When James and Janet Baker filed suit against Goldman Sachs & Co., alleging that inadequate research by the investment bank cost them $300 million, they likely never intended to test the scope of New York’s journalist shield law.

But their efforts to force Wall Street Journal reporter Jesse Eisinger to substantiate their claim against Goldman ended up before the 2nd Circuit, which, on Feb. 15, upheld a ruling from the Federal District Court for the Southern District of New York, quashing their subpoena of Eisinger.

In oral arguments before the appeals court, the Bakers’ attorney said he would only ask the reporter whether information published in a story he wrote was “accurately reported” and would not delve into the newsgathering process—an area protected by the shield law.

But in its ruling in Baker v. Goldman Sachs & Co., the 2nd Circuit said that even if the questioning was limited to nonprivileged information, it would inevitably open the door to questions about privileged matters on crossexamination. In doing so, the court clarified the extent to which the state shield law protects reporters.

“[The plaintiffs’ attorney] said, ‘My question wouldn’t involve privileged information—cross-examination might, but that’s not my problem,’” says Douglas Lee, a partner at Ehrmann Gehlbach Badger & Lee. “The 2nd Circuit slapped that down pretty easily, as it should have.”

The appeals court also upheld the district court’s finding that the Bakers had not shown the reporter’s testimony “would be critical and relevant” to their case against Goldman, a test for an exemption from privilege.

“This decision is a good example of a case in which journalist testimony is sought because it would be helpful [but not critical] to have it, but that is not the standard under this or any other state’s shield law I am aware of,” says Weil, Gotshal & Manges Counsel Jonathan Bloom.

Quirky Element

The underlying case involved Goldman Sachs’ role as adviser to the Bakers in a merger of their company, Dragon Systems, with Lernout & Hauspie (L&H). The couple claimed breach of contract and fiduciary duty, saying Goldman failed to adequately research L&H’s finances, resulting in the loss of their $300 million investment when L&H filed for bankruptcy within months of the merger.

The Bakers subpoenaed Eisinger because he wrote articles on L&H’s finances, finding that L&H had overstated the extent of its client base by listing Asian companies that were not clients. They wanted Eisinger’s testimony on how he got the information to show that Goldman easily could have done the same.

Eisinger refused the subpoena for his videotaped testimony, invoking the New York shield law. He claimed qualified privilege, which protects information that is unpublished and not obtained under a promise of confidentiality.

The district court found that the information sought would include “unpublished details of the newsgathering process” that was covered by the shield law, and that the Bakers had failed to show the testimony would be “critical and relevant” to their claim.

On appeal, the Bakers changed their argument, saying they would only ask Eisinger if his published reports, which were not subject to privilege, were “accurately reported.”

“The plaintiffs attorney’s change of position on appeal injected a quirky element into the analysis,” Lee says.

The 2nd Circuit said cross-examination on that question “would turn the [shield] statute on its head by allowing an evasion of the privilege through a question deliberately framed to (supposedly) be outside the scope of the privilege to have the effect of compelling testimony on cross-examination within the privilege.”

Defending Journalists

The case serves as a reminder that state laws are critical to the protection of reporters’ privilege in the absence of a federal shield law or Supreme Court recognition of protection under the First Amendment.

“The law would appear to be straightforward; there simply is no constitutionally mandated reporters’ privilege,” says Dennis Olson, a professor at the University of Detroit Mercy School of Law. “The whole notion of a reporters’ shield law is entirely discretionary on the part of the states.”

In the 1972 case Branzburg v. Hayes, the Supreme Court said the First Amendment doesn’t protect reporters from testifying before a grand jury. Some courts of appeal have relied on a concurring opinion by the late Justice Lewis Powell to carve out exceptions to Branzburg, primarily requiring the government to show the testimony is critical. Efforts to overturn Branzburg by passing a federal shield law died in the wake of WikiLeaks’ publication of classified information, which complicated the question of who would qualify for protection under the proposed law, according to Bloom. The federal issue continues to be tested, most recently in a case pending before the 4th Circuit (See “Risen’s Reasoning”).

In the meantime, state legislatures have stepped in. In addition to the New York statute cited in Baker, 39 states and the District of Columbia have shield laws on the books.