The Limits of a Successful Daubert Challenge
In the wake of a 1993 Supreme Court case, challenges against expert witnesses have found greater success. In that case, two minor children and their parents alleged in a lawsuit that the children’s serious birth defects had been caused by the mothers’ prenatal ingestion of Bendectin, an antinausea prescription drug marketed by Merrell Dow Pharmaceuticals.
A lower court allowed a “well credentialed expert’s affidavit” that concluded “that maternal use of Bendectin has not been shown to be a risk factor for human birth defects,” according to court documents.
The parents responded with “the testimony of eight other well credentialed experts, who based their conclusion that Bendectin can cause birth defects on animal studies, chemical structure analyses, and the unpublished ‘reanalysis’ of previously published human statistical studies.” (Daubert v. Merrell Dow Pharmaceuticals, Inc. 113 S.Ct. 2786 (1993))
The Supreme Court decision articulated a new set of criteria for the admissibility of expert testimony.
The Factors in that Decision Can Generally
Be Described this Way:
1. An expert’s foundational theory or technique must be tested.
2. The technique or theory must be subject to peer review.
3. The “rate of error” within the technique must be known and the standards for controlling the application of the technique must be known.
4. The technique must attract “widespread acceptance” in the relevant scientific community.
The court ruled that, in order to be admissible, expert witness testimony had to be both “relevant and reliable” and that judges had to serve as gatekeepers to decide whether it should be allowed into evidence. If one side feels expert testimony does not meet the criteria listed above, a Daubert challenge is made to try to prevent it from being admitted in court.
Another Supreme Court case in 1999 took Daubert challenges to the next level. This case, Kumho Tire v. Carmichael, eventually expanded the rules to include the testimony of those who have “technical” and “other specialized” knowledge, such as an engineer.
In the wake of the Daubert and Kumho Tire cases, challenges against expert witnesses have found greater success. Still, not all Daubert disputes succeed. A case that came before the U.S. Court of Federal Claims helps clarify how one party can successfully challenge the qualifications or methodologies of an expert witness.
The case involved a dispute over gift and income tax refunds filed by stockholders in Schwan’s Sales Enterprises, Inc.(SSE), a privately held Minnesota company that produced food products. The IRS disallowed the valuation of stock gifts made by SSE and assessed tax deficiencies against each of the owner’s children.
At trial, the plaintiffs made a Daubert challenge against an IRS expert, Dr. Herbert Spiro, who was called to give a valuation of nonvoting SSE shares. The plaintiffs claimed that the expert’s testimony shouldn’t be admitted because he had insufficient qualifications, spent little time working on the valuation, and delegated most of the effort to his assistants.
The court found these arguments unconvincing for several reasons:Education. Dr. Spiro held a doctorate in business economics and finance from the University of California. In addition, he had been a tenured professor at California State University for more than 10 years, teaching courses in finance and business policy.
Professional credentials. The expert witness also managed a consulting firm, which specialized in economic analysis and financial valuation. He had been a certified expert on more than 50 prior occasions and served as an arbitrator in a business valuation case.
Hours spent on this valuation. The fact that Dr. Spiro’s assistants had billed more for the work on this case than he did himself does not preclude his certification as an expert in the case, according to the court. One reason: It is well established that expert witnesses can give opinions on hypothetical situations and don’t have to possess personal knowledge of the specifics of a case to render an opinion. However, the court also noted that Dr. Spiro supervised his assistants’ work and was well acquainted with the conclusion and methodologies used.
Methodology. Also dismissed was the notion that Spiro’s methodologies did not enjoy “general acceptance” as required by Daubert. While the opposing experts disagreed on the specific pricing multiples and discounts taken for lack of marketability, they both used the same generally accepted methodologies for appraising the value of the closely held stock. Specifically, income and market approaches used by both experts have long been established as reliable methods for business analysis. (Okerlund v. United States, U.S. Ct. of Fed. Claims, 99-133T 99-134T)
While the exact parameters of what makes a successful Daubert challenge have still not been set, this case provides useful guidance for those preparing for trial.