Expert Contingency Fee Agreements and Galactic Conquest

In 1976 George Lucas was having a difficult time. His new film, Star Wars, was scheduled to be released, but it wasn’t yet finished. He had to push the release date back to 1977, something the studio execs were not pleased about. In fact, it didn’t look like Star Wars would ever be finished. Lucas was having to make artistic compromises in order keep budget; his vision of a greedy slug monster known as Jabba the Hutt wouldn’t be realized, instead replacing him with just another human. To top it off, Lucas had just shown an early cut to the studio execs who were, at best, bemused by the production.

Things didn’t begin easy for Lucas either. The idea for Star Wars had been in his head for years, but he was unable to find a studio to fund it. Even after his success in American Graffiti, many studios turned him down. They found the concept “weird.” Lucas then attempted to pitch the idea to Twentieth Century Fox. Fox had recently made another weird film. Planet of the Apes was a peculiar concept but it was one that enjoyed massive financial success. It was perhaps because of this experience that Fox agreed to fund Lucas’s new project.

In contrast, some people in New York were having a much better day than George Lucas. In a lawsuit which started in 1974, stockholders had filed a derivative suit against the directors of Twentieth Century Fox-Film Corporation. By February of 1977 the parties had finally reached an agreement. The directors agreed to pay $1,138,500 to Fox. However, in exchange, the directors were to receive the right to purchase 425,000 shares of unregistered Fox stock and the right to compel registration under certain circumstances. This right was valued at $.80 each for a total value of $340,000. This was a win for the Fox shareholders. Shortly after the settlement agreement had been signed, George Lucas’s new movie hit theaters.

When Star Wars was released, it was only available at 32 theaters. Many theaters didn’t want to carry it, something that deeply concerned Lucas and Fox. The only person not concerned was Steven Spielberg. Spielberg would soon be coming out with his own movie, Close Encounters of the Third Kind. Confident in Star War’s success, Spielberg made a wager. Spielberg and Lucas both agreed to exchange 2.5% of the profit on each other’s films.

Spielberg would have the last laugh, he made over $40 million on the bet. Star Wars was an instant success. The theaters were immediately sold out and more and more theaters started carrying the film. Prior to 1977, the highest annual profit Fox had made was $37 million. In 1977 they posted a profit of $79 million. Their stock price had more than doubled to a record high. And the film’s success wasn’t limited to America; it made $461 million in America and $314 million abroad, making it the highest grossing film of all time. Financially, Star Wars, was massively successful, but it was also successful on the award circuit. Star Wars was nominated for 10 Academy Awards and won 7.

The success of Star Wars cannot be understated. The shares of Fox more than doubled. This was bad news for the Fox stockholders. They had hired an expert who determined that the rights the directors had secured as part of the settlement agreement were now worth $3.50, up from $.80 each. This meant that the stockholders had given to the directors rights then valued at $340,000. However, they were now valued at $1,138,500. Needless to say, they were not pleased and a new suit was brought challenging the adequacy of the settlement agreement, a suit that would ultimately be successful.

The stockholder’s attorneys had managed to accrue $256,436 in legal fees and their expert had accrued $12,225 in costs. The district court had awarded these fees to the stockholders and Fox appealed. Among other complaints, Fox argued that the stockholder’s expert was retained on something that looked substantially similar to a contingency agreement in which the expert would not be paid unless the case was won. The expert was paid $150.00 an hour. However, the court found Fox’s prediction that had the stockholders lost the case, the expert would not have sought to collect anything like the $150 an hour “doubtlessly sound.” In other words, there appeared to be an unspoken agreement that the expert would only collect his full compensation had the case been won.

Going to Court isn’t cheap. For many people the cost is simply too high of a barrier. The justice system has attempted to solve this problem in a number of ways. The first is through fee shifting statutes. Certain statutes provide that the party who loses must pay the attorney’s fees of the party that wins. Another is through the use of contingency fees. A contingency fee is when, instead of charging a flat sum or by the hour, an attorney takes a percentage of the award. This means that the client doesn’t pay anything unless the case is won. Contingency fees have long been used by lawyers to great effect. Because of it many people who would otherwise not be able to afford a lawyer have access to the justice system.

Experts, on the other hand, do not have access to contingency fee arrangements. Most states have declared them void as against public policy. Further, the Model Rules of Professional Conduct state that “[t]he common law rule in most jurisdictions is . . . that it is improper to pay an expert witness a contingent fee.” The reason is plain. An expert’s job is to provide a professional and unbiased opinion on an issue of fact of which a jury may not be familiar. If the expert were to have a financial investment in the outcome of the trial, it is less likely that his opinion will be unbiased.

However, this does not mean that the testimony of an expert witness who is paid by a contingency fee agreement is per se excluded. Some jurisdictions have preferred to allow juries to determine whether the expert’s compensations scheme will prejudice the expert. See, e.g., Tagatz v. Marquette Univ., 861 F.2d 1040, 1042 (7th Cir. 1988) (“[i]t 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.”); Universal Athletic Sales Co. v. Am. Gym, Recreational & Athletic Equip. Corp., 546 F.2d 530, 539 (3d Cir. 1976) (“it does not necessarily follow that any alleged professional misconduct on [the expert’s] part would in itself render his testimony, once it was adduced, a nullity.”); In re Joy Recovery Tech. Corp., 286 B.R. 54, 69 (N.D. Ill. Bankr. 2002).

These jurisdictions are in the minority. See Straughter v. Raymond, 2011 U.S. Dist. LEXIS 53195, at *8-10 (N.D. Cali. 2011) (compiling cases) (“[t]he Court finds that the better course of action is to exclude the testimony of expert witnesses in civil cases whose compensation is contingent on the outcome of the case.”)

Contingency fee agreements with experts are most often void. This is an easy rule to apply. However, what happens when, as in Fox’s case, the stockholders would not have been able to pay the full amount to the expert and the expert would not have sought full, or perhaps any, compensation. The Court ended up finding that such an arrangement is not invalid. It reasons that it would be problematic to make any award of expert fees invalid because an expert may not realistically expect to be fully compensated on event of failure. The Court opined that such a ruling may create a problem of a constitutional dimension.

While allowing experts to not expect full compensation is tolerated, it may leave a bad taste in the mouths of some judges, and certainly some juries. Exploring whether an expert witness expects full compensation in the event of failure certainly speaks to the credibility of the witness and can provide powerful impeachment evidence.

Star Wars went on to become one of the most popular franchises of all time. The most recent iteration, The Force Awakens, has already blown past old records and there is no sign of stopping. As for the stockholder’s expert, the Court determined he should be paid the full $12,225 and that, in fact, the services he provided were “ultimately worth millions of dollars.”