Daily Blast November 26, 2012

On November 26, 2012, the California Supreme Court issued an opinion in Sargon Enterprises, Inc. v. University of Southern California (November 26, 2012, S191550) ____ Cal.4th ____, addressing both the admissibility of expert witness testimony and the acceptable basis for ascertaining lost future profits. The Supreme Court held that the trial court has a gatekeeping role to exclude expert opinion 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.” (Slip opn., p. 28.) In addition, the court held that although lost profits need not be proven with mathematical precision, they must not be unduly speculative. (Id. at p. 1.)

The case arose out of a contract between Sargon Enterprise, Inc. (“Sargon”), a dental implant company, and the University of Southern California to conduct a five-year clinical study of a patented dental implant that Dr. Sargon Lazarof developed. (Slip opn., pp. 1-2.) Sargon sued USC for breach of contract claiming that the university failed to present proper reports for the clinical trials. (Id. at p. 3.) Sargon claimed that if USC did not breach its contract, the company would have become a worldwide leader in the dental implant industry and would have made millions of dollars per year in profit. (Id. at p. 1.) At trial, the court excluded evidence of Sargon’s lost profits on the grounds that they were unforeseeable and the expert’s methodology was speculative. (Id. at pp. 3, 34.) Sargon’s expert based his opinion on a “market share” approach where “he determined what share of the worldwide dental implant market Sargon would have gained had USC completed a favorable clinical study, and he calculated future profits based on that market share.” (Id. at p. 4.) The market share approach was based on a comparison of Sargon to six other large, multinational dental implant companies (“Big Six”). (Id. at p. 6.) Sargon’s expert claimed that Sargon, unlike other smaller companies, would have become a market leader over a period of 10 years and eventually replaced one of the Big Six. (Ibid.) 

The Supreme Court examined Evidence Code sections 801, subdivision (b) and 802 to define the trial court’s duty to act as a “gatekeeper” to exclude speculative and irrelevant expert testimony. (Slip opn., pp. 1, 25-29.) The court explained that “the trial court’s preliminary determination whether the expert opinion is founded on sound logic is not a decision on its persuasiveness.” (Id. at p. 29.) Rather, the trial court must “simply determine whether the matter relied on can provide a reasonable basis for the opinion or whether that opinion is based on leap or logic or conjecture.” (Ibid.) According to the court, the trial court properly found that the expert’s methodology was too speculative for the evidence to be admissible. (Id. at p. 34.)

Finally, the court emphasized that damages for lost profits must be reasonably certain. (Slip opn., p. 31.) The Supreme Court reasoned that although an expert could determine with reasonable certainty what Sargon’s profits would have been if it had achieved a market share comparable to one of the Big Six, the expert’s testimony in this case “provided no logical basis to infer that Sargon would have achieved that market.” (Id. at p. 41.) “Except for belief, that like the Big Six and unlike the rest of the smaller companies, Sargon was innovative, Sargon was dissimilar to all of the Big Six.” (Id. at p. 37.) According to the court, Sargon was not comparable to the Big Six because it had no track record of being a global leader. (Ibid.) The expert’s testimony was also speculative since he assumed that none of the Big Six would fall out of the group and that Sargon would replace it. He also assumed that none of the Big Six would take any additional steps to compete with Sargon. (Id. at p. 39.) Additionally, the expert improperly speculated that Sargon would have developed marketing and research development departments, despite the fact that it did not have these departments. (Ibid.) As a result, the trial court properly acted as a gatekeeper to exclude the expert’s speculative testimony. (Id. at p. 42.)

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