Southern District of New York

The National Law Journal
Volume 20, Number 4
The National Law Journal

Monday, September 22, 1997

Corporate Brief
In Focus: Litigation


Elizabeth J. Sher and Ronald D. Coleman [FNa]
Special to the National Law Journal

IN GOLDSTEIN v. Exxon Research and Engineering Co., [FN1] a U.S. magistrate judge ruled last spring that a party may not pay a fact witness for services rendered in connection with the preparation of his testimony, even if the arrangement is characterized as a “consulting agreement.” In a subsequent decision, filed April 17, Magistrate Judge R. Stanley Chesler, of the U.S. District Court for the District of New Jersey, rejected motions by both parties for reconsideration. [FN2] Because of the lack of clear precedent in other federal circuits, the decision may have a serious effect on corporate litigation strategy nationwide.

Judge Chesler’s Goldstein opinion relied primarily on Hamilton v. General Motors Corp. [FN3] and Alexander v. Watson, [FN4] which it characterized as representative of the “modern” trend. But the decision omits contrary authority from its analysis and stands in opposition to a recent formal opinion from the American Bar Association’s Standing Committee on Ethics and Professional Responsibility. There also are strong legal policy arguments against the Goldstein approach. Each of these factors will be considered in turn.

The most recent published decision on the topic of “litigation consultants” is New York v. Solvent Chemical Co. Inc., [FN5] in which the state of New York brought an action against a company under the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA. The defendant had hired Eric Beu, a former employee and significant fact witness, as a litigation consultant; his rate was $100 an hour plus expenses. [FN6]

But the defendant had done more than hire him to testify or even to assist in developing his testimony. Upon learning that a deposition subpoena had been served on Mr. Beu by the state, the defendant settled an ongoing litigation with him and made covenants not to join him in the CERCLA action. [FN7] At the deposition that followed, the defendant’s counsel instructed Mr. Beu not to answer questions about the consulting agreement and subsequently brought a motion for a protective order. The defendant argued that the information sought was protected by the work-product doctrine, on the theory that as a litigation consultant, Mr. Beu was part of the legal litigation team. The state cross-moved to compel production.

Judge John T. Curtin held for the state, ruling that the consulting agreement was not protected under the work-product doctrine. [FN8] The court reasoned that the relationship between Mr. Beu and the defendants “threatened to undermine the integrity of the adversary process in this case,” adding that it was “the equivalent of making cash payments to Mr. Beu as a means of making him sympathetic and securing his testimony.” [FN9]

Solvent Chemicals would thus far seem consistent with Goldstein. Yet the district court in Solvent Chemicals added a caveat: “[T]he court finds nothing improper in the reimbursement of expenses incurred by Mr. Beu in traveling to New York to provide [the defendant] with factual information, or in the payment of a reasonable hourly fee for Mr. Beu’s time. But in providing Mr. Beu with protection from liability in the [earlier] litigation, and in this action, as a means of obtaining his cooperation as a fact witness, [defendants] went too far.” [FN10]

The court made a critical distinction between reasonable and unreasonable compensation for a fact witness. Reasonableness, under this analysis, depends on the facts of the case. The key is whether the parties’ actions suggest that the compensation package is part of a concerted effort at “buying” cooperation, as opposed to compensating the witness for the reasonable value of his time. This distinction is missing from Goldstein’s broad injunction against remuneration of fact witnesses. [FN11]

The ABA’s Position

The American Bar Association’s Standing Committee on Ethics and Professional Responsibility’s position is contrary to Goldstein. On Aug. 2, 1996, the committee issued Formal Opinion 96-402, which distinguishes between compensation for the substance of the testimony and reasonable payment for a witness’s time.

The ABA opinion focuses on ABA Model Rule 3.4(b), Fairness to Opposing Party and Counsel, which states only that a lawyer shall not “offer an inducement to a witness that is prohibited by law.” It also argues that paying a fact witness for “lost time” is not payment of a fee, noting that the model rule’s predecessor, DR 7-109, explicitly permitted such payment. The ABA opinion notes further that reasonableness must be determined by a realistic assessment of the commercial or fair value of the witness’ lost time. [FN12]

The case law and the ABA opinion suggest that Goldstein at best overstates the trend, and at worst misstates the law, regarding payments made to former-employee fact witnesses. Given the lack of clear precedent, it is critical to consider the policy reasons Goldstein should not be followed.

Both Goldstein and its underlying authority argue that payments to witnesses amount to buying testimony and that a layperson with factual knowledge is under a civic obligation to cooperate with the justice system and provide testimony without pay. These arguments, while compelling, rest on unexamined assumptions. Further, these propositions ignore legitimate considerations, such as the value of a witness’ time-especially in complex litigation, when his or her extra-testimonial assistance may be great-and presume that the litigation-consultant practice will produce bias, rather than leave the evaluation of that possibility to the finder of fact.

The Goldstein opinion relies heavily on the 7th U.S. Circuit Court of Appeals’ Hamilton opinion, which in turn relies on the 91-year-old Illinois appellate decision in Wright v. Somer. [FN13] The theme of the language quoted from Wright is “evil consequences,” specifically “the procurement of perjury.” [FN14] Both Wright and Hamilton accept the premise that payment of a flat, hourly fee for assistance, with no contingency based on the outcome of the litigation, tends to create professional witnesses. Neither case distinguishes such a scenario from the case of expert witnesses, who actually have become professional witnesses.

Experts, even though they are forbidden contingency fees, have an interest in the outcome of the litigation: If the side that engages them prevails, they can expect similar engagements in the future. Contrast this with the fact witness, who is usually someone with a long-time association with the company that “retains” him. He is unlikely to benefit by having additional opportunities to testify or assist in litigation, at his “consultant” rate, on behalf of other companies.

While the Goldstein approach evidences concern for the subtle effect that any compensation might have on a witness, it does not consider the inverse possibility: that testimony of a fact witness dragged into litigation under threat of a contempt-of-court citation (i.e., the coercion of a subpoena) may be distorted by, at least unconscious, resentment toward the subpoenaing party. [FN15]

Civic-Duty Argument

The arguments against this line of reasoning would be that public policy and civic duty dictate that fact witnesses come forward with testimony when they have relevant factual knowledge, and that further, if they refuse to do so, they may be forced to testify by subpoena. By this reasoning, however, an expert should also have a civic duty to testify when his or her knowledge would be useful in assisting the trier of fact, regardless of whether other experts may also have such knowledge.

More important, the public policy argument does not account for the reality of the litigation consultant. Consultants are rarely paid for time spent on testimony but usually are paid for extra-testimonial assistance-usually substantial-in investigating and developing facts. In Hamilton, the court found no compensation justified, even though “for approximately ten years [the witness] regularly devoted, substantially, all of his time and effort in assisting GMC officials and counsel.” [FN16] This hands-on, knowledgeable assistance of an expert fact witness, critical to the truth-finding process of litigation and analogous to that of the expert, cannot be achieved practically by the subpoena power. [FN17]

The distinction between the duty of a citizen (personal or corporate) to cooperate with a tribunal and an undertaking to render special assistance to a litigant is recognized in Premier Electric International Corp. v. Solar Devices Inc. [FN18] In that case, a corporate third party that had been served with a federal records subpoena offered to identify specific information and provide material statements in exchange for a release from a litigant. The litigant sought to have the release overturned as lacking consideration-because the third party was obligated to comply with the subpoena anyway-and as void as against public policy.

The 1st Circuit refused to overturn the release, ruling that the extra assistance, beyond the literal requirements of the subpoena, constituted adequate consideration to support the release. As to the public policy issue, the court rejected the analogy to cases such as Hamilton and Watson (both of which the court cited) that held unenforceable promises to pay “witnesses who demand compensation in exchange for their appearing in court.” [FN19]

Quoting from Hamilton, the court stated, “The policy underlying the rule invalidating these agreements is to discourage parties under such a duty from using the threat of nonperformance to extort greater compensation for doing only that which they already were obligated to do….Because the witnesses only agreed to do what they were legally obligated to do, the possibility of extortionate demands exists.” [FN20]

The 1st Circuit, in Premier Electric, finessed the facts of Hamilton, which do not suggest extortion or even involve a witness being paid merely to cooperate with the bare terms of a subpoena. But Premier Electric represents a judicial casting of Hamilton in a light that limits the latter’s seemingly broad holding. No less important, Premier Electric elucidates the distinction, well-enunciated in the ABA opinion, between “paid testimony” and true “litigation consulting.”

The Witness’ Time

Perhaps the most compelling criticism of Goldstein is that it fails to weigh the value of a witness’ time. In Hamilton, the witness came out of retirement and spent the next 10 years helping General Motors prepare its case. It is extraordinary that a court could hold that it is against public policy for a person to be compensated for 10 years spent at a lawful and socially beneficial activity. [FN21]

The ABA opinion explicitly recognizes this problem and cites, as an exemplary proof that federal law does not take such an approach, former 18 U.S.C. 201(j). That statutory provision, now designated Sec. 201(d), deals with bribery of public officials and witnesses. After setting out a list of prohibited inducements for testimony, the statute provides: “[The foregoing provisions] shall not be construed to prohibit…the payment, by the party upon whose behalf a witness is called and receipt by a witness, of the reasonable cost of travel and subsistence incurred and the reasonable value of time lost in attendance at any such trial, hearing or proceeding, or in the case of expert witnesses involving a technical or professional opinion, a reasonable fee….”

The final clause deals with expert witnesses and clarifies that in the previous clause the statute is authorizing payment for a fact witness’s lost time. Once this proposition is recognized, there is no distinction between 10 years of lost time and 10 hours.

It should be noted that Goldstein is implicitly premised on an unstated distinction between present and retired employees. In Hamilton, the witness had been retired before being “reactivated” by GM. If he had never retired and GM had merely shifted his job function to assisting in the preparation of the litigation, there would be no basis to forbid him from being compensated for his time. GM could assign any employee to the task of working with its counsel on the case. In other words, GM could “pay for the fact testimony” of any of its employees.

Yet because the employee in Hamilton had left GM’s service, that nearly identical payment was decreed illegal. There is no viable conceptual distinction between an employee and a former employee. Indeed, such a distinction cuts in the direction of forbidding the former more than the latter. A litigation consultant can point to his or her contract and demand payment, regardless of the outcome of the case or even the usefulness of his or her testimony to his or her former employer. In contrast, the remedies available to an at-will employee facing his or her employer’s wrath over a bungled day on the stand are relatively circumscribed.

The Finder of Fact

The Goldstein approach also ignores the role of the finder of fact in its need to get as much evidence as possible and its ability to weigh claims of bias and incredibility. By depriving a party of the ability to compensate former employees, that approach could frustrate the truth-finding function of litigation. Compensation paid to a litigation consultant can be weighed by the finder of fact.

Payments to fact witnesses may be no different from payments to expert witnesses, or other aspects of bias that arise from a long-time employee’s association with a company. These may include loyalty, the payment of a pension and provision of other retirement benefits-any of which can be brought to the fact-finder’s attention on cross-examination or in closing statements.

This was the approach taken in Fund of Funds Ltd. v. Arthur Andersen & Co., [FN22] the only 2d Circuit decision to cite Hamilton. On a motion for judgment notwithstanding the verdict, the movant argued that the jury should have been instructed that because certain witnesses were paid in connection with their testimony, the party that put them on the stand may have been guilty of suborning perjury. Rejecting this contention, the Southern District court, citing Hamilton in a footnote, agreed that the case stands for the proposition that there is a “strong public policy against payments to fact witnesses.” [FN23]

The court added that Hamilton addressed “potentially questionable payments,” and not perjury. But it then stated that “it is permissible, indeed desirable, to bring any such payments to the attention of the jury and for counsel to comment upon [their] possible effect… upon a witness'[s] credibility.” [FN24]

Similarly, in Jamaica Time Petroleum v. Federal Ins. Co., [FN25] the 10th Circuit explained that Alexander v. Watson-one of the two cases relied on by Goldstein-was about the enforceability of contracts, rather than the competence of witnesses. The Jamaica Time court went on to explain that the payment of a reward “affects the credibility of the witness and the weight to be given his testimony…[and not his] competence to testify.” [FN26]

Indeed, the Goldstein court admitted some recognition of this point in its reconsideration opinion, citing a string of cases as authority for the proposition that “consistent appellate rulings in civil and criminal cases [hold] that the appropriate relief [where a payment is brought to the court’s attention] is to require full disclosure of the arrangements and permit full examination at trial.” [FN27] It was on the authority of this line of cases that the court declined to grant more severe sanctions against Exxon for use of a paid witness/consultant. But the court did not extend this reasoning to encompass a better solution to this issue than “hide-and-sanction.”

The Goldstein decision is stated more broadly than precedent and policy suggest is appropriate. The courts must, when considering this issue in the future, consider not only the diversity of authority on the topic of litigation consultants, but the complexity of modern business litigation; the requisites of the truth-finding process; and the fact that not only expert witnesses but fact witnesses may fairly place a value on their time. Courts need not despair of the fact-finder’s ability to analyze proffered testimony when apprised of the possibility of bias; they can leave that reckoning to the jury.

FNa. Ms. Sher, a partner, and Mr. Coleman, an associate, practice commercial litigation at Morristown, N.J.’s Pitney, Hardin, Kipp & Szuch. The firm represents Exxon, the defendant in the Goldstein case, in other litigation matters.

FN1. 95 Civ. 2410 (Feb. 27, 1997).

FN2. The plaintiff had urged the imposition of stronger sanctions on Exxon for use of a “paid fact witness.”

FN3. 490 F.2d 223 (7th Cir. 1973).

FN4. 128 F.2d 627 (4th Cir. 1942).

FN5. 166 F.R.D. 284 (W.D.N.Y. 1996).

FN6. Id. at 286.

FN7. Id.

FN8. Id. at 289.

FN9. Id.

FN10. Id. at 289-90.

FN11. It is significant that the Solvent Chemical court believed it necessary to make this caveat, which, considering the fairly egregious facts actually before it, was dictum.

FN12. The ABA opinion also argues that there is no distinction between compensation for time spent in actual testimony and that for time not spent on the stand or in a deposition.

FN13. 125 Ill. App. 256 (1906).

FN14. Id. at 257, 258, as cited in Hamilton, supra.

FN15. See Barrett Indus. Trucks Inc. v. Old Republic Ins. Co., 129 F.R.D. 515, 517 (N.D. Ill. 1990).

FN16. 490 F.2d at 225.

FN17. Such a consultant might be characterized as a “fact expert” or an “institutional expert,” who could come under the expert-witness rubric.

FN18. 778 F.2d 71 (1st Cir. 1985).

FN19. Id. at 74.

FN20. Id.

FN21. If it were not socially beneficial, no “civic duty” argument would obtain.

FN22. 545 F.Supp. 1314 (S.D.N.Y. 1982).

FN23. Id. at 1370 n.28, quoting Hamilton, supra.

FN24. Id., citing U.S. v. Barrett, 505 F.2d 1091 (7th Cir. 1974).

FN25. 366 F.2d 156, 158 (10th Cir. 1966).

FN26. Id.

FN27. Reconsideration opinion, Id. at 4.

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