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.