Friday, December 1, 2006

Is It Okay to Fudge to the Judge (If Your Opponent Misses It)?

Posted by Jeff Lipshaw

I've just been transfixed by a war story about a witness getting skewered on cross-examinationBeldar_150x183 because of a false statement in an affidavit prepared by his lawyer.  The war story comes from the cross-examiner, Bill Dyer, right, who goes under the nom de blog of Beldar (Conehead, I presume), to which Professor Hricik links over at Legal Ethics Forum.  Professor Hricik concludes with the warning that "it's always a 77nconeheads3 mistake to fudge the truth." 

It turns out that this story, with a couple tweaks by yours truly, fits nicely into a thesis I've been discussing at various law schools over the past little whileAn older and incomplete version of the thesis has been up on SSRN for a while now, but we can boil it down to the following:  when the contract says that you can only rely on its affirmative representations as to the state of a business you are buying, and cannot rely on anything outside the contract, what is the effect of the "anti-reliance" clause if it turns out the the contractual representation is literally true, but is a fudge?

The most articulate response to my thesis, which is that the contractual disclaimer has to be construed narrowly, is that contract negotiations among sophisticated parties are a stylized, ritualized business, and the ordinary use of language defers to the particular language of lawyers (and I suppose business people) in that particular setting.  Indeed, one responder said that the reason for the writing was to speak to a judge some day if necessary; hence, even more support for the notions that the only words with meaning were those expressly set forth, at least in the face of the disclaimer.  Indeed, on several occasions when I have strayed (no, that's misleading, I have charged) into a Coaseian default rule analysis, I have stirred significant response with the assertion that in that circumstance it is the fudger, not the fudgee, who is the best cost avoider, at least as to later disputes around whether the statement was a lie.  So it is incumbent (or the burden rests) on the fudger, not the fudgee, to make it clear that the parties have negotiated around the default rule.

I think what I am saying is controversial because it tends to undercut the lawyer's self-image of value creation (something on which it is difficult to have a balanced perspective if you've always been a lawyer, looking at the world through lawyer's eyes).  In particular, one response to the thesis is that making the language clear and precise is what we do as lawyers, and why do we bother if that's all for naught?  To the contrary, say my colleagues, we operate in a special community of language technicians, in which the relative cost-avoiding positions of the receiver of the statement (the fudgee) and the maker of the statement (the fudger) are up for grabs.

That is a cogent criticism, and I have heard it now on several occasions.  So with due credit to Mr. Beldar, I mean Dyer, let's take his war story, but with just a tweak to make it fit my purposes.  But it's long, so we'll do it below the fold.

Here's Bill Dyer's set-up for his story (slightly redacted by me):

The defendant in the lawsuit — that is, the alleged trademark infringer — I'll call "Doe Corp." The plaintiff, whom I'll call "Doe Inc.," asserted that it had a superior right to use the tradename "Doe." Both companies were based in Europe, where they'd done business side by side for centuries. Both of them manufacture what I'll call "widgets." And both were in fact founded and are still owned by families named "Doe." But Doe Inc. claimed that it had started using the "Doe" name in connection with its widgets in the U.S. and the Western Hemisphere several years ago, and that it had spent lots of time and money promoting the "Doe" name here — whereas Doe Corp. was, according to Doe Inc., a new-comer to the widget market in the US and the Western Hemisphere. Doe Inc. also claimed that Houston is the widget capital of the Western world, and that Doe Corp. was causing customers here to become confused between Doe Inc. widgets and Doe Corp. widgets, in turn causing Doe Inc. to lose sales.

So Doe Inc. had gotten an emergency "temporary restraining order" in state district court in Houston that prohibited Doe Corp. from using the name "Doe" in this half of the world. Doe Inc.'s lawyers did so "ex parte" — meaning without anyone from Doe Corp. being present — based on Doe Inc.'s assertion that this was such a big emergency that there just wasn't time to give Doe Corp., all the way over in Europe, any notice of the hearing on Doe Inc.'s TRO application.

That very directly affected the business of my client, whom I'll call Acme. Acme is a Houston-based company that buys and then re-sells widgets from many companies, among them both Doe Inc. and Doe Corp. Because of the TRO, Doe Corp. suddenly couldn't sell Acme any more widgets — and the world-wide widget market is smoking hot right now, and Acme needs lots and lots of widgets as fast as it can get them! Indeed, Doe Inc. was even making noises about trying to use the TRO it had gotten against Doe Corp. to stop Acme from "acting in concert with Doe Corp." In other words, Doe Inc. was suggesting that Acme was deliberately helping Doe Corp. infringe on Doe Inc.'s tradename, even if just by re-selling the Doe Corp. widgets that Acme already had in its inventory. So even though Doe Inc. hadn't yet directly sued Acme, Acme instructed me to jump into the middle of this lawsuit (i.e., to "intervene") to protect Acme's own interests.

Thus it came to pass that in mid-October, we had a two-day evidentiary hearing on Doe Inc.'s application to convert its TRO into a longer-lasting pretrial injunction. . . .  A defendant can defeat an injunction by showing that the plaintiff was not diligent in trying to protect his rights — in other words, that the plaintiff knowingly let his rights be trampled for a long time without saying a peep. That's especially important in a trademark/tradename contest. So precisely when Doe Inc. first learned of the alleged tradename infringement by Doe Corp. in the U.S. was potentially very important — and could possibly even decide the outcome.

The TRO had been issued in part on the basis of an affidavit of Doe Inc.'s Mr. Smith that he first became aware of the conflict between the two Does in August.  The rest of Bill Dyer's story has to do with how he was able to discover (through metadata, as a result of having taken Professor Hricik's CLE course!) that Smith had really heard about it back in February or April but somehow his affidavit (drafted by his lawyer) ended up with the far more favorable, from a laches perspective, unequivocally false statement that he first heard about the problem much later. 

My twist is to change the story into a hypothetical wherein the problem is not that you lie to the judge, but you fudge the judge.  Assume, for my purposes, that Mr. Smith told his lawyer (call her Ms. Jones) he heard about the other Doe in April, then forgot about it, then recalled again in August.  So his affidavit says "I became aware in August."  This statement is literally true, but it is a half-truth, but  because what is left out is that Mr. Smith also became aware in April.  Assuming Doe Inc. is chargeable, for laches purposes, with Mr. Smith's earlier becoming aware, it's a significant half-truth!

Here's the dilemma (or trilemma).  Put aside morality or professional ethics for a moment.  Let's consider this as a laboratory in which every participant in the test is an equally proficient parser of language.   Ms. Jones has deliberately fudged the truth.  In the adversarial setting, is it fair game to fudge, and then incumbent on Ms. Jones' opponent (call her Ms. Johnson) to ferret out the full truth?  Presumably, Ms. Jones and Ms. Johnson are equally capable of discerning impreciseness in language that gives rise to the ambiguity that in turn gives rise to the half-truth (i.e. does "became aware" imply "first became aware")?  And assuming Ms. Johnson misses the trick, the judge is also a lawyer, and is also, presumably, as capable as either lawyer of discerning that kind of trick.

So why is everybody so angry (particularly the judge) when it turns out that Ms. Jones has slicked both Ms. Johnson and him?  My thesis is that even sophisticated lawyers presume the truth of the words in their communicative action, accordingly to a community standard that is far less precise than lawyers (or economists) would generally like to think.  We have an intuitive reaction, even as sophisticated lawyers, that we have been wronged in this instance.  I can muster, I think, a coherent explanation through philosophy of language, and I think, in Coaseian terms, if I consider Ms. Jones to be the lowest cost avoider.  But if I make all the lawyers and judges fully rational actors in their use of language, I have no accounting for the sense that something has gone terribly amiss.

Since the posting on SSRN, I've developed the thesis quite a bit, and even tweaked the title:  "Of Fine Lines and Blunt Instruments:  Business Acquisition Agreements and the Right to Lie."

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