The Appellate Strategist : Appellate Lawyers & Attorneys for Updates on Trial Consultations, Amicus Briefs & Punitive Damage Awards

Yesterday, the California Supreme Court issued a unanimous opinion confirming the obligation of California trial judges to act as gatekeepers to insulate jurors from speculative expert testimony.  The Court affirmed a trial court discretionary ruling excluding an expert’s opinion on future lost profits where the opinion lacked any objective factual anchor and applied standards so inherently subjective that they could not be reliably applied. While noting that California does not apply Daubert standards to new scientific techniques, the Court cited the U.S. Supreme Court’s seminal opinions in the area (Daubert , Kumho, and Joiner), and the Federal Rules of Evidence, as well as the “gatekeeper” vocabulary that most practitioners associate with federal jurisprudence, perhaps signaling that the widely-understood gap between admissibility of expert testimony in California state courts and their federal counterparts may not be as wide as most thought.

Sargon Enterprise, Inc. v. University of Southern California, S191550, involved a breach of contract action brought by the maker of new, patented dental implant against the university’s School of Dentistry, seeking lost profits allegedly caused by the breach.   The case was tried twice, with the first jury awarding $433,000 in compensatory damages. Following an appeal, at the second trial the court excluded Sargon’s expert witness on lost profits, and the parties then stipulated to the entry of judgment in the original amount of compensatory damages, and Sargon appealed again. The Court of Appeal reversed the exclusion of the expert testimony in a non-published opinion. The Supreme Court unanimously affirmed the trial court, reversing the Court of Appeal.

While not a start-up, Sargon was a small dental implant company with sales barely in excess of $100,000, and less than 20 employees. It invented an implant that distinguished itself from the conventional technology because it could be implanted immediately following the tooth extraction and contained both the implant and the full restoration, i.e., the crown. Where other implants required two steps, Sargon’s required only one because its mechanism seated the implant into the bone socket immediately, making it ready for placement of the crown. The dental school agreed to conduct a five-year clinical trial of the implant, but allegedly breached the agreement by failing to fulfill contractually-specified reporting requirements.

Sargon’s expert was a CPA and an attorney with experience as a business and industry analyst and forensic accountant. His opinion was that Sargon’s lost profits ranged from $220 million to $1.18 billion, based on a market share approach that analogized Sargon to the six largest dental implant companies, based on the innovativeness of the various companies as compared to perceived innovation in the Sargon device. For company in this market to be successful it required innovation, clinical studies, and outreach to general practitioners. Because Sargon’s one step implant was such an innovation that met a market need (ease of use, shortened healing time, and overall cost), the expert opined that Sargon was assured of succeeding in the product mix, and was entitled to a favorable clinical study outcome from the university (which was denied it through the alleged breach). Therefore, Sargon would take over market share from the other larger companies, even though he acknowledged that he assumed that the larger companies were innovative based on their revenues rather than the technology they employed or products they produced.

The Court stressed twin concerns as it approached the subject. First, judges are charged with the duty to “exclude matter which does not rise to a clearly sufficient degree of value; something more than a minimum of probative value is required.” Second, this judicial function is particularly important with expert testimony about dizzying figures “where a jury’s common sense is less available than usual to protect it.” California statutory authority requires that expert testimony has no value if its basis is unsound, because an expert can only rely on matter of a type that other expert reasonably rely upon in forming an opinion upon the subject to which his testimony relates. Thus, borrowing a bit from Daubert’s helpfulness requirement, the Court noted that expert opinion may not be based on unsupported assumptions, speculation or conjecture. The trial judge’s gate keeping responsibilities enforce these requirements by barring unsupported expert opinion. (Sounding another Daubert note, the Court emphasized that the focus must on methodology not the ultimate conclusions.)

After observing that California law has always required that there be evidence to support the fact of lost profits, even if the amount cannot be calculated with certainty, the Court then turned to the proffered opinion. The problem, as the trial judge observed, was that “innovativeness” is simply too ephemeral a factor on which to base a lost profits projection. Suppose, the trial judge said in his opinion, Miss Oklahoma contracts with Greyhound to get her to the Miss America contest, and breached the contract. If she were allowed to compete, can it be said that she would have won over Miss Colorado, or if she didn’t win, would have beaten out Miss Montana? Likewise, whether the implant is good, better or best has to be determined in the market not the jury room. The Court amplified the analogy by turning to professional football, where a hypothetical team claims lost profits because a lineman could not play. Who is to say that it was the lineman, who was great at sacks, made the difference in a successful season, as opposed to a cornerback who was great at interceptions? Sargon’s expert’s testimony was inadmissible because he could only speculate as to the performance of its implant in the market, and hence it was within the trial judge’s discretion (and part of his duty) to exclude the proffered opinion.

Most California lawyers perceive a bright line between state and federal law when it comes to expert testimony, with federal law being more restrictive and California more lax. Sargon could be the harbinger of a change bringing the standards more closely into alignment.

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As we noted here, the Ninth Circuit Court of Appeals’ decision in Stengel v. Medtronic Inc. is making its way through en banc review. Stengel, which involved both Riegel express preemption and Buckman implied preemption of state law claims regarding medical devices, was re-heard by the full Ninth Circuit on September 19, 2012. An audio recording of the hearing is available here. Pending the en banc panel’s ultimate determination, readers interested in the scope of Buckman implied preemption may appreciate my article, recently published by the Washington Legal Foundation, which briefly surveys the competing interpretations of Buckman in the federal appellate circuits and analyzes the Stengel opinion in that context.

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In Thomas, Melau, and Anderson v. Novartis Pharms. Corp., the Sixth Circuit Court of Appeals recently affirmed a trio of cases prohibiting the testimony of treating physicians as specific causation experts. Though the appellate court’s opinion was not recommended for full-text publication, it nonetheless offers a salient reminder of a Daubert rule well-enunciated in the Sixth Circuit: A physician’s presumed expertise is in the diagnosis and treatment of disease, not necessarily in the scientifically reliable determination of its underlying cause.

Thomas involved three plaintiffs who filed separate lawsuits, but whose claims were heard by the Middle District of Tennessee pursuant to consolidated MDL proceedings. They alleged they developed biophosphonate-induced osteonecrosis of the jaw after taking Zometa and Aredia, drugs manufactured by Novartis for the prevention of bone maladies, typically in cancer patients. The plaintiffs retained general causation experts, but relied for proof of specific causation upon their non-retained treating physicians. Each plaintiff’s treating physician was excluded, but it is the exclusion rationale in Thomas that is of interest here.

The court began its analysis by noting that Thomas’ physician, Dr. Johnson, “appears to have used some form of a differential diagnosis, or differential etiology, which we have previously recognized is a proper basis for determining the cause of a medical condition when done properly.” Id. at 5. The propriety of such a method, however, depends upon the underlying expertise of the practitioner. The court acknowledged that Dr. Johnson was “unquestionably an experienced oral surgeon with many years of practice and training. He treated other patients with osteonecrosis of the jaw, and has read literature and attended conferences on osteonecrosis of the jaw.” Id. at 6. However, “[b]ecause Thomas relied on Dr. Johnson to give an expert opinion on the cause of his osteonecrosis of the jaw, it is not enough to show that Dr. Johnson can recognize and treat osteonecrosis of the jaw.” Id. 

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Matrixx Initiatives, Inc. v. Siracusano (.pdf) was a securities fraud class action where claimants alleged that Matrixx failed to disclose reports of a potential link between its cold medicine, Zicam, and loss of smell. The district court dismissed the claim because the reports lacked statistical significance and, therefore, could not have formed a “material” omission under the Securities Exchange Act. The Ninth Circuit reversed the dismissal.

In a unanimous opinion, authored by Justice Sotomayor, the Supreme Court held that the district erred in employing a statistical significance requirement. Instead, the court should have considered the “total mix” of information available to investors. No single bright-line test of materiality is controlling, and the allegation taken as a whole permitted the inference that the adverse reports could have affected a reasonable investor.

Although the opinion does not concern the admissibility of expert testimony, the Court’s discussion of the reliability of a causation inference in the absence of statistically significant findings will doubtless be cited in future Daubert battles.

Also of general interest is the Court’s explanation of how the facts pleaded met the Twombly plausibility requirements. Indeed, the case may serve as a template for pleading fraud by omission.

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US Supreme Court Will Decide Fate of Preemption Defense for Generic Companies this Term

Since the decision of the Supreme Court in Wyeth v. Levine, 129 S.Ct. 1187 (2009), the Eighth Circuit (in Mensing v. Wyeth, Inc., 588 F.3d 603 (8th Cir. 2009)) and the Fifth Circuit (in DeMahy v. Actavis, Inc., 593 F.3d 428 (5th Cir. 2010)) have both concluded that failure-to-warn claims against generic drug manufacturers are not automatically preempted by the federal Food, Drug and Cosmetic Act’s (FDCA) requirement that generic labeling conform to the approved labeling for the innovator drug.  Last Friday, the United States Supreme Court agreed to decide whether a plaintiff’s state-law failure-to-warn claim against a generic drug manufacturer for failing to modify its labeling to include warnings that differ from the name-brand equivalent is preempted by the FDCA’s requirement that the label for a generic drug be the same as the label for the brand-name counterpart.  Against the advice of acting solicitor general, Neil Katyal, the Court agreed to address the issue in three cases Pliva v. Mensing, 09-993; Actavis v. Mensing, 09-1039; and Actavis v. DeMahy, 09-1501 and consolidated them for review. 

Since a majority of all drug prescriptions (approximately 75 percent) are now filled with generic drugs, the impact of this decision will be widespread.  The stakes are enormous for consumers and the generic pharmaceutical industry alike.

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