Surprising Revelations on Experts and Contingent Fees
New York Law Journal
A decision by the U.S. Court of Appeals for the Eighth Circuit issued at the end of July,Taylor v. Cottrell,1 stimulates consideration of important questions that many of us don’t think much about. We will discuss the recent Taylor decision later in this article. First, we focus on the questions and some background information.
Can experts be retained on a contingency fee basis, that is, get paid a fee based on the outcome of the case? At first blush, the answer would seem to be “no.” Litigators will recall, at least in the deep recesses of their memory, that there’s something wrong about entering into contingent-fee arrangements with experts. It’s not ethical, not kosher, probably a kind of taboo. Such initial instincts or imprecise recollections are well-founded. Generally, the law does, indeed, frown upon lawyers retaining experts to be compensated depending on the outcome of the litigation.
Courts have noted that state rules of professional conduct prohibit litigants “from entering into contingency fee arrangements with expert witnesses.”2 Thus, for example, California’s Rule of Professional Conduct 5—310(B) prohibits an attorney from “[d]irectly or indirectly pay[ing], offer[ing] to pay, or acquies[cing] in the payment of compensation to a witness contingent upon…the outcome of the case.”3 The American Bar Association’s Model Rules of Professional Conduct provide that “[a] lawyer shall not…offer an inducement to a witness that is prohibited by law.” The comments to this rule recognize that “[t]he common law rule in most jurisdictions is…that it is improper to pay an expert witness a contingent fee.”4
The Third Restatement’s “Law Governing Lawyers” covers the topic of “Compensating a Witness” in Section 117. It provides that “A lawyer may not offer or pay to a witness any consideration:…(2) contingent on the content of the witness’s testimony or the outcome of the litigation.” The Restatement’s rule, in subsection (3), also prohibits an offer or payment to a witness “otherwise prohibited by law.”5 Comment c states that a fee paid an expert “may not be contingent on the content of the witness’s testimony or the result of the litigation.” Comment d, titled, “The prohibition against a contingent fee to a witness,” quotes from the American Bar Association’s rules but independently notes that “almost all jurisdictions prohibit a contingent fee to an expert witness.”6
Sounds pretty clear-cut, right? No contingency fees for experts, period! But, when one peels away the bold surface statements, one may find some nuanced questions, possibly devilish ones. So, for example, does the prohibition apply to all retained experts or only those who actually will testify? Surprise! The Restatement, Third, in §117’s comment c (“Compensating an expert witness”) starts out with the no-contingency rule but then declares: “The prohibition against contingent compensation does not apply to an expert retained only to consult and not to testify or otherwise present evidence.”
Aha! So, if the applicable jurisdiction were to follow the Restatement’s approach, consulting, non-testifying experts could get a fee contingent on the outcome. And, what if that consultant then “feeds” the effective testifier the “expertise” that facilitates the actual in-court testimony? Have the policy imperatives that justify adoption of the prohibitive rule been circumvented? And, since consultant, non-testifying experts often need not be identified or their opinions disclosed, such a contingency arrangement may never see the light of day.
Another nuanced question: Is the proposed or actual testimony of the contingent-fee-paid expert “void” so that it is completely excluded by the court, i.e., it has no value whatsoever as evidence? Or, does the weight of the prohibition fall upon the lawyer or expert only from a professional or disciplinary standpoint, but the actual testimony itself will not be considered a nullity? Surprise! There’s actually some serious disagreement in the case law on this question.
Thus, for example, in Straughter v. Usher Raymond IV,7 the federal court in California said that contingency-fee agreements between litigants and expert witnesses are “void as against public policy.” They pose “too great a temptation to practice deceit and to commit the too common crime of perjury.” Thus, relying on the common law and the “court’s authority to forestall violations of ethical principles,” courts have held testimony of expert witnesses whose compensation is contingent on the outcome of the case “must be excluded.”8
However, other courts “have rejected a per se rule of exclusion, preferring to allow the factfinder to assess the credibility of such witnesses at trial.”9 Thus, in Tagatz v. Marquette University,10 the U.S. Court of Appeals for the Seventh Circuit panel said that, although it is “unethical for a lawyer to employ an expert witness on a contingent-fee basis, it does not follow that evidence obtained in violation of the rule is inadmissible.” The court suggested that “the trier of fact should be able to discount for so obvious a conflict of interest.” Because there actually was no objection made to the expert testifying, the court said, “so we need not delve deeper into this intriguing subject.”11 Other decisions within the Seventh Circuit held similarly that the testimony itself is not a nullity and could be admitted.12
Contingent-fee arrangements with experts are not necessarily all hatched from nefarious intentions. Sometimes, the litigant simply lacks funds to underwrite the costs of a lawsuit, particularly one in which the attorneys are themselves not operating under a contingent-fee arrangement. For example, in Farmer v. Ramsay,13 a racial discrimination suit, plaintiff Rob Farmer, a white male, contended that he was denied admission to the University of Maryland School of Medicine on account of his race. Farmer alleged that he would have been accepted had he been an applicant from an “underrepresented minority.” He also claimed that the school’s admission policies were unconstitutional because, in pursuit of a diverse student body, the admissions committee considered race and ethnicity when making admissions decisions.
Plaintiff retained Dr. Robert Lerner, a sociologist critical of affirmative action, as an expert. Defendants learned that Farmer hired Lerner on a contingency basis. When asked about this at oral argument, plaintiff’s counsel explained that his client “lacked the funds necessary to pay an expert in advance.” The federal court considered the explanation “unsatisfactory.” Because witness contingency agreements violate the “fundamental policy of Maryland and the United States,” the court granted defendants’ motion to strike the Lerner expert reports.14
Similarly, in Straughter, where plaintiff sued for copyright infringement, an expert ethnomusicologist, Dr. Cheryl L. Keyes, was retained by plaintiff’s first counsel. She was paid a retainer and compensated by the attorneys at an hourly rate. The original attorneys were later replaced by a lawyer who had expressed interest in representing plaintiff but could not advance the costs of the expert. Yet, he also said that Keyes’ continued involvement was a sine qua non of his willingness to take on the case.
Plaintiff contacted Keyes and asked if she was willing to work on a “contingency percentage fee arrangement.” She agreed. The new lawyer drafted the fee agreement between plaintiff and the expert. Keyes was to be compensated only if plaintiff obtained a recovery. This was not disclosed in the initial expert disclosure. Defendants found out and filed a motion to exclude and/or strike Keyes’ reports, opinions and testimony. Upon this defense motion, plaintiff and Keyes voided their contingent-fee agreement and returned to an hourly fee arrangement “retroactive to the date” when the contingency fee contract was executed. Plaintiff explained that he was suffering financial hardship and could not pay her hourly rate. Accordingly, in order to secure his obligation, plaintiff provided Keyes with a lien on all of his personal property and assets “including any recovery he may obtain in this action.”15
The federal court in California held that contingent-fee agreements were improper and unethical, mandating the exclusion of Keyes’ reports and testimony. The court noted that it found no Ninth Circuit authority that such testimony must be excluded and, further, that some courts elsewhere allow it, preferring the jury to assess the expert’s credibility. But the district court held that the “better course of action” is to exclude the testimony in civil cases. The expert’s direct financial interest in the outcome of the action raised “serious questions about the integrity of her expert testimony.”
But, what about the fact that the contingency fee arrangement was cancelled? That, said the court, did not change the analysis. Keyes produced her expert reports and testified at her deposition when the contingency fee arrangement was in place. Moreover, the recent “lien” agreement amounted to a “de facto” contingent-fee arrangement. As a practical matter, said the court, the expert will not be paid for her work “unless and until plaintiff recovers a sum of money in connection with this case.” Keyes “continues to have a direct financial stake in the outcome of this litigation.” Accordingly, the motion to exclude the opinions, reports and testimony was granted.
The expert contingent-fee issue was presented in a recent Eighth Circuit decision that issued at the end of July. In Taylor v. Cottrell, plaintiff sued for injuries sustained in two incidents involving a car-hauling truck trailer. On one occasion, plaintiff was injured while attempting to secure a vehicle on a trailer. This led him to get surgical treatment from Dr. James M. Odor, who performed a cervical fusion. Years later, plaintiff fell from a trailer and, once again, Odor performed complex spinal surgery, the cost of which exceeded $450,000. Two weeks before trial, defendant moved for a postponement of the trial, claiming it had uncovered copies of agreements between plaintiff’s counsel and Odor evidencing an impermissible contingent-fee arrangement. After a hearing, the court postponed the trial and allowed further discovery.
Defendant then filed its motion to strike Dr. Odor’s testimony and for sanctions for plaintiff’s failure to disclose the contingent-fee agreements. The judge granted the motion to exclude Odor’s testimony and expressed “dismay” at the contingency arrangement which was “not merely a lien on any proceeds from the litigation.” Thereafter, the judge dismissed the neck and lower back claims, allowed only the shoulder injury claims, stayed the trial and certified the matter for immediate appeal. The appellate panel observed that the contingent-fee issue was one of “first impression in this Court.” It discussed the disagreement in case law as to whether the expert testimony should be excluded entirely or be allowed to let the jury sort out the credibility and conflict-of-interest questions.16
However, because the Eighth Circuit found that no expert contingent interest existed in this case, the panel did not have to answer the question. The district court erred in concluding that Dr. Odor was being paid via a fee contingent on the outcome of the litigation. To the contrary, the undisputed evidence was that the medical expert was being paid hourly. So, what caused the trial court to consider the fee impermissible? It seems that there were three so-called “letters of protection” addressed to Dr. Odor by the plaintiff’s various attorneys. These letters represented that plaintiff wished to continue with the treatment advised by Dr. Odor, even if it would not be covered by insurance, and that he would guarantee the payment of the medical services through any proceeds from Workers’ Compensation or litigation.
As the appellate court put it, “[e]ssentially these letters provided a personal guarantee for the payment of medical expenses and simply reaffirmed a lien on any future recovery by [plaintiff].” The letters themselves “fail to establish that the payment of medical services was contingent on a favorable outcome in the litigation.” Stated another way, they “do not demonstrate that [plaintiff] would not be responsible for paying the medical bills should he fail to recover anything.”17 The court also noted that it was the hospital, not Odor’s office, which placed the $450,000 lien on any litigation proceeds.
The only remaining interest Odor, himself, may have had is based on “an increased likelihood of receiving payment through the personal guarantee and medical liens.” But the court observed that the practice of offering a personal guarantee for payment from litigation proceeds or placing a lien on potential litigation proceeds “is not uncommon.” Such a “common interest” does not present such a bias in the witness as “to overcome our general rule that such issues are to be considered and evaluated by the jury….”18 Accordingly, Odor could testify and his credibility be assessed by the jury.
What starts out as a seemingly simple general rule—no contingency fees for experts—actually masks some subtleties and questions that warrant litigators’ attention. Does the prohibition apply to consultant, non-testifying experts? Are the experts’ opinions and testimony void and a nullity or can they be admitted for jury consideration? Do “lien” agreements or so-called “letters of protection” or other variants amount to “de facto” contingent-fee arrangements? Normally off the radar screen, these issues likely should be included in the litigator’s checklist. And, it seems wise to get solid information on the adverse expert’s fee arrangement. The Restatement, Third, comment c says: “An opposing party may inquire into the fee paid to an expert or other witness in order to impeach the testimony of the witness.”
- 2015 U.S. App. LEXIS 13173 (8th Cir. July 29, 2015).
- E.g., Straughter v. Usher Raymond IV, 2011 U.S. Dist. LEXIS 53195, at *7 (C.D. Cal. May 9, 2011) (citing California Rules of Professional Conduct, Rule 5—310(B) and American Bar Ass’n Model Rules of Prof. Conduct, 3.4(b) (2006)).
- Id., LEXIS at *7.
- Id., LEXIS at *7—*8 (quoting from ABA Model Rule 3.4(b) (2006) and comment 3).
- Restatement of the Law, Third, The Law Governing Lawyers, §117 (2), (3) (American Law Inst. 2000).
- Rest. 3d, Id., Comments c and d.
- 2011 U.S. Dist. LEXIS 53195 (C.D. Cal. May 9, 2011).
- Id., LEXIS at *8—*10 (citing also decisions by other federal courts).
- Id., LEXIS at *10—*11 (citing other federal decisions including circuit court precedents).
- 861 F.2d 1040, 1042 (7th Cir. 1988).
- Milfam II v. Am. Commercial Lines, 2006 U.S. Dist. LEXIS 65494, at *2 (S.D. Ind., March 30, 2006) (“The Seventh Circuit has not held such arrangements illegal per se but has instead left the trier of fact to consider the credibility issues”); Valentino v. Proviso Twp., 2003 U.S. Dist. LEXIS 10945, at *3 (N.D. Ill. June 26, 2003) (The issue of the expert’s “compensation and his beliefs about his compensation only affect [his] credibility as a witness, not the admissibility of his report and testimony.”)
- 159 F.Supp.2d 873 (D. Md. 2001).
- Id., at 883. The court also said that, even if the reports were admitted, they would add “little, if any, weight to Farmer’s case.”
- Id., LEXIS at *6—*7.
- Id., LEXIS at *5—*8.
- Id., LEXIS at *10.
- Id., LEXIS at *13—*14. Nor did the court find any authority holding that such an interest alone is a basis for exclusion.