January 2013: Landmark Victory for USC on Expert Opinion before the California Supreme Court

The firm won a unanimous victory in the California Supreme Court that not only protected the University of Southern California from more than $1.2 billion in alleged lost profits, but also established that trial judges have a duty to act as “gatekeepers” against unreliable expert witness testimony, a landmark ruling that will have an important impact on business litigation in California.

In 1996, USC contracted with a small company, Sargon Enterprises, Inc., to conduct a clinical study of a new dental implant developed by Sargon. In a trial at which USC was represented by another law firm, a jury found that USC had breached its contract and awarded Sargon several hundred thousand dollars in direct damages. Sargon appealed, claiming that it was entitled to lost profits as well, and the Court of Appeal remanded the case for a new trial on lost profits. On remand, Sargon’s damages expert opined that the company’s lost profits ranged from $220 million to $1.18 billion. The expert arrived at these large numbers by positing that market share in the dental implant industry is based primarily on “innovativeness” and that due to the “innovativeness” of the company’s implant, absent breach of the clinical study, Sargon would have become a leader in the global dental implant industry.

Now represented by Quinn Emanuel, USC moved to exclude Sargon’s expert on the ground that his testimony lacked any reliable basis and was speculative. Under the Supreme Court’s 1995 decision in Daubert v. Merrell Dow Pharmaceuticals, Inc., 516 U.S. 869 (1995), federal courts have a duty to exclude such expert testimony, but California law did not clearly impose any analogous duty, and many California trial judges routinely allowed virtually any expert testimony in civil cases to go to the jury, without regard to its reliability. Nevertheless, the firm persuaded the trial judge to review the expert’s lost profits opinions, and after conducting an eight-day evidentiary hearing, the judge excluded the expert’s testimony because it was speculative and lacked any reliable basis.

The Court of Appeal reversed, ruling that any challenges to the expert’s reasoning were for the jury to resolve, but Quinn Emanuel successfully petitioned the California Supreme Court, which grants review in less than 1.5% of civil, to review case. Arguing in the California Supreme Court only two days after being before the U.S. Supreme Court, Kathleen Sullivan, the head of the firm’s appellate group, persuaded the California Supreme Court to overturn the Court of Appeal and rule for USC in a unanimous 7-0 decision.

In addition to protecting USC against $1.18 billion in lost profits, the California Supreme Court’s decision in Sargon Enterprises v. USC establishes that California trial courts have a duty to exclude speculative and unreliable expert testimony. Using language similar to Daubert, the Court held that trial judges have a “gatekeeping” responsibility, which requires them to exclude expert testimony that is based on invalid or unreliable reasoning. This now clearly established responsibility will enable businesses litigating in California courts to exclude speculative and unreliable expert testimony. Also, by bringing California practice more in line with federal practice, the Sargon decision removes a significant incentive for forum-shopping in complex business cases.

The Sargon decision also establishes another principle that may have a wide ranging impact on business litigation. It is well settled that new businesses seeking lost profits bear a heavy burden because they have no track record of profitability. Small businesses such as Sargon frequently claim that they would have grown into much larger companies absent some tort or breach of contact but that they should not be subject to the standard for new businesses because they already were earning some small profit. The Sargon decision makes clear that claims that a small business would grow into a much larger entity are subject to the same burden of proof. This ruling will change the dynamic in cases in which start-ups and other small companies seek large lost profit awards based on growth that they alleged that they would achieve. Moreover, because of California’s leading role in the high-tech industry involving so many start-ups, this aspect of the Sargon decision is likely to influence decisions in other jurisdictions.