In a unanimous opinion, the California Supreme Court (Chin, J.) held in Sargon Enterprises, Inc. v. University of Southern California, et. al (No. S191550, 11/26/2012) (“Sargon”), that trial courts, in their role as “gatekeepers” of the admissibility of expert testimony, may exclude testimony based on the application of potentially sound scientific data in a manner that does not logically support the expert’s reasoning. This decision clarifies decades-long uncertainty about whether a trial court may exclude expert opinion testimony based solely on a determination that it was based on unreliable types of information, or whether, in addition, such testimony could be excluded because the court found the expert’s reasoning itself was flawed.
Sargon arose from an alleged breach of contract between Sargon Enterprises (“Sargon”), inventor of an innovative dental implant, and the University of Southern California (“USC”), which had contracted with Sargon to perform a five-year clinical study of the effectiveness of the implant and its new, streamlined insertion procedures but never prepared final reports as had been agreed. At trial, Sargon contended that had USC completed a favorable clinical study report, Sargon, which then employed fewer than twenty people and had profits in 1998 of $100,000, would have become one of the top six worldwide market share leaders in the dental implant industry. To prove future lost profits, Sargon sought to admit the testimony of its expert witness, a certified public accountant and attorney (“Skorheim”). Skorheim offered testimony that there was a correlation between the degree of a product’s innovation and the degree of market share held by any given company. He theorized that because Sargon’s dental implant invention and its streamlined insertion procedure was highly innovative, Sargon would, over time, have captured a high proportion of the worldwide dental implant market. Skorheim then used a scientific market share approach to show that Sargon sustained a loss of future profits in a range from $220 million to more than $1 billion. In pretrial motions, the trial court excluded Skorheim’s testimony, finding his methodology too speculative to permit the evidence to be admissible. The Court of Appeal reversed the trial court’s ruling. On remand, the trial court conducted an extensive evidentiary hearing over eight days, consisting primarily of testimony from Skorheim. Again finding the testimony and its bases speculative, the court excluded his opinions in a lengthy written ruling. On a second appeal, the Second District Court of appeal reversed the trial court’s ruling.
The California Supreme Court reversed the appellate court’s decision finding that the trial court had not abused its discretion in excluding the expert’s testimony and, in so doing, clarified the trial court’s role in admitting expert testimony and setting a framework for the admissibility of opinion testimony as to claimed lost profits. The court recognized the delicate balance between the need to exclude unreliable evidence and the risk of setting the evidentiary threshold so high that the trial judge is essentially making a determination of an expert’s credibility. These considerations are especially visible in the context of determining admissibility of expert testimony relating to future lost profits, which are inherently uncertain. In reaching its decision, the court relied heavily on its construction of Evidence Code sections 801(b) and 802.
Evidence Code section 801(b) provides, in relevant part: “If a witness is testifying as an expert, his testimony in the form of an opinion is limited to such an opinion as is: [. . .] [b]ased on matter . . . 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, unless an expert is precluded by law from using such matter as a basis for his opinion.” The court held that section 801(b) permits courts to review the type of matter (i.e., the substance of the information) relied upon by the expert in making its ruling.
On the other hand, Evidence Code section 802 allows courts to review the reasons underlying an expert’s opinion. Section 802 provides, in pertinent part: “A witness testifying in the form of an opinion may state on direct examination the reasons for his opinion and the matter . . . upon which it is based, unless he is precluded by law from using such reasons or matter as a basis for his opinion. The court in its discretion may require that a witness before testifying in the form of an opinion be first examined concerning the matter upon which his opinion is based.” The court reasoned that “the reasons for the expert’s opinion is part of the matter on which they are based just as is the type of matter.” As a result, an expert’s reasoning itself may be considered in a judge’s determination of admissibility in addition to the substance relied upon by the expert.
In applying these standards, the California Supreme Court found that the Superior Court had not abused its discretion as the trial judge reasonably concluded that Skorheim based his lost profit estimates on the circular reasoning that Sargon would become a market share leader because there is a direct correlation between market share and innovation. Skorheim’s opinion, however, had no evidentiary basis as nothing he presented showed that the degree of innovation of companies correlated with the degree of difference in the market shares of those companies. In fact, Skorheim agreed that a company with a smaller market share could be more innovative than a company with a larger share. The court agreed that the testimony was also speculative in other regards. For example, Skorheim assumed that Sargon would have developed competitive marketing, research, and development departments and that one of the current top six market share holders would lose its position and Sargon would replace it.
Sargon represents a widening of judicial authority to exclude expert testimony based on a court’s determination that an expert’s own reasoning is unreliable or speculative. The ruling puts California law closer to the federal standard, which allows judges to question the credibility of expert evidence. (See Daubert v. Merrell Dow Pharmaceuticals, Inc. (1995) 516 U.S. 869 and Kumho Tire Co. v. Carmichael (1999) 526 U.S. 137.) The court cautioned, however, that its ruling did not go so far as to allow judges to engage in credibility determinations, a realm long left to the jury. Rather, a trial judge’s role remains to act as the gatekeeper who filters out only that testimony which is so speculative, irrelevant or unreliable that it would not assist a trier of fact to evaluate the issues before it.
This document is intended to provide you with information about professional liability law related developments. The contents of this document are not intended to provide specific legal advice. This communication may be considered advertising in some jurisdictions.