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November 26, 2012

Sargon Enterprises, Inc. v. University of Southern California (2012) 55 Cal.4th 747

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The California Supreme Court re-affirms trial courts, as “gatekeepers” regarding expert testimony, may exclude testimony supporting speculative or conjectural damages.

Sargon Enterprises, Inc. obtained a patent and FDA approval for a dental implant.  Sargon contracted with the University of Southern California School Of Medicine (“USC”) to perform a five-year study on use of the implant.  Sargon sued USC for breach of contract, alleging it failed to properly report results.  Sargon sought damages for lost profits in amounts ranging from $200 million to more than $1 billion.

USC moved to exclude the expert opinion testimony of Sargon’s damages expert, Skorheim.  At an evidentiary hearing, Skorheim testified Sargon would have been a market leader because of its innovative product.  Skorheim did not focus, however, on Sargon’s actual track record of past profitability.

The trial court excluded Skorheim’s testimony as inadmissible because his projections were “wildly beyond, by degrees of magnitude, anything Sargon had ever experienced in the past.” Skorheim compared Sargon to established companies which had little in common with Sargon besides the fact that they all sold dental implants.  Skorheim’s conclusion was not based on any actual historical financial results or comparisons to similar companies, and therefore was not based on a matter of a type on which an expert could reasonably rely.

The Supreme Court agreed with the trial court’s approach, finding expert testimony may not be speculative and lost profit damages may not be speculative.  Under California Evidence Code § 801 the trial court acts as a gatekeeper to exclude speculative expert opinions.  In this role, the court may inquire into the type of material on which the expert relies and whether that material actually supports the expert’s reasoning.

The Court also noted that California Evidence Code § 802 permits the trial court to find the expert is precluded “by law” from using the reasons or matter as a basis for the opinion, and “law” includes constitutional, statutory and decisional law.  Thus, Section 802 authorizes the court to restrict or preclude the type of expert opinion being offered.  In doing so, the trial court can apply case law restrictions to an expert’s “reasons” for his or her opinion, and can conclude that there is simply too great an analytical gap between the relevant data and the expert’s proffered opinion.

The standards set forth Evidence Code §§ 801 and 802 thus provide trial courts, in their roles as “gatekeepers,” may exclude expert testimony (1) based on 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.

As to the specific opinions involved in Sargon Enterprises, lost profits must be proven with reasonable certainty, both as to occurrence and amount.  Lower courts must distinguish between established and unestablished businesses.  For established businesses, lost profits are generally recoverable because they may be ascertained based on past business volume and other reliable data.  For businesses that are not established, lost profits are typically too uncertain, contingent, or speculative to be recoverable.  Only when the evidence is not speculative and is reasonably reliable, are the lost profits of an unestablished business recoverable.

The Supreme Court observed that Skorheim’s methodology was speculative because he did not base his analysis on a market share Sargon ever achieved.  Instead, he concluded that Sargon’s market share would have increased “spectacularly” over time to levels far above anything it had ever reached.  Skorheim calculated lost profits based upon a hypothetical increased market share.  The Court concluded that this was speculative evidence upon which an expert may not reasonably rely.

Comment: Sargon Enterprises has some interesting implications for attorney’s professional liability cases.  For one, it reaffirms the control of the trial court to exclude types of opinions based upon matters on which experts may not reasonably rely, opinions that are factually unsupported and speculative expert opinions.
For commercial litigators, including intellectual property attorneys, Sargon suggests the foundation for expert testimony on market share or lost profits must be laid with extreme care.

For professional liability defendants, Sargon Enterprises provides support to challenge assertions that due to attorney error, a new business did not achieve “spectacular” levels of success.  Damages experts often create enormous damage models which hinder resolution.  Sargon Enterprises provides a good framework to challenge these models and reduce damage exposure to a manageable level.

 

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