Brian P. Brinig, J.D., C.P.A.
Michael W. Prairie, J.D.

I. INTRODUCTION

A. Overview.

1. Testimony of expert witnesses is governed by Cal. Evid. Code §§720-723 and 801-805, and Fed. R. Evid. 702-705.

2. California and Federal statutes are similar and confer upon trial judge broad discretion in ruling on the admissibility of expert testimony.

B. When is expert testimony admissible?

1. In California courts, Evid. Code §801(a) permits an expert to testify on subjects which are "sufficiently beyond common experience that the opinion of an expert would assist the trier of fact."

2. In Federal courts, Fed. R. Evid. 702 allows expert testimony "if scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue."

3. Expert testimony is not required or appropriate when an issue is within the realm of "common knowledge" of the trier of fact. See Jorgensen v. Beach 'N Bay Realty, Inc., 125 Cal. App. 3d 155. 177 Cal. Rptr. 882 (1981). The valuation of a business or business interest involves issues beyond common knowledge of the trier of fact. Accordingly, the testimony of a qualified valuation expert is admissible.

A. Deposition procedure.

1. A deposition upon oral examination is a pretrial discovery procedure used to obtain facts relevant to the litigation. The witness is asked questions under oath by an examining lawyer. The questions and answers are transcribed by a court reporter verbatim. If testimony at trial is different from the deposition testimony, the witness can be impeached with the deposition transcript at trial.

2. Depositions and other discovery procedures are governed by Cal. Code Civ. P. §2017-2034 and Fed. R. Civ. P. 26-37. Because of liberal discovery rules, almost any question can be asked during the deposition.

3. The deposition is the most important event during the course of business litigation because most cases settle before trial based on the opposing lawyer's evaluation of testimony and the demeanor of witnesses.

B. The role of experts in depositions.

1. The expert must assist the lawyer for his party in preparing for the deposition of the opponent's expert.

a) The expert should provide the lawyer with background information about the education, experience and reputation of the opponent's expert.

b) The expert should advise the lawyer where to probe for weaknesses in the methodology and analysis used by the opponent's expert in reaching his opinion. For example, the opponent's expert may have skipped some steps in his analysis or failed to review financial records which would affect his conclusions.

c) The expert should suggest deposition questions to his party's lawyer and, if possible, attend the deposition of opponent's expert.

2. The expert must prepare for and give an effective deposition.

a) The expert should complete his analysis before the deposition. However, the expert should not prepare a report or reduce his conclusions to writing unless he is asked to do so by his party's lawyer.

b) The expert should insist on a detailed briefing with his party's lawyer before the deposition to discuss his testimony. It is advisable to conduct a rehearsal with mock cross-examination to ferret out potential weaknesses in testimony.

C. Ten Commandments for effective depositions.

1. Tell the truth, but answer only the question which is asked. Do not volunteer information and avoid long, narrative answers. The more topics that you bring up in your answer, the more questions the examining lawyer will ask. The deposition is an opportunity for the opponent to obtain information, it is not the trial.

2. Think about the question before answering it. This will give you the time to formulate an appropriate response. It will also give your party's lawyer time to analyze the question and interpose any objections. Remember that the examining lawyer will attempt to develop an informal, but rapid conversation to elicit from you as much information as possible. Watch out for an examiner who attempts to catch you off-guard with a casual friendly manner or flattering questions.

3. Do not answer a question unless you understand it. If a question is unclear, ask the examining lawyer to repeat or rephrase the question or have the court reporter read the question back.

4. Do not guess or speculate. If you do not know the answer to the question, say so. If you are not sure, qualify your answer by saying "approximately" and the like. Beware of hypothetical questions. Before answering a hypothetical, make sure that all essential facts or assumptions are included. Remember that at trial, a portion of the deposition may be taken out of context and used to impeach you.

5. Do not bring notes, diagrams, books or other written material to the deposition unless they are required by a subpoena or unless you have been instructed by your party's lawyer to bring them. If asked to testify regarding documents or other exhibits, take the time to review them carefully before answering questions about them.

6. Listen carefully to objections made by your party's lawyer. The objection may be intended to alert you to a trick question or some other problem with the question. If your party's lawyer instructs you not to answer a question, follow his instructions, even if the examining lawyer threatens you with court sanctions.

7. Do not argue or become angry or hostile with the examining lawyer. Such a reaction will communicate to the examining lawyer a lack of confidence that will be exploited at trial. It may also alert the examining lawyer to weaknesses in your theories or conclusions.

8. Even if the question calls for a "yes" or "no" answer, ask to explain your answer briefly if a qualification or explanation is necessary. However, do not be concerned if your answer does not apply all information which would be required for a complete understanding of the topic. Your party's lawyer will decide whether to obtain a more complete explanation during the deposition or at trial.

9. Watch out for questions which involve absolute terms, such as "have you identified all of the documents which you have reviewed" or "are there any other facts that you have relied upon." If possible, provide a qualified answer in the event that you inadvertently omitted to identify a pertinent document or fact.

10. Do not memorize your answers in advance of the deposition. Provide a direct and factual response to the questions.

D. Discovery of documents prepared or reviewed by the expert.

1. Under California law, the reports and writings concerning and expert witness' proposed testimony and his preparation are discoverable. See Fed. R. Civ. P. Sec. 2037.3.

2. Under federal law, documents prepared or relied upon by an expert may be obtained only upon motion and under certain circumstances. See Fed. R. Civ. P. 26(b) (4) (A) (ii); Quadrini v. Sikorsky Aircraft Division, 74 F.R.D. 594 (D. Conn. 1977).

3. All communications between expert and lawyer should be phrased in a manner consistent with the evidence and theory of the case. Even the fee or engagement letter may be discovered by the opponent.

4. Documents prepared by an expert witness may also be discoverable. Although an expert may be required to prepare some documents in connection with his studies and analysis, he should be careful not to commit tentative conclusions or speculations to writing. If discovered, such conclusions or speculations can result in impeachment at trial.

A. During direct examination, the expert witness will testify about: (i) his qualifications as a valuation expert; (ii) the scope of the valuation assignment; (iii) the methodology of the appraisal; and (iv) the conclusions he has reached as a result of his analysis.

B. Foundational questions and testimony.

1. Rules governing qualification of an expert.

a) In California, Evid. Code §720(a) provides that a witness is qualified to testify as an expert "if he has special knowledge, skill, experience, training, or education" on the subject at issue. Fed. R. Evid. 702 is in substantial accord.

b) The determination as to whether a witness is qualified to testify as an expert is made by the trial judge whose decision is reversible only for an abuse of discretion. See Naples Restaurant, Inc. v. Coberly Ford Co., 259 Cal. App. 2d 881, 66 Cal. Rptr. 835 (1968).

c) The qualifications of a witness to testify as an expert must relate to the subject about which he is asked to express an opinion. See Miller v. Los Angeles County Flood Control Dist., 8 Cal. 3d 689, 106 Cal. Rptr. 1 (1973); Reno-West Coast Distribution Co., Inc. v. Mead Corp., 613 F.2d 722 (9th Cir. 1979). A C.P.A. is qualified to testify as an expert witness on a wide range of subjects including the results of an audit, and whether financial statements were prepared in accordance with generally accepted accounting principles.

d) An expert need not actually be employed in the trade or profession to which his testimony relates. See People v. Crambit, 84 Cal. Rptr. 440 (1978). However, the testimony of an expert may be excluded if the witness does not have sufficient knowledge of the subject matter. See Cooper v. Board of Medical Examiners, 49 Cal. App. 3d 931, 123 Cal. Rptr. 563 (1975). A court may find that a C.P.A. is not qualified to testify as a valuation expert unless he can show sufficient experience.

2. Technique of foundational testimony.

a) Although the legal purpose of foundational testimony is to qualify the witness as an "expert witness," the practical purpose of the foundational testimony is to establish the expert's credibility and professional expertise. In business litigation, the relative credibility of the expert witnesses may be dispositive of the case.

b) General subjects of foundational testimony:

(1) Education - general and specialized.

(2) Professional credentials.

(3) Employment experience, particularly as it relates to the valuation issue being considered.

(4) Academic affiliations, particularly teaching of accounting, finance or appraisal.

(5) Publications or lectures.

(6) Previous qualifications as an expert witness.

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SEE SAMPLE FOUNDATIONAL QUESTIONS

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c) The lawyer should not allow his expert's qualifications to be removed from the issue by stipulation. Such a stipulation will deprive the expert of the opportunity to establish his credibility and strength.

d) The expert should be prepared to respond to specific questions about his background, education and experience. The lawyer should be given the specific questions, rather than a copy of the expert's resume. This technique will help assure that the expert's qualifications are presented completely and in an organized fashion.

e) The breadth of the foundational testimony will vary depending upon the type of the case and the circumstances of the trial. The lawyer and expert must be prepared to condense the testimony if they sense that the judge is becoming impatient or the jury is becoming bored.

f) At the end of the foundational testimony, the lawyer should ask the judge for a ruling on the qualification of the witness as an expert. There is a psychological benefit to obtaining a confirmation from the judge that the expert has met the requirements of Cal. Evid. Code §720(a).

C. Expert testimony - analysis and opinion.

1. Rules governing the basis of expert opinion testimony.

a) In California, Evid. Code §801(b) provides that an expert witness may base his testimony on matter "perceived by or personally known to the witness or made known to him at or before the hearing...that is of a type that reasonably may be relied upon by an expert in forming an opinion upon the subject to which his testimony relates." Fed. R. Evid. 703 is in substantial accord.

b) Information relied upon by an expert need not necessarily be admissible into evidence. Cal. Evid. Code §801(b); Fed. R. Evid. 703. An expert may rely on hearsay or other inadmissible evidence as a basis for his opinion if it is the type of matter upon which an expert may reasonably rely in forming an opinion. See Brown v. Colm, 11 Cal. 3d 639, 114 Cal. Rptr. 128 (1974); U.S. v. Sims, 514 F.2d 147 (9th Cir. 1975). The opinion of the valuation expert will commonly be based in part upon inadmissible evidence, including inquiries made with other persons involved in a similar business or trade.

c) The court in its discretion may require the expert to state the basis for his opinion before being allowed to testify. Cal. Evid. Code §802; Fed. R. Evid. 705. Because the testimony of a valuation expert is commonly based upon a detailed analysis of financial records and various assumptions, the trial judge will often require detailed foundational evidence before allowing an opinion as to value.

d) Expert witnesses may testify based upon a hypothetical question because the hypothetical is "made known to him at or before the hearing" within meaning of Cal. Evid. Code §801(b) and Fed. R. Evid 703. The opinion of a valuation expert will commonly be based upon an analysis of financial records and empirical studies instead of hypothetical questions. However, hypothetical questions are commonly used in cross-examination to test the assumptions and analysis used by the valuation expert.

2. Scope of valuation assignment.

a) After his qualifications are established, the expert and the attorney shall set forth the origination of the expert's involvement in this case.

(1) Who retained the expert?

(2) What investigation or analysis the expert was asked to undertake.

(3) When the investigation was commenced and when concluded.

(4) The basis of expert's compensation.

(5) An assurance that no suggestion was made as to the conclusion the expert should reach.

(6) An assurance that the expert has no financial interest in the outcome of the case.

b) The expert will be asked what he did in carrying out his investigation or analysis. The expert's response should provide a detailed discussion of each step of his analysis and investigation. It should show the judge or jury that the expert's procedures covered every facet of the valuation assignment.

3. Valuation methodology.

a) A economic overview of the available valuation methods must be presented to the judge or jury.

b) The expert's presentation should assess the strengths and weaknesses of the available valuation methods and their applicability to the facts of the case. Clear reasoning should be stated for the rejection of methods that were not ultimately used in reaching the valuation conclusions.

c) The general economic support for the valuation method chosen should be presented at this stage of the testimony.

d) The expert should avoid a detailed explanation of elaborate economic theories. Generally, these theories cannot be adequately explained in a trial setting and result in confusion. Also, complicated theories are fertile ground for stiff cross-examination.

4. Technique of expert opinion testimony.

a) The difficulty with valuation is that it is a "soft data" analysis. C.P.A.s are used to "hard data" analysis: exact numbers and pre-determined formulae to make calculations. Valuation is a rational, objective look at economics. Economics is not an exact science and, therefore, valuation is not an exact science. Any attempt to present a valuation in a precise fashion is subject to strong cross-examination.

b) It is critically important to present the weaknesses of an economic position during direct examination. Every economic position has some weaknesses, and the expert has presumably considered and incorporated them into his opinion. Strategically, it is advisable to disclose the weakness in an "offensive" posture, rather than to "defend" against a challenge during cross-examination.

(1) "Real" weaknesses:

(a) Inability to investigate important information.

(b) Inaccuracy of financial information.

(c) Lack of confirming, external data.

(d) Choice of one valuation method to the exclusion of others.

(e) An error in the expert's calculations.

(2) "Asserted" weaknesses (will be argued by other side under any circumstances):

(a) Imprecision of conclusions.

(b) Discounting of comparable data, i.e., "it is not comparable enough."

(c) Statistical impurity in any outside study.

(d) Other methods of valuation that could have been used.

(e) Analysis could have been more thorough.

(f) Conclusion could have been different, (even if only $1 different).

c) The strength of the valuation expert's opinion is ultimately dependent on the thoroughness of the investigation, the soundness of the economic assumptions, an accurate perception of the facts, and a proper application of the facts to economic theory.

d) The expert and the lawyer should carefully plan the technique of direct examination. The options include specific questions with relatively narrow answers or more generalized questions (why's and how's) with narrative answers.

(1) If the expert is experienced in litigation, narrative testimony can resemble an economics class. The difficulty here is that the lawyer relinquishes control to some extent. Furthermore, the testimony may be subject to an objection as non-responsive to the question asked.

(2) If the testimony is to proceed on the basis of specific questions, the lawyer must be extremely versed in the nuances of the expert's field.

(3) The most important consideration is preparation. The lawyer and the expert must be in agreement about the techniques and strategy to be employed during the trial. In addition, lawyer and expert must be prepared to alter the technique and strategy in response to rulings from the judge.

e) The expert should feel free to volunteer an important point, by way of explanation, during direct examination.

f) A very important aspect of the expert witness' function is to take a reasonable amount of control of his aspect of the case, including direct examination. Frequently, a lawyer is hesitant to disclose how little he knows about accounting, finance and economics, and is somewhat intimidated by the expert. A competent lawyer will be glad to share control of the case to benefit his client.

A. During cross-examination, the opponent's lawyer will attempt to expose and exploit any weakness of the expert's position as it was presented on direct.

B. Rules governing cross-examination.

1. An expert witness may be cross-examined to the same extent as any witness, and, in addition, as to his qualifications, the subject to which his expert testimony relates, and the matter upon which his opinion was based, and the reasons for his opinion. See, Cal. Evid. Code §721(a); Fed. R. Evid. 705.

2. An expert witness may not be cross-examined as to the content of any scientific, technical or professional treatises or journals unless the witness referred to or considered such publications in arriving at his opinion, or such publications have been admitted into evidence. See, Cal. Evid. Code §721(b).

C. Technique of cross-examination.

1. In general, many of the Ten Commandments for effective depositions apply to cross-examination.

2. The best preparation for cross-examination is a thorough, professional job on the valuation assignment. Nothing is easier than defending a sound economic position.

3. Each assumption in the valuation expert's analysis is the subject to question on cross-examination. During the appraisal process, the expert should have questioned each of his assumptions and weighed alternative positions.

4. The expert should be thoroughly versed in any opposing expert's valuation analysis because that analysis will certainly be one of the foundations of the cross-examining lawyer's questions.

5. A valuation (or an appraisal) should not be approached like an accounting problem. There is no exact answer that can be calculated. It should be noted that numbers, per se, are very easy to cross-examine because there is only one right answer (exactly); and the other conclusion is therefore WRONG.

6. Frequently, a series of facts or premises will be compounded into a question (or a series of questions). A simple "yes" or "no" answer will then be asked for. If the question cannot be fairly answered with a "yes" or "no," do not hesitate to state that the question cannot be so simply answered. Shift the burden back to the lawyer to frame a proper question or require that a more general question - permitting fair explanation - be asked.

7. Answer only the questions asked. Many times, additional qualifying information given by the expert will be turned around by the cross-examining lawyer and used against the expert.

8. To the extent possible, the expert should be familiar with the background of the cross-examining lawyer and his litigation skills.

9. Do not try to vary your personal style, but be aware of negative habits that may be distracting from the quality or credibility of your testimony.

10. Be polite. It is generally more effective to answer questions in a pondering or reflective manner, rather than answering them defensively.

11. Avoid the appearance of bias or untrustworthiness.

12. Certain facts or arguments will go against any economic position. Do not hesitate to acknowledge these things if you are challenged.

13. Do not hesitate to concede an error. However, do not accept the opponent's lawyer's characterization of the facts of your testimony. Examples:

a) "So, you just picked a number?"

b) "So, your study isn't accurate then, is it?"

c) "So, after this brief, informal interview, you decided to...."

14. Do not overstate your opinion. Any extreme or absolute position is very easy to cross-examine.

D. Assisting your party's lawyer in cross-examining other experts.

1. The lawyer's greatest resource in challenging his opponent's economic position is his own expert. The expert should provide his party's lawyer with a critique of the opposing expert's opinion. The critique should outline erroneous facts and assumptions contained in the opposing report. It should also include written questions for the cross-examination.

2. Some lawyers want the expert witness to be present at the counsel table during the cross-examination of the opposing expert. Careful consideration should be given to the problem of the appearance of advocacy on the part of the expert. It would appear that sufficient preparation could eliminate the need to have the expert present at counsel table.

For the purposes of this presentation, these questions must be very general. In actual practice, the expert and the lawyer should prepare their questions and answers so that a continuity will develop.

1. What is your present occupation?

2. What is the nature of your firm and your occupation within the firm?

3. How long have you been employed in this capacity?

4. Do you have any professional credentials or licenses that qualify you to give your opinion of the value of ABC Company?

5. Could you give the court a brief description of your background?

6. What is your education?

7. Would you characterize your professional experience as it relates to the subject about which you are testifying?

8. Have you written any books, papers or articles on the subject of accounting or appraising?

9. Have you been involved in any lectures on the subject of business valuation?

10. Have you taught any courses in business valuation?

11. Have you been asked to value any other businesses similar to the subject business of your testimony today?

12. Have you appraised businesses for the purpose of purchase or sale?

13. Have you appraised businesses for the purpose of internal transfer of ownership?

14. Could you provide a list of some law firms or accounting firms that have engaged you to perform valuation services?

15. Have you been accepted by the courts as an expert witness previously?

16. How many times have you testified as a valuation expert witness?

17. Have you ever been appointed as an expert witness by the court?

18. Have you ever been requested to work as an expert by Mr. (opponent)?

19. Who retained you in the engagement?

20. What was your assignment?

21. What is the basis for your compensation?

22. Was there any suggestion as to the results that you were to find?

23. What steps did you take in order to begin your analysis of this business?

24. Did you meet with Mr. Owner?

25. Did you meet with any other management personnel?

26. Did you have the opinion that you had full access to the information that would enable you to render an opinion of value?

27. Did you receive all the records that you requested?

28. Were there any significant omissions?

29. You didn't audit books or records, did you?

30. How much time did you spend on this case?

31. Did the material that you reviewed appear to be credible and trustworthy?

32. Did any of the materials that you reviewed appear to be created for you?

33. How old was the material that you reviewed?

34. Did you prepare and compile a report?

35. Does your report set forth your conclusions of value?

36. What are your conclusions of value?

37. Would you please describe for the court how you arrived at this conclusion of value?