Sargon Enterprises, Inc. v. University of Southern California brings California courts more in line with the standards used to assess expert witness testimony in federal court under Daubert and Kumho Tire

On November 26, 2012, the California Supreme Court issued an important opinion in Sargon Enterprises, Inc. v. University of Southern California (Case No. S191500, 11/26/12) clarifying the role that California trial judges play in evaluating the admissibility of expert witness testimony at trial. Finding that trial judges possess wide discretion to exclude unreliable expert testimony, the California Supreme Court recognized that courts have an important “gatekeeper” responsibility regarding expert testimony and brought California courts more closely in line with standards applied in federal court under Daubert v. Merrill Dow Pharmaceuticals, Inc. and Kumho Tire Co. v. Carmichael. Because of the prevalent use of experts in California civil lawsuits, Sargon will have a widespread impact on trials in this state.

1. Background Facts of Sargon

Sargon involved a dispute between Sargon Enterprises, Inc. (“Sargon”), a dental implant company, and the University of Southern California (“USC”) over an agreement to conduct a five-year clinical study of Sargon’s innovative and newly-patented dental implant. After USC failed to prepare final reports for the study, Sargon sued USC for breach of contract. Sargon sought breach of contract damages and additional lost profits damages, which its expert estimated to be between $220 million and $1.18 billion.

Sargon’s claim was tried to a jury. Before trial, the court excluded evidence of Sargon’s lost profits because it determined that those profits were not foreseeable by USC at the time of the contract. The jury found in Sargon’s favor and awarded the company $433,000 in compensatory damages. Sargon appealed the trial court’s exclusion of its lost profits evidence, and the California Court of Appeal reversed and remanded the case back to the trial court.

On remand, USC again moved to exclude Sargon’s lost profits expert, contending that his testimony was speculative. The trial court held an eight-day evidentiary hearing at which Sargon’s expert was the primary witness. To calculate lost profits, Sargon’s expert employed a “market share” approach purporting to determine the share of the worldwide dental implant market Sargon would have gained had USC completed a favorable clinical study and calculate future profits based on that projected share. Sargon’s expert did not base his opinion on Sargon’s historical financial performance. Instead, he took the position that Sargon would have become one of the “Big Six” dental implant companies due to its “innovativeness” and that Sargon’s future profits would have been comparable to those of the dental implant market leaders. Based on those assumptions, Sargon’s expert presented a damages model that calculated four alternative damages scenarios based on the jury’s determination of the “degrees of innovativeness” of the implant. Those scenarios calculated Sargon’s lost profits as ranging from $220 million to $1.18 billion.

The trial court held that Sargon’s expert’s lost profits testimony was unduly speculative and inadmissible. The trial court found that while a market share analysis could be a valid approach to calculating lost profits, it was unreasonable for Sargon’s expert to base his opinion on data that ignored Sargon’s historical performance, failed to compare Sargon to companies with similar historical financial data, and ignored material dissimilarities between Sargon and the market leaders.

The trial court also found that Sargon’s expert’s conclusion that Sargon’s innovativeness would have resulted in Sargon’s rise into a market leader in the dental implant market was inherently speculative and failed to assist the jury in its fact-finder function. Sargon’s expert’s opinion that “innovativeness” inevitably led to increased market share was wholly subjective and did not rest on a reasonable reading of the data. Furthermore, there was no valid evidentiary basis to equate the degree of innovativeness with the degree of difference in market share. As observed by the trial court, “[b]ecause there are no standards or guidelines to determine ‘degrees of innovation,’ it relegates the question of determining potentially more than a billion dollars in damages to pure speculation.”

Following the trial court’s ruling, Sargon appealed. After the California Court of Appeal again reversed the trial court, USC petitioned the California Supreme Court for review. The California Supreme Court granted review and affirmed the trial court’s decision to exclude Sargon’s expert.

2. The Sargon Court Found That Trial Judges Possess Wide Discretion to Evaluate Expert Witness Testimony

The California Supreme Court noted that trial judges face competing interests of allowing juries to decide cases based on sufficient information, on the one hand, and excluding evidence that may be misleading or unreliable, on the other. To address those concerns, “trial courts have a substantial ‘gatekeeping’ responsibility” when evaluating expert witness testimony. As part of that inquiry, trial judges may not only consider the type of material that an expert relies upon to form an opinion, but also whether the material actually supports the expert’s reasoning. If the trial judge concludes that the data does not support the expert’s opinion, the trial judge may exclude the testimony as unduly speculative and unhelpful to the jury.

The trial court’s authority to evaluate and exclude expert opinion, however, must not be used to intrude into the jury’s role in weighing admissible expert opinions. In this regard, the California Supreme Court noted that “[t]he trial court’s preliminary determination whether an expert opinion is founded on sound logic is not a decision on its persuasiveness.” Instead, the trial court should determine whether the matter relied on by an expert “can provide a reasonable basis for the opinion or whether that opinion is based on a leap of logic or conjecture.”

Applying those principles to the case at hand, the California Supreme Court found that the trial judge properly exercised his discretion in excluding Sargon’s expert’s lost profits analysis. The court found that Sargon’s expert based his lost profits analysis on unfounded assumptions about hypothetical increases in market share that ignored Sargon’s actual historical financial data as well as factors that distinguished Sargon from the market leaders. While conceding that lost profits analyses are always speculative to some degree, the court found that there was no logical basis upon which Sargon’s expert could reasonably conclude that Sargon would have attained the substantial increases in market share he projected based on the data he relied upon. The court also agreed with the trial court’s conclusion that there was no valid basis to equate “degrees of innovativeness” with market share, since Sargon’s expert’s reasoning that the most innovative companies would inevitably capture the biggest market share was circular and solely based on subjective interpretation of the data. For these reasons, the court found that the trial judge had appropriately exercised his gatekeeping discretion in keeping such speculative and unfounded testimony away from a jury.

3. Conclusion

Sargon brings California courts more in line with the standards used to assess expert witness testimony in federal court under Daubert and Kumho Tire. In addition, while Sargon involved the exclusion of expert testimony relating to a lost profits analysis, its principles apply equally to a wide variety of other types of expert opinions.

California courts rely upon expert testimony more than virtually any other jurisdiction in the country. Previous research has found that experts have been used in approximately 86 percent of civil trials in California, with an average of 3.3 experts per trial. As a result, Sargon’s impact on civil trials in this state will likely be substantial and immediate, and both parties hoping to introduce expert testimony and parties seeking to exclude expert testimony will be well served by becoming familiar with its principles.