Wall Street Journal reporter protected by N.Y. shield law

A former reporter for The Wall Street Journal is protected from testifying in a lawsuit between the financial firm Goldman Sachs and a former client, the U.S. Court of Appeals in New York City (2nd Cir.) ruled yesterday.

Jesse Eisinger wrote about the financial and customer misrepresentations by Lernout & Hauspie. L&H was a Belgian software company that went bankrupt and saw several executives sentenced to prison terms for inflating the company's revenues, according to a Bloomberg news article. The court held that Eisinger was protected by the New York reporter's shield law from testifying about unpublished information he obtained in the course of his reporting.

Janet and James Baker, founders of Dragon Systems, which distributed the popular voice recognition software Dragon Dictation, sued Goldman for failing to "exercise proper diligence in investigating and analyzing" the customer relationships and financial accounting of L&H, which had sought to buy Dragon Systems, according to the opinion. The Bakers had merged with L&H in exchange for a large amount of stock, which became worthless when the firm collapsed.

The Bakers had sought to depose Eisinger, who had investigated Lernout & Hauspie's claims regarding their customers and their earnings, according to the opinion. The District Court quashed the subpoena served on Eisinger, finding that he was protected by the New York reporter's shield law, and the Court of Appeals affirmed.

Eisinger published two articles, in February and August 2000, relevant to the case. In the first, Eisinger quoted an analyst at Lehman Brothers who had raised concerns about L&H's earnings and stock valuation. This article was published just before the announcement of the merger, according to the opinion.

For the second article, Eisinger had communicated with a number of supposed-customers of L&H, whose names the company's CEO had volunteered. Of the 30 whom he had contacted, 13 responded, with some of them saying that they had not actually done business with L&H, or that L&H had exaggerated the extent of their business, according to the opinion.

Under New York law, journalists have an absolute privilege from testifying with regard to news obtained confidentially, but a qualified privilege for news that is both unpublished and not obtained "under a promise of confidentiality," the court wrote. The information in this case implicated the qualified privilege.

To overcome the qualified privilege, a party must make a "clear and specific showing" that the information requested is "highly material and relevant," "critical or necessary to the maintenance of the party's claim, defense, or proof an issue material thereto," and "not obtainable from any alternative source."

The Bakers had sought only to have Eisinger testify to the truth of what he reported, a matter which was not privileged, according to Alan Cotler, who represents the Bakers. The court rejected this argument because Goldman would almost certainly delve into privileged matters on cross-examination, such as the Journal's newsgathering methods.

Just because the Goldman may get into privileged matters on cross, the Bakers should have been allowed to depose Eisinger on non-privileged matters, Cotler said. "You can't let the tail wag the dog," he said.

The court disagreed. If a party, on cross-examination, could overcome a reporter's privilege by showing that they had a "critical need" to question the witness on protected matters, even if direct examination had not involved privilege matters, this "would undermine the privilege created by New York's statutory shield law."

The privilege issue is a small part of the larger litigation, which is going on in federal court in Boston, Cotler said.