It seemed a match made in heaven. On November 13, 2018, after over a year of entertaining bids, proposals and presentations from over 100 cites, Amazon announced that it had selected the Long Island City, Queens neighborhood in New York City as one of two locations for its new headquarters dubbed “HQ2” (the other location was Arlington, Virginia).
To snag Amazon, New York offered a $3 billion incentive package comprised of tax breaks and other subsidies. New York justified that largesse with projections that Amazon’s presence would generate $27.5 billion in additional tax revenue over 25 years through the direct and indirect creation of an estimated 107,000 new jobs. New York State Governor Andrew Cuomo called the 9:1 ratio of revenue to subsidies “the highest rate of return for an economic incentive program the state has ever offered.” Advocates of the deal also maintained it would diversify New York City’s economy away from Wall Street and real estate.
But fierce dissent surfaced quickly. One day after the announcement, a group of local politicians, community activists, and union leaders organized an anti-Amazon rally in Queens to voice their objections. Some were angry at the high price paid to lure Amazon when New York City seemingly lacks funds to address other pressing needs affecting the average New Yorker such as a deteriorating infrastructure. Others decried Amazon’s hostility to unions. Still others expressed concern about the impact on local housing prices.
A month later, at the first hearing concerning the deal before the City Council (New York City’s lawmaking body), Council members accused Amazon executives and economic development officials of bypassing the normal land use approval process to avoid a review and vote by the Council. The apparent lack of transparency hardly endeared Amazon to critics of the rich incentive package.
To be sure, the proposed deal also attracted ardent supporters who touted the new high paying jobs, training opportunities, boon to local service businesses, and promised investment in schools and public spaces. Indeed, a poll found that 56 percent of New York State voters approved the proposal (versus 36 percent who did not). In New York City, an even higher percentage (58 percent) of voters supported the plan.
Amazon attempted to placate critics. Among other steps, it hired lobbying and public relations firms to assist with community outreach. But the vocal, persistent and well-organized opposition eventually took its toll, and on February 14, 2019, Amazon announced it was pulling the plug on the project with the following statement:
After much thought and deliberation, we’ve decided not to move forward with our plans to build a headquarters for Amazon in Long Island City, Queens. For Amazon, the commitment to build a new headquarters requires positive, collaborative relationships with state and local elected officials who will be supportive over the long-term. While polls show that 70% of New Yorkers support our plans and investment, a number of state and local politicians have made it clear that they oppose our presence and will not work with us to build the type of relationships that are required to go forward with the project we and many others envisioned in Long Island City.
In the aftermath, supporters of the deal bemoaned the lost opportunity and began pointing fingers. Governor Cuomo blamed “a small group of politicians [who] put their own narrow political interests above their community.” In contrast, opponents of the project rejoiced with one politician celebrating victory over what he characterized as “an anti-union corporation that mistreats workers and assists ICE in terrorizing immigrant communities.”
So what went wrong? It may be that New Yorkers expected Amazon to haggle (as many New York City real estate developers historically have done when negotiating with the government), but apparently that’s not what Jeff Bezos had in mind. Meanwhile, opponents of the deal seemed more keen on notching a victory over corporate America, regardless of whether the deal might ultimately deliver a net economic gain to New Yorkers. But assuming the HQ2 deal offered substantial benefits to both sides, and it was just a matter of working through some concededly challenging issues, what could have been done differently?
One option that no one seems to have considered is mediation. Mediation? New York and Amazon weren’t embroiled in litigation! However, as Professor Scott R. Peppet convincingly argues in an article entitled “Contract Formation in Imperfect Markets: Should We Use Mediators in Deals?” (in the 2004 issue of the Ohio State Journal on Dispute Resolution), mediation is not just useful in settling lawsuits; it can also be deployed in the deal making context to help contracting parties overcome non-economic barriers that often threaten to derail otherwise economically sound agreements.
What are some of those barriers? For starters, Professor Peppet observes that deals that make economic sense may sometimes still fall apart due to equitable concerns; that is, “transacting parties sometimes are willing to forego doing business together if they feel forced to do so on grossly unfair terms.” Moreover, assessments of fairness tend to be self-serving with each party “likely to see the other’s arguments, claims and positions as less valid and the other side as less flexible and understanding, while simultaneously interpreting their own actions generously.” This phenomenon can cause an impasse because each side starts to feel it is being unfairly exploited or tarred by the other party.
“Unfairness” was certainly a central theme in the Amazon debate with opponents regularly castigating the deal as an egregious case of corporate welfare at the expense of hard working locals. For example, after the deal was announced, Congresswoman Alexandria Ocasio-Cortez (whose District includes Long Island City) criticized it as a huge giveaway that diverted resources from the local community, and when the deal was canceled she celebrated “everyday people” coming together to defeat the “overreach of one of the world’s biggest corporations.” For its part, Amazon viewed opponents of the deal as unfairly impugning its motivations.
Professor Peppet suggests that a skilled mediator can address perceptions of unfairness by evaluating the assumptions underlying those perceptions, and offering a neutral assessment of “what’s fair.” In the case of Amazon, a mediator could have, for example, asked opponents of the deal to identify the changes they thought were needed to make it fair, run those proposed changes by Amazon and deal supporters for their feedback, and suggested adjustments that addressed the concerns of both sides.
A second phenomenon that sometimes derails deals, according to Professor Peppet, is “reactive devaluation,” which describes the tendency of parties to question the sincerity and integrity of concessions made directly by the other side. Professor Peppet offers this example:
[I]magine that a disputant is considering two possible agreements that would resolve her dispute: Solution A and Solution B. If the disputant knows nothing about the origin of the two solutions, and does not know which solution her opponent favors, she would, all things considered, prefer Solution A. It meets her interests more completely than Solution B. Now imagine that the disputant discovers that Solution A is in fact the offer proposed by her opponent. Research shows that this information about the offer’s origin will often taint a disputant’s evaluation of the merits of the two proposals. She may no longer prefer Solution A, merely because the other side proposed it.
According to Professor Peppet, reactive devaluation poses serious risks to a deal since if each party consistently devalues the other side’s proposals, “bargaining may become unnecessarily adversarial.” This dynamic certainly poisoned the Amazon debate with opponents devaluing any concessions proposed by Amazon to demonstrate goodwill. For example, as criticism mounted, Amazon pledged to fund computer science classes at more than 130 city high schools, and a program at LaGuardia Community College to help students enter the tech industry, and to hire public housing residents to work at a new 30-person customer service center. Perhaps this opening offer was indeed insufficient. But rather than praising the concession as a helpful start, one leading politician immediately devalued it:
Crumbs off the table for a trillion dollar company with the principal owner living with a net worth of over $160 billion. We have the largest housing development in the United States of America with at least 7,000 residents—to come to 30 jobs—are you kidding me? 30 jobs? I would be embarrassed.
Professor Peppet asserts that a mediator can help negotiating parties avoid reactive devaluation simply by sharing “Party A’s proposed solution privately with Party B without telling B that the idea came from Party A. If B assumes that the idea originated with the neutral, B may be more willing to consider it on the merits.” Had Amazon communicated concessions to opponents through a neutral who took credit for them, those concessions would have almost certainly found a much more receptive audience (rather than being immediately ridiculed).
Professor Peppet’s 86-page article explores numerous other benefits that can be gained from using mediators in the transactional context. A full review is far beyond the scope of this blog post. But suffice to say that utilization of a mutually trusted intermediary employing some form of “shuttle diplomacy” might have saved the Amazon deal by enabling the relevant stakeholders to work through their differences in a less confrontational and more collaborative manner.
We say “might” because, to be sure, given the complexity of the issues, and the diversity of the stakeholders and their viewpoints, any mediation of the Amazon dispute would have been incredibly challenging. Maybe there was ultimately no way to bridge all the gaps. But given the economic stakes, and the potential of transactional mediation to overcome barriers to a deal, it would have certainly been worth a shot.