Tuesday, November 27, 2012
Supreme Court Reverses C.A. Ruling on Evidence of Lost Profits
Testimony That USC’s Breach of Contract May Have Cost Small Company $1 Billion in Profits Held Too Speculative
By KENNETH OFGANG, Staff Writer
A Los Angeles Superior Court judge did not abuse his discretion in excluding expert testimony that the University of Southern California may have cost a small dental implant manufacturer more than $1 billion in profits by breaching a contract to conduct a clinical trial of one of its products, the state Supreme Court said yesterday.
The justices unanimously reversed a ruling by Div. One of this district’s Court of Appeal in favor of Sargon Enterprises, Inc. The Court of Appeal said Judge Terry Green should have allowed the jury to hear the proffered testimony.
Sargon claimed the university failed to provide academic support for Sargon implants, contrary to the parties’ clinical trial agreement. The plaintiff alleged that it did not learn until after the contract expired that a USC professor working on the trials had a financial arrangement with one of Sargon’s competitors.
Sargon won a judgment for more than $400,000, but argued on appeal that the damages would have been in the hundreds of millions of dollars had Green not excluded testimony by an attorney/CPA regarding the anticipated share of the dental implant market that Sargon would have earned if USC had performed under the contract.
The Court of Appeal, in an unpublished opinion by Presiding Justice Robert Mallano, held that the exclusion of the testimony was an abuse of discretion because the inability of the plaintiff to prove its lost profits was a result of the defendant’s misconduct.
“If USC had not sabotaged the clinical study of the Sargon implant, Sargon would have had a successful clinical trial to its credit and a prominent university using the implant at its dental school,” the presiding justice wrote. “But it was denied. Through its wrongful conduct, USC allegedly caused the loss of profits and has made the proof of lost profits all the more difficult, thereby rendering its evidentiary attack unconvincing.”
The jury, he said, should have been allowed to make the assessment as to whether the witness, James Skorheim, was persuasive. At an eight-day evidentiary hearing on USC’s motion to exclude the testimony, Skorheim explained that Smargon’s innovative approach to implants would have enabled it to surpass other small companies and gain a share of the multibillion dollar implant market currently dominated by what the industry calls the “Big Six.”
Justice Jeffrey Johnson dissented in the Court of Appeal, saying the trial judge “must be permitted to draw the line in the sand, either letting the evidence in as meeting the certainty threshold, or excluding it as below that threshold.” Green’s reasons for excluding the evidence, he said, were “founded on a detailed, methodical and well-reasoned examination of the law of contracts and the limits on lost profits damages.”
Chin, in his opinion for the high court, said the trial judge and the dissenting justice were correct in their reasoning, because the trial judge must act as “gatekeeper” in excluding speculative expert testimony. This is particularly true with regard to evidence of lost profits, where there is a particular risk of the jury being unduly influenced by speculative testimony, he said.
The justice agreed with Green that Skorheim—who opined that Smargon’s device was so innovative that the company’s lack of resources for marketing and research would not preclude it from competing with the larger companies—could not justify a “faith-based prediction so absolutely devoid of any factual basis about an industry where he has no expertise.”
Chin offered a sports analogy:
“If a professional football team claims lost profits because a certain defensive lineman did not play for it the previous season, could an expert testify that in his opinion the key driver for success in the National Football League is quarterback sacks and, because the player was the best in the league in sacking the quarterback, the team would have won the Super Bowl had he played? Could another expert counter that testimony by expressing her opinion that the key to success is turnovers, and, because the player was not particularly adept at forcing turnovers, the team would not even have made the playoffs with that player? Should the court ask the jury to choose between the two experts? Or could the jury choose something in between and conclude the team would have reached, but lost, the Super Bowl? Or lost in the conference title game?”
The justice reasoned:
“An accountant might be able to determine with reasonable precision what Sargon’s profits would have been if it had achieved a market share comparable to one of the Big Six. The problem here, however, is that the expert’s testimony provided no logical basis to infer that Sargon would have achieved that market share. The lack of sound methodology in the expert’s testimony for determining what the future would have brought supported the trial court’s ruling.”
Eric M. George of Browne George Ross argued for Smargon and Kathleen M. Sullivan of Quinn Emanuel Urquhart & Sullivan for USC.
The case is Sargon Enterprises, Inc. v. University of Southern California, 12 S.O.S. 5977.
Copyright 2012, Metropolitan News Company