  If a corporation is found insolvent, the owners of the company may be left with nothing.  In contrast, Chapter 9 preserves the operational powers for the municipality (or the emergency manager empowered to act in the elected officials’ place).  Even while inside bankruptcy, the city or county can continue to maintain its roads, pay its employees, and undertake new contracts.
• Plan of Adjustment:  To exit bankruptcy, the municipality (not the creditors) must develop a “plan of adjustment” which is presented to the responsible judge.  For the plan to be approved, it must be legal (i.e., comply with relevant state and federal law), be in the best interests of the creditors, not discriminate unfairly between the creditors, and be feasible to implement.

The Negotiation

Judge Steven Rhodes was appointed to oversee Detroit’s bankruptcy.  Broadly speaking, there were five parties involved in Detroit’s bankruptcy negotiations:

• The Government of the City of Detroit:  With strong statutory powers, the state-appointed emergency manager Kevyn Orr was given control of Detroit’s budget and had the ability to set aside labor contracts and sell assets.  Orr recognized that Detroit needed to be able to protect its citizens with fire and police, pave and light its streets, plow snow in the winter, and perform a host of services that would make people want to live in Detroit, rather than abandon it.  So, in addition to solving the city’s debt problem, Orr wanted $1.7B of new spending over 10 years to fix things like streetlights and computer systems, purchase buses, and provide wage increases to workers whose pay had stagnated during the years of budgetary crisis.
• Current Detroit City Workers:  The policemen, firemen, and other city workers were in a difficult position, particularly if they had put substantial time toward their city pension.  It was hard for many of them to walk away, but not all of them needed to walk away to tip the city into an ungovernable mess.  If a significant percent of the city workers took jobs in Detroit suburbs or moved to other cities, the city could grind to a halt.  Throughout the negotiations, the unions representing the city’s workers were visible and vocal advocates for their members, reminding everyone who would listen of the important services they provided.
• Retirees Receiving Healthcare and Pensions from Detroit:  The retirees were perhaps the most vulnerable in this negotiation.  Many were entirely dependent on their pensions because, as city workers, they had not paid into Social Security.  If they took a significant hit in the negotiation, many would not be able to pay their rent or buy groceries.  But, in a way, this was also a strength of their bargaining position.  It would be extremely difficult for the bankruptcy judge to endorse a plan that put tens of thousands of retirees on the street.  And, they had one other card to play, Michigan state law said that pensions could not be reduced in municipal bankruptcy.  (On the other hand, federal law allowed pensions to be reduced in bankruptcy, so the law was unclear.)  If the retirees felt that they got unfair treatment, they could attempt to litigate against the plan of adjustment.
• Unsecured Creditors of Detroit:  Secured creditors held debt tied to specific streams of revenue (for example the revenue of the city’s water and sewer system)—they stood to recover 100% of their capital.  But, unsecured creditors were not so lucky—what they recovered was the subject of negotiation within the bankruptcy.  These creditors had little leverage in the negotiation.  They could express their dismay at the “haircut” they were to receive, and they could refuse to sign onto the plan of adjustment.  Ultimately, they could appeal the plan if they felt that they had grounds, perhaps delaying or casting a shadow over the plan.
• Bankruptcy Mediator:  Judge Gerald Rosen was appointed to act as a bankruptcy mediator, working with the parties to narrow differences and flesh out possible terms.  However, Rosen acted as more than an honest broker.  He developed a mechanism to bring additional funds into the settlement.  Detroit had authority over the works in the collection of the Detroit Museum of Art.  Rosen realized that these works of art would become targets of liquidation in bankruptcy, leaving the city with a huge cultural vacuum.  Rosen created a deal in which private foundations and the Michigan state government were solicited for funds to protect the Detroit Museum of Art, and the funds were then used to protect the city’s pensioners.  In effect, the donations were a pass through to the retirees which had the effect of protecting the city’s art in perpetuity:

The negotiations proceeded from July 18,2013 when the city filed for Chapter 9 to November 7, 2014 when Judge Steven Rhodes accepted the plan of adjustment.  Some significant milestones in the negotiation were [2]:

• Kevyn Orr had a vision for the city with the people of Detroit at the center of his vision, but he was no cupcake.  Shortly after filing for bankruptcy, Orr made his first offer to pensioners with 50% reductions to retirement benefits and major cuts to healthcare coverage.  This and other early offers to unsecured creditors had the effect of sobering all the parties in the proceeding.  This was in effect a low ball first offer.
• Orr used his powers to put other markers down.  For instance, he named a new chief of police, James Craig, who came from the Cincinnati police force.  Craig would work to restore morale, reduce response times, and improve documentation systems.  By naming the new police chief and supporting the police force, Orr wanted to signal that Detroit was still open for business.
• Both Bank of America Merrill Lynch and UBS held significant debt from Detroit.  They attempted to settle with the city early in the bankruptcy process.  First, they cut a deal for 75¢ to 87¢ on the dollar.  Then, they and the city cut a more modest payout for the banks in a second deal.  Both times, Judge Rhodes nixed the deal, indicating that he would not tolerate side deals that might make the overall settlement impossible or might burden the city with too much debt imperiling its financial health after emerging from bankruptcy.
• Two of the last holdouts on the plan were bond insurers Syncora and Financial Guaranty Insurance Company (FGIC).  They stood to lose a lot in the bankruptcy—Syncora would receive $25M on a $400M claim.  As financial institutions, they did not have the public sympathy that either the pensioners or the city workers received.  But, they had one thing on their side—if the city ruined them, then the reputation of Detroit in financial deals would suffer.  Both Syncora and FGIC were able to cut sweetheart real estate side deals with the city that did not make them whole but offered the opportunity that over time they could make good some of their losses in the bankruptcy.  With Syncora and FGIC signing on, essentially all the large unsecured creditors were inside the bankruptcy deal.
• The cost of the bankruptcy in terms of fees to lawyers and financial professionals was $170M to Detroit, an index of the Herculean effort required to put Detroit’s financial house in order.  Of course, the savings in forgiven debt was many times that figure.  Ultimately $7B was removed from Detroit’s books, leaving Detroit with somewhat more debt in November 2014 than it had at the end of the Kilpatrick administration.

Conclusions

Multiparty negotations are often difficult and time consuming, as was the case in Detroit’s 16 month bankruptcy.  Two significant features of this negotiation were:

• An iterative approach to the negotiation in which early offers to the pensioners, the unions, and the financial institutions were revised, sometimes significantly, until a zone of satisfaction was located.
• Creative enlargement of the pie was critical to drafting the final plan of adjustment.  The most impressive addition to the plan was the $800M added to preserve the art held by the Detroit Museum of Art and to protect the retiree pensions.  And, the sweetheart real estate deals with Syncora and FGIC were critical to bringing those creditors into the plan.  The latter is an example of the strategy of “is there something that would cost little to one party and would mean a lot to another party?”

It’s a credit to emergency manager Kevyn Orr, bankruptcy judge Steven Rhodes, and mediator Gerald Rosen that they were able to resolve the financial crisis and return the city to democratic administration.  As Eminem rapped, “You only get one shot, do not miss your chance to blow.  This opportunity comes once in a lifetime.”

[1] Bomey, N. and Gallagher J.  “How Detroit went broke: The answers may surprise you – and don’t blame Coleman Young,” Detroit Free Press, Sept. 15 (2013).  All dollar values adjusted to 2013 dollars.

[2] Bomey, N.  Detroit Resurrected:  To Bankruptcy and Back, W.W. Norton and Company (2017).

Disclaimer:  DiscussingTerms^TM provides commentary on topics related to negotiation.  The content on this website does not constitute strategic, legal, or financial advice.  Consult an appropriately skilled professional, such as a corporate board member, lawyer, or investment counselor, prior to undertaking any action related to the topics discussed on DiscussingTerms.com.

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