"Lost profits" expert evidence concerning projected upstart dental implant manufacturer too speculative.

November 30, 2012
By Justice Steven Vartabedian (Ret.) on November 30, 2012 6:00 AM |

Lost Profit.jpgThe California Supreme Court in Sargon Enterprises, Inc. v. University of Southern California (filed November 26, 2012, S191550) starts its reasoning concerning a trial court's discretion in excluding expert testimony with the following advice of Federal Judge Friendly written 50 years ago: "[A court] must be exceeding careful not to set the threshold too high. Yet it is the jury system itself that requires the common law judge in his efforts to prevent the jury from being satisfied by matters of slight value, capable of being exaggerated by prejudice and hasty reasoning . . . to exclude matter which does not rise to a clearly sufficient degree of value; something more than a minimum probative value is required."

The case before the state high court involved plaintiff, a small dental implant company which sued defendant for breach of contract; the plaintiff succeeded at jury trial in proving that defendant had breached its promise to conduct and report on a five-year clinical study of plaintiff's patented and government-approved one-step dental implant. The critical question, presented in an earlier motion in limine, was damages. Plaintiff proffered the testimony of an accountant expert that plaintiff's lost profits over a five-year period ranged from $200 million to over $1 billion. At the initial trial, the court excluded this testimony, and based upon other evidence, the jury awarded $433,000. Plaintiff appealed and the Court of Appeal, Second District, court ruled the trial court improperly focused on forseeability.

On remand, defendant again moved to exclude the expert testimony. After an extensive evidentiary hearing, the trial court again granted the motion to exclude, finding no factual basis for the expert's assumption that, had defendant studied and reported on plaintiff's innovative product, plaintiff would have had the marketing success and profits in the range of the top six dental implant manufacturers worldwide, which each at minimum did approximately 50 times the business that plaintiff did. The Court of Appeal again reversed; this time the Supreme Court granted review.

The Supreme Court noted that the appellate court identified no specific error in finding the trial court abused its discretion. That panel had found the trial court's ruling was tantamount to a flat prohibition on lost profits in any case involving a "revolutionary breakthrough in an industry." Not so. While an accountant might be able to determine with reasonable precision plaintiff's profits if it had achieved a market share comparable to one of the "Big Six." The expert provided no logical basis to infer it would have achieved that market share. There may have been other methods of proof that could have established a reasonable certainty as to amount of loss. Absolute certainty is not required. But the highly speculative methodology used supported the trial court's exercise of discretion to exclude the evidence. Thus the trial court properly acted as a gatekeeper to exclude speculative expert testimony.

In my view, the appellate court here saw the trial court ruling as more of an indictment of "lost profits" claimed by an upstart company without a track record, than as a review of whether the trial court abused its discretion in ruling the evidence inadmissible as excessively speculative. The latter is the more appropriate inquiry. The Supreme Court was careful to note that the lost profit inquiry is always speculative to some degree. The key for a new business is to show the nature and occurrence of future events, upon which the anticipated profits are dependent, are reasonably certain to occur. The expert testimony in Sargon fell far short of this mark.