DECEPTION IS STILL KING — Apple, iPad, And The Still Murky World Of Negotiation Ethics

Hi Mike.  Did you read where Apple is being sued for fraud in a trademark case over the name “iPad”?  The plaintiff, a company called Proview, claims that Apple created a dummy British corporation, used a negotiator with a fake name, and lied about its intended use of the mark, in order to negotiate the purchase of the trademark “iPad” in various countries.  Is this unethical negotiating behavior?  Or is it fair to hide the identity of the real buyer so the seller doesn’t get too greedy once it finds out the buyer is a gigantic corporation?  What’s the scoop?

– Honest Negotiator –

Dear Honest!

I read that article in the L.A. Times and found it fascinating – at least from the Negotiation Geek Ethics point of view.  (You can find the article here (assuming the Times keeps its link alive.))

I see two ethical questions:  First, is there anything wrong with hiding the identity of the principal in a negotiation?  Can you go so far as to create dummy corporations, and use pseudonyms, to hide the true buyer’s (and the true negotiator’s) identities?  Or does this cloak and dagger stuff cross the line into “bad faith” negotiating – if there is such a thing.  Or worse, unethical or unlawful negotiating?

Second, even if you can use dummy companies and make up the names of the company’s key employees, do you cross the line when you lie about the purpose of your interest in the product being sold?

OK, this is all a little nebulous.  Let’s get a little background first.

THE “iPAD” TRADEMARK LAWSUIT

According to the complaint filed in Santa Clara Superior Court (click here if you want to see for yourself), Proview is a Taiwanese company that manufactured computer monitors.  In 2000, with the help of National Semiconductor, Proview began developing an “all-in-one internet terminal with a built-in 15-inch color monitor.”  Guess what they called this new-fangled device?  Yup, the iPad.

So, being the thorough company that it was, Proview registered the “iPad” trademark in various countries, including China, the European Union, Mexico, and various Asian countries.

From 2000 on, nothing much came of Proview’s iPad.  And then 2008 struck … with a vengeance.  You remember that year.  The bottom fell out of the world economy and we are all still swimming in the muck trying to reach the shore.  Proview lost its two biggest customers, Circuit City and Polaroid, and fell on hard times.  It was desperate for cash.

Now the story gets interesting.  According to the complaint, Apple was working on its latest revolutionary “must-have” overpriced device, the tablet computer.  Apple even had a clever name all picked out.  Unfortunately, what it didn’t have was the trademark for that clever name in China, the EU, Mexico, and various Asian countries.  It needed to acquire the trademark for “iPad” from Proview.

Now can you imagine the leverage Proview would have enjoyed had Apple come knocking on its door saying “Hello there.  We have invented the next revolutionary technological gadget that tens of millions of people around the world will have to buy at inflated prices, and we want to call it the ‘iPad.’  We’d like to buy the trademark from you.  How much will you charge us for the rights?”

How many zeros are there in a gajillion?

So clearly, Apple needed a different negotiating strategy, preferably one that did not involve “Apple,” “next it gadget,” or very many zeros.  It needed to hide its negative leverage.  And hide it, it did.

Again, according to the complaint, Apple created a dummy British corporation called IP Application Development Ltd.  And the initials of this company?  What a coincidence, it’s “IPAD.”  Apple then created a fake person, by the name of Jonathan Hargreaves, and had Mr. Hargreaves contact Proview to open discussions for the purchase of the iPad trademark rights.

“Mr. Hargreaves” did his job dutifully and opened the dialogue.  Proview, which, don’t forget, was in dire financial straits at the time, was interested and a negotiation ensued.

Here is where the second ethics question comes in.  Proview wasn’t going to sell its trademark to just anyone; and was particularly concerned about selling to a competitor.  So it asked “Mr. Hargreaves” to describe IP Application Development Ltd., and to explain why the company wanted the trademark.

“Mr. Hargreaves” was “less than entirely forthcoming” (to quote my favorite line from the ABA’s Ethics Opinion 06-439 (April 12, 2006)  “Lawyer’s Obligation of Truthfulness When Representing a Client in Negotiation”).  In reply, “Mr. H.” stated the company was new, but intended to be “in the computer field.”  However, “Mr. H.” continued, “since we have only just incorporated, it is premature to disclose more than that.”  Nonetheless, “Mr. H.” did go out of the way to reassure Proview that “we will not be competing with your company.”

Thereafter, according to the complaint, Proview asked again why IP Application Development wanted the trademark, and followed that with what was probably a negotiating strategic blunder by asking “how much IP Application Development was willing to pay” for the trademark.  (Why was this a blunder?  This is probably a situation where the seller should set the bidding range…after doing a lot more due diligence!)

In an ethically questionable response, Apple’s fictitious Mr. Hargreaves is alleged to have written in an email (copied in the complaint) that it wanted the trademark because “IPAD is an abbreviation for the company name IP Application Development Limited. This is a newly formed company, and I’m sure you can understand that we are not yet ready to publicize what the company’s business is, since we have not yet made any public announcements.”  Mr. Hargreaves then again affirmed that the company “will not compete with Proview.”

To create a little positive leverage of its own, Mr. Hargreaves then allegedly took advantage of Proview’s financial destitution and “threatened to initiate legal action to cancel Proview’s trademarks…if Proview did not agree to sell them.”

Proview eventually sold its trademark for all of £35,000 (or about $55,000).

THE MYSTERIOUS MR. HARGREAVES REVEALED

According to the complaint, Apple later revealed in a Hong Kong affidavit that “Jonathan Hargreaves” was an “alias” for someone named Graham Robinson.  (“Alias,” “pretexting,” “lying,” it’s all in the spin.)  A quick Google search turned up a Graham Robinson at the national law firm of Wilmer and Hale, where Mr. Robinson is listed as the head of the firm’s Corporate practice.  Wilmer and Hale, according to its website, has done significant IP work for Apple, including obtaining “a significant win for Apple in an ITC action in which Nokia had accused Apple’s iPhone, iPad, iPod and MacBook products of infringing seven Nokia patents.”  (I’m not saying this is the same “Graham Robinson” who pretended to be Johathan Hargreaves in the Proview negotiations…I’m just saying….)

SO ABOUT THE ETHICS

So what’s wrong, if anything, with the way Apple negotiated?  Well, let’s look at it in smaller bites.

1)  The Undisclosed Principal

As noted, Apple wanted to buy the iPad trademark, and knew that if it was open and honest about it (“Hi, I’m Apple, and I would like to buy your trademark for our next big thing”), the seller would have held out for an exorbitant sum.  Thus, Apple looked for a way to buy the trademark without identifying the fact that it was Apple that was buying it.

Apple could have simply utilized an agent to buy the mark for it.  And if asked, the agent could have honestly stated:  “I’m sorry, I can’t identify the principal I’m working for.”  This probably would have made the seller suspicious, and possibly even increased the sales price, but it would have been an honest transaction.

Indeed, there is a long history of lawyers negotiating deals on behalf of undisclosed principals for the very reason at issue here – that if the seller knew the true identity of the buyer, the seller could increase the price and the buyer would have to pay more to get what it wanted. Apparently, it’s common in real estate deals where developers want to buy up numerous parcels, but don’t want the last seller to hold out for an inflated price.  (San Diego mediator Extraordinaire Scott Markus shared with me the great example of how Disney bought up Orlando, Florida through a series of dummy companies.  Similarly, Pepperdine’s Director of the Straus Institute for Dispute Resolution, Tom Stipanowich reminded me of the Controversial Los Angeles water rights acquisition when the City used agents to purchase water rights under the guise that it was for cattle operations.  Remember the movie Chinatown?)   (See also the fine paper by New Mexico attorney Catherine Goldberg which looks at this very issue.)

In fact, it is such a recognized negotiation tactic that the ABA Model Rules of Professional Conduct seem to condone it.  For instance, ABA Model Rule 4.1 forbids attorneys from making false statements of material facts.  However, the Comments to the Rule then clarify that “[u]nder generally accepted conventions in negotiation, certain types of statements ordinarily are not taken as statements of material fact,” such as “the existence of an undisclosed principal except where nondisclosure of the principal would constitute fraud.”

In other words, one way to read this Comment is that it has become so common, and hence now “generally accepted,” in negotiations to bargain on behalf of an undisclosed principal, that an attorney would not be violating his or her ethical obligations by misrepresenting the existence of an undisclosed principal…unless, of course, such misrepresentation (or failure to disclose) would constitute fraud.  (Fraud, of course, requires a misstatement of a material fact; but the ABA Comment says this is not material…unless it constitutes fraud, in which case it is material…ohhh my head hurts.)

Strange rule, if you think about it.  By saying that a statement about an undisclosed principal is not a “statement of material fact,” the Bar has adopted a rule that says essentially that it’s o.k. for lawyers to lie about who they are negotiating for…so long as that does not constitute fraud.

The Goldberg article mentioned above tried to find where that line is between permissible lying about the identity of one’s principal and fraudulent (and hence impermissible) lying about the identity of one’s principal.  It was a valiant effort…but I’m not sure the distinction was entirely satisfying.

(See also the short article by Thomas Joseph of the Price & Adams firm in Pennsylvania which cites to some cases and commentators acknowledging the “common and ethical practice in the IP community” to negotiate on behalf of undisclosed principals.)

2)  The Shill Corporation

But even accepting that one can, under non-fraudulent circumstances, negotiate on behalf of an undisclosed principal, is that what happened here?  Did Mr. Robinson, assuming he is a U.S. attorney, merely negotiate on behalf of an undisclosed principal?  Or did he and Apple go further?

They went further.  According to the complaint, Apple formed a shill British company and had the British company purchase the trademark.

So what?  Is this really any different than the “undisclosed principal” situation where the agent says “I can’t disclose who I’m buying this mark for?”  Actually, yes!  Setting up a dummy company is hiding the very existence of the principal.  By deceiving the seller into thinking there is no hidden principal, the true principal is making an effort to avoid even the moderate increase in price that would likely be associated with a purchase by an agent of a known, but unidentified, principal.

Looked at another way, if “Apple” is the buyer, the sales price for the trademark will be astronomical.  If “an undisclosed principal” is the buyer, the sales price may not be astronomical, but may still be high to reflect the possibility that a mysterious large company is buying the mark.  However, if there is no undisclosed principal at all, and the buyer is by all appearances a small startup computer company, then the sales price might be relatively low.  Hiding the existence of a principal by using a dummy buyer is the first step in the deception of the seller designed to lower the sales price.

And yet, no untruth has yet been uttered.  Deception?  Yes, since the eventual owner of the mark, and the entity allegedly orchestrating the entire operation, is Apple.  But untruthful?  No.  The shill company with the convenient name was in fact buying the trademark.

Was the company obligated to affirmatively inform the seller that it intended to assign the mark to Apple once the transaction was done?  Not according to the standards of ethics governing U.S. attorneys.  According to Comment 1 to ABA Model Rule 4.1, “A lawyer … generally has no affirmative duty to inform an opposing party of relevant facts.”  So being silent seems to be o.k., placing the burden of investigation and education squarely on the shoulders of the seller.

3)  The Fake Negotiator

But Apple didn’t stop with simply setting up the dummy company.  According to the complaint, Apple then had its negotiator, Mr. Robinson, create a fictitious identity, Jonathan Hargreaves, to further the subterfuge, just in case Proview thought to run a Google search on the individual.  Is there anything wrong with negotiating under a pseudonym?  Well, assuming the negotiator’s name is not a material fact, then maybe not.  Using a fake name does not became fraud if it is not a misstatement of a material fact.

On the other hand, ABA Model Rule 4.3 does forbid a member of the bar from dealing with unrepresented parties under certain circumstances:

In dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested.  When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer’s role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding.

Mr. Robinson (assuming he is a U.S. attorney) may argue he was not acting as a lawyer when he was negotiating for the British company in England with a non-attorney in China,  and hence these Rules of Professional Conduct won’t apply to him.  I know this is a running debate among attorneys working in a business capacity, and I don’t know the answer.  However, I do hope all involved did their research.

4)  The Affirmative Representation

Maybe Apple could have set up the shill, utilized the alias, and hidden its role as ultimate buyer of the trademark and still remained above the amorphous ethical line.  Probably.  But Apple went one step further still, according to the complaint.  And this may be where Apple fell below the line (assuming the allegations in the complaint are true).

When asked why the shill company wanted to acquire the trademark, Hargreaves/Robinson affirmatively represented in writing that it was because it “is an abbreviation for the company name, IP Application Development Limited.”

Hargreaves/Robinson didn’t say “we choose not to respond to that question,” or “we reserve the right to use it for any lawful purpose.  We don’t want to limit ourselves at this time.”  He didn’t remain silent.  He didn’t redirect the question.  Instead, he responded with what appears to this untrained eye to be a flat out lie.

The fact that “iPad” was the abbreviation for the shill company was not the real reason Hargreaves/Robinson/IP Application Development/Apple wanted the trademark.  They were not looking to trademark the abbreviation for the company; rather, it seems clear they selected the company name to match the trademark they wanted.  But is this a lie that crosses the line and renders the negotiation unethical?  Or is this one of those lies, like the negotiator’s name, that is not material.

Looked at another way, is the buyer’s intended use of the IP a material fact?  Clearly Proview will say it is.   And they will point to the great lengths Apple went to in order to avoid disclosing what its true intent was!  Indeed, I think we can all agree that the buyer’s intended use had an impact on the price.

But that doesn’t seem to be the test of “materiality.”  The buyer’s purpose in buying the mark would have an impact on price only because Apple was going to invest untold zillions in creating a product that would have a worldwide demand.  So it would be Apple’s investment and efforts in creating the product, and linking that “must have” product to the iPad mark, that would make the mark valuable.  Why should the seller get to capitalize on any of that effort?  Apple’s desire for the mark is negative leverage in the negotiation, and why shouldn’t Apple be able to conceal its negative leverage?

It can.  But can it lie in order to conceal?  I think ultimately that is the question.

CONCLUSION

So the answer is, as is usually the case with ethical conundrums … I dunno???  Some of Apple’s conduct seems to be pretty well accepted in today’s (and yesterday’) negotiation world.  But the misrepresentation seems to be flying a little closer to the gutter.

In the long run, regardless of whether the conduct was ethical or not, after the dust of the Chinese and U.S. lawsuits and legal fees have settled, I wonder if it might not have been cheaper to negotiate at a little higher ethical altitude.  When you play at the cutting edge of the ethical line, you are bound to get cut now and again.

WHAT DO YOU THINK?  PLEASE LEAVE A COMMENT.