Comtech Telecommunications Corp. is an American company that makes satellite ground stations. It had planned to merge with an Israeli company, Gilat Satellite Networks Ltd., that makes in-flight entertainment systems.

Comtech called off the merger after the pandemic caused a sharp loss in Gilat’s revenues. Gilat took issue with Comtech’s claim that the merger agreement allowed it to back out of the deal because Gilat had suffered a “material adverse effect.” Gilat sued Comtech in the Delaware Court of Chancery to enforce the contract.

The case settled on the eve of trial. Before the settlement, however, the parties argued about whether expert reports should be admitted into evidence or excluded as inadmissible hearsay. The court decided to admit the reports of testifying experts as substantive evidence.

Chancery Court

Chancery Courts are generally limited to awarding equitable relief to parties. Most states give judges the authority to preside in common law cases involving damages and in cases that seek equitable remedies, such as injunctive relief.

Chancery Courts are no longer common in the United States. The Delaware Court of Chancery traces its lineage to 1792 and has its roots in the High Court of Chancery of Great Britain.

Since jury trials are unavailable in Chancery Court, judges may be inclined to receive expert reports without worrying that a jury might be tainted by inadmissible content. The presiding judge in the Comtech case observed that “parties typically agree to admit the reports of testifying experts in Chancery as a means to streamline (and focus) the trial presentations.” Noting that expert reports are helpful to the Chancery Court, the judge encouraged that practice. Still, since the parties to the Comtech case did not agree, the court needed to decide whether, under Delaware law, an expert report is inadmissible hearsay.

Hearsay Rule and Expert Reports

Hearsay is almost universally defined as a statement not made by a testifying witness during a trial that is offered into evidence to prove the truth of the statement. An expert report is prepared before trial and is therefore not a statement made during trial testimony. Lawyers who seek admission of reports offer them to prove the truth of facts and opinions asserted in the report.

Expert reports therefore fit the definition of hearsay. It is, in fact, common for courts to rule (as a New Jersey court recently decided) that expert reports are hearsay and not admissible. The Chancery Court noted that Delaware’s Superior Court (the court that hears most civil disputes in Delaware) takes the position that expert reports are hearsay.

Not all hearsay is inadmissible. Every state has adopted, either by rules of evidence or judicial opinions, a variety of exceptions to the hearsay rule. In addition, certain out-of-court statements are excluded from the definition of hearsay. Prior statements made by a testifying witness are typically excluded, but only when they are offered against the party that called the witness.

Experts can testify about the same facts and opinions that are contained within the report, even if the report itself is inadmissible. The expert’s testimony (assuming it meets other criteria of admissibility) is evidence, but the prevailing view is that expert reports are “merely discovery materials” that are not themselves evidence.

Admissibility of Expert Reports in Chancery

Chancery Court, while subject to the same rules of evidence as other courts, is a different animal. The Chancery judge in the Comtech case decided that expert reports should be admissible and that opposing parties should be free to cross-examine experts about information and opinions stated in their reports even if the experts don’t testify about those facts and opinions on direct examination.

The judge admitted that his decision was “detached from the rules of evidence.” The court rejected the idea, advanced in an earlier Chancery decision, that expert reports are not hearsay when the expert is subject to cross-examination about the report’s contents. The earlier decision concluded that the expert “essentially made the challenged statements [in his report] while testifying,” a bit of sophistry that defies reason. As the judge in the Comtech case noted, a report that is written at an expert’s desk is not magically teleported from the desk to the courtroom simply because the expert testifies.

Anxious, however, to gain the time-saving advantage of admitting the report, the judge relied on the residual hearsay exception to justify its admission. The residual hearsay exception arguably allows all kinds of out-of-court statements into evidence if a judge regards them as “trustworthy.”

The residual hearsay exception has been criticized as swallowing the hearsay rule. The exception is difficult to apply to expert reports because they may or may not be trustworthy, and their trustworthiness can’t be determined until the expert testifies and is cross-examined. Admitting the report before that cross-examination occurs seems to stand the exception on its head.

In the end, the judge decided that no party in the Comtech case would be hurt if he considered the reports and admitted them because he expected them to be useful. In cases tried to other courts, parties might generally expect expert reports to be treated as a discovery tool and not as admissible evidence to prove a party’s claim.

Last year, ExpertPages called attention to the difference that expert witnesses might have made in the prosecution of Rosa Jimenez. Prosecutors in Travis County, Texas claimed that Jimenez caused the death of a child by stuffing paper towels down his throat.

No witness saw Jimenez place paper towels in the child’s mouth, but medical experts testified that no child would be capable of swallowing a wad of paper towels. The experts cited no studies and conducted no experiments to support their opinions.

An ER doctor testified that the child’s gag reflex would have pushed the wad out of Bryan’s mouth if it had not been forced down his throat. A forensic pathologist testified that Bryan’s throat was too narrow to ingest the paper towels. The other two experts simply testified that the towels could not have become lodged in the child’s throat accidentally.

As it now concedes, the prosecution’s case rested entirely on the testimony of its medical experts. The Travis County Conviction Integrity Unit of the District Attorney’s Office now admits that its prosecutors “presented  no  evidence  of  motive,  prior  mistreatment,  substance  abuse,  or  any  other  evidence  to  support  its  theory that [Jimenez] perpetrated an unprecedented attack on a young boy  in  her  care.”

Jimenez’s defense attorney was not given the funding it needed to present highly qualified experts. The defense managed to call a medical examiner who opined that the choking could have been accidental, but the expert had no pediatric training and did not belong to any forensic science organizations.

The one-sided presentation of expert testimony convinced the jury of Jimenez’s guilt. A judge sentenced her to 99 years in prison. Until recently, her efforts at overturning her conviction were consistently rebuffed.

State Concedes New Expert Evidence Is Persuasive

With the help of the Innocence Project, Jimenez marshaled new expert testimony to refute the opinions of the prosecution experts. Her attorneys gathered affidavits from four leading pediatric otolaryngologists: Dr. Michael J. Rutter, Dr. Douglas Sidell, Dr. Ron Mitchell, and Dr. Karen B. Zur. All of the experts specialize in pediatric airways, including the removal of foreign bodies from a child’s airway. They all agreed that a child can accidentally swallow the quantity of paper towels found in the child’s throat.

In addition, the doctors all agreed that it is very unlikely that one person, acting alone, would be able to stuff paper towels down a child’s throat. One of the doctors noted that he can’t even place a tongue depressor in a struggling child’s mouth without the assistance of another adult.

In addition, a prosecution expert, Dr. Elizabeth Peacock, admitted that her testimony was mistaken. She no longer believes that the child’s death could not have been accidental. After reviewing the information provided by the defense experts, she conceded that their knowledge of pediatric airways is superior to her own.

While the Conviction Integrity Unit, perhaps as a face-saving measure, suggested that the medical understanding of pediatric airways has evolved since Jimenez’s 2005 trial, qualified experts could likely have offered the same opinion at Jimenez’s trial if she had received the expert witness funding she needed. They could at least have testified to the absence of scientific support for the opinion that it would be “impossible” for a child to swallow paper towels accidentally.

Jimenez Released

Texas Judge Karen Sage agreed that Jimenez is innocent. She ordered Jimenez released on bond pending further proceedings in the case. Jimenez was released just in time to attend her daughter’s wedding.

The Innocence Project reports that U.S. Immigration and Customs Enforcement officers had told Jimenez that “we’re taking you to Mexico and doing an expedited deportation.” Perhaps realizing that taking an innocent person into custody after her release by a federal judge would not reflect well on an agency that has been directed to take a more compassionate approach to immigration enforcement, USCIS changed its mind and decided not to hold Jimenez in custody. Her freedom, at least for the moment, has been made possible by diligent defense lawyers who found the expert witnesses that Jimenez needed.

When experts merely state the obvious without grounding their testimony in known facts, their testimony is typically excluded as being unhelpful to the jury. At a preliminary hearing in a criminal prosecution, however, decisions are made by a judge rather than a jury. Judges tend to be more lax about admitting expert testimony when they act as the decisionmaker.

It may nevertheless be worth questioning the value of an arson investigator’s expert opinion that a dumpster fire was probably started by a lighter or matches. Flames start most dumpster fires, but in the absence of evidence connecting a flame to a defendant, the expert opinion tells the judge nothing that the judge doesn’t already know.

Arson Prosecution

Efren Uribe is homeless. He was charged with arson in Sacramento County, California. Prosecutors allege that he used a lighter to start a fire in a dumpster and that he did so intentionally.

The dumpster is one that Uribe visits regularly in a search for food. He was seen entering the dumpster and then climbing out of it on the day of the fire. A convenience store employee had seen Uribe search the dumpster for food on multiple occasions during the previous two or three years.

There is no dispute that a fire began in the dumpster a few minutes after Uribe climbed out of it. No video captured the cause of the fire. No eyewitness saw anyone start the fire. The prosecution therefore relied on expert testimony to make a case against Uribe at his preliminary hearing.

Expert Testimony

The arson investigator, Brandon Lynch, works for the Sacramento Fire Department. His job is to investigate the origin of fires. He has done so on dozens of occasions. The court allowed him to testify as an expert witness.

Lynch testified that the dumpster fire originated from an “open flame device … such as a lighter or potentially matches.” The fact that flames start fires is obvious and uncontroversial. Electrical fires don’t occur in dumpsters. Nor was the dumpster struck by lightning.

Yet fires do not need to be started by lighters or matches. As Lynch admitted on cross-examination, someone could have tossed a cigarette into the dumpster, igniting its contents. A heated Sterno can or some other hot object tossed into the dumpster might also have started the fire.

In short, the arson investigator had no evidence as to how the fire started. His opinion that it was probably started by a flame is one that the judge could just as easily have formed without the benefit of expert testimony.

The prosecutor apparently believed that Lynch’s testimony was significant because Uribe had three lighters in his possession when the police arrested him. Yet Lynch’s testimony that the fire was caused by “a lighter or potentially matches,” while carefully phrased to make it seem that a lighter was the more likely source of the flame, added little to the prosecution’s case.

Uribe might have used a lighter to start the fire while he was inside the dumpster, but nobody saw him do so. Lynch admitted that he could think of no reason why Uribe would want to set the dumpster on fire. An expert opinion that “lighters can start fires” says nothing about whether this fire was started by a lighter, much less by one of Uribe’s lighters.

Hearing Outcome

A preliminary hearing is held to determine whether the prosecution has sufficient evidence to allow the case to proceed to trial. Prosecutors face a low standard of proof at a preliminary hearing. The judge who presides does not evaluate the credibility of witnesses. If the evidence that a jury could believe to be true makes it probable that the defendant committed a crime, the case will proceed to trial.

In light of that low standard, the judge allowed the case to proceed to trial. Whether the arson investigator would be permitted to render the same unhelpful expert opinions at trial is unclear. Given the gaps in the testimony provided by its expert witness, however, the prosecution may decide that it lacks the evidence it needs to meet the trial standard of proof beyond a reasonable doubt. Uribe’s prosecution is a reminder that expert opinions cannot salvage a weak case when the opinions are grounded on speculation rather than evidence.

Can a defendant who is charged with misbranding drugs that were administered to racehorses offer expert testimony that the drugs were not performance enhancing? The Court of Appeals for the Third Circuit held that the expert testimony was inadmissible.

Misbranding Drugs

Pennsylvania has a law that prohibits administering nearly all drugs to a horse during the 24 hours prior to post time if the horse will run in a thoroughbred race. Veterinarians who administer drugs to racehorses must keep a record of the date, time, and drug that was given to the horse.

Murray Rojas is a horse trainer who handles horses at Penn National Race Track. He was accused of executing a scheme to administer drugs to horses within 24 hours of their races. While that conduct would typically result in prosecution of a state crime, prosecutors “made a federal case out of it” by indicting Rojas with 21 federal charges, including multiple counts of wire fraud and misbranding of animal drugs. He was also charged with conspiring to commit those crimes.

Misbranding typically refers to changing or removing labels on prescription drugs. Another federal law provides that certain animal drugs may be “dispensed only by or upon the lawful written or oral order of a licensed veterinarian in the course of the veterinarian’s professional practice.”

A prescription “authorized by law” is a lawful order. Dispensing such a drug without a lawful order is deemed a form of “misbranding” of the drug. While the government stretched to find a theory that supported a federal charge, the facts fit the charge well enough for prosecutors to federalize the crime.

Rojas’ Trial

At Rojas’ trial, three veterinarians testified that, at Rojas’ direction, they administered drugs to horses and falsified reports by either backdating or misrepresenting the drugs that were administered. The court rejected Rojas’ argument that the statute only prohibits “dispensing” drugs and that “administering” the drugs does not violate the law.

A jury acquitted Rojas of the wire fraud and associated conspiracy counts but convicted him of each count of misbranding animal drugs and conspiring to do so. Among the issues Rojas raised on appeal was whether the court erred by disallowing expert testimony.

Expert Testimony

Rojas argued that the Pennsylvania law making it unlawful to administer drugs to a racehorse within 24 hours of the race is meant to assure that races are fair by preventing owners from winning races through fraudulent means. In his view, if the drugs could not have affected the race, they were lawfully administered and thus were not misbranded.

Rojas wanted to establish his defense with expert testimony. His expert would have testified that the drugs were therapeutic rather than performance enhancing. The expert would also have testified that the drugs could not have improved a horse’s opportunity to win a race.

The jury might have wondered why Rojas wanted veterinarians to falsify the names of the drugs and backdate the reporting forms if the drugs were innocuous. In any event, the jury did not hear the expert testimony because the trial judge concluded that it was irrelevant.

The appellate court affirmed that decision. To be admissible, expert testimony must help a jury decide a disputed fact. The court of appeals decided that Pennsylvania law made no distinction between therapeutic and performance-enhancing drugs. The administration of all drugs must be reported accurately. Since no drug may be administered within 24 hours of a race, regardless of the drug’s nature, the expert’s opinion was not relevant to any fact that the jury needed to find.

Lessons Learned

Expert witness admissibility often turns on the expert’s qualifications or on the reliability of the expert’s testimony. Just as fundamental is whether the expert has something useful to say.

Rojas’ expert may have been well qualified and may been able to offer a reliable opinion about the effect of drugs on racehorses. If there had been a question about the identity of the drugs that were administered, an expert could have provided a useful opinion. Unfortunately for Rojas, the case turned on whether he caused drugs to be administered without a lawful order, regardless of the nature of the drugs.

Since the expert’ opinions did not address facts that mattered to the verdict, the expert testimony was properly excluded. The Rojas case stands as a reminder that expert testimony, while often an important means of proving facts, will only be admitted if it proves facts that matter.

Payroll Services by Extra Help, Inc. and Teresa Katubig sued Kimberlyn Haag in an Illinois state court. They asked the court to determine the value of Haag’s 25{d61575bddc780c1d4ab39ab904bf25755f3b8d1434703a303cf443ba00f43fa4} shareholder interest in Payroll Services.

Pursuant to the shareholder agreement, Haag retained an expert who offered an opinion about the fair market value of the shares. Payroll Services and Katubig asked the court to reject the expert’s report on the ground that it was a “calculation” and not a “valuation.”

After the report was revised, and against Payroll Services’ objection that the expert merely changed the report’s title, the court decided that the expert’s opinion did, in fact, constitute a valuation. An appellate court agreed with that decision.

Facts of the Case

Katubig was the president of Payroll Services. Haag was an employee. Katubig and Haag entered into a shareholder agreement that gave Katubig 75{d61575bddc780c1d4ab39ab904bf25755f3b8d1434703a303cf443ba00f43fa4} ownership and Haag 25{d61575bddc780c1d4ab39ab904bf25755f3b8d1434703a303cf443ba00f43fa4} ownership of the business. Payroll Services later fired Haag and exercised its option to purchase her shares.

The shareholder agreement allowed the parties to agree upon a business valuation company and to abide by its determination of the business value. In the absence of agreement, it allowed each party to retain a business valuation company. In that event, the purchase price for the shares would be based on an average of the two valuations.

Payroll Services hired the Anders firm to prepare a valuation of the company. Haag hired Kemper Group to prepare a valuation.

An accountant employed by the Anders firm opined that Haag’s shares were worth nothing. That accountant referred to his analysis as a “valuation engagement.”

An accountant employed by the Kemper Group opined that Haag’s shares were worth $587,000. That accountant referred to her analysis as a “calculation engagement.” The accountant explained that a calculation engagement is based on a methodology defined by the accountant’s client and may differ significantly from a valuation engagement.

Haag requested payment of the average of the two values. Payroll Services objected, contending that a “calculation” is not the “valuation” required by the shareholder agreement. Payroll Services filed suit, asking the court to declare that it owed Haag nothing.

Expert Testimony

Haag argued that the shareholder agreement did not define the term “valuation.” In her view, the agreement did not require a “valuation engagement” and did not prohibit a “calculation engagement.”

Payroll Services countered that “valuation” is a term of art that is defined by the American Institute of Certified Public Accountants (AICPA). The AICPA’s Statement on Standards for Valuation Services, however, defines valuation as the process of determining the value of a business.

The AICPA statement describes both a valuation engagement and a calculation engagement while noting that a valuation engagement results in a “conclusion of value” while a calculation engagement results in a “calculation of value.” Whether to use a valuation engagement or a calculation engagement is decided by the accountant’s client.

The Anders accountant testified that business valuations can be prepared by using an asset approach, a market approach, an income approach, or a hybrid of those methods. Which method to use was a matter of professional judgment.

The Anders accountant noted that Payroll Services was in debt because it had recently purchased some other companies. Since the debt exceeded the company’s equity value, the accountant employed an income stream approach to decide that the shares had no market value.

The Kemper accountant testified that she could not prepare a valuation engagement because Payroll Services refused to provide the financial information that she needed. She therefore agreed with Haag to prepare a calculation engagement.

The Kemper accountant used the comparable company approach to valuation. She considered the price that Payroll Services had paid to acquire similar companies. Her valuation was based on that comparison.

The Kemper accountant testified that a valuation engagement should consider the economic reality of the company. She did not believe that the Anders accountant’s valuation reflected that reality because the stock of an ongoing enterprise that is regularly acquiring competing companies is probably not worthless.

Trial Court Decision

The court initially decided that Haag’s expert did not make a sufficient “valuation” as that term is used in the business valuation industry. Given the parties’ dispute as to whether the shareholder agreement required the term “valuation” to be defined by industry standards, as well as the dispute as to whether a calculation engagement satisfies the industry standard for valuations, the court granted Haag leave to file a new expert report.

Haag’s expert then prepared a “full valuation.” Payroll Services objected that the full valuation used the same methodology as the calculation engagement and arrived at the same conclusion. Payroll Services asked the court to reject the report because it was little more than the former report with a new title.

Haag’s expert explained that she conducted new research and calculated a book value in preparing her new report. The new information she received persuaded her that comparing Payroll Services to recent purchase prices of comparable companies would yield that most realistic valuation. She also explained that she rejected the income stream analysis relied upon by Payroll Services’ expert because the company’s acquisition of new businesses created debt that made the income stream an unrealistic measure of the company’s value.

The trial court determined that Haag’s new expert report met the definition of “valuation” as it was used in the business valuation industry. It accordingly admitted the report and awarded Haag the average of the two competing valuations.

Appellate Opinion

Competing methods for valuing property can yield dramatically different conclusions. In many cases, a judge or jury will decide which of two competing methods arrived at the most accurate result.

In this case, however, the judge merely needed to decide whether each expert produced a “valuation” as required by the shareholder’s agreement. If they did, the judge’s role was limited to calculating the average of the two valuations.

The appellate court rejected the trial court’s initial decision that a calculation engagement is not a valuation. The court noted that the shareholder agreement did not specify the means by which a valuation was to be made. The AICPA recognizes that both engagements are valuations and leaves it to the accountant and the client to determine which engagement to use.

The appellate court also rejected the holding that the term “valuation” should be defined according to business valuation industry standards. Since the parties did not adopt a particular definition of “valuation,” the court gave the term its ordinary meaning: an estimation of worth, especially one that is made by a professional. Regardless of its label, Haag’s expert prepared a valuation that met that definition.

Haag’s only obligation was to retain an expert to prepare a business valuation. She did so. The shareholder agreement left no room for the courts to decide which expert prepared a better valuation. Since both parties obtained valuations prepared by business valuation experts, the appellate court affirmed the trial court’s decision to award the average of those two valuations to Haag.