Until recently, California trial courts were not required to perform the rigorous expert testimony gatekeeping responsibility adopted by federal courts and a majority of state courts.  As a practical matter, California’s standards meant that juries in California could consider and rely on expert opinion testimony that would have been excluded as scientifically unreliable or speculative in other jurisdictions.

The California Supreme Court recently closed this gap with its decision in Sargon Enterprises, Inc. v. University of Southern California, Case No. S191550.  With minor exception, a trial judge is now required to act “as a gatekeeper to exclude testimony that is (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.”

Sargon involved a breach-of-contract claim filed by start-up firm Sargon Enterprises (Sargon) against the University of Southern California (USC).  Sargon contracted with USC to perform a five-year and 23-patient clinical study of a patented dental implant.  Sargon later sued USC, alleging that USC and its faculty inadequately conducted the clinical study.  Had USC adequately conducted the clinical study, Sargon contended, its dental implant procedure would have become the standard of care and the firm would have grown into an international company.  Sargon sought both compensatory damages and lost profits.

Regarding its lost profits, Sargon sought to introduce testimony from an accountant who lacked experience in the dental field.  To calculate the prospective damages the start-up firm suffered, the accountant first opined that, with adequate clinical testing of its device, Sargon would have been one of the six largest dental implant companies in the world.  Based on this opinion, the accountant then performed a market-share analysis using the performance of the six largest dental implant firms to arrive at a lost profits figure as high as $1.2 billion.

After reversal of the trial court’s earlier decision to exclude the proffered testimony on grounds that the claimed lost profits were not foreseeable, the trial court again considered whether the accountant’s testimony should considered by the jury.  Following a protracted evidentiary hearing on this issue, the trial court again excluded the accountant’s testimony, this time on grounds that the accountant’s opinions were based on unreliable methodology, were speculative, and lacked foundation as to Sargon’s historical data or that of reasonably comparable business.

Reviewing the trial court’s exclusionary order for the second time, the Court of Appeal again reversed the trial court.  This time, the Court of Appeal found that the trial court placed too high of a burden on a plaintiff seeking to establish lost profits based on an innovative product.  Relying on the then widely held view of California evidence law, it was enough that the accountant based his opinion on financial data and market surveys that are “of a type” generally accepted by experts in the field as a means to calculate lost profits.  It is then up to the jury to determine the accountant’s credibility.

The Supreme Court disagreed, rejecting the Court of Appeal’s overly restrictive interpretation of the trial court’s role as gatekeeper.  In so doing, the Supreme Court clarified that Evidence Code sections 801 and 802 required a rigorous and intrusive new role of trial judges to determine whether a contested expert opinion should be heard by a jury.

The consequences of the Supreme Court’s decision in Sargon remain uncertain.  Narrowly, the decision provides clear guidelines regarding the evidentiary requirements of a lost profits damages analysis, especially one involving innovative technology in a business without an established track record.  More broadly, the analysis and policy considerations set forth in Sargon will impact the admissibly of expert testimony generally.  This change to expert admissibility suggests, if not assures, that unreliable and speculative expert testimony that previously would have reached the jury will no longer be considered.  With 86 percent of California civil cases involving expert testimony, and an average of three or more experts testifying in every trial, the potential impact on pending and future cases in California will be significant.

If you have any questions, please contact Craig Crawford at ccrawford@carr-mcclellan.com or at (650) 342-9600.