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Article: Sargon Enterprises, Inc. v. University of Southern California: A New “Gatekeeper” Role for the Admission of Expert Testimony in California State Court

October 01, 2013
Business Litigation Reports

What is the likely effect of the California Supreme Court’s decision in Sargon Enterprises, Inc. v. University of Southern California (“USC”), 55 Cal. 4th 747 (2012), on the admissibility of expert testimony in California? This major decision, in which Quinn Emanuel won a 7-0 victory for USC, upheld a trial court’s exclusion of expert lost profits testimony as unduly speculative and unreliable. Sargon, a small dental implant company, claimed that had USC completed a clinical study of the efficacy of a dental implant device, Sargon would have rocketed from a tiny market share to a market share as high as any of the six leading dental implant device makers in the world, earning profits from $220 million to as high as $1.2 billion, depending on how “innovative” the jury determined the plaintiff’s device to be. After lengthy pretrial evidentiary hearings, the trial court agreed with Quinn Emanuel that the expert testimony should be excluded as speculative and unable to assist the jury in determining damages. (Id. at 765.)

While the Court of Appeal reversed the trial court in a 2-1 decision, holding that the jury was entitled to hear the excluded testimony and that the trial court’s ruling would be “tantamount to a flat prohibition on lost profits in any case involving a revolutionary breakthrough in an industry,” a unanimous California Supreme Court reversed and reinstated the trial court’s decision to exclude. It cited California’s Evidence Code §§ 801(b) and 802 to conclude that “the trial court acts as a gatekeeper to exclude expert opinion testimony that is (1) based on a matter of a type on which an expert may not reasonably rely, (2) based on reasons unsupported by the material on which the expert relies, or (3) speculative.” (Id. at 771-772.)

To understand the likely effect of Sargon v. USC in California state court, it is useful to recall how Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), and Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999), fundamentally changed the process for determining the admissibility of expert testimony in federal court. In Daubert, the Supreme Court ruled that the Federal Rules of Evidence, not the “Frye” test (based on Frye v. United States, 54 App. D.C. 46 (1923)), governed the admissibility of expert testimony. The Frye test required that the techniques used by the expert, and the data to which those techniques were applied, be “generally accepted” as reliable by experts in the field. Justice Blackmun wrote for the Court that the Frye test did not survive the 1975 adoption of the Federal Rules of Evidence, observing that “a rigid ‘general acceptance’ requirement would be at odds with the ‘liberal thrust’ of the Federal Rules and their general approach of relaxing the traditional barriers to ‘opinion testimony.’” (509 U.S. at 588.) The Court held instead that Frye’s “austere standard, absent from and incompatible with, the Federal Rules of Evidence, should not be applied in federal trials.” (Id. at 589.) Six years later, Kumho Tire made express what was implicit in Daubert —the Daubert test applied to all expert testimony, not simply “scientific” expert testimony.

Daubert replaced the Frye “general acceptance” test with the now familiar “relevant” and “reliable” test—if the district court determines that the proffered expert testimony is both relevant to the questions the fact-finder would answer and reliable, then it should be admitted, whether or not it had been “generally accepted” by the relevant expert community. “The inquiry envisioned by [Federal] Rule [of Evidence] 702 is, we emphasize, a flexible one. Its overarching subject is the scientific validity—and thus the evidentiary relevance and reliability—of the principles that underlie the proposed submission.” (509 U.S. at 594-595.) In short, in Daubert and Kumho Tire, the Court replaced the “austere” Frye test with a more “flexible,” more “liberal,” Rule 702 “relevant” and “reliable” test.

There is a good deal of irony in that. The actual impact of Daubert and Kumho Tire has been to make possible the exclusion of expert testimony from leading experts in economics and other disciplines, an outcome virtually unthinkable under Frye. The reason for this is that the Daubert test gave the trial court an important role—that of “gatekeeper.” Under Frye, qualifying an expert’s testimony was rote: the examiner would elicit from the expert the techniques he had used and the data to which he had applied them, then elicit that those techniques and data were “generally accepted” as reliable by experts in the field. The court had little to do but nod. Daubert and Kumho Tire changed that: “under the Rules [of Evidence] the trial judge must ensure that any and all scientific testimony or evidence admitted is not only relevant, but reliable”—or what the Court characterized as “a gatekeeping role for the judge.” (Id. at 589 & 597; emphasis added.)

This background provides a suggestive context to predict the likely effect of Sargon v. USC. While the California Supreme Court did not alter California’s adoption of the Frye test (called Kelly-Frye in California, after the California case which adopted the Frye test), Sargon contains two rulings that will likely prove important to practitioners in California state court. One is its ruling that excluded lost profits testimony was “speculative” because the plaintiff was an “unestablished” company and the expert had based the future profitability of the plaintiff not on its own (limited) financial performance, but on the performance of much larger “established” companies that were not “substantially similar” as to any objective business metric. The opinion could make it difficult in the future for a newly-established business to claim lost profits entirely out-of-line with its more limited, start-up earnings; as the Court observed, the “trial court’s ruling merely meant that Sargon could not obtain a massive verdict based on speculative projections of future spectacular success.” (Id. at 781.)

A second holding—Sargon’s articulation, based on the California Evidence Code, of a “gatekeeper” role for California’s trial courts—will likely have a broader impact, just as Daubert’s articulation, based on the Federal Rules of Evidence, of a gatekeeper role for federal trial courts has had on federal practice. Sargon tells California trial courts that they have an affirmative duty at the gate to ensure the jury does not hear expert testimony based on unreasonable comparisons, or not supported by the materials on which the expert purports to rely, or otherwise speculative. California trial courts have always had the duty to exclude such testimony, but in practice some trial courts have been reluctant to exclude expert testimony, reasoning that the many alleged errors or faulty assumptions in the expert’s reasoning identified by the adverse party should make excellent fodder for cross-examination, but affect only the weight to give to the evidence, not its admissibility. Sargon’s express identification of a “gatekeeper” role may change that. As was the case in federal court with the application of the Daubert gatekeeper role, Sargon is likely to raise the hurdle of the admissibility of expert testimony as a practical matter, which could prove to be case dispositive where the plaintiff badly overreaches in its damages case.