Supreme Court of California Justia
Citation 55 Cal.4th 747 (2012), 149 Cal. Rptr. 3d 614, 288 P.3d 1237

Sargon v. Univ. Southern Cal.

Filed 11/26/12



IN THE SUPREME COURT OF CALIFORNIA



SARGON ENTERPRISES, INC.,

Plaintiff and Appellant,

S191550

v.

Ct.App. 2/1 B202789, B205034

UNIVERSITY OF SOUTHERN

CALIFORNIA et al.,

Los Angeles County

Defendants and Appellants.

Super. Ct. No. BC209992



A small dental implant company that had net profits of $101,000 in 1998

has sued a university for breach of a contract for the university to clinically test a

new implant the company had patented. The company seeks damages for lost

profits beginning in 1998, ranging from $200 million to over $1 billion. It claims

that, but for the university‘s breach of the contract, the company would have

become a worldwide leader in the dental implant industry and made many millions

of dollars a year in profit. Following an evidentiary hearing, the trial court

excluded as speculative the proffered testimony of an expert to this effect. We

must determine whether the court erred in doing so.

We conclude that the 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

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company would have become extraordinarily successful had the university

completed the clinical testing.

We reverse the judgment of the Court of Appeal, which had held the trial

court erred in excluding the testimony.

I. FACTUAL AND PROCEDURAL HISTORY

Because neither party petitioned the Court of Appeal for rehearing, much of

this summary of the factual and procedural history is taken from that court‘s

majority opinion. (See Richmond v. Shasta Community Services Dist. (2004) 32

Cal.4th 409, 415; Cal. Rules of Court, rule 8.500(c)(2).)

A. The Lawsuit and First Appeal

In 1991, plaintiff Sargon Enterprises, Inc. (Sargon) patented a dental

implant that its president and chief executive officer, Dr. Sargon Lazarof, had

developed. The United States Food and Drug Administration approved the

implant, which meant it could be sold and used in the United States. As the Court

of Appeal opinion described it, Sargon‘s implant ―could be implanted immediately

following an extraction and contained both the implant and full restoration. [¶] In

the 1980‘s, the standard implant was the Branemark implant developed at the

University of Gothenburg in Sweden. The Branemark implant required several

steps. First, surgery would place the implant in a healed extraction socket in the

patient‘s mouth; a second surgery would inspect the implant to see if it had

properly integrated with the bone (a process known as ‗osseointegration‘); last, a

crown would be placed on the implant. Sargon‘s implant was a one stage implant:

it expanded immediately into the bone socket with an expanding screw; this

mechanism permitted the implant to be ‗loaded‘ with a crown the same day.‖

In 1996, Sargon contracted with defendant University of Southern

California (USC) for the USC School of Dentistry to conduct a five-year clinical

2

study of the implant. In May 1999, Sargon sued USC and faculty members of its

dental school involved in the study, alleging breach of contract and other causes of

action. USC cross-claimed for breach of contract. All of Sargon‘s claims except

the breach of contract claim against USC were eliminated by demurrer or

summary judgment. In 2003, the contract action was tried before a jury. Before

trial, at an in limine hearing, the trial court excluded evidence of Sargon‘s lost

profits on the ground USC could not have foreseen them.

The evidence presented at trial showed that after initial success in the

clinical trials, USC failed to present proper reports as its contract with Sargon

required. The jury found that USC had breached the contract and awarded Sargon

$433,000 in compensatory damages. It also found in Sargon‘s favor on USC‘s

cross-complaint for breach of contract.

Sargon appealed. The Court of Appeal reversed the judgment, holding that

the trial court had erred in excluding evidence of Sargon‘s lost profits on the

ground of foreseeability.1 It also stated, ―Given that the in limine hearings

focused on foreseeability and not the amount of lost profit damages, it is

premature to determine whether such damages can be calculated with reasonable

certainty.‖ (Sargon Enterprises, Inc. v. University of Southern California (Feb.

25, 2005, B167519) [nonpub. opn.].)

On remand, the case proceeded to retrial on the breach of contract claim.

USC moved to exclude as speculative the proffered opinion testimony of one of

Sargon‘s experts, James Skorheim. The court presided over an eight-day

evidentiary hearing at which Skorheim was the primary witness.


1

We express no opinion on the correctness of this ruling, which is not before

us on review.

3

B. The Evidentiary Hearing

Skorheim testified that he was a certified public accountant and an attorney.

He had been an accountant for 25 years and ―work[ed] as a business and industry

analyst and forensic accountant.‖ As the Court of Appeal summarized, he testified

that Sargon‘s lost profits ―ranged from $220 million to $1.18 billion. In preparing

his opinion, Skorheim reviewed litigation materials (including deposition

transcripts and reports of USC‘s damages experts), financial information from

Sargon and its competitors (including annual reports), and market analyses of the

global dental implant market prepared by Millennium Research Group . . .‖

(Millennium). Skorheim based his opinion on a ―market share‖ approach, by

which 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. ―Skorheim used the market

share approach to lost profit damages because the methodology had been used in

complicated patent cases, antitrust cases, and unfair competition cases.‖

The Court of Appeal summarized Skorheim‘s testimony about the dental

implant industry: ―Nobel Biocare‘s Branemark implant was the pioneer implant

developed in the 1960‘s and 1970‘s and required two surgeries. Straumann

developed the second generation implant, which was placed in the bone without

being submerged in the gum. In the early 1990‘s, there was very little penetration

into the potential dental implant market. Out of millions of potential patients, only

about 1 percent of this potential market was receiving product, presenting an

opportunity for tremendous growth. In the late 1990‘s, the market began to grow

dramatically. Industry reports demonstrated the global market was expected to

grow during the period 1998 to 2009 at an annualized rate of 18.5 percent. At the

time, the market craved technological innovation aimed at shortening healing time,

cost, and treatment time. [Millennium] predicted that sales of immediate load

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implants would grow at compound annual rates of 56.3 percent during 2002 to

2006, and 32.8 percent from 2005 to 2009. Further, [Millennium] reported in

2004, immediate loading implants represented only a ‗niche‘ market because

demand was limited by industry acceptance. By 2009, immediate load implants

would account for 14.9 percent of the United States market, up from 0.4 percent in

2000.

―Sargon‘s innovation lay in the use of an ‗immediate load implant,‘ the

‗ ―holy grail of dental implantology,‖ ‘ which was directed at the market‘s need

for ease of use, shortened healing times, and overall cost. Given the state of the

implant market at the time, in Skorheim‘s opinion an innovator such as Sargon

would have rapidly commanded a significant market share; with the exception of

Nobel Biocare, all of the other major implant makers are recent arrivals on the

scene.‖

In Skorheim‘s opinion, three key ―market drivers‖ operate in the dental

implant industry: (1) innovation, (2) clinical studies, and (3) outreach to general

practitioners. A company must have all three to be successful. Skorheim had

testified, the Court of Appeal stated, that ―[t]he value of a clinical study to an

implant maker is two-fold: It establishes the efficacy of the device and permits

entry into the universities where students can be taught to use the device, with the

expectation that, upon graduation, they will use the product in their practices.‖ He

believed that clinical success of the Sargon implant would likely lead to

commercial success. Skorheim also had testified that because virtually every

dental implant company employed clinical studies and general practitioner

outreach, innovation really determined market success and what market share a

company would achieve. He had explained, ―The greater the technological

achievement in the product mix, the greater the likelihood for revenues.‖ In

Skorheim‘s opinion, innovation was a necessary prerequisite to achieving market

5

success. ―[F]irst and foremost, you have to have the technological innovation and

the efficacy.‖

As the Court of Appeal observed, ―Skorheim‘s ‗market share‘ approach

was based upon a comparison of Sargon to six other large, multinational dental

implant companies that were the dominant market leaders in the industry, and

which controlled in excess of 80 percent of global sales (Big Six): Nobel Biocare,

Straumann, [Biomet 3i], Zimmer, Dentsply, and Astra Tech. Although there are

approximately 96 companies worldwide that make dental implants, Skorheim

believed the Big Six were the top innovators based upon his analysis of the

[Millennium] report and market intelligence.‖ Skorheim had described the smaller

companies as ―copycats‖ and ―price cutters‖ that competed on the basis of price

and were not innovative; he believed that ―the top six are innovators and the rest

are copycats.‖ The Court of Appeal stated: ―On cross-examination, Skorheim

acknowledged that [Millennium‘s] report did not state the Big Six were the most

innovative; rather, it was an inference he drew from reviewing the report and the

size and success of the companies in comparison to other, smaller companies.‖

Skorheim had acknowledged that many of the smaller companies claimed

to be innovative, but he believed in fact they were not. When the trial court noted

that the Millennium report mentioned other companies that claimed to be

innovative, Skorheim had responded, ―And I would say that the proof is in the

pudding. And the proof is their ability to track the market share and they haven‘t

been able to do that.‖ When asked whether he agreed ―that the company with the

largest market share is not necessarily the most innovative,‖ Skorheim had

answered, ―I don‘t think I can agree with that. I mean, ultimately, the markets

determine what‘s innovative and what‘s not innovative. These markets reward

innovativeness. . . . And so the market really makes a determination of which of

these companies is more innovative than not by the extent to which they reward

6

them with purchasing their products, and so forth.‖ Skorheim had acknowledged

that the Millennium report did not specifically indicate that some of the smaller

companies were not innovative, but explained that this was because ―those

companies are not big enough to be even addressed in the global market, so there‘s

nothing specific.‖

Skorheim believed that Sargon was innovative, like the Big Six, and not a

copycat or price cutter, like the other small companies. He acknowledged that

Sargon was a very small company whose annual profits peaked in 1998 at around

$101,000 and, unlike the big companies, it had no meaningful marketing or

research and development organization and no parent company to assist it. But he

believed these factors were merely ―incidental‖ to innovation and played little role

in achieving market share. Accordingly, and because innovation is the key factor

driving market success, Skorheim had compared Sargon to the ―Big Six‖ rather

than to the smaller companies in computing lost profits. He considered the Big

Six and Sargon to be ―comparable companies.‖

Skorheim had testified that ―assuming the jury finds [the new implant] was

a superior innovative revolutionary product and based upon everything else I see

in the materials here, I think that Sargon had a very good chance of becoming the

market leader over a period of time. I estimated maybe a 10-year period of time.‖

Indeed, he believed to a ―reasonable certainty‖ that within 10 years or so Sargon

would have become a market leader. He also believed it likely that one of the Big

Six would have dropped out of the leadership, and that Sargon would have

replaced that company as a world leader.

When the trial court asked whether it mattered that some of the big

companies had many different products, Skorheim had responded that Sargon

―would have to remain competitive by investing significant amounts of money in

[research and development] like . . . the other major manufacturers. Each of them

7

are investing tens of millions of dollars a year into research and development to

remain strong and technologically sound.‖ He was confident that a company like

Sargon would have been able to expend the necessary resources to ―develop other

products over time, that they would be able to use their patented expandable root

process with other types of coatings, let‘s say, or shapes or sizes.‖ He thought

Sargon‘s ability to do so distinguished it from the other small companies.

The Court of Appeal stated: ―Skorheim outlined similarities and

differences between the Big Six and Sargon: First, they all manufactured titanium

implants, and the implants were one-stage, two-stage, or immediate load (Sargon

only); second, all used clinical studies; third, all used outreach to general

practitioners; fourth, pricing was substantially the same; fifth, their qualitative and

quantitative cost structures were the same; and the implants were manufactured

either in-house or pursuant to a contract with a third party. Qualitative cost

structure consisted of cost of goods sold, research and development costs (R & D),

sales and marketing costs, and general administrative costs. Sargon did not have a

meaningful R & D organization or a sales and marketing department. In all other

respects, Sargon‘s costs were similar to the Big Six.‖ Skorheim had

acknowledged, however, that he could not think of any objective ―business

metric‖ — ―whether it‘s sales, number of employees, number of distributers,

anything‖ — by which Sargon was comparable to, for example, Astra Tech, the

member of the Big Six with the smallest market share.

The Court of Appeal opinion provided a chart summarizing Skorheim‘s

testimony regarding Sargon and its competitors for the ―relevant time period,

approximately 1998.‖ We reproduce it here:

8



Sargon

AstraZeneca

Dentsply

Biomet 3i

Nobel[2]

(1998)

(1999)

(1998)

(2000)

(1998)

Employees

< 20

> 55,000

> 6,000

> 4,000

> 1,000

R&D

$ 46,000

$ 2,923,000,000

$ 18,200,000

$ 40,208,000

$ 8,741,808

Net Sales

$1,748,612

$18,445,000,000

$795,122,000

$ 920,582,000

$164,747,305

Net Profits

$ 101,113

$ 1,143,000,000

$ 34,825,000

$ 173,771,000

$ 5,868,080

Assets

$ 544,977

$19,816,000,000

$895,322,000

$1,218,448,000

$243,621,260

Market Share

N/A

4.8%

7%

17%

22–23%

(2007)[3]

The dental implant business was only part of AstraZeneca‘s company.

Skorheim testified that Astra Tech, its dental implant division, had sales in 1999 of

$111 million.

For the reasons he gave, Skorheim believed that Sargon, unlike any of the

other smaller companies, would, over time, have become a market leader, one of

the Big Six. In calculating Sargon‘s lost profits, he had not considered profits

Sargon had ever actually realized, but instead considered the market leaders‘

profits. He believed that Sargon‘s profits would have increased over time until

they reached the level of one of the market leaders. He testified, however, that in

one respect he had taken into account Sargon‘s actual income.4 He had started

with Sargon‘s gross revenues (not net income) in 1998, the year USC should have

produced an interim report, which were around $1.7 million to $1.8 million and


2

The Court of Appeal explained that these figures were converted from

Swedish kroner using the exchange rate in effect in 1998. Nobel Biocare acquired
another implant company in 1999, which increased its market share and added
products to its portfolio.
3

The Court of Appeal explained that ―Straumann, another comparator

company for which there was no data in the record during the relevant period, had
attained a 22 percent global market share in 10 years.‖
4

The trial court had initially sustained USC‘s objection to this testimony on

the basis that it was inconsistent with Skorheim‘s deposition, and Sargon had
failed to provide notice of this testimony, thus depriving USC of the opportunity to
cross-examine Skorheim meaningfully on the point. But it permitted Skorheim to
present this testimony ―to make a record.‖

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constituted approximately one half of 1 percent of the total global market. He then

doubled that number based on his belief that, had the initial report from the

clinical study been favorable and had other potentially favorable publicity

followed, Sargon would have sold approximately 20 implants each to

approximately 200 additional dentists. This would have brought Sargon‘s market

share for that year to about 1 percent. Skorheim believed that beginning in 1998,

Sargon‘s market share would have ―ramp[ed] up‖ over the years from this 1

percent to a share that a comparable member of the Big Six enjoyed. He had

calculated the lost profits based on sales in 1998 of over $3 million and a

subsequent increase each year until Sargon reached the level of one of the Big Six.

Skorheim claimed no expertise regarding how innovative Sargon‘s dental

implant was, although he had testified that ―the immediate loading of implants is

kind of the so-called holy grail of dental implantology.‖ He said the jury would

have to ―wrestle‖ with the question of how innovative Sargon was. Because of

this lack of expertise, Skorheim could not give a single sum of lost profits. Rather,

in Skorheim‘s opinion, the amount would depend on how innovative the jury

found Sargon to be, compared to the market leaders.

As the Court of Appeal explained, ―Skorheim‘s damages model created

four alternative damage scenarios based upon the jury‘s determination of the

innovativeness of the implant. As a predicate, Skorheim had ranked the

innovativeness of the comparator companies and established a hierarchy. If the

jury concluded Sargon‘s level of innovation was equal to the least innovative of

the benchmark companies, Astra Tech, Sargon would have attained a 3.75 percent

share; if the jury concluded Sargon‘s level of innovation was equal to one of the

lesser innovators of the benchmark companies, like Dentsply, Sargon would have

attained a 5 percent market share; if the jury concluded Sargon‘s level of

innovation was equal to a middle-level innovator, like [Biomet 3i], Sargon would

10

have attained a 10 percent share; and if the jury concluded Sargon‘s level of

innovation was that of the most innovative companies, Nobel Biocare and

Straumann, Sargon would have attained a 20 percent market share.‖ In

establishing this hierarchy, Skorheim had assumed that the higher the market share

a company had obtained, the more innovative it was. He also agreed, however,

that it was possible, for example, that Astra Tech, with its smaller market share,

was more innovative than Biomet 3i, which had a greater market share.

For each of these four scenarios, Skorheim had calculated lost profits from

1998 to 2009, then added what he calculated to be post-2009 lost profits.

Skorheim believed that Sargon‘s net profits, which in actuality peaked at $101,000

in 1998, would have grown to $26 million per year in 2009 under the least

profitable of the scenarios, and to $142 million per year in 2009 under the most

profitable of the scenarios.

The Court of Appeal opinion provided a chart summarizing Skorheim‘s lost

profits calculations. We reproduce it here:

Market

3.75%

5%

10%

20%

Share

(Astra Tech)

(Dentsply)

(Biomet 3i)

(Nobel/Strau.)

Lost Profits

$120,011,000

$181,020,949

$335,940,541

$ 640,232,628

1998-2009
Value

100,473,347

134,343,563

269,824,425

540,786,150

Post 2009
TOTAL:

$220,484,347 $315,364,512 $605,764,968 $1,181,018,778

Thus, Skorheim had projected total lost profits of $220 million if the jury

found Sargon‘s innovation was comparable to that of the least innovative market

leaders, making what he described as a ―meaningful contribution to innovation‖;

of $315 million if the jury found Sargon‘s innovation was somewhat greater; of

$600 million if the jury found Sargon‘s innovation was somewhat greater yet; and

of $1.2 billion if the jury found Sargon‘s innovation was comparable to that of the

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market leaders, making what he described as ―revolutionary industry changing

technology.‖

The Court of Appeal summarized the testimony of the other witnesses at

the evidentiary hearing. ―Dr. Lazarof confirmed Skorheim‘s conclusion that

innovation coupled with clinical studies was the driver of market share. Sargon

also presented the testimony of Steven Hanson, president from 1992 to 2004 of

Calcitek, a successful implant company, who testified Sargon could have

commanded a 15 to 20 percent share of the market if the USC study had been

completed, although he had not done a market study or considered the probability

of all of the other steps necessary to get Sargon a 15 to 20 percent market share.

Robert Pendry was at Straumann from 1992 to 2001 and at Thommen Medical

from 2002 to 2006, and testified that in his opinion the Sargon implant was

‗absolutely revolutionary‘ and ‗world changing‘ when introduced in 1997 to 1998.

In Pendry‘s words, the Sargon implant ‗was the most exciting thing I‘d heard in

the implant business ever.‘ ‖

C. The Trial Court’s Ruling

Following the evidentiary hearing, the court issued a 33-page written ruling

on USC‘s motion to exclude Skorheim‘s testimony.

The court began by quoting an opinion by Judge Friendly of the Second

Circuit Court of Appeals stressing the need to protect juries from ―an array of

figures conveying a delusive impression of exactness in an area where a jury‘s

common sense is less available than usual to protect it.‖ (Herman Schwabe, Inc. v.

United Shoe Machinery Corp. (2d Cir. 1962) 297 F.2d 906, 912.) The court found

it unreasonable for Skorheim, ―or any such expert, to rely on much of the data

which forms the basis of his opinions, because no data bears any resemblance to

Plaintiff‘s historical profits or to those of any similar business.‖ ―Mr. Skorheim‘s

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opinion leaves the determination of up to a billion dollars of lost profit damages to

pure speculation.‖

The court assumed for purposes of its ruling ―that a ‗market share‘ analysis

is appropriate and warranted under California law,‖ but it found that Skorheim‘s

―market share opinion is not based on any actual historical financial results or

comparisons to similar companies and, therefore, is not based on matter of a type

[on which] an expert may reasonably rely.‖ ―The fatal flaw in Mr. Skorheim‘s

reasoning is that it starts off assuming, without foundation, its conclusion. The

fatal flaw in his analysis is that he relies on data that in no way is analogous to

Plaintiff. Mr. Skorheim deems Plaintiff‘s historical data, such as past business

volume, ‗not relevant‘ to his lost profits projections.‖ (Fn. omitted.)

The court noted that at the evidentiary hearing, Skorheim had ―offered a

new opinion that would have been grounded in some historical performance.‖ It

explained that it had sustained USC‘s objection to this new opinion ―on grounds it

was never disclosed in discovery. This court notes that this new methodology is

directly inconsistent with Mr. Skorheim‘s declaration, depositions testimony and

the position Plaintiff has taken throughout this litigation. . . . Regardless, the

methodology of the new opinion is unreasonable.‖ Later in the evidentiary

hearing, ―Plaintiff again attempted to show some historical grounding for the

damage projections. Mr. Skorheim testified that his damage projections started

with Sargon‘s gross revenues of $1,700,000 in 1997. Mr. Skorheim then doubled

those revenues in 1998 . . . . To accomplish this, Mr. Skorheim assumed a

favorable USC study and resultant publicity would cause 200 more dentists to buy

at least 20 more implants each. The Court can find no factual basis for this

assumption. [¶] . . . [¶] This Court specifically finds that Sargon‘s historical

performance played no role in determining Mr. Skorheim‘s market projections,

except to the extent that Sargon‘s data showed it had some sales.‖

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The court found that Skorheim‘s ―projections are wildly beyond, by

degrees of magnitude, anything Sargon had ever experienced in the past. Under

the 20% market share scenario, for example, Plaintiff would see its profits climb

by 534.4% the first year, and by over 157,000% by 2009.‖ Instead, the court

found, Skorheim ―starts his analysis with a comparison to industry leaders, all

multi-million or multi-billion international corporations, or subsidiaries of such.

This, of course, is unavoidable if one only looks to industry ‗drivers‘ to ascertain

who most successfully employs those ‗drivers.‘ [¶] The only thing these

established companies have in common with Plaintiff is that they all sell or make

dental implants. In all other respects, in areas the [Millennium] report deems

relevant, such as size, history, product line, sales force, access to financing, among

others, they are worlds apart from Sargon.‖ (Fn. omitted.)

The court noted that Skorheim had testified ―that of all the 98 dental

implant manufacturers, he could not identify one that did not pursue clinical

studies or target general practitioners, rendering these two ‗drivers‘ meaningless

for comparison purposes. [¶] Moreover, many implant companies who touted

‗innovative‘ products, yet had smaller revenues, were omitted for comparison

purposes.‖ In his testimony, ―Mr. Skorheim grouped the companies that he

deemed had ‗innovative‘ products. He omitted certain smaller companies who,

according to the [Millennium] report, also claimed to have innovations. When

asked in court to explain this omission, he testified, ‗The proof is in the pudding.‘

The small market share of these companies showed the market disagreed.

Apparently, a product is ‗innovative‘ if the market embraces it and it sells. [¶]

The summary exclusion of other companies from his analysis, along with the fact

that it should not be a startling revelation that biotechnology companies that have

innovative products, all other things being equal, do better than those who do not,

14

render this ‗driver‘ equally meaningless for comparison purposes.‖ The court

found this argument to be ―entirely circular.‖

The court continued: ―At the hearing, Plaintiff changed its theory and

attempted to show that it was similar to the industry leaders in ways other than

possession of the three ‗drivers.‘ The characteristics that Mr. Skorheim contended

made Plaintiff ‗similar‘ to the industry leaders, however, were characteristics

common to most, if not all, implant companies. Obviously, if most share these

‗common traits,‘ the traits are meaningless for comparison purposes. If, based

upon these common characteristics, the very smallest is considered ‗similar‘ to the

very biggest, all cases that have required objective similarity would be effectively

overruled, and the rule requiring ‗similarity‘ would cease to exist. This Court

finds that Sargon is not similar to the industry leaders by any relevant, objective

business measure.‖

The court found that the dissimilarity between Sargon and the industry

leaders ―is sufficient, itself, to grant Defendant‘s motion‖ to exclude Skorheim‘s

testimony, but ―this court has other problems with Mr. Skorheim‘s opinion that

give further grounds, by themselves, to grant Defendant‘s motion.‖ It found that

―[c]omparing ‗degrees of innovation‘ with other products fails to give the jury

standards from which it can make a rational decision, is inherently speculative and

subjective, and thus fails to assist the jury in its fact-finding function. [¶] The

relevance of Mr. Skorheim‘s testimony, if any, is that it provides the jury with an

evidentiary basis to make market share choices and thus assess damages. The jury

can choose from four market shares ranging from 3.75% to 20%, depending upon

its finding of relative ‗innovativeness.‘ The highest rating gets Nobel Biocare‘s

share, with the lesser market share percentages awarded depending upon whether

the innovativeness of the Plaintiff‘s implant is more on a par with products from

Zimmer, 3i, and Straumann. The lowest percentage finding the jury can make is

15

that the innovativeness of the Sargon implant is comparable to Astra Tech‘s or

Dentsply‘s products. The fatal problem with this is that there is little rational basis

for this choice, and no rational standards for how the jury is to choose.

―Implicit in this choice is that there is an evidentiary basis for this ranking;

an ‗innovativeness‘ pecking order where, in fact, Nobel Biocare is on top, others

follow, with Astra Tech and Dentsply on the bottom. Likewise, there must be an

evidentiary basis for degree of difference; evidence that shows not only that Nobel

Biocare is more innovative, but, with 20% of the market, it must be twice as

‗innovative‘ as 3i, in the 10% group, and so on. Otherwise, ‗innovativeness‘

would not track the percentage market share for the findings he proposes the jury

make. Yet, the only factual basis for such a pecking order comes from Dr.

Lazarof‘s opinion of such, and there is no evidence or reason to believe one

company is more innovative than another, in the percentage difference, other than

the fact the companies have different market shares. [¶] . . . [¶] The only

possible evidentiary support for the percentage difference in the pecking order

comes from Mr. Skorheim‘s oft repeated observations of the marketplace. Certain

smaller companies, who claimed to have innovative products, were excluded from

his ‗industry leader‘ market share list because ‗the market‘ disagreed with their

claim of ‗innovativeness.‘ ‗The proof is in the pudding,‘ Mr. Skorheim explained.

If their products were truly innovative, they would sell more and thus have larger

market shares. [¶] . . . [¶] To the extent that this ranking of ‗innovativeness,‘

with Nobel Biocare on top with 20%, and Astra Tech on the bottom with 3.75%,

rests on the fact that some have larger market shares, it rests on nothing more than

a tautology. As there is no evidentiary basis that equates the degree of

innovativeness with the degree of difference in market share, the question posed to

the jury — to rank innovativeness and assign a market share, the sine qua non of

Mr. Skorheim‘s opinion — has no rational basis.‖

16

Additionally, the court continued, ―[t]he only rational answer to the

question Mr. Skorheim seeks to have the jury answer comparing ‗innovativeness‘

is ‗it depends.‘ What is ‗most innovative‘ about any implant depends upon what

the practitioner and patient think is important. [¶] What is good, better or best is

inherently subjective, and depends upon the need, the patient, the price, and the

situation. [¶] . . . [¶] It is not that the jury, given the time confines of a trial,

will not have enough information to decide relative ‗innovativeness,‘ it is that no

jury, given an infinite amount of time, will ever have enough information. Such is

the nature of purely subjective determinations. Which is the most innovative

implant? The Court expects there to be experts giving their views, but do we have

any standards or guidelines to help us in the determination?‖

The court explained that in the Millennium reports ―there are many

different types of implants. The market leaders have product lines of implants to

serve the diverse needs of patients and practitioners. Some implants have different

coating and/or screws. Some are immediate loading, some are two-stage loading,

others have internal or external connections. Astra Tech markets an implant that it

claims ‗has amassed significant documentation that confirms the increased bone

retention right up to the top of the implant compared to competitive products.‘

Another Astra Tech implant is touted as ‗simple and easier to use.‘ [Citation.]

Others are more ‗affordable‘ such as INNOVA Life Sciences and IMTEC.

[Citation.] Each company offers a line of implant products it claims are excellent

for various uses.‖ ―Is the Sargon implant as good or better than those offered by

competitors? Plaintiff will advocate for the Sargon implant. Who will advocate

for all the rest?‖

The court explained why, in its view, Skorheim‘s opinion was speculative.

―A jury can determine if a Ford was defective, because there are objective facts,

such as industry standards and standards for safety, as well as a body of case law

17

on the subject of products liability. A jury cannot say if a Ford is a better car than

a Chevrolet, because that is subjective and depends upon what the driver wants

and what he can afford, among other things.

―By way of example, assume that Miss Oklahoma entered into a contract to

transport her to the ‗Miss America‘ contest. Assume further that the carrier

breached the contract and Miss Oklahoma missed the chance to compete. A jury

could decide if she was damaged by the breach, to the extent damages could be

ascertained. Could the jury go further and, based upon testimony of experts,

decide that, had she been allowed to compete, she would have defeated Miss

Colorado for the title of Miss America, or decide that she would have been second,

behind Miss Colorado and ahead of Miss Montana? [¶] It is not a situation . . .

that juries can and do decide complex issues. Of course they do. But in all cases,

including cases where jurors are asked to ‗rank,‘ as in comparative fault, there are

standards in the form of jury instructions and a body of case law to refer to if

needed for special instructions.‖

The court believed that asking a jury to rank innovativeness ―is no different

than deciding whether Miss Oklahoma or Miss Colorado should wear the Miss

America crown. [¶] Mr. Skorheim‘s question calls for nothing but a subjective

and speculative response. Whether an implant is good, better or best can only be

answered in the market place, not the jury room. The market place has rendered

its verdict: ‗It depends.‘ That is why all the various implant companies, even the

very biggest, and their implants have their own market niche with corresponding

minority market shares. [¶] . . . [¶] Because there are no standards or guidelines

to determine ‗degrees of innovation,‘ it relegates the question of determining

potentially more than a billion dollars in damages to pure speculation.

Accordingly, the court finds that there are two independent grounds to rule this

evidence inadmissible: No damage award can be based on speculation; and

18

evidence that cannot assist the trier of fact in the resolution of an issue is not

relevant.‖

The court continued: ―Mr. Skorheim has no qualifications to opine that but

for Defendant‘s breach, Plaintiff would have a program of targeting general

practitioners on a par with any of the companies he singled out for comparison.

[¶] The [Millennium] report sets forth sales and marketing strategies for the

industry leaders. For example, Nobel Biocare in the 2001-2003 timeframe had 80

field representatives in the United States alone. What makes Mr. Skorheim think

that Plaintiff would equal or surpass these numbers, or done so with equal or

greater success? The only information he can offer is the uncritical acceptance of

Dr. Lazarof‘s hoped-for marketing plans. Whether these plans would ever have

been implemented as anticipated, or succeeded, is pure speculation.‖

―Mr. Skorheim testified that, in the perfect world where there had been no

breach, by 2007 Sargon would have made the seamless transition from a three-

person operation to sharing industry leadership with Nobel Biocare, a multi-

million dollar international corporation. Nobel Biocare touts, according to the

annual reports he relied upon, many different product lines, including different

types of implants. When asked how Sargon could be an industry leader with only

one implant (he later testified that Sargon had developed seven) Mr. Skorheim

testified that ‗he would expect‘ Sargon to have invested in ‗R and D‘ in the

intervening years and also, by 2007, to have invented new products and coatings.

Mr. Skorheim thus opined that not only would Sargon have invested in ‗R and D‘

by 2007, but has also opined on what the results of that ‗R and D‘ would be. [¶] It

is not reasonable for any expert to make such a faith-based prediction so

absolutely devoid of any factual basis about an industry where he has no

expertise.‖

19

Additionally, ―nowhere in [Skorheim‘s] success scenario is any mention of

how competitors will react to having their market share taken by Plaintiff. . . . We

do not know if these million or billion dollar corporations, or their shareholders,

would just go quietly, because it is not discussed or considered. We are forced to

assume they would do nothing.‖ ―This ‗Field of Dreams‘ ‗trust me‘ analysis

forces us to assume, speculate and believe too much. It is no different than our

Miss Oklahoma asking the jury to vote her Miss America and arguing that her

damages include the inevitable movie deals and product endorsements that

‗common sense‘ dictates every Miss America receives and were lost because her

transportation breached the contract to take her to the contest.‖ (Fn. omitted.)

In its concluding portion, the court stated that ―case law demands that to

establish such lost profits through expert testimony, the expert must base his/her

opinion on either historical performance of the company or a comparison to the

profits of companies similar in terms of size, locality, sales, products, number of

employees and other relevant financial factors. A party is not permitted to ‗make

up‘ its own factors as a basis for comparison and invite the jury to decide whether

the corporations are similar. To allow this is to invite proceedings where there are

no objective standards as there will always be some way to argue that companies

are ‗similar,‘ no matter how superficial or irrelevant. Here, for example, the

factors Mr. Skorheim uses would lead to the absurd result that Sargon, one of the

industry‘s smallest companies, was ‗similar‘ to the largest. In assessing lost profit

damages in this context, there is a meaningful difference between biggest and

smallest. [¶] Mr. Skorheim admittedly shunned historical performance and

comparison to companies of similar size and financial situation, choosing instead

to compare Plaintiff to multi-national industry giants based upon his own criteria

of ‗similar.‘ His criteria, even assuming he has the qualifications to decide them,

which he does not, are nebulous and legally irrelevant under case law.

20

Accordingly, there is no issue of similarity to give to the jury to compare and

decide.‖

The court concluded ―that Mr. Skorheim‘s opinions are not based upon

matters upon which a reasonable expert would rely, and do not show the nature

and occurrence of lost profits with evidence of reasonable reliability, because his

opinion is not based on any historical data from Plaintiff or a comparison to

similar businesses. The court also finds his ‗market drivers‘ meaningless for

comparison purposes. Additionally, his opinion rests on speculation and

unreasonable assumptions.‖

Accordingly, the court granted USC‘s motion to exclude Skorheim‘s

testimony.

D. The Second Appeal

After the court excluded Skorheim‘s testimony, the parties stipulated to

entry of judgment for $433,000 on Sargon‘s breach of contract claim. Sargon

appealed for the second time.

By a two-to-one vote, the Court of Appeal reversed the judgment and

remanded the matter for a new trial on lost profits. It concluded the trial court

erred in excluding Skorheim‘s testimony.

After reviewing in detail the facts, the parties‘ arguments, and the relevant

law, the court found that ―Sargon has the better argument here. . . . In 1998,

Sargon had about $1.8 million in revenues, roughly one-half of 1 percent of the

global market for dental implants. Astra Tech, one of the companies relied on by

Skorheim, had around $18.5 million in revenues, for a 4.8 percent market share.

The other companies had greater revenues and market shares. At the very least,

the jury was entitled to hear about Astra Tech because it was sufficiently similar to

21

Sargon, and a damages award based on a comparison to that company would have

been supported by substantial evidence, not speculation.

―We acknowledge the difficulty in determining lost profits when an

established business is built upon the sale of an innovative, revolutionary, or

world-changing product. The factor of innovation — what the trial court

described as a ‗beauty contest‘ — is not easily converted into dollars and cents.

But exactitude is not required. None of Sargon‘s competitors used its implant,

and, to that extent, they were different. But lost profits may be based on a

comparison of similar companies; they need not be identical in all respects.

Skorheim‘s expert opinion was based on ‗economic and financial data, market

surveys and analyses, business records of similar enterprises, and the like.‘ (Kids’

Universe v. In2Labs[ (2002) 95 Cal.App.4th 870, 884].) He also considered

Sargon‘s historical financial data. The trial court‘s ruling is tantamount to a flat

prohibition on lost profits in any case involving a revolutionary breakthrough in an

industry.

―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. 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.

(GHK Associates v. Mayer Group, Inc.[ (1990) 224 Cal.App.3d 856, 874].) We

have carefully reviewed the trial court‘s criticisms of Skorheim‘s proffered

testimony and conclude they were better left for the jury‘s assessment.‖

Justice Johnson dissented. He argued that ―[w]here, as here, the law does

not offer precise parameters to the quantum of proof required to establish lost

profit damages, a trial court 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

22

that threshold. The placement of that threshold is left to the trial court so long as it

is within the bounds of the law.‖ He found the trial court‘s decision to be

―founded on a detailed, methodical and well-reasoned examination of the law of

contracts and the limits on lost profits damages. . . . [¶] . . . [T]he task of

determining the threshold measure of certainty to permit Skorheim‘s opinion to go

to the jury should be left to the gatekeeping function of the trial court, in the

context of its evidentiary rulings after an evaluation of all of the facts, evidence,

and arguments. Here, the trial court drew a very reasonable line in the sand with

its ruling excluding Sargon‘s evidence of lost profit damages. I see no

justification for this court to overturn that decision.‖

The dissent argued that ―Sargon was not similar to the Big Six under any

relevant, objective business measure‖ and found ―nothing in this ruling that

indicates the trial court acted in an arbitrary, capricious fashion, was guided by

whim rather than the rule of law, or exceeded the bounds of reason.‖ Justice

Johnson added that ―while I admittedly share with the trial court a healthy dose of

skepticism over Skorheim‘s unyieldingly optimistic projections for Sargon‘s

market share growth and while I struggle to see a nexus between those projections

and business and economic reality, this dissent nonetheless does not stem from the

havoc that Skorheim‘s methodology may wreak upon reasonable damage

calculations but from the damage done to the trial judge‘s reasonable and

prudently exercised judgment on an evidentiary issue over which he and he alone

should have decisional authority, absent arbitrariness and capriciousness. Nothing

in the trial judge‘s reasonable, straightforward and clearly articulated evidentiary

ruling bears even a smidgeon of arbitrariness or capriciousness.‖ Accordingly,

Justice Johnson would have affirmed the trial court‘s ruling excluding Skorheim‘s

testimony.

23

We granted USC‘s petition for review to decide whether the trial court

erred in excluding Skorheim‘s testimony.

II. DISCUSSION

This case stands at the intersection of two legal principles: (1) Expert

testimony must not be speculative, and (2) lost profit damages must not be

speculative. We will discuss both principles, then apply them to this case.

A. Expert Testimony

As did the trial court, we begin our consideration of expert testimony with

words that Judge Friendly wrote half a century ago: ―There is no bright line that

divides evidence worthy of consideration by a jury, although subject to heavy

counter-attack, from evidence that is not. Especially because of the guaranty of

the Seventh Amendment, a federal court must be exceedingly careful not to set the

threshold to the jury room 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 of probative value‘ is required. 1

Wigmore, Evidence (3d ed. 1940), pp. 409-410. These comments are especially

pertinent to an array of figures conveying a delusive impression of exactness in an

area where a jury‘s common sense is less available than usual to protect it.‖

(Herman Schwabe, Inc. v. United Shoe Machinery Corp., supra, 297 F.2d at p.

912.)

Although Judge Friendly was discussing federal law and federal courts, his

comments, both in their cautionary note that, due to the jury trial right, courts

should not set the admission bar too high, and in their stressing the need to exclude

unreliable evidence, could just as well have described California law and

24

California courts. Under California law, trial courts have a substantial

―gatekeeping‖ responsibility.5

Evidence Code section 801 provides: ―If a witness is testifying as an

expert, his testimony in the form of an opinion is limited to such an opinion as is:

[¶] (a) Related to a subject that is sufficiently beyond common experience that

the opinion of an expert would assist the trier of fact; and [¶] (b) Based on matter

. . . that is of a type that reasonably may be relied upon by an expert in forming an

opinion upon the subject to which his testimony relates, unless an expert is

precluded by law from using such matter as a basis for his opinion.‖ (Italics

added.) Subdivision (b) clearly permits a court to determine whether the matter is

of a type on which an expert may reasonably rely.

In Lockheed Litigation Cases (2004) 115 Cal.App.4th 558, 563, the

plaintiffs argued that under Evidence Code section 801, subdivision (b), ―a court

should determine only whether the type of matter that an expert relies on in

forming his or her opinion is the type of matter that an expert reasonably can rely

on in forming an opinion, without regard to whether the matter relied on

reasonably does support the particular opinion offered.‖ The Court of Appeal

disagreed. ―An expert opinion has no value if its basis is unsound. [Citations.]

Matter that provides a reasonable basis for one opinion does not necessarily

provide a reasonable basis for another opinion. Evidence Code section 801,

subdivision (b), states that a court must determine whether the matter that the

expert relies on is of a type that an expert reasonably can rely on ‗in forming an


5

Recent United States Supreme Court decisions have referred to the trial

judge‘s ― ‗gatekeeper‘ role‖ (General Electric Co. v. Joiner (1997) 522 U.S. 136,
142) or ― ‗gatekeeping‘ obligation‖ (Kumho Tire Co. v. Carmichael (1999) 526
U.S. 137, 141). We have used the term ―gatekeeping responsibility.‖ (People v.
Prince
(2007) 40 Cal.4th 1179, 1225, fn. 8.)

25

opinion upon the subject to which his testimony relates.‘ (Italics added.) We

construe this to mean that the matter relied on must provide a reasonable basis for

the particular opinion offered, and that an expert opinion based on speculation or

conjecture is inadmissible.‖ (Lockheed Litigation Cases, supra, at p. 564.)

We agree with this analysis. Indeed, as the Court of Appeal in that case

also noted (Lockheed Litigation Cases, supra, 115 Cal.App.4th at p. 564), the

California Law Revision Commission comments to Evidence Code section 801

explained that ―under existing law, irrelevant or speculative matters are not a

proper basis for an expert‘s opinion. See Roscoe Moss Co. v. Jenkins [(1942) 55

Cal.App.2d 369] (expert may not base opinion upon a comparison if the matters

compared are not reasonably comparable) . . . .‖ (Cal. Law Revision Com. com.,

29B pt. 3A West‘s Ann. Evid. Code (2009 ed.) foll. § 801, p. 25.) Comments of a

commission that proposed a statute are entitled to substantial weight in construing

the statute, especially when, as here, the Legislature adopted the statute without

change. (Jevne v. Superior Court (2005) 35 Cal.4th 935, 947.) Thus, under

Evidence Code section 801, the trial court acts as a gatekeeper to exclude

speculative or irrelevant expert opinion. As we recently explained, ―[T]he

expert‘s opinion may not be based ‗on assumptions of fact without evidentiary

support [citation], or on speculative or conjectural factors . . . . [¶] Exclusion of

expert opinions that rest on guess, surmise or conjecture [citation] is an inherent

corollary to the foundational predicate for admission of the expert testimony: will

the testimony assist the trier of fact to evaluate the issues it must decide?‘

(Jennings v. Palomar Pomerado Health Systems, Inc. (2003) 114 Cal.App.4th

1108, 1117.)‖ (People v. Richardson (2008) 43 Cal.4th 959, 1008; accord, People

v. Moore (2011) 51 Cal.4th 386, 405.)

Additionally, as a recent law review article explains, Evidence Code section

801 is not the only statute that governs the trial court‘s gatekeeping role. We must

26

also consider Evidence Code section 802. (See Imwinkelried & Faigman,

Evidence Code Section 802: The Neglected Key to Rationalizing the California

Law of Expert Testimony (2009) 42 Loyola L.A. L.Rev. 427 (hereafter

Imwinkelried & Faigman).)

Evidence Code section 802 provides: ―A witness testifying in the form of

an opinion may state . . . the reasons for his opinion and the matter . . . upon which

it is based, unless he is precluded by law from using such reasons or matter as a

basis for his opinion. The court in its discretion may require that a witness before

testifying in the form of an opinion be first examined concerning the matter upon

which his opinion is based.‖ (Italics added.) This section indicates the court may

inquire into the expert‘s reasons for an opinion. It expressly permits the court to

examine experts concerning the matter on which they base their opinion before

admitting their testimony. The reasons for the experts‘ opinions are part of the

matter on which they are based just as is the type of matter. Evidence Code

section 801 governs judicial review of the type of matter; Evidence Code section

802 governs judicial review of the reasons for the opinion. ―The stark contrast

between the wording of the two statutes strongly suggests that although under

section 801(b) the judge may consider only the acceptability of the generic type of

information the expert relies on, the judge is not so limited under section 802.‖

(Imwinkelried & Faigman, supra, 42 Loyola L.A. L.Rev. at p. 441.)

Evidence Code section 802 also permits the trial court to find the expert is

precluded ―by law‖ from using the reasons or matter as a basis for the opinion.

― ‗Law‘ includes constitutional, statutory, and decisional law.‖ (Evid. Code,

§ 160.) Thus, ―construed in the context of section 160, section 802 authorizes a

court to promulgate case law restrictions on an expert‘s ‗reasons‘ . . . .‖

(Imwinkelried & Faigman, supra, 42 Loyola L.A. L.Rev, at p. 442.) This means

that a court may inquire into, not only the type of material on which an expert

27

relies, but also whether that material actually supports the expert‘s reasoning. ―A

court may conclude that there is simply too great an analytical gap between the

data and the opinion proffered.‖ (General Electric Co. v. Joiner, supra, 522 U.S.

at p. 146, quoted in Imwinkelried & Faigman, supra, 42 Loyola L.A. L.Rev., at p.

448.)

Thus, under Evidence Code sections 801, subdivision (b), and 802, the trial

court acts as a gatekeeper 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. Other

provisions of law, including decisional law, may also provide reasons for

excluding expert opinion testimony.6

But courts must also be cautious in excluding expert testimony. The trial

court‘s gatekeeping role does not involve choosing between competing expert

opinions. The high court warned that the gatekeeper‘s focus ―must be solely on

principles and methodology, not on the conclusions that they generate.‖ (Daubert

v. Merrell Dow Pharmaceuticals, Inc., supra, 509 U.S. at p. 595.) The advisory

committee on the 2000 amendments to Federal Rules of Evidence, rule 702, which

codified the rule established in Daubert, noted that the trial court‘s task is not to

choose the most reliable of the offered opinions and exclude the others: ―When a

trial court, applying this amendment, rules that an expert‘s testimony is reliable,

this does not necessarily mean that contradictory expert testimony is unreliable.

6

In People v. Leahy (1994) 8 Cal.4th 587, 604, this court held that the

―general acceptance‖ test for admissibility of expert testimony based on new
scientific techniques (see People v. Kelly (1976) 17 Cal.3d 24) still applies in
California courts despite the United States Supreme Court‘s rejection, in Daubert
v. Merrell Dow Pharmaceuticals, Inc.
(1993) 509 U.S. 579, of a similar test in
federal courts. Nothing we say in this case affects our holding in Leahy regarding
new scientific techniques.

28

The amendment is broad enough to permit testimony that is the product of

competing principles or methods in the same field of expertise.‖ (Advisory Com.

Notes to Federal Rules Evid., rule 702, 28 U.S.C.)

The trial court‘s preliminary determination whether the expert opinion is

founded on sound logic is not a decision on its persuasiveness. The court must not

weigh an opinion‘s probative value or substitute its own opinion for the expert‘s

opinion. Rather, the court must simply determine whether the matter relied on can

provide a reasonable basis for the opinion or whether that opinion is based on a

leap of logic or conjecture. The court does not resolve scientific controversies.

Rather, it conducts a ―circumscribed inquiry‖ to ―determine whether, as a matter

of logic, the studies and other information cited by experts adequately support the

conclusion that the expert‘s general theory or technique is valid.‖ (Imwinkelried

& Faigman, supra, 42 Loyola L.A. L.Rev. at p. 449.) The goal of trial court

gatekeeping is simply to exclude ―clearly invalid and unreliable‖ expert opinion.

(Black et al., Science and the Law in the Wake of Daubert: A New Search for

Scientific Knowledge (1994) 72 Tex. L.Rev. 715, 788.) In short, the gatekeeper‘s

role ―is to make certain that an expert, whether basing testimony upon professional

studies or personal experience, employs in the courtroom the same level of

intellectual rigor that characterizes the practice of an expert in the relevant field.‖

(Kumho Tire Co. v. Carmichael, supra, 526 U.S. at p. 152.)

Except to the extent the trial court bases its ruling on a conclusion of law

(which we review de novo), we review its ruling excluding or admitting expert

testimony for abuse of discretion. (People v. McWhorter (2009) 47 Cal.4th 318,

362; People v. Gardeley (1996) 14 Cal.4th 605, 619; People v. Mickey (1991) 54

Cal.3d 612, 687-688; Lockheed Litigation Cases, supra, 115 Cal.App.4th at p.

564.) A ruling that constitutes an abuse of discretion has been described as one

that is ―so irrational or arbitrary that no reasonable person could agree with it.‖

29

(People v. Carmony (2004) 33 Cal.4th 367, 377.) But the court‘s discretion is not

unlimited, especially when, as here, its exercise implicates a party‘s ability to

present its case. Rather, it must be exercised within the confines of the applicable

legal principles.

―The discretion of a trial judge is not a whimsical, uncontrolled power, but

a legal discretion, which is subject to the limitations of legal principles governing

the subject of its action, and to reversal on appeal where no reasonable basis for

the action is shown.‖ (9 Witkin, Cal. Procedure (5th ed. 2008) Appeal, § 364, p.

420; see Westside Community for Independent Living, Inc. v. Obledo (1983) 33

Cal.3d 348, 355 [quoting this language].) ―The scope of discretion always resides

in the particular law being applied, i.e., in the ‗legal principles governing the

subject of [the] action . . . .‘ Action that transgresses the confines of the applicable

principles of law is outside the scope of discretion and we call such action an

‗abuse‘ of discretion. [Citation.] . . . [¶] The legal principles that govern the

subject of discretionary action vary greatly with context. [Citation.] They are

derived from the common law or statutes under which discretion is conferred.‖

(City of Sacramento v. Drew (1989) 207 Cal.App.3d 1287, 1297-1298.) To

determine if a court abused its discretion, we must thus consider ―the legal

principles and policies that should have guided the court‘s actions.‖ (People v.

Carmony, supra, 33 Cal.4th at p. 377.)

In this case, we consider whether the trial court properly exercised its

discretion to exclude expert opinion testimony. As we have explained, the trial

court‘s discretion in this regard is circumscribed; it must be exercised within the

limits the law permits. Accordingly, we must review the record to ensure that the

ruling comes within the scope of that discretion.

30

B. Lost Profits

Lost profits may be recoverable as damages for breach of a contract.

―[T]he general principle [is] that damages for the loss of prospective profits are

recoverable where the evidence makes reasonably certain their occurrence and

extent.‖ (Grupe v. Glick (1945) 26 Cal.2d 680, 693.) Such damages must ―be

proven to be certain both as to their occurrence and their extent, albeit not with

‗mathematical precision.‘ ‖ (Lewis Jorge Construction Management, Inc. v.

Pomona Unified School Dist. (2004) 34 Cal.4th 960, 975.) The rule that lost

profits must be reasonably certain is a specific application of a more general

statutory rule. ―No damages can be recovered for a breach of contract which are

not clearly ascertainable in both their nature and origin.‖ (Civ. Code, § 3301; see

Greenwich S.F., LLC v. Wong (2010) 190 Cal.App.4th 739, 760.)

Regarding lost business profits, the cases have generally distinguished

between established and unestablished businesses. ―[W]here the operation of an

established business is prevented or interrupted, as by a . . . breach of contract . . . ,

damages for the loss of prospective profits that otherwise might have been made

from its operation are generally recoverable for the reason that their occurrence

and extent may be ascertained with reasonable certainty from the past volume of

business and other provable data relevant to the probable future sales.‖ (Grupe v.

Glick, supra, 26 Cal.2d at p. 692.) ―Lost profits to an established business may be

recovered if their extent and occurrence can be ascertained with reasonable

certainty; once their existence has been so established, recovery will not be denied

because the amount cannot be shown with mathematical precision. [Citations.]

Historical data, such as past business volume, supply an acceptable basis for

ascertaining lost future profits. [Citations.] In some instances, lost profits may be

recovered where plaintiff introduces evidence of the profits lost by similar

31

businesses operating under similar conditions. [Citations.]‖ (Berge v.

International Harvester Co. (1983) 142 Cal.App.3d 152, 161-162.)

―On the other hand, where the operation of an unestablished business is

prevented or interrupted, damages for prospective profits that might otherwise

have been made from its operation are not recoverable for the reason that their

occurrence is uncertain, contingent and speculative. . . . But although generally

objectionable for the reason that their estimation is conjectural and speculative,

anticipated profits dependent upon future events are allowed where their nature

and occurrence can be shown by evidence of reasonable reliability.‖ (Grupe v

Glick, supra, 26 Cal.2d at pp. 692-693.)

―Where the fact of damages is certain, the amount of damages need not be

calculated with absolute certainty. [Citations.] The law requires only that some

reasonable basis of computation of damages be used, and the damages may be

computed even of the result reached is an approximation. [Citation.] This is

especially true where . . . it is the wrongful acts of the defendant that have created

the difficulty in proving the amount of loss of profits [citation] or where it is the

wrongful acts of the defendant that have caused the other party to not realize a

profit to which that party is entitled.‖ (GHK Associates v. Mayer Group, Inc.

(1990) 224 Cal.App.3d 856, 873-874 [permitting an award of profits calculated

from a project‘s ―actual income‖].)

A recent case provides an example of claimed lost profits that were found

to be ―uncertain, hypothetical and entirely speculative.‖ (Greenwich S.F., LLC v.

Wong, supra, 190 Cal.App.4th at p. 743.) There the plaintiffs sought lost profits

for breach of a real property sales agreement. They ―presented evidence of lost

profits through the testimony of [a] real estate appraiser,‖ who testified about what

the property would have been worth had it been developed according to the

intended plans and specifications. (Id. at p. 749.) The appellate court found the

32

resulting award of $600,000 in lost profits to be unsupported. ―[T]he occurrence

and extent of the projected lost profits were not proven with the requisite

reasonable certainty in this case.‖ (Id. at p. 760.) ―The evidence in this case was

insufficient to show that [either plaintiff] was an established business or had a

track record of successfully developing or redeveloping properties. . . . [¶] . . .

The existence of plans for a development does not supply substantial evidence that

the development is reasonably certain to be built, much less that it is reasonably

certain to produce profits.‖ (Id. at p. 763.) ―The lost profits claim was based on

the assumption that [plaintiffs] would have constructed the residence according to

the plans and specifications without changes and that the venture would have been

profitable. These assumptions were inherently uncertain, contingent,

unforeseeable and speculative. The proposed real estate development project here

involved numerous variables that made any calculation of lost profits inherently

uncertain.‖ (Id. at p. 766.)

Once again, we add a cautionary note. The lost profit inquiry is always

speculative to some degree. Inevitably, there will always be an element of

uncertainty. Courts must not be too quick to exclude expert evidence as

speculative merely because the expert cannot say with absolute certainty what the

profits would have been. Courts must not eviscerate the possibility of recovering

lost profits by too broadly defining what is too speculative. A reasonable certainty

only is required, not absolute certainty.

C. Application to This Case

We now apply these principles to this case. The issue before us is whether

the court abused its discretion in excluding the expert testimony, not whether

substantial evidence supports a lost profits award. But the substantive law

regarding lost profits is relevant to help define the type of matter on which an

33

expert may reasonably rely. For example, as the trial court explained, ―While lost

profits can be established with the aid of expert testimony, economic and financial

data, market surveys and analysis, business records of similar enterprises and the

like, the underlying requirement for each is ― ‗a substantial similarity between the

facts forming the basis of the profit projections and the business opportunity that

was destroyed.‖ ‘ ‖ (Quoting Kids’ Universe v. In2Labs, supra, 95 Cal.App.4th at

p. 886.) But, as the trial court further found, Skorheim‘s analysis relied ―on data

that in no way is analogous to Plaintiff.‖

To the extent that the expert relied on data that is not relevant to the

measure of lost profit damages, the trial court acted within its discretion to exclude

the testimony because it was not ―[b]ased on matter . . . that is of a type that

reasonably may be relied upon by an expert in forming an opinion upon the

subject to which his testimony relates . . . .‖ (Evid. Code, § 801, subd. (b); see

Westrec Marina Management, Inc. v. Jardine Ins. Brokers Orange County, Inc.

(2000) 85 Cal.App.4th 1042, 1050-1051 [upholding the exclusion of expert

testimony due in part to substantive law of lost profits].) Accordingly, although

the issue is the admissibility of expert testimony, we will also consider the law of

lost profits to the extent it is relevant to that issue.

The trial court did not abuse its discretion in the sense of making a ruling

that was irrational or arbitrary. It presided over a lengthy evidentiary hearing and

provided a detailed ruling. The Court of Appeal majority identified no specific

error in that ruling. As the dissenter in the Court of Appeal stated, ―Nothing in the

trial judge‘s reasonable, straightforward and clearly articulated evidentiary ruling

bears even a smidgeon of arbitrariness or capriciousness.‖ Indeed, the court could

hardly have exercised its discretion more carefully.

The trial court also excluded the expert testimony for proper reasons. It

properly found the expert‘s methodology was too speculative for the evidence to

34

be admissible. The court assumed that Skorheim‘s market share approach would

be appropriate in a proper case. We will do so also. An expert might be able to

make reasonably certain lost profit estimates based on a company‘s share of the

overall market. But Skorheim did not base his lost profit estimates on a market

share Sargon had ever actually achieved. Instead, he opined that Sargon‘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.

Skorheim considered Sargon to be comparable to the Big Six dental

implant companies rather than the smaller ones that appear to have far more

closely resembled it. He admitted that by no objective business metric, such as

sales or number of employees, was Sargon in fact comparable to the Big Six.

Instead, he based his comparison solely on his belief that Sargon, like the Big Six,

and unlike the rest, was innovative, and that innovation was the prime market

driver. (He also testified that clinical studies and outreach to general practitioners

were market drivers, but he recognized that all dental implant companies used

them, thus making them essentially irrelevant for comparison purposes.) But, as

the trial court noted, Skorheim‘s reasoning was circular. He concluded that the

Big Six were innovative because they were successful, and that the smaller

companies (excluding Sargon) were not innovative because they were less

successful. In essence, he said that the smaller companies were smaller because

they were not innovative. The trial court properly considered this circularity in the

reasoning as a basis to exclude the testimony under Evidence Code section 802.

Skorheim based his estimates on the belief that the more innovative a

company was, the larger the market share it would achieve. Thus, he testified, if

Sargon had a level of innovation equal to that of the smallest of the Big Six, it

would have gained only its level of market share. He then testified to gradations

35

of innovation, with each increase in innovation equaling a step up in market share

and thus in future profits. However, as the trial court explained, ―Implicit in this

choice is that there is an evidentiary basis for this ranking; an ‗innovativeness‘

pecking order where, in fact, Nobel Biocare is on top, others follow, with Astra

Tech and Dentsply on the bottom. Likewise, there must be an evidentiary basis

for degree of difference; evidence that shows not only that Nobel Biocare is more

innovative, but, with 20% of the market, it must be twice as ‗innovative‘ as 3i, in

the 10% group, and so on. Otherwise, ‗innovativeness‘ would not track the

percentage market share for the findings he proposes the jury make.‖ But

Skorheim also agreed that a company with a smaller market share could, in fact,

be more innovative than a company with a larger share.

As the trial court further explained, ―The only possible evidentiary support

for the percentage difference in the pecking order comes from Mr. Skorheim‘s oft

repeated observations of the marketplace. Certain smaller companies, who

claimed to have innovative products, were excluded from his ‗industry leader‘

market share list because ‗the market‘ disagreed with their claim of

‗innovativeness.‘ ‗The proof is in the pudding,‘ Mr. Skorheim explained. If their

products were truly innovative, they would sell more and thus have larger market

shares. [¶] . . . [¶] To the extent that this ranking of ‗innovativeness,‘ with

Nobel Biocare on top with 20%, and Astra Tech on the bottom with 3.75%, rests

on the fact that some have larger market shares, it rests on nothing more than a

tautology. As there is no evidentiary basis that equates the degree of

innovativeness with the degree of difference in market share, the question posed to

the jury — to rank innovativeness and assign a market share, the sine qua non of

Mr. Skorheim‘s opinion — has no rational basis.‖

Sargon argues that the cases concerning an unestablished company do not

apply here because it was an established company with a track record of having

36

made a profit. It had, for example, a net profit of $101,000 in 1998. But Sargon

had no track record of being a global leader, one of the Big Six. An established

company may base its claim to future profits on evidence of its past profits, but

Skorheim did not do so. He tried to compare Sargon to the Big Six, but the

companies were not comparable. In Parlour Enterprises, Inc. v. Kirin Group, Inc.

(2007) 152 Cal.App.4th 281 (Parlour Enterprises), a jury gave a small restaurant

business called Farrell‘s a multimillion-dollar lost profit award. The Court of

Appeal reversed the award, finding the claim of lost profits was improperly based

on speculative expert testimony. The expert in that case had compared the

company to ―a publicly traded restaurant chain called Friendly‘s, which he

claimed was ‗relatively similar to the Farrell‘s concept.‘ ‖ (Id. at p. 290.) But the

Court of Appeal found the two companies not comparable. ―Although one way to

prove prospective profits is through the experience of comparable businesses, [the

expert‘s] cursory description of Friendly‘s business model failed to establish its

profit-and-loss experience is sufficiently similar to Farrell‘s to be relevant to the

question of plaintiffs‘ alleged lost profits.‖ (Ibid.) The court explained that

―[b]efore evidence of similar businesses may be used to prove loss of prospective

profits, there must be ‗ ―a substantial similarity between the facts forming the basis

of the profit projections and the business opportunity that was destroyed.‖ ‘ ‖ (Id.

at p. 291.)

This case is like Parlour Enterprises, supra, 152 Cal.App.4th 281. Except

for Skorheim‘s 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. As

the trial court noted, ―Sargon is not similar to the industry leaders by any relevant,

objective business measure.‖ Skorheim did not base his lost profits estimates on

any objective evidence of ―past volume of business‖ or any ―other provable data

relevant to the probable future sales.‖ (Grupe v. Glick, supra, 26 Cal.2d at p. 692.)

37

Instead, as the trial court further noted, Skorheim‘s lost profit projections were

―wildly beyond, by degrees of magnitude, anything Sargon had ever experienced

in the past.‖

In finding that the trial court should have admitted Skorheim‘s testimony,

the majority below observed that ―exactitude is not required.‖ The observation is

correct. If lost profits can be estimated with reasonable certainty, a court may not

deny recovery merely because one cannot determine precisely what they would

have been. But exactitude is not the problem here. Whether the actual profits

could logically be estimated in the manner Skorheim claimed is the problem. As

the trial court noted, a lost profit award of up to $1 billion may not be based on

pure speculation.

The Court of Appeal majority found that the case of Palm Medical Group,

Inc. v. State Comp. Ins. Fund (2008) 161 Cal.App.4th 206 ―is more on point‖ than

Parlour Enterprises, supra, 152 Cal.App.4th 281. In Palm Medical, a medical

clinic sued, claiming it was wrongly denied admission into a preferred provider

network. The Court of Appeal upheld a lost profits award. But there the

plaintiff‘s expert based his lost profits estimate on the plaintiff‘s own profit margin

and a comparison to the profits of other clinics that had participated in the

preferred provider network from which the plaintiff had been excluded. (Id. at p.

227.) As far as the opinion indicates, the plaintiff and the other clinics were, in

fact, comparable. The opinion gives no indication the defendant claimed

otherwise. Nothing in Palm Medical suggests the trial court here abused its

discretion in finding Sargon not to be comparable to the Big Six.

Sargon also relies on Sanchez-Corea v. Bank of America (1985) 38 Cal.3d

892. The trial court considered and aptly distinguished that case: ―In Sanchez-

Corea, the earnings of plaintiff‘s small company were compared to the earnings of

‗other companies, including Honeywell, which occupied the market after

38

[plaintiff‘s] departure . . . .‘ (Id. at p. 907.) On appeal, the defendant complained,

as does USC, that the comparison was unfair because plaintiff had ‗far smaller

financial resources.‘ (Id. at p. 908.) [¶] Sargon‘s reliance is misplaced. The

Supreme Court held the evidence supported a $1,000,000 compensatory damage

award because the damage award was based on Plaintiff‘s historical growth, as

Plaintiff had experienced a ‗tenfold growth in contracts (sales) from $180,000 in

1970 to $1.5 million in 1973.‘ (Id. at p. 907.) In that case, the Plaintiff‘s expert‘s

projections were based on pre-litigation estimates, which underestimated

Plaintiff‘s actual growth in the year before Defendant‘s wrongful act and the

subsequent lawsuit. The court never discussed the comparison to Honeywell, and

this case has never been cited as authority for comparing businesses of any size.‖

As the trial court also noted, Skorheim‘s testimony was speculative in other

ways as well. He assumed Sargon, which had virtually no marketing or research

and development departments, would have developed such departments to permit

it to compete with the Big Six, all of which had large ones. He assumed one of the

Big Six would fall out of that group, and Sargon would replace it. He assumed the

Big Six would have taken no steps to contend with their new competitor, Sargon.

All of these factors also support the trial court‘s exclusion of Skorheim‘s

testimony.

Skorheim gave the opinion that, to a ―reasonable certainty,‖ Sargon would

have become a market leader within 10 years. The quoted term derives from the

law of lost profits. We stated in Grupe v. Glick, supra, 26 Cal.2d at page 693, that

lost profits must be ―reasonably certain‖ to be recoverable. But, as the trial court

found, this testimony was inherently speculative. It ―involved numerous variables

that made any calculation of lost profits inherently uncertain.‖ (Greenwich S.F.,

LLC v. Wong, supra, 190 Cal.App.4th at p. 766.) Skorheim‘s attempt to predict

the future was in no way grounded in the past.

39

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?

Similarly, if a first-time author sues a publisher for breach of a contract to

publish a novel, could a witness who was an expert on the publishing business,

literature, and popular culture testify that the novel, if published, would have

become a national bestseller, won the Pulitzer Prize, and spawned a megahit

movie with several blockbuster sequels? Could a jury award lost profits based on

that scenario? Or could it compromise by finding the book would have been a

bestseller but would not have won the Pulitzer Prize, and would have spawned a

moderately successful movie but no sequel?

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? What if the Saxon King Harold had prevailed at Hastings, and

William, later called the Conqueror, had died in that battle rather than Harold?

What if the series of Chinese overseas discovery expeditions that two Ming

Dynasty emperors sponsored, and that reached at least the east coast of Africa by

1432, had continued rather than stopped? Many serious, and not-so-serious,

historians have enjoyed speculating about these what ifs. But few, if any, claim

40

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.

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.

The Court of Appeal majority was concerned that ―[t]he trial court‘s ruling

is tantamount to a flat prohibition on lost profits in any case involving a

revolutionary breakthrough in an industry.‖ We disagree. Other avenues might

exist to show lost profits. An expert could use a company‘s actual profits, a

comparison to the profits of similar companies, or other objective evidence to

project lost profits. Sargon itself argues that the record in this case contains

evidence of specific lost sales and canceled contracts due to USC‘s failure to

complete the study. Evidence of this kind might support reasonably certain lost

profit estimates.7 The trial court‘s ruling merely meant Sargon could not obtain a

massive verdict based on speculative projections of future spectacular success.


7

Sargon notes that the trial court had ruled that at least some of this evidence

was insufficient to support a claim of intentional interference with prospective
economic advantage. The court found no evidence the lost sales were related to
USC‘s actions or omissions. It is not clear how this ruling would have affected a
lost profit claim. What is clear is that the ruling is not before us on appeal.
Moreover, even if this type of evidence would not have been sufficient to support


(footnote continued on next page)

41

The trial court properly acted as a gatekeeper to exclude speculative expert

testimony. Its ruling came within its discretion. The majority in the Court of

Appeal erred in concluding otherwise.

III. CONCLUSION

We reverse the judgment of the Court of Appeal and remand the matter to

that court for further proceedings consistent with this opinion.

CHIN, J.

WE CONCUR:

CANTIL-SAKAUYE, C. J.
KENNARD, J.
BAXTER, J.
WERDEGAR, J.
CORRIGAN, J.
LIU, J.




(footnote continued from previous page)

a lost profit claim in this case, similar evidence might support such a claim in
some other case.

42

See next page for addresses and telephone numbers for counsel who argued in Supreme Court.

Name of Opinion Sargon Enterprises, Inc. v. University of Southern California
__________________________________________________________________________________

Unpublished Opinion
XXX NP opn. filed 2/9/11 – 2d Dist., Div. 1
Original Appeal
Original Proceeding
Review Granted

Rehearing Granted

__________________________________________________________________________________

Opinion No.
S191550
Date Filed: November 26, 2012
__________________________________________________________________________________

Court:
Superior
County: Los Angeles
Judge: Terry A. Green

__________________________________________________________________________________

Counsel:

Browne George Ross, Brown Woods George, Allan Browne, Eric M. George, Benjamin D. Scheibe, Ira
Bibbero; Glaser Weil Fink Jacobs Howard Avchen & Shapiro, Patricia L. Glaser, Elizabeth G. Chilton and
Andrew Baum for Plaintiff and Appellant.

Quinn Emanuel Urquhart & Sullivan, Quinn Emanuel Urquhart Oliver & Hedges, Kathleen M. Sullivan,
Daniel H. Bromberg, John B. Quinn, Michael E. Williams and Michael T. Lifrak for Defendants and
Appellants.

Cole Pedroza, Curtis A. Cole and Cassidy E. Cole for California Medical Association, California Hospital
Association and California Dental Association as Amici Curiae on behalf of Defendants and Appellants.

Daniel J. Popeo, Richard A. Samp; Bergeson and Mark E. Foster for Washington Legal Foundation and
Allied Educational Foundation as Amici Curiae on behalf of Defendants and Appellants.

Mayer Brown and Donald M. Falk for Actelion Pharmaceuticals U.S. as Amicus Curiae on behalf of
Defendants and Appellants.

Ada Meloy; Hogan Lovells US, Michael Shepard, Martin Michaelson, Alexander Dreier and David Ginn
for American Council on Education and other Higher Education Associations and Institutions as Amici
Curiae on behalf of Defendants and Appellants.

Morgan, Lewis & Bockius, Thomas M. Peterson and Benjamin P. Smith for Asahi Kasei Pharma
Corporation as Amicus Curiae on behalf of Defendants and Appellants.




43





Counsel who argued in Supreme Court (not intended for publication with opinion):

Eric M. George
Browne George Ross
2121 Avenue of the Stars, Suite 2400
Los Angeles, CA 90067
(310) 274-7100

Kathleen M. Sullivan
Quinn Emanuel Urquhart & Sullivan
555 Twin Dolphin Drive, 5th Floor
Redwood Shores, CA 94065
(650) 801-5000



44

Opinion Information
Date:Citation:Docket Number:
Mon, 11/26/201255 Cal.4th 747 (2012), 149 Cal. Rptr. 3d 614, 288 P.3d 1237S191550

Opinion Authors
OpinionJustice Ming W. Chin

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If you'd like to submit a brief document to be included for this opinion, please submit an e-mail to the SCOCAL website
Jun 7, 2013
Annotated by Arwa BenOmran

Facts:

Plaintiff Sargon Enterprises, Inc. (Sargon), a dental implant company that had a net profit of about $100,000 in 1998, contracted with the dental school at the University of Southern California (USC) to clinically test a new implant the company had developed. Sargon claimed that its innovative design would have revolutionized the dental implant industry and propelled the company to the top of the market. In 1999, Sargon sued USC for failing to prepare proper reports. Plaintiffs prevailed on the breach of contract claims—despite exclusion of its damage experts at trial—and were awarded $433,000 in compensatory damages.

Sargon appealed and sought to present the testimony of an expert, James Skorheim, that Sargon would have become one of the leading companies in the dental implant industry if USC had not breached the contract and that it would have earned future profits ranging from $220 million to over $1 billion. The exact amount within this range would depend on how innovative the jury found Sargon’s new dental implant to have been.

Plaintiff, Sargon argued that it was up to the jury, not the trial court, to decide whether to credit Skorheim’s testimony whereas the defendant countered that the trial court properly acted as a “gatekeeper” to exclude expert testimony it found unreliable.

Procedural History:

The trial began in 1993 when Sargon sued the University of Southern California for breach of contract. The trial court excluded evidence of lost profits at an in limine hearing and the jury returned verdict for the plaintiffs. Plaintiff appealed to recover greater profits that it contended were due (somewhere between $2 million-$1 billion rather than the awarded $433,000) and the Court Appeal reversed.

On remand the trial court held an evidentiary hearing, and excluded proffered testimony on lost profits, finding it impermissibly speculative. Ultimately, Sargon received a damages award of $433,000 for breach of the contract. Sargon appealed a second time. By a two-to-one vote, the Court of Appeal reversed the judgment. The majority held that the trial court erred in excluding Skorheim’s testimony, finding that it was up to the jury to assess that testimony. The dissent argued that the trial court acted within its discretion to exclude speculative testimony. Defendant and plaintiff petitioned for review.

Issue:

This case presents the following issues:

What are the standards that govern the admissibility of expert opinion testimony under California Evidence Code §§ 801(b) and 802, more specifically, under what circumstances, if any, may a trial court exclude expert testimony regarding lost profits? Did the trial court err in excluding proffered expert opinion testimony regarding lost profits?

Holding:

The California Supreme Court held that the trial court properly acted to exclude speculative expert testimony regarding lost profits. Trial courts have substantial “gatekeeping” responsibilities derived from California Evidence Code §§ 801 and 802.

Analysis:

Following the analysis in Lockheed Litigation Cases, the Court expressly rejects the limited view that trial courts should “determine only whether the type of matter that an expert relies on in forming his or her opinion is the type of matter that an expert reasonably can rely on in forming an opinion, without regard to whether the matter relied on reasonably does support the particular opinion offered.” Sargon, 55 Cal. 4th at 770. Instead, the Court approves of what federal courts term a “gatekeeper” function and cites to federal court decisions, such as Daubert v. Merrell Dow Pharmaceuticals Inc., 509 U.S. 579 (1993), General Electric Co. v. Joiner, 522 U.S. 136 (1997), and Kumho Tire o. v. Carmichael, 526 U.S. 137 (1999), suggesting federal decisions may be relied on in California in this context. In conducting the foundational assessment required by the California Evidence Code, trial courts should draw upon the scientific and technical evidence admissibility principles developed by the federal courts.

California Evidence Code Sections 801(b) and 802 govern the trial court’s role in determining the admissibility of expert opinion testimony. The California Law Revision Commission comments to Evid. Code § 801 explain that “under existing law, irrelevant or speculative matters are not a proper basis for an expert’s opinion.” Thus, the trial court acts as a “gatekeeper” to inquire into the type of material on which an expert relies. Furthermore, under Cal. Evid. Code § 802 the trial court may determine whether that material supports the expert’s reasoning. Cal. Evid. Code § 802 allows courts to look beyond the types of matter that experts rely on and provides that “the court in its discretion may require that a witness before testifying in the form of an opinion be first examined concerning the matter upon which his opinion is based.”

These sections indicate the court may inquire into the expert’s reasoning: “Evidence Code section 801 governs judicial review of the type of matter; Evidence Code section 802 governs judicial review of the reasons for the matter.” Sargon, 55 Cal. 4th at 771. Thus, the trial court must determine whether the matter relied on can provide a “reasonable basis” for the opinion and exclude unreliable expert testimony. California trial courts must determine whether “as a matter of logic, the studies and other information cited by experts adequately support the conclusion that the expert’s general theory or technique is valid.” Sargon, 55 Cal. 4th at 772.

Applying these principles in the context of lost profits, the Court explained lost profits are recoverable when their occurrence and extent can be determined with reasonable certainty though "mathematical precision" is not required. The claim of lost profits may not be based on speculative expert testimony. Where growth of an unestablished business is affected, damages for prospective profits are "uncertain, contingent and speculative" and therefore not recoverable unless they can be “shown by evidence of reasonable reliability.” Grupe v. Glick, 26 Cal. 2d 680 (1945).

Trial court decisions should be overturned only for an abuse of discretion, People v. McWhorter, 47 Cal. 4th 318 (2009), Lockheed Litigation Cases, Cal. Rptr. 3d 762 (2005), and the discretion of the trial judge is subject to “limitations of legal principles governing of its action” (9 Witkin, Cal. Procedure (5th ed. 2008). Here, the trial court exercised proper discretion in excluding expert testimony. Following a lengthy evidentiary hearing the trial court issued a detailed, 33-page ruling and provided proper reasons for excluding the expert testimony. The expert’s damage projections were too speculative; they did not relate to the company’s actual profits and were not based on data from similarly situated companies (in terms of size and market share). Plaintiff’s expert did not base his lost profits on any objective evidence of “past volume of business” or any “other provable data relevant to the probable future sales.” Furthermore, plaintiff failed to introduce evidence of the profits lost by similar businesses operating under similar conditions.

Therefore, the trial court properly acted within its discretion.

Tags:

Expert Testimony, Gatekeeper, Evidentiary Hearing, Judicial Review, Trial Court Discretion, Exclusion of Evidence, Cal. Evidence Code § 801, Cal. Evidence Code § 802, Lost Profits, Scientific Evidence, Daubert, Lockheed Litigation Cases

Arwa BenOmran