Sargon Enterprises, Inc. v. USC, the Supreme Court said lost profits need not be proven with mathematical precision, but they must also not be unduly speculative.
By Garrett C. Dailey, family law specialist
FACTS: Dental implant company (P) with net profits of $101,000 in 1998 sued USC for breach of a contract it had with USC to clinically test a new implant P had patented. P sought damages for lost profits beginning in 1998, from $200 million to over $1 billion. P claimed it would have become a worldwide leader in the dental implant industry and made many millions a year in profit had the contract not been breached. Following evidentiary hearing, trial ct. excluded as speculative the proffered testimony of P’s expert (E) as to the lost profits. Jury found USC breached the contract and awarded P $433,000 in compensatory damages. P appealed. Court of Appeal found trial ct. erred in excluding the testimony. Supreme Ct. reversed Court of Appeal.
Sargon Enterprises, Inc. v. USC: Trial Court’s To Remove Speculative Testimony
HELD: Trial court acted within its discretion in excluding opinion testimony that P company would have become extraordinarily successful had USC completed the clinical testing to which parties had contracted.
“[T]he trial court has the duty to act as a ‘gatekeeper’ to exclude speculative expert testimony. Lost profits need not be proven with mathematical precision, but they must also not be unduly speculative. Here, the court acted within its discretion when it excluded opinion testimony that the company would have become extraordinarily successful had the university completed the clinical testing.” (Sargon Enterprises, Inc. v. USC, supra, 55 Cal.4th at p. 753.) (See EvC §801, EvC §802, Daubert v. Merrell Dow Pharmaceuticals, Inc. (1993) 509 U.S. 579.)
(1) Expert testimony must not be speculative, and (2) lost profit damages must not be speculative.
Substantive law regarding lost profits, though not at issue, was relevant to help define the type of matter on which an expert may reasonably rely. To the extent E relied on data not relevant to the measure of lost profit damages, trial ct. acted within its discretion to exclude the testimony. Thus, although the issue is the admissibility of expert testimony, the Court considered the law of lost profits to the extent relevant.
Trial ct. did not make any ruling that was irrational or arbitrary. Supreme Ct. found that “[i]ndeed, the court could hardly have exercised its discretion more carefully.” (Sargon Enterprises, Inc. v. USC, supra, 55 Cal.4th at p. 776.) Trial ct. also excluded the expert testimony for proper reasons. It properly found the methodology was too speculative for the evidence to be admissible. The trial ct. and Supreme Ct. agreed E’s market share approach would be appropriate in a proper case: “An expert might be able to make reasonably certain lost profit estimates based on a company’s share of the overall market. But [the expert here] did not base his lost profit estimates on a market share [plaintiff] had ever actually achieved. Instead, he opined that [plaintiff’s] market share would have increased spectacularly over time to levels far above anything it had ever reached. He based his lost profit estimates on that hypothetical increased share.” (Ibid.)
Supreme Ct. discussed E’s testimony in great detail. It noted testimony was speculative in its primary analysis as well as in other ways. E assumed P, which had virtually no marketing or research and development departments, would have developed such departments to permit it to compete with the Big Six implant companies, all of which had large ones. He assumed one of the Big Six would fall out of that group, and P would replace it. He assumed the Big Six would have taken no steps to contend with their new competitor, P. All of these factors also support the trial ct.’s exclusion of the testimony.
“World history is replete with fascinating ‘what ifs.’ What if Alexander the Great had been killed early in his career at the Battle of the Granicus River, as he nearly was? . . . Many serious, and not-so-serious, historians have enjoyed speculating about these what ifs. But few, if any, claim they are considering what would have happened rather than what might have happened. Because it is inherently difficult to accurately predict the future or to accurately reconstruct a counterfactual past, it is appropriate that trial courts vigilantly exercise their gatekeeping function when deciding whether to admit testimony that purports to prove such claims.” (Sargon Enterprises, Inc. v. USC, supra, 55 Cal.4th at p. 781.)
Court of Appeal had found the exclusion a flat prohibition on lost profits in any case involving a revolutionary breakthrough in an industry—Supreme Ct. noted other avenues might exist to show lost profits.
Garrett C. Dailey is a Certified Family Law Specialist focusing on appellate issues and consultations, a Fellow in American Academy of Matrimonial Lawyers and publisher/co-author of ATTORNEY’S BRIEFCASE® CALIFORNIA FAMILY LAW, California’s oldest provider of self-contained legal research software. BriefCase is available online and through the Attorney’s BriefCase iPad® app. For more information visit them at www.atybriefcase.com. Also check out their FREE legal education log at www.MyLegalEducationLog.com.