May 20, 2015 Articles

When Former Employees Are Fact Witnesses: A Guide to the Ethical Landscape

Be sure to research the state's ethics rules, opinions, and case law before doling out compensation

by Andrew Graeve

Commonly, a former employee is at the center of the alleged facts, has specialized knowledge that provides justification for using the former employee as a consultant on the case, or is the best option for a Rule 30(b)(6) representative on certain topics. In either situation, the issue of whether the former employee may be compensated for his or her lost time may arise.

Nearly 20 years ago, the ABA Committee on Ethics and Professional Responsibility approved of reasonable payments to fact witness for their time lost working on and preparing to be a witness in the litigation, as long as it is made clear "that the payment is not made for the substance or efficacy of the witness's testimony." Some states, however, continue to cling to elements of the common law rule strictly limiting payments to fact witnesses. Accordingly, caution and research are advised before making payments to former employees who may be fact witnesses.

Ethical and Legal Patchwork
At common law, payments to fact witnesses, for whom "the giving of testimony as to facts within one's knowledge is a matter of public duty," were prohibited. Goldstein v. Exxon Research & Eng'g Co., No. 95-2410, 1997 WL 580599, at *3–4 (D.N.J. Feb. 28, 1997). As the Seventh Circuit Court of Appeals explained in 1973: "If a witness, who knows a fact material to the issue in the cause, . . . can traffic with the suitor, who desires to call him, as to the value of this testimony," there is a tendency toward "the procurement of perjury; toward the raising up of a class of witnesses who, for sufficient consideration, will give testimony that shall win or lose the lawsuit, toward the perversion of justice; and toward corruption in our courts." Hamilton v. Gen. Motors Corp., 490 F.2d 223, 228 (7th Cir. 1973) (internal quotation marks omitted).

While there is no doubt the legal profession and the courts should prevent "the procurement of perjury," there also is room to distinguish between the buying of false testimony and the reasonable payment to someone for the time spent to prepare to provide accurate and complete testimony. Reasonable compensation of fact witnesses for time lost does not automatically trigger concerns about "perversion of justice" and "corruption in our courts," and indeed can facilitate the vigorous preparation of one's case and encourage the truth-seeking function of litigation. A flat bar to compensation for time lost, on the other hand, imposes an unwarranted burden on fact witnesses and on development of litigation. Recognizing this, most states have created room for attorneys to arrange "reasonable compensation" for fact witnesses for their time lost preparing for testimony and consulting on a case.

Interpreting Model Rule of Professional Conduct 3.4(b), which prohibits "falsify[ing] evidence, counsel[ing] or assist[ing] a witness to testify falsely, or offer[ing] an inducement to a witness that is prohibited by law," the ABA Committee on Ethics and Professional Responsibility's Formal Opinion 96-402 explains that there is nothing to indicate that the rule was intended to prohibit payments to a fact witness for "the reasonable value of time lost" by the witness preparing for and testifying at a trial or deposition. While comment 3 to Model Rule 3.4 notes the common law rule was that it was "improper to pay an occurrence witness any fee for testifying," reasonable compensation for time lost is not a "fee for testifying." Formal Opinion 96-402 states:

As long as it is made clear to the witness that the payment is not being made for the substance or efficacy of the witness's testimony, and is being made solely for the purpose of compensating the witness for the time the witness has lost in order to give testimony in litigation in which the witness is not a party, . . . such payments do not violate the Model Rules.

Indeed, the rule that preceded Model Rule 3.4(b), DR 7-109, expressly permitted "reasonable compensation" to a witness for the witness's time lost testifying or attending a deposition, trial, or interview, and there is nothing to suggest that the drafters of Model Rule 3.4(b) intended to deviate from that permissible practice.

Compensation of potential fact witnesses as litigation consultants is no different. Courts have held that retaining a former employee to act as a litigation consultant "does not, in and of itself, appear to be improper, absent some indication that the retention was designed as a financial inducement or as a method to secure the cooperation of a hostile witness." Prasad v. MML Investors Servs., Inc., No. 04-380, 2004 WL 1151735, at *6 (S.D.N.Y. May 24, 2004). The New York State Bar Association Committee on Professional Ethics, in Opinion 668, directly addressed the issue of litigation consultants, concluding that payments of fees to an individual "for assistance in the fact-finding process of a litigated matter where the individual may be a witness" is permitted, as long as the payments are reasonable and not designed to elicit false testimony. Reasonable compensation to former employees for their time spent preparing for and testifying as Rule 30(b)(6) representatives to information known or reasonably available to the corporate client should similarly be permitted, as long as the engagement is not designed to produce false testimony.

Although the ABA's opinion is the majority rule, outliers remain, justifying caution and research of the relevant state's ethics opinions and case law. As an example, Formal Opinion 96-402 notes that the Pennsylvania Bar Association Committee on Legal Ethics and Professional Responsibility, in its Opinion 95-126 which interpreted DR 7-109, had taken a different tack, permitting payment to witnesses to compensate them for the time spent "attending or testifying," but disfavoring payments to fact witnesses for preparatory work such as reviewing documents before testifying. However, in June 2014, the Philadelphia Bar Association Professional Guidance Committee concluded that the Pennsylvania Rules of Professional Conduct permit and do not disfavor "transparent, reasonable compensation to a witness for loss of time." Phila. Bar Ass'n Prof'l Guidance Comm., Op. 2014-2 (June 2014).

Other ethics committees, focusing on varied concerns with payments to fact witnesses, have adopted different rules. For example, the Delaware State Bar Association Committee on Professional Ethics, in Opinion 2003-03, focused its analysis on whether the former employee would suffer an actual loss of wages if the employee spent time testifying. The Delaware ethics committee advised that if the former employee would not suffer any economic loss, because the employee was retired, for example, then payment for "loss of time" may be improper. In contrast, the New Mexico State Bar Ethics Advisory Committee, in Advisory Opinion 1984-01, seemingly drew a distinct line between expert-witness services and preparation by a fact witness, interpreting its rules to prohibit any compensation to "fact" witnesses for their time lost preparing or testifying. In addition, New Mexico has a statute, N.M. Stat. Ann. § 38-6-4(A), that prohibits "fees for services," not just "fees for testifying," which could be interpreted to prohibit payments of fees to fact witnesses for consulting, preparing, or testifying. However, the author was recently involved in a trial in New Mexico, in Santa Fe Pacific Gold Corp. v. United Nuclear Corp., No. D-1113-CV-9700139-II, at which the trial court determined that the prohibition against payments to "fees for services" equaled "fees for testimony," and therefore payments of compensation for preparation did not violate the New Mexico statute.

Additionally, the federal antibribery statute, 18 U.S.C. § 201, makes it a crime punishable by fine, imprisonment, or both, to "corruptly" give, offer, or promise anything of value to any person with intent to influence that person's testimony under oath. Significantly though, it excepts from this prohibition payment 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." 18 U.S.C. § 201(d). Whether a payment to a fact witness violates the federal antibribery statute turns on whether the payment to the fact witness was "for" or "because of" his or her testimony. Courts have generally held that reasonable payments for time that the witness spends reviewing documents and meeting with attorneys does not constitute a payment "for" or "because of" testimony in violation of the statute. Consol. Rail Corp. v. Grand Trunk W. R.R., No. 09-cv-10179, 2012 WL 511572, at *8 (E.D. Mich. Feb. 16, 2012).

Finally, one must consider the choice of law ethics rule, Model Rule 8.5(b)(1), which states that the forum court will govern ethical issues. When dealing with complex litigation involving numerous suits, it may be necessary to consult the ethics rules of more than one state.

Keep It Reasonable and Know When to Say "No"
Reasonableness is the keystone of proper payments to former employees who are fact witnesses in litigation. ABA Formal Opinion 96-402 states that the compensation "must be reasonable, so as to avoid affecting, even unintentionally, the content of a witness's testimony." "Reasonableness" turns on all relevant circumstances, including whether the witness sustained any direct loss of income, and if not the value of the witness's time based on the witness's last hourly rate or what similar individuals earn for comparable activity. As the New York State Bar Association Committee on Professional Ethics has explained, reasonableness is determined by "the line between compensation that enhances the truth seeking process by easing the burden of testifying witnesses, and compensation that serves to hinder the truth seeking process because it tends to 'influence' witnesses to 'remember' things in a way favorable to the side paying them." N.Y. State Bar Ass'n Comm. on Prof'l Ethics, Op. 668 (1994).

A potential red flag arises when payments are made to a fact witness who was hostile to the party prior to the payments. For example, agreements that engage a former employee as a litigation consultant in exchange for settlement of ongoing litigation with the former employee are highly suspect. See, e.g., New York v. Solvent Chem. Co., 166 F.R.D. 284, 289 (W.D.N.Y. 1996). Likewise, payments made to a fact witness who was affiliated with an opposing party will be viewed critically by the courts. See Fla. Bar v. Wohl, 842 So. 2d 811, 814–15 (Fla. 2003).

When permitted, consider putting any consulting or payment agreement in writing. That agreement could state that the compensation being paid to the former employee is not being made in any way as an inducement to testify, or to not testify, or as an inducement to have the witness appear at any proceeding, made for the substance of the former employees' testimony, or even conditioned on the former employee giving truthful testimony. The agreement also could lay out the consideration being paid and state that it is not contingent to any extent on the outcome of the litigation. Such agreements may be discoverable. So counsel should be prepared to disclose the compensation agreement in advance before the deposition or trial and should be prepared for use of the compensation as impeachment material.

Keywords: litigation, commercial, business, former employee, fact witness, litigation consultant, compensation


Copyright © 2015, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).