Discovering the Work Of Your Opponent's Consulting Expert

I. INTRODUCTION

Parties often hire consulting experts to assist them in preparing their testifying experts for trial. Under Rule 26(b)(4)(B) ("R.26") of the Federal Rules of Civil Procedure, it is difficult, but not impossible, to gain access to the work of a consulting expert. This article will explain when the rule applies and how it is possible in certain circumstances to discover the opinion of a consulting expert.

Rule 26(b)(4) Trial Preparation: Experts.

(A) Expert Who May Testify. A party may depose any person who has been identified as an expert whose opinions may be presented at trial. If Rule 26(a)(2)(B) requires a report from the expert, the deposition may be conducted only after the report is provided.

(B) Expert Employed Only for Trial Preparation. Ordinarily, a party may not, by interrogatories or deposition, discover facts known or opinions held by an expert who has been retained or specially employed by another party in anticipation of litigation or to prepare for trial and who is not expected to be called as a witness at trial. But a party may do so only:

(i) as provided in Rule 35(b); or

(ii) on showing exceptional circumstances under which it is impracticable for the party to obtain facts or opinions on the same subject by other means.

The rule is designed to prevent one party from taking advantage of the other party's investigative work. The Advisory Committee made clear that the protections provided by the rule are not based upon the attorney work product privilege. See Notes of the Advisory Committee ('70)("Notes").

Rule 35(b) provides a very narrow exception for the notes, opinions and conclusions of examining physicians. Castillo v. Western Beef, Inc. (E.D. NY December 21, 2005) (Garaufis, J.) (unpublished opinion).

II. DOES THE RULE APPLY?

The first question is whether a potential witness is covered by the rule. According to the rule a consulting expert must be "retained or specifically employed... in anticipation of litigation or preparation for trial and who is not expected to be called as a witness at trial." R.26. The Committee also commented that the rule "precludes discovery against experts who were informally consulted in preparation for trial, but not retained or specifically employed." See Advisory Committee Notes. See also USM v. American, 631 F.2d 420 (6th Cir.'80) (defendant could not discover letter written by expert informally consulted but not retained by plaintiff); Ager v. Jane, 622 F.2d 496 (10th Cir.'80). [The rule may not apply to witnesses consulted by non-parties. Awkwright v. National, 148 F.R.D. 552 (S.D.W.Va.'93) (rule does not protect work done by expert witnesses who consulted with a third party).]

Medical examiners and treating physicians do not apply as consulting experts. In Harasimowicz v. McAllister, 78 F.R.D.319 (E.D.Pa.'78), a civil rights action, plaintiff sought to take the deposition of the medical examiner for Philadelphia who had done an autopsy on the decedent. The medical examiner's work was not protected by the rule because he was not an expert. The autopsy was a routine job duty of the medical examiner. Thus, he did "not obtain or develop the information in anticipation of litigation or trial." Id. at 320. See also Congrove v. St. Louis-San, 77 F.R.D.503 (W.D.Mo.'78) (treating physician subject to ordinary discovery).

Where a party claims that its employee is a consulting expert, courts have required the party to show that at the time the materials were prepared there was "more than a remote possibility of litigation." Fox v. Cal. Sierra, 120 F.R.D.520 (N.D.Cal.'88). The rule does not apply to ordinary employees. In re Sinking of Barge, 92 F.R.D.486 (S.D.Tex.'81). Where work was done to assist litigation and for ordinary business purposes, "the privilege is available only if the primary motivating purpose behind the creation of [the materials] was to assist in pending or impending litigation." U.S. v. Gulf Oil, 760 F.2d 292 (Temp.Emer.Ct.App.'85); McEwen v. Digitran, 155 F.R.D.678 (D.C.Utah'94) (no protection where accountant's reports were prepared primarily for the preparation of the company's financial statements).

A fact witness who is later retained as an expert or who is later asked to give opinion testimony is not immune from discovery. The Notes caution:

the [Rule] does not address itself to the expert whose information was not acquired in preparation for trial but rather because he was an actor or viewer with respect to transactions or occurrences that are part of the subject matter of the lawsuit. Such an expert should be treated as an ordinary witness.

This is an important caveat. Without this exception, some litigants might attempt to shield fact witnesses from discovery.

This comment applies where a person witnesses an event and is later retained as an expert. Because the person is a fact witness, his personal knowledge is subject to discovery just as any other witness's factual knowledge would be. As one court explained, "the relevant distinction is not between fact and opinion testimony but between those witnesses whose information was obtained in the normal course of business and those who were hired to make an evaluation in connection with expected litigation." Chiquita v. M/V Bolero, 1994 U.S.Dist.Lexis 5820 (S.D.N.Y.'94).

An example of a fact witness turned expert occurred in Silman v. Aetna, 990 F.2d 1063 ('93). In Silman, a fire destroyed plaintiffs' painting business but the defendant insurer denied coverage and asserted that the plaintiffs had set the fire. Plaintiff prevailed at trial. On the appeal the insurer argued that the court erred in allowing plaintiff to offer testimony concerning the cause of the fire from the local fire chief. The fire chief had arrived on the scene twenty minutes after the fire started. Id. at 1068. At trial, defendant objected to the testimony on the ground that plaintiffs had not disclosed the fire chief as an expert witness in their discovery responses and that R.26 should therefore bar his testimony. Although the court agreed that the fire chief had given expert testimony at trial, the court held that his testimony was properly admitted because he had observed the fire. Moreover, he was not a consulting expert because both parties had copies of his statements and had equal access to him before trial. Id. The court's opinion makes clear that either party could have taken the deposition of the fire chief and asked him what he believed caused the fire.

Where a potential witness has first-hand factual information and also acted as a consulting experts one court restricted discovery to factual knowledge and barred inquiry into consulting work. In Adams v. Shell, 134 F.R.D.148 (E.D.La.'90), defendant retained several employees to work with its attorneys in defending litigation arising from an explosion at one of its refineries. Because the employees had factual knowledge concerning the refinery's activities, they could be deposed about facts known and opinions held prior to their retention as consulting expert. The rule, however, shields both facts and opinions known by a consulting expert. See Grindell v. American, 108 F.R.D.94 (W.D.N.Y.'85) (work done by consulting expert retained to assist with litigation and to evaluate automobile for possible improvement was protected; court refused to allow a limited deposition into actual knowledge of the witness). Adams can be viewed as an effort to find a compromise solution to discovery from a consulting expert who also has factual knowledge.

III. WHAT IS REQUIRED FOR A SHOWING OF EXCEPTIONAL CIRCUMSTANCES?

Even if the rule applies, it is possible to discover the work product and opinions of a consulting expert upon a showing of "exceptional circumstances." A party attempting to make such a showing bears a "heavy" burden. See Hartford Fire v. Pure Air, 154 F.R.D.202 (N.D.Ind.'93). Exceptional circumstances are present where the other party lacks the ability to discover equivalent information by other means. Id. at 208. The mere fact that information known by a consulting expert would be helpful to the moving party's expert is, of course, insufficient to show exceptional circumstances. Santos v. Rando, 171 F.R.D.19 (D.RI.'93). Exceptional circumstances are present where one party's experts cannot duplicate a test or an observation by a consulting expert. For example, in Sanborn v. Kaiser, 45 F.R.D.465 (E.D.Ky.'68), plaintiff claimed that defendant's aluminum sewer pipe was defective. Plaintiff's experts were present and took photographs when the pipe was removed and replaced. Plaintiff, however, denied access to defendant's experts. Defendant was entitled to plaintiff's consulting experts' reports and photographs because the information could not be obtained by defendant's experts. See also Delcastor v. Vail, 108 F.R.D.405 (D.Colo.'85) (compelling deposition of consulting expert who investigated a mud slide in part because conditions at the site had changed).

A party may also obtain access to a consultant's work where a testifying expert relies on it in forming his opinion. Heitmann v. Concrete Pipe, 98 F.R.D.740 (E.D.Mo.'83) (testifying expert relied on consulting expert's report); Delcastor at 408 (testifying expert relied on the report of the consulting expert who had the first opportunity to observe conditions after a mudslide). However, if the testifying expert does not consider the work of the consulting expert it is protected. In Dominguez v. Syntex, 149 F.R.D.158 (S.D.Ind.'93), consulting experts examined plaintiff and prepared records. Where plaintiff's testifying expert stated that he read the records but did not consider them in forming his opinion, the court denied defendant's motion to compel production of the records. Id. at 161 (court also noted that defendant could obtain the substantial equivalent by doing its own examination).

IV. WAIVER

Is it possible to waive the protections of R.26? One court has rejected the possibility of waiver because the rule is not based on the attorney work product privilege. Vanguard v. Banks, 1995 U.S.Dist.Lexis 2016*6 (E.D.Pa.'95) (no waiver where report inadvertently turned over to third parties). However, in U.S. v. 22.80 Acres, 107 F.R.D.20 (N.D.Ca.'85), a gov't employee prepared an appraisal report concerning a parcel of real estate in a land acquisition action. Because two gov't employees used the report to refresh their recollection in preparation for their depositions, the court held, pursuant to Fed.R.Evid. R.612(2), that the gov't waived any work product privilege. Id. at 25. It is possible to waive almost any legal right, including the attorney-client privilege, so it follows logically that the protections of Rule 26 can be waived by the careless.

V. CASES WHERE THE EXPERT IS REDESIGNATED

Sometimes in baseball one manager selects a batter to pinch hit, only to learn that the other team is changing the pitcher. In Baseball, the manager is allowed to select another hitter. In litigation, this can be very problematic where a party designates a testifying expert and then revokes the designation and decides that the former testifying expert is really a consulting expert. A party would only do this where the party discovered some huge problem with the testifying expert’s testimony or methodology.

In Netjumper Software, LLC v. Google, Inc., 19-138,04-70366-CV (Keehan, J.) the District Court permitted Plaintiff to redesignate a testifying expert as a consulting expert because the expert had not yet been deposed. See also Ross v. Burlington Northern Railroad Co., 136 F.R.D. 638 (N.D. Ill. 1991) (re-classification of expert as non-testifying where the expert was not deposed). These cases show that it may be possible to avoid disaster where a testifying expert develops an opinion that is inconsistent with the theory of the case of the party that disclosed him. But see Bradley v. Cooper Tire, (D. New Hampshire; January 11, 2007) (Muirhead, J.) (motion to quash denied where the expert produced a report).

VI. RECENT DEVELOPMENTS

Since this note was first published in 1996, there have been several decisions of interest.

In Spearman Industries, Inc. v. St. Paul Fire and Marine Insurance Company, 128 F.Supp. 2d 1148 (N.D. Ill. 2001) (Alesia, J.), the district court considered whether certain testimony by an appraiser was covered by the Rule, and therefore inadmissible. The lawsuit was a coverage case in which the plaintiff insured claimed that its roof was damaged by a winter storm. Defendant contended that the roof was damaged by ordinary wear and tear and thus not covered. There was no dispute that the appraiser had appraised the damage to the roof. The Court found that the appraiser was a non-testifying expert “consulted in anticipation of litigation or preparation for trial.” Defendant was unable to show “exceptional circumstances.” The Court wrote: “Defendant had ample opportunity to conduct whatever investigation it desired, and the site was inspected by [two consultants hired by defendant]. Thus, the court granted Plaintiff’s Motion in Limine to exclude the work and opinions of its consulting expert. The court noted that “any opinions or records developed or acquired by [the appraiser] prior to consultation by plaintiff fall outside the protection of Rule 26(b)(4)(B).

In Portis v. City of Chicago, 02 C 3139 (August 24, 2005) (Nolan, J.), the plaintiffs hired a computer consultant to develop a database supporting their 42 U.S.C. Section 1983 claims. Magistrate Nolan found that because the computer database was an important piece of evidence in the case and because the consultant was “undisputably the person most knowledgeable about the database and its creation, what information went into the database, how the data was input, what procedures were followed to ensure accuracy,” the City could take his deposition. The Court limited the deposition to the creation of the database and the accuracy of the methodology.


V. CONCLUSION

Rule 26 shields most work done by consulting experts. To obtain the protection of the rule a litigant must show that the potential witness was, in fact, a consulting expert. If that showing is made, it is only possible to discover the consultant's opinion upon a showing of "exceptional circumstances." Exceptional circumstances can be shown where the work or analysis done by the consulting expert cannot be repeated by another expert because conditions have changed or where there are no other experts in the field. This is a very heavy burden to meet and those attempting too meet this burden will rarely succeed.


Edward X. Clinton, Jr.
Copyright 2009

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Mohanty v. St. John Heart Clinic, S.C. 866 N.E.2d 85 (Ill. 2006) - Doctors Face Steep Uphill Battle In Attempting to Void Noncompetition Agreements

The validity of doctor noncompetition agreements frequently arises under Illinois law. In 2006, the Illinois Supreme Court decided the Mohanty case which has made it extremely difficult for doctors to successfully challenge noncompetition clauses in their employment contracts.

The Mohanty case is significant because it upheld two doctor-clinic noncompetition agreements; both with substantial restrictions on the doctor.

The Defendant in the case was a heart clinic owned and operated by Dr. Monteverde, board certified in both cardiology and internal medicine.

The first noncompetition agreement was entered into by the Defendant clinic and Dr. Ramadurai. Dr. Ramadurai's contract called for minimum compensation of $160,000 per year, but provided that upon termination, "Dr. Ramadurai 'shall not' practice medicine within a two-mile radius of any Clinic office or at any of the four hospitals where the Clinic operated for a period of three years.

The second noncompetition agreement was entered into by the Defendant and Dr. Mohanty. This contract also guaranteed Dr. Mohanty minimum compensation of $160,00, but provided that upon termination "Dr. Mohanty 'shall not' practice medicine within a five-mile radius of any Clinic office or at any of the four restricted hospitals for a period of five years." Id. at 90.

The Illinois Supreme Court held that (a) the Doctors had not shown any breach of the employment contracts which would render the noncompetition clauses unenforceable; and (b) that neither restrictive covenant was "unreasonably overbroad in [its] temporal or activity restrictions."

The Court first rejected the doctors' contention that noncompetition agreements in physician employment contracts were void as against public policy.

Next, the Court held that "under general contract principles, a material breach of a contract by one party may be grounds for releasing the other party from his contractual obligations." The Doctors contended that the clinic breached the employment contracts by billing Medicare for tests that they conducted. Thus, alleged the doctors, the clinic wrongfully profited from their work. Furthermore, they alleged that the billing practice of the clinic was improper. The Illinois Supreme Court upheld the finding of the trial court that the plaintiff doctors had not proved a breach of contract.

Therefore, the employment contracts, and the non-competition clauses contained in those agreements were valid and enforceable.

The obvious result of this case is that a doctor will have an exceedingly difficult time in challenging a noncompetition clause in an employment contract, provided that the clause closely resembles the clauses upheld in the Mohanty case.

Edward X. Clinton, Jr.
Copyright 2009

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Seventh Circuit Rejects Lost Profits Claim Because Plaintiff Unable to Obtain Admissible Expert Testimony Supporting Its Theory of Recovery

On June 30, 2009, the Seventh Circuit decided Von Der Ruhr v. Immtech International, Inc., Nos. 08-1496, 08-1956 and 08-1971.

The main issue in the case was whether the Defendant had breached an agreement to license a patented pharmaceutical product. Septech claimed that, had the Defendant honored the licensing agreement, it could have eventually obtained FDA approval to market the pharmaceutical product. Septech claimed that the Defendant had caused it to lose substantial lost profits on the pharmaceutical product.

Septech did not disclose an expert witness. Instead, Septech sought to present the lost profits testimony through its President, a lay witness. The District Court granted Defendant's motion in limine to bar this testimony pursuant to Federal Rule of Evidence 701. The Seventh Circuit affirmed.

Rule 702 governs the testimony of expert witnesses, while Rule 701 governs opinion testimony by lay witnesses.

Rule 701 Opinion Testimony by Lay Witnesses, provides:

If the witness is not testifying as an expert, the witness' testimony in the form of opinions or inferences is limited to those opinions or inferences which are (a) rationally based on the perception of the witness, and (b) helpful to a clear understanding of the witness' testimony or the determination of a fact in issue, and (c) not based on scientific, technical, or other specialized knowledge within the scope of Rule 702.

The Court noted that the last sentence "is intended 'to eliminate the risk that the reliability requirements set forth in Rule 702 will be evaded through the simple expedient of proffering an expert in lay witness clothing.'" (Id. quoting the Fed. R. Evid. 701 Advisory Committee Note).

As the Court noted, "[Septech's President] intended to testify to his expectation of millions of dollars in profits from a brand new drug, which had not been approved by the FDA, which still needed a corporate partner, and for which no competitive market analysis had been conducted. It is difficult to imagine how anyone in this situation could possess the necessary personal knowledge to give a useful lay opinion based on his perception and it is clear that [the President] did not have such knowledge." The Court noted that the President had no personal knowledge of the market for the pharmaceutical.

Without the President's testimony, Septech had no evidence to support its lost profits theory and the District Court barred Septech from arguing this issue to the jury.

In affirming the District Court's rejection of the lost profits theory, the Seventh Circuit indicated that Septech needed competent expert testimony to support the lost profits theory. Having no such testimony, Septech attempted to rely on the testimony of its President, a lay witness. The President, however, was not competent and lacked sufficient personal knowledge, to give such testimony.

The Septech case is the latest in a series of cases decided by the Seventh Circuit on issues arising where a party attempts to obtain expert testimony from a lay or fact witness.

The leading case is Musser v. Gentiva Health Services, 356 F.3d 751 (7th Cir. 2004). In Musser, the plaintiff failed to disclose any expert testimony. Plaintiff argued that the failure to make the disclosure was harmless because it had disclosed several doctors as treating physicians. The district court held that the disclosure that certain witnesses were treating physicians violated Rule 26(a) because the defendant was not informed that plaintiff was going to call the treating physicians as expert witnesses.

The district court, pursuant to Rule 26 and Rule 37(c)(1) struck the proposed expert testimony as a sanction. The Seventh Circuit affirmed and held that, pursuant to Rule 26, all opinion testimony must be disclosed. The Court held: “Thus, all witnesses who are to give expert testimony under the Federal Rules of Evidence must be disclosed under Rule 26(a)(2)(A).” Id. at 755 (emphasis in original); see also Hammel v. Eau Galle Cheese Factory, 407 F.3d 852 (7th Cir. 2002). The Seventh Circuit noted that the deposition taken of an opinion witness is much different than the deposition taken of a fact or occurrence witness. The opposing party should be informed that the witness will be offering opinion testimony so that it can make proper preparations for trial.

Conclusion:

The Septech v. Immitech case again illustrates the importance of (a) determining whether or not an expert is necessary long before trial; (b) finding such an expert; and (c) disclosing the expert before trial. Rule 702 requires a lay witness who intends to give expert testimony to have personal knowledge - something that is often impossible to demonstrate where opinions are offered.

Edward X. Clinton, Jr.

Copyright 2009

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IFC Credit Corp. v. Burton Industries, Inc. 536 F.3d 610 (7th Cir. 2008) - This Case Illustrates the Importance of "Delivery and Acceptance."

The Burton Industries case is another chapter in the saga of Norvergence, a company the Seventh Circuit has described as a "bogus telecommunications provider."

Norvergence and Burton entered into a five year contract for telecommunications services.

Norvergence then sold the contract to IFC Credit Corp., a finance company.

IFC sued to enforce the equipment lease, but the district court and the Seventh Circuit granted summary judgment in favor of Burton on the ground that although a lease was signed, the equipment was never delivered to Burton, installed at Burton's place of business or "delivered and accepted."

As the Seventh Circuit noted the Equipment Rental Agreement contained a "hell-or-high-water clause," stating that the lessee's obligation to pay was "'unconditional despite equipment failure, damage, loss or any other problem." The Equipment Rental Agreement also contained a clause limiting any claims that the Lessee could bring against any company that purchased the Equipment Rental Agreement from Norvergence. That clause prohibited the lessee from asserting against the Finance Company any "'claims, defenses or set-offs'" it might have against Novergence. Third, and most importantly, the Equipment Rental Agreement stated that it was not binding until the equipment "'was mounted in [Burton's] phone closet." Finally, the Equipment Rental Agreement contained a merger or integration clause providing that the Agreement was the sole agreement between the parties and that oral promises not contained in the Equipment Rental Agreement would not be enforced.

Norvergence delivered a box of equipment to the Lessee, which signed a Delivery and Acceptance Agreement.

However, the Norvergence equipment was never "mounted" in Burton's phone closet.

Thus, the Seventh Circuit held that the obligation to pay was subject to a condition precedent - the installation of the Norvergence equipment in Burton's phone closet. As the Court held "because that condition never occurred, it was as if the Equipment Rental Agreement - along with its "hell-or-high-water" and "assignment clauses- never existed. Thus, the Equipment Lease never existed and was not binding. Thus, the Court held that no contract existed because a condition precedent - installation - was not met. See id., citing Quake Contruction Inc. v. Am. Airlines, INc. 565 N.E.2d 990, 993-94 (Ill. 1990) (stating no contract existed where conditions precedent to contract formation were not met.).

The Burton Industries opinion is thoughtful and well-written. Its holding is consistent with well-settled principles of equipment leasing. This case again illustrates that in the world of equipment leasing, delivery and acceptance is vital to an enforceable equipment lease.

Edward X. Clinton, Jr.

Copyright 2009

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The Sad Tale of Norvergence Illustrates the Unique Law Applicable to Finance Companies

Most people think that if a product does not work, you should not have to pay for it. This is usually true. It is not true when a finance company or a commercial factor purchases the promise to pay from the original vendor.


So, the transaction works like this. Vendor A sells a product or leases a product to Customer B. The contract says that Customer B will make payments for a five-year period. Vendor A then sells the right to collect payments to Commercial Factor C (a finance company) for cash. Vendor A remains liable on the contract and is required to complete performance. So if the equipment needs to be serviced, Vendor A is required to do it for the entire five year period. How does Commercial Factor C make money? It discounts the expected payments by the cost of money plus a profit percentage. Usually the finance company will earn a profit. However, if the underlying vendor disappears, the finance company will have to resort to litigation to collect.


The United States Court of Appeals for the Seventh Circuit decided two significant equipment leasing cases in 2008. Both cases involved Norvergence, a bankrupt supplier of phone equipment.


The cases are: IFC Credit Corp. v. United Business & Industrial Federal Credit Union, 512 F.3d 989 (7th Cir. 2008) and IFC Credit Corp. v. Burton Industries, Inc. 536 F.3d 610 (7th Cir. 2008). These are some of the many lawsuits spawned by Norvergence.


Norvergence sold a piece of telephone equipment and required its customers to sign a contract requiring them to make payments for many months.


According to the Court, the product sold by Norvergence, was not in any way special. Indeed, it was an ordinary telephone switching box. Ultimately, Norvergence collapsed and stopped providing services. When Norvergence collapsed, many of its customers stopped paying for the service.


The Plaintiff, IFC Credit was a commercial factor that "bought the right to payments under Novergence contracts." IFC Credit brought numerous lawsuits to enforce the contracts it purchased from Norvergence. IFC Credit claimed to be a holder in due course, which meant that it had no knowledge of any problems with the equipment when it purchased the Norvergence contracts.


In the cases, the customer would attempt to assert a defense to IFC Credit's claim for payment. The customer would typically claim that Norvergence lied when it sold the equipment or that the equipment did not work "as promised."


Judge Easterbrook rejected these arguments: "But IFC, and simliar entities claim to be holders in due course. If they have this status, then personal defenses that the customers could have asserted agasint Norvergence are unavailable, and the customers must pay IFC even though Norvergence told lies to make the sales"


The specific issue in the case was whether the provision in Norvergence's contract waiving a jury trial was enforceable. The Seventh Circuit held that the waiver was binding and reversed the district court's decision.


This case is an excellent example of how finance companies and commercial factors are immune from typical contract defenses to payment. The law, though well-settled, is contrary to the lawyer's typical gut reaction that the customer should be able to raise a defense if the equipment did not work "as promised."


Edward X. Clinton, Jr.
Copyright 2009

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Topics of Interest In Commercial Law

This blog will cover topics of interest in the commercial world and which come up from time to time in our cases. We principally focus on Illinois law, but may discuss important cases from other states and jurisdictions.

Edward X. Clinton, Jr.
Copyright 2009

Disclaimer: this blog does not constitute legal advice to you or create an attorney-client relationship with you. This blog is an expression of our opinions only. Moreover, this blog is not a solicitation of any kind.

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Finance Leasing

We recently completed a finance lease case. The following provides some of our thoughts on the subject:

Question: If I lease a computer or an office machine, such as a copier, can I withhold payment from the finance company if the computer or office machine does not work “as promised?”

Answer: No, the lessor must pay no matter what under Illinois Common law and the Uniform Commerical Code.

A. Legal Framework – Computer Form Contracts Are Enforceable For Important Policy Reasons.

In our society almost everyone who is literate has or uses a computer. Some computers are purchased; others are leased for a period of time. All computer leases in Illinois are governed by the Uniform Commercial Code. See Walter E. Heller v. Convalescent Home, 365 N.E.2d 1285 (Ill. App. 1^st Dist. 1977) (holding that Article 2 of the UCC applies to computer leases).

To avoid costly litigation with end users and to clarify their obligations, all computer companies have required end users to enter into written contracts, here known as the Equipment Leases and Software Licenses. These contracts are universally enforced by Illinois courts and the Seventh Circuit.

Moreover, as everyone knows, computers sometimes crash, freeze up or stop working – often for no apparent reason. For this reason almost all computer licenses (software or equipment) specifically disclaim the implied warranty of merchantability and fitness. See Robert W. Gomulkiewicz “The Implied Warranty of Merchantability In Software Contracts: A Warranty No One Dares To Give And How To Change That, 16 J. Marshall J. Computer & Info. L. 393 (1997). As a result, software companies do not typically warrant that their software will work. Instead, they disclaim warranties, including the implied warranty of merchantability and the implied warranty of fitness for a particular purpose.

B. Illinois Law Offers State of The Art Protection For Software Companies And Finance Companies.

Illinois law contains state of the art protections for computer companies and companies that finance computer and equipment leases. The Illinois Courts have a long (and unbroken) history of enforcing equipment leases and software licenses. See e.g., Christensen v. Numeric Micro, 503 N.E.2d 558 (Ill. App. 2d Dist. 1987) (holding that finance company could collect full payment from end user where the end user claimed that the computer “would not operate, and, when started, it began smoking.”); Walter E. Heller v. Convalescent Home, 365 N.E.2d 1285 (Ill. App. 1^st Dist. 1977) (enforcing a computer lease including provisions requiring the customer to pay even if the customer claimed some problem with the product and which prohibited the customer from suing the finance company directly); Trans Leasing v. Schmer, 550 N.E.2d 1285 (Ill. App. 1^st. Dist. 1990) (enforcing equipment lease against unconscionability challenge); see also Imaging Financial Services v. Graphic Arts, Inc., 172 F.R.D. 322 (N.D. Ill. 1997) (Keys, J.) (applying New York law and holding that the disclaimer of express and implied warranties in a computer lease is valid and binding); GreatAmerica Leasing Corporation v. Cozzi Iron & Metal, Inc., 76 F.Supp. 2d 875 (N.D. Ill. 1999) (Bucklo, J.) (enforcing equipment lease to bar claims of oral misrepresentations and following the Heller and Trans Leasing cases). These decisions constitute the Illinois law that is applicable to this diversity case.

Two Seventh Circuit cases authored by Judge Easterbrook and one United States Supreme Court decision have greatly increased the protections for computer companies and equipment leasing companies. See ProCD v. Zeidenburg, 86 F.3d 1447 (7^th Cir. 1996) (“shrinkwrap licenses are enforceable unless their terms are objectionable on grounds applicable to contracts in general (for example, if they violate a rule of positive law, or if they are unconscionable)”); Hill v. Gateway 2000, Inc. 105 F.3d 1147 (7^th Cir. 1997) (enforcing arbitration clause contained in Gateway’s shrinkwrap license – customer could opt out by returning the computer within 30 days); see also Carnival Cruise Lines v. Shute, 499 U.S. 585 (1991) (enforcing a forum-selection clause included among three pages of terms attached to a cruise ship ticket). These three decisions expressly allow a computer company to put a time limit on the end user’s revocation of acceptance. In Hill, the customer was required to return the equipment in 30 days. The decisions, recognizing the validity of a contract printed on the materials accompanying the software or hardware, are a huge benefit to the computer industry. Otherwise, computer companies would be forced to obtain a user's signature on a written contract, a tedious and highly costly process.

C. The UCC Law On Finance Leases Provides Bullet-Proof Protection To Finance Companies.

The drafters of the Uniform Commercial Code also included powerful protections for companies that finance equipment leases. The UCC recognizes the concept of a finance lease used only in commercial transactions like the transactions at issue here. The concept and purpose of a UCC finance lease is that one party provides the goods and another party provides the financing. Where the Lessee uses the goods for commercial purposes, the UCC finance lease law allows the Lessor to include strong warranty disclaimers, provisions that the lease is irrevocable even if there is poor performance (801 ILCS 5/2A-407(1), provisions that the lessee’s obligation to pay is “independent” of any performance obligation and a provision prohibiting the Lessee from suing the finance company. (810 ILCS 5/9-403). These provisions have been universally upheld by Illinois Courts. See cases cited below; see also 19 Williston on Contracts §53:19.

Many equipment leases and computer leases contain this provision: “The parties agree that Article 2A of the Uniform Commercial Code applies to this agreement and the lease hereunder and that this Agreement and the lease hereunder will be considered a finance lease under the Code.”

Section 5/2A-407 Irrevocable Promses; Finance Leases.

(1) In the case of a finance lease that is not a consumer lease the lessee’s promises under the lease contract become irrevocable and independent upon the lessee’s acceptance of the goods.

(2) A promise that has become irrevocable and independent under subsection (1); (a) is effective and enforceable between the parties, and by or against third parties including assignees of the parties; and

(b) is not subject to cancellation, termination, modification, repudiation, excuse, or substitution without the consent of the party to whom the promise runs.

Section 9-403 Agreement Not To Assert Defenses Against Assignee.

(b) Agreement not to assert claim or defense. Except as otherwise provided in this Section, an agreement between an account debtor and an assignor not to assert against an assignee any claim or defense that the account debtor may have against the assignor is enforceable by an assignee that takes an assignment.

These two provisions of the UCC essentially prevent any lessor of a computer or office machine from withholding payment to a finance company on the ground that the computer or machine did not work “as promised.”

D. Strong Policy Reasons Support The UCC Finance Lease Provisions.

The UCC finance lease provisions give finance companies bullet-proof protection from performance-related claims by lessees: the Finance company’s right to collect is unaffectd by any claimed complaints about the computer systems. The purpose of these protections is to allow commercial parties to more easily finance equipment and to protect the finance company from garden variety breach of lease claims by the Lessees. See 19 Williston on Contracts §53:19 (discussing policy reasons supporting the UCC’s Finance Lease provisions). See Wells Fargo Bank, N.A. v. BrooksAmerica Mortgage Corp., 419 F.3d 107 (2d Cir. 2005).

This protection for the finance company is important because the finance company only provides the money. It does not provide the computer or the equipment or the performance required - i.e., an 800 number and technical support people.

Wells Fargo is a classic example of a finance lease for computers. Wells Fargo financed a business’s purchase of some computers. The lessee signed a standard equipment lease and signed a Delivery and Acceptance Certificate. The lessee refused to pay on the ground that the computers didn’t work as expected. In response to the lessee’s claim that the computers did not perform as expected, the Wells Fargo Court held: “non-performance by the lessor is irrelevant; at least when the lessee was a sophisticated party and the party asserting the right to rental payments is a good-faith assignee.” (Emphasis supplied).

In Wells Fargo, the bank is basically saying - we provided the money only - it's not fair to make us service the equipment or make sure the equipment is working properly. It's simply too costly for the bank or finance company to do that.

In sum, the Illinois cases the Seventh Circuit’s cases and the UCC finance lease provisions – in connection with properly drafted UCC equipment leases - flatly bar any user from refusing to pay on the ground that the computer system did not work or did not meet the user’s expectations. The Illinois cases also bar the user from making raising any product issues or product performance issues as a defense or offset to the finance company's claim for payment. See e.g, Trans Leasing, Christensen, Heller, Pro Cd, Hill as cited above.

The Illinois cases place an insurmountable burden on the purchaser who claims that the computer did not work or the software didn’t function or the photocopier did not work as expected. No commercial purchaser in Illinois has ever successfully challenged an equipment or computer lease. See Trans Leasing, Christensen, see also 19 Williston on Contracts § 53:19 (4^th Ed.).

Many equipment leases contain a clause known as the "Hell or High Water" clause which requires the lessee to pay for the leased goods no matter what. This clause provides added strength to a UCC finance lease and makes the lease unbreakable.
In the industry, the clause that a business customer must pay under a financing lease even if the equipment is defective is known as a “Hell Or High Water Clause.” See e.g., Wells Fargo Bank v. BrooksAmerica Mortgage Corp., 419 F.3d 107 (2d Cir 2005) (holding that the “hell or high water clause at issue here makes BrooksAmerica’s obligation to pay rent absolute and unconditional.”); De Lage Landen Financial v. M.B. Management Co., Inc., 888 A.2d 895 (PaSuper 2005) (enforcing Hell or High Water clause in lease); 19 Williston on Contracts §53:19.

Edward X. Clinton, Jr.

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