Sargon Enterprises, Inc. v. University of Southern California
149 Cal. Rptr. 3d 614, 55 Cal.4th 747, 288 P.3d 1237 (2012)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Under Evidence Code sections 801 and 802, a trial court has a gatekeeping duty to exclude speculative expert opinion testimony, particularly when an expert's opinion on lost profits is based on assumptions that are not grounded in the company's actual performance or comparison to substantially similar businesses.
Facts:
- In 1991, Sargon Enterprises, Inc. (Sargon) patented a new type of 'immediate load' dental implant, which was considered a significant innovation.
- In 1996, Sargon, a small company, contracted with the University of Southern California (USC) for its School of Dentistry to conduct a five-year clinical study of the implant.
- Sargon's business was modest; its annual net profits peaked in 1998 at approximately $101,000.
- After initial success in the clinical trials, USC failed to present proper reports as required by the contract.
- Sargon's damages expert, James Skorheim, prepared an opinion on Sargon's lost profits.
- Skorheim opined that had the USC study been successfully completed, Sargon would have become a global market leader, comparable to the six largest dental implant companies in the world (the 'Big Six').
- Skorheim's analysis compared Sargon to the 'Big Six'—multinational corporations with billions in sales and thousands of employees—based solely on the subjective factor of 'innovation,' while admitting Sargon was not comparable on any objective business metric.
- Skorheim's model projected Sargon's lost profits to be between $220 million and $1.18 billion, based on Sargon capturing a market share comparable to one of the 'Big Six'.
Procedural Posture:
- Sargon Enterprises, Inc. sued the University of Southern California (USC) in a state trial court for breach of contract.
- In the first trial, the court excluded evidence of Sargon’s lost profits on foreseeability grounds, and a jury awarded Sargon $433,000.
- Sargon, as appellant, appealed to the California Court of Appeal (an intermediate appellate court).
- The Court of Appeal reversed, holding the exclusion was error, and remanded the case for a new trial.
- On remand, USC filed a motion to exclude the testimony of Sargon's damages expert, James Skorheim, as speculative.
- After an eight-day evidentiary hearing, the trial court granted USC's motion and excluded Skorheim's testimony.
- The parties stipulated to a judgment for Sargon for $433,000, and Sargon again appealed to the Court of Appeal.
- In a divided 2-1 decision, the Court of Appeal reversed the trial court again, concluding it was error to exclude the expert testimony.
- USC, as petitioner, sought review from the Supreme Court of California, which was granted.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Did the trial court abuse its discretion by excluding expert opinion testimony on lost profit damages as speculative because the expert's projections were based on comparing a small, fledgling company to the largest, multinational market leaders?
Opinions:
Majority - Chin, J.
No, the trial court did not abuse its discretion. An expert opinion on lost profits must be based on matter of a type on which an expert may reasonably rely and cannot be speculative. The trial court properly acted as a gatekeeper in excluding expert testimony that relied on a flawed and speculative methodology. The expert's reasoning was circular, concluding that the 'Big Six' companies were innovative because they were successful, and successful because they were innovative. Furthermore, the expert's comparison of Sargon, a small company with minimal profits, to vastly larger multinational corporations was improper because there was no 'substantial similarity' between them on any objective business metric. The expert's opinion was based on a series of unsupported assumptions about Sargon's ability to instantly develop massive marketing and R&D capabilities and displace an established market leader, rendering the entire projection conjectural and an improper basis for a damages award.
Analysis:
This decision solidifies the trial court's gatekeeping role in California regarding the admissibility of all expert testimony, emphasizing that the expert's reasoning and methodology must be sound, not just the type of data relied upon. It establishes a significant precedent for lost profit claims by new or unestablished businesses, making it difficult to claim damages based on speculative projections of massive, unprecedented success. The ruling requires that any comparison to other businesses for the purpose of calculating lost profits must be based on substantial, objective similarities, not on subjective or abstract qualities like 'innovativeness.' This makes it harder for plaintiffs to present juries with damage models that produce 'an array of figures conveying a delusive impression of exactness' without a sound, logical foundation.
