Ethical Concerns Raised by the Payment of a Fact Witness Expense

Cailteux, Konrad L., Maskin, Arvin

(May 1999, Product Liability Law & Strategy)

By Arvin Maskin and Konrad L. Cailteux

In toxic tort and product liability actions, more often than not the product at issue was developed, manufactured and sold years before the litigation arose. Thus, a common problem faced by defendant corporations is that the employees most knowledgeable about the product have either retired or are no longer with the corporation. When the corporation locates the retired or former employees, they may be willing to cooperate, but in return for their cooperation, they ask to be paid for the time and expenses they incur in testifying and meeting with the corporation's attorneys. Putting aside for the moment the impact such payments may have on the credibility of the witnesses when cross-examined, the question arises: Is it ethical to pay these potential fact witnesses for their time and expenses?

The American Bar Association (the "ABA") Model Rules of Professional Conduct ("Model Rules"), and its predecessor, the ABA Model Code of Professional Responsibility ("Model Code"), provide the starting point for answering this question. Rule 3.4(b) of the Model Rules provides that a lawyer shall not "counsel or assist a witness to testify falsely, or offer an inducement to a witness that is prohibited by law." Guidance on the meaning of this rule is contained in the comments section, which states:

[I]t is not improper to pay a witness's expenses or to compensate an expert witness on terms permitted by law. The common law rule in most jurisdictions is that it is improper to pay an occurrence witness any fee for testifying and that it is improper to pay an expert witness a contingent fee.

Rule 7-109(C) of the Model Code is even more explicit in delimiting what constitutes proper payment of a witness's expenses. It provides that:

A lawyer shall not pay, offer to pay, or acquiesce in the payment of compensation to a witness contingent upon the content of his testimony or the outcome of the case. But a lawyer may advance, guarantee, or acquiesce in the payment of:

1. Expenses reasonably incurred by a witness in attending or testifying.
2. Reasonable compensation to a witness for his loss of time in attending or testifying.
3. A reasonable fee for the professional services of an expert witness.

The policy behind this rule is set forth in Ethical Consideration 7-28 to the Model Code, which states:

Witnesses should always testify truthfully and should be free from any financial inducements that might tempt them to do otherwise. A lawyer should not pay or agree to pay a non-expert witness an amount in excess of reimbursement for expenses and financial loss incident to his being a witness; however, a lawyer may pay or agree to pay an expert witness a reasonable fee for his services as an expert. But in no event should a lawyer pay or agree to pay a contingent fee to any witness. A lawyer should exercise reasonable diligence to see that his client and lay associates conform to these standards (emphasis added).

Thus, the Model Rules and Model Code reflect the consensus view that it is proper to pay a fact witness for lost income and other expenses incurred in testifying. Indeed, various state bar association ethics committees have issued opinions confirming this point. See, e.g., General Counsel, Alabama State Bar, Opinion 81-549 (undated) (a lawyer acting for his client may compensate deposition and trial witnesses for wages lost and expenses incurred due to testifying); State Bar of New Mexico Advisory Opinions Committee, Opinion 1984-1 (10/22/84) (a lawyer may compensate prospective witnesses for time lost from their present jobs while the lawyer interviews them regarding their firsthand knowledge of facts at issue); Committee on Professional Ethics of the State Bar of Wisconsin, Opinion E-88-9 (9/23/88) (a lawyer may pay a non-expert witness compensation for lost wages, for travel and similar expenses incurred in testifying provided that such compensation is reasonable and does not exceed actual out-of-pocket losses); New York State Ethics Opinion 547 (1982) (DR 7-109(c)(2) expressly permits the payment of reasonable compensation to a fact witness for his loss of time in attending or testifying).

In determining what payment is proper, the distinguishing feature is that the payment must be for expenses only and cannot constitute a fee for testifying. Thus, unlike an expert witness, who may properly be paid a fee for testifying about issues on which he has special expertise, a fact witness may not be paid for merely telling the truth. See In re Robinson, 151 A.D. 589, 600, 136 N.Y.S. 548, 556 (N.Y. App. Div. 1912) (the payment of a sum of money to a witness to "tell the truth" is as clearly subversive of the proper administration of justice as to pay him to testify to what is not true). Accordingly, payments to a fact witness which appear to be in excess of reasonable expenses may be suspect because they raise a question about whether such payment was made to induce favorable testimony. Moreover, the payment must be a set fee for expenses. Payment cannot be contingent on either the content of the testimony or the outcome of the trial because such an arrangement could be construed as an attempt to influence a witness to perjure himself to assure that he would receive the highest fee.

Neither the Model Rules nor the Model Code, however, provide much guidance on whether a witness can be compensated for his time and expenses in meeting with attorneys or reviewing documents to prepare for his testimony. The ABA Standing Committee on Ethics and Professional Responsibility, construing Rule 3.4(b) of the Model Rules, has opined that fact witnesses may be compensated for preparation time, including pre-trial meetings with lawyers and time spent reviewing and researching records. The payment, however, must be solely to compensate the witness for time lost in order to prepare and give testimony, and the lawyer must make it clear to the witness that the payment is not being made "for the substance (or efficacy) of the witness's testimony or as an inducement to 'tell the truth.'" See ABA Ethics Opinion 96-402 (1996) (footnote omitted). Moreover, the payment must be reasonable to avoid affecting, even unintentionally, the content of the witness's testimony, and cannot violate the laws of jurisdiction. The reasonableness of the payment for the witness's time should be based on all the relevant circumstances.

Similarly, New York State Ethics Opinion 668 (1994), opines that a fact witness can be paid for loss of time and expenses incurred in preparing to testify. The Opinion also cautions that the compensation must be reasonable, and should not be designed to influence a witness to "remember" things in a way favorable to the side paying him. Reasonableness of the payment depends on a realistic assessment of the commercial or fair market value of the witness's time. See also California Ethics Opinion 1997-149 (1997) ("[R]easonable compensation for preparation time, the amount and nature of which is discoverable and admissible at trial, seems no more objectionable in principle than expert witness fees. In some cases, accurate testimony without substantial preparation may be impossible.") (footnote omitted); Mass. State Bar Assn. Comm. on Prof. Ethics Op. No. 1991-3 (extensively analyzing Massachusetts rule and other ethics opinions, and concluding payment to a former employee for time spent reviewing documents in preparation for testimony, or overtime to regular for same, is not improper); Ill. State Bar Assn. Ethics Op. No. 87-5 (1988) (finding permissible payment of reasonable compensation to witness for time spent in pre-testimony interviews); Va. State Bar Assn. Standing Comm. on Legal Ethics Op. No. 587 (1984) (reasonable payment for witness's preparation time proper); New York State Ethics Opinion 547 (1982) ("'[L]oss of time in attending or testifying" has been interpreted to mean "loss of time in testifying or in otherwise attending court proceedings and preparing therefor'") (citations omitted).

On the other hand, some courts and state bar associations have taken the view that a fact witness may not be paid for the time spent preparing for testimony. For example, in Goldstein v. Exxon Research & Eng'g Co.,No. Civ. 95-2410, 1997 WL 580599 (D.N.J. Feb. 28, 1997), the court held that corporate defendant could not pay a retired employee for "time spent preparing to testify on facts within his personal knowledge". 1997 WL 580599 at *3. See also Hamilton v. General Motors Corp., 490 F.2d 223, 228-29 (7th Cir. 1973) (fact witness only entitled to compensation for reasonable cost of travel and subsistence incurred, and reasonable value of the time lost in testifying; fact witness not entitled to compensation for time spent preparing to testify); Alexander v. Watson, 128 F.2d 627, 629-30 (4th Cir. 1942) (fact witness not entitled to compensation beyond ordinary witness fee for time spent preparing to testify, no matter how valuable the testimony). Similarly, the Pennsylvania Bar Association Committee on Legal Ethics and Professional Responsibility has opined that Model Rule 3.4 and Pennsylvania's Witness Compensation Statute, when read together, "disfavor" the payment of fact witnesses for the time they spend preparing to testify. Pa. Bar Assn. Comm. Leg. Eth. Prof. Resp., Informal Op. No. 95-126A. The primary concern expressed by the courts and bar associations which have held that witnesses should not be compensated for preparation time is that such compensation may effectively buy the witness's cooperation and could subvert the administration of justice. Moreover, they have taken the view that testimony should be considered a civic obligation, just like jury duty.

Thus, while the majority rule appears to be that a fact witness can be compensated for the time and expenses reasonably incurred in preparing to testify, there are some jurisdictions that consider such payments improper. Accordingly, before advising a client that a fact witness can be compensated for his time and expense in preparing to testify, an attorney must first review the ethical rules in the jurisdiction in which the action is pending to make sure such payments are proper.

A more troublesome issue is whether the retired or former employee who may later be a fact witness can be hired pursuant to a "consulting agreement" to help the defendant corporation's attorneys reconstruct the facts and understand the documents in the corporation's files regarding the product at issue. New York State Ethics Opinion 668 (1994) opines that there is no ethical impropriety in paying an individual to assist attorneys in the pre-trial fact finding, even if these "consultants" may later testify as fact witnesses in the proceedings. The rationale given for this opinion is that the individual is not acting as a witness in such a pre-trial fact-finding process, and, therefore, the ethical rules against payment of a fact witness would not apply. See also Barrett Indus. Trucks, Inc. v. Old Republic Ins. Co., 129 F.R.D. 515 (N.D. Ill. 1990) (nothing improper in a corporation hiring, as a litigation consultant, a former employee who may also be a fact witness in the litigation); In re Gulf Oil/Cities Service Tender Offer Litig., Nos. 82-CIV-5253, 87-CIV-8982, 1990 WL 108352 (S.D.N.Y. July 20, 1990) (same).

New York State Ethics Opinion 668, however, cautions an attorney that compensation to an individual for such "fact-finding" services must be reasonable, and cannot be a disguised payment for the individual's testimony. Indeed, courts have not hesitated to find such "consulting" agreements improper when they have found the compensation to be unreasonable or viewed the circumstances under which the consulting agreement was entered into to be suspicious. For example, in New York v. Solvent Chem. Co., 166 F.R.D. 284 (W.D.N.Y. 1996), the court found nothing improper about a corporation paying a former employee for his time and expenses in providing the corporation and its attorney with past factual information. Nevertheless, the court found the "consulting agreement" at issue in that case improper because the defendant corporation did more than just pay the former employee to help gather the facts. Not only did the defendant corporation agree to pay its former employee $100 per hour, plus expenses, to help its counsel review documents related to the litigation, but it also agreed to settle previous on-going litigation between the corporation and the former employee, and made a covenant not to cross-claim against the former employee in the action at bar.

The district judge found that the "consulting agreement," by providing benefits beyond reasonable compensation for the consultant-witness's time and expenses in helping the corporation's attorneys gather factual information, went too far and threatened to undermine the adversary process in that case. Accordingly, the court ordered the defendant to produce the consulting agreement, and any documents related to the consulting agreement. Moreover, the court ordered the defendants to produce any documents reviewed or prepared by the consultant-witness, and allowed the plaintiff to redepose the consultant-witness.

Similarly, in Goldstein v. Exxon Research & Eng'g Co., No. Civ. 95-2410, 1997 WL 599612 (D.N.J. Feb. 28, 1997), the court found that the consulting agreement between the defendant and its former employee was improper. In Goldstein, the witness, a former supervisor for the defendant who had since retired, began testifying in a deposition in an age discrimination case. After the second day of his deposition, the defendant negotiated a consulting agreement with the witness to "compensate" him for the extra time he was spending on the litigation. The consulting agreement was to pay the witness at a rate roughly equivalent to his former salary to provide factual information and to explain the meaning of various documents in the defendant's files. The plaintiff moved for sanctions, arguing that the consulting agreement was clearly improper because the witness's testimony, which had been advantageous to plaintiff's case for the first two days of the deposition, suddenly became unfavorable after the defendant agreed to pay the witness a consulting fee. The court, clearly suspicious of the timing of the consulting agreement, found that the purpose of the agreement was to "pay" for the time the witness was spending with defendant, not to compensate him for any out-of-pocket loss, and thus held that the consulting agreement was improper because it violated the common-law rule that a witness may be reimbursed only for expenses and loss of time in attending or testifying. Accordingly, the court ordered complete disclosure of the consulting agreement, and allowed the plaintiff to examine the witness at trial as a hostile witness.

Thus, an attorney should advise client corporations to be extremely careful when entering into a consulting agreement with a retired or former employee who may later testify as a fact witness in the litigation. When drafting the consulting agreement, the client should assume that the agreement will have to be produced in the litigation. Furthermore, the consulting agreements should only provide for reasonable payments to the consultant, and should make clear that the payments are solely for the purpose of reimbursing the witness for time and expenses incurred in helping the corporation's attorney with pre-trial fact gathering, not for the consultant's potential fact testimony. Moreover, the consulting agreements should not contain any incentives that could arguably influence the potential fact witness's future testimony. And, the client should be advised to execute such consulting agreements as early as possible in the litigation. Courts will take a very close look and view with suspicion consulting agreements entered into on the eve of, or during the witness's testimony.

Reprinted with permission from the May 1999 edition of Product Liability Law & Strategy © 1999 ALM Properties, Inc. All Rights Reserved. Further duplication without permission is prohibited.