Whether experts should be allowed to testify when they have a financial stake in the outcome of litigation is a question that divides courts. In an unusual case, a judge in the Western District of Virginia excluded the expert testimony of a witness who sold a litigation interest in a claim brought by his company. The sale proceeds were contingent on winning the lawsuit, a fact that (according to the court) disqualified the witness from giving expert testimony.
Facts of the Case
David Steffens co-founded Keystone Transportation Solutions and served as its CEO. He eventually tried to sell the business to Northwest Hardwoods. When that effort failed, Keystone ceased doing business.
Keystone’s former president, Thomas Mereen, went to work for Northwest Hardwoods. Keystone sued Northwest Hardwoods, alleging that it improperly gained access to Keystone’s trade secrets. The lawsuit also alleged that Northwest Hardwoods interfered with Keystone’s business interests.
Keystone sold its interest in the lawsuit to Clarendon, described in the court’s opinion only as “another business entity.” Keystone’s operating agreement with Clarendon provides that Clarendon will receive ten percent of any lawsuit recovery that Keystone receives. The remaining recovery will be split equally between Steffens and the other co-founder of Keystone.
Keystone designated Steffens as an expert witness. Among other opinions, Steffens proposed to testify that Keystone’s alleged trade secrets were valuable within the lumber transportation industry, that the information was propriety and not readily available from a review of public information, and that Keystone’s efforts to maintain its trade secrets were commercially reasonable. Steffens also opined that Northwest Hardwoods relied on Keystone’s confidential information when it committed to opening a new business unit and that its business model for operating that unit depends on Keystone’s trade secrets.
Northwest Hardwoods moved to exclude Steffens’ expert testimony. Among other reasons, Northwest Hardwoods claimed that Steffens is an unreliable witness because he has a financial interest in the outcome of the litigation.
The potential for bias affects the credibility of any witness, including an expert witness. Credibility is for the jury, not a judge hearing a pretrial motion, to determine. Reliability, on the other hand, is something a court can determine after deciding whether the expert has based opinions on sufficient facts and a reliable methodology.
The trial court thought that an expert’s bias might render a witness “inherently unreliable” and that the expert could therefore be excluded under Daubert. While there is precedent to support that doubtful proposition, the fuzzy line between credibility and reliability is difficult to discern when reliability is based on allegations of bias rather than the analysis that informs the expert’s opinions. After all, police officers and crime lab employees are often employed by the same government that uses them as expert witnesses in criminal trials, but their obvious potential for bias does not result in the wholesale exclusion of their testimony.
Steffens’ situation is somewhat different in that he had a direct financial interest in the outcome of the litigation. The court considered a Fourth Circuit decision holding that assignments of interests in lawsuits are against public policy in Maryland because they promote the interests of the entity to which they are assigned rather than the interests of the injured party and thus promote unnecessary litigation.
Apart from the fact that Keystone brought its case in West Virginia rather than Maryland, the Fourth Circuit precedent is not easily squared with the facts of the Keystone case. The founders of Keystone will share 90% of the proceeds if their interests are vindicated in court. Had they not sold the litigation interest they would have received 100%.
This case is plainly not an example of “lawsuit-mining” that the Fourth Circuit claimed to deplore. Rather, it seems to be an example of business owners exercising reasonable judgment to raise the capital they need to fund litigation that will protect their interests. It is difficult to see how that harms public policy.
Experts and Contingent Fees
An afterthought in the Fourth Circuit decision referred to a proposal to hire experts on a contingent fee basis, which it viewed as threatening “the very integrity of the judicial process which depends on the truthfulness of witnesses.” The concern seems overblown, as it is unclear why a contingent fee is more threatening to judicial integrity than the common practice of a corporation paying its own employees or independent contractors huge fees to testify on the employer’s behalf.
Substantial payments always have the risk of instilling bias, whether or not the payments are contingent. The potential for compensation to affect an expert witness’ opinions is one that juries evaluate every time an expert testifies. Juries understand that experts need to be paid and they are capable of deciding whether compensation affects an expert’s credibility.
While most states prohibit employing an expert on a contingent fee basis, that rule governs the conduct of lawyers, not experts. Recognizing that distinction, the Seventh Circuit has wisely decided that the existence of a contingent fee agreement goes to the expert’s credibility, which can only be determined by a jury. Attorney disciplinary rules have nothing to do with an expert’s reliability.
Steffens’ contract with Clarendon had little to do with the rules of professional responsibility. Steffens’ agreement to share in the proceeds was not contingent on whether he testified as an expert witness. Steffens was an owner of the business that brought the lawsuit. Business owners always have a financial interest in the outcome of litigation affecting their business, but that does not preclude them from testifying as experts in that litigation.
While Steffens was not earning a contingent fee for testifying, the court deemed Steffens’ contingent financial interest in the litigation’s outcome to be analogous to a contingent fee. For reasons that are not clearly explained, the court deemed it important that Keystone is no longer operating. Whether or not the business continued in operation, Steffens was likely to benefit from the lawsuit’s favorable outcome, with or without a contingent agreement to share in the proceeds of the lawsuit. The court’s conclusion that selling a litigation interest is the same as a contingent fee for testifying is not persuasive.
The court nonetheless deemed the Fourth Circuit’s questionable precedent regarding contingent fees for expert witnesses to be controlling. It excluded Steffens’ expert testimony on that basis. The court went on to exclude his testimony on more defensible grounds, including the fact that some of his proffered opinions were beyond the scope off his expertise and others reflect his subjective beliefs without the support of a reasoned methodology.
Steffens will be allowed to testify as a fact witness. The court noted that some of the narrative in his expert report would be admissible as lay testimony. To the extent that Steffens gives that testimony, however, he will not be allowed to bolster his opinions by portraying them as expert opinions.