By Sherrye Henry, Jr, Esq. BVWire Legal Editor
It’s been ten years since the U.S. Supreme Court expanded its ruling in Daubert v. Merrell Dow Pharmaceuticals, Inc. to all types of technical expert testimony—including financial experts and business appraisers—in Kumho Tire v. Carmichael. PriceWaterhouseCoopers has just released its new Daubert Challenges to Financial Experts: A Ten-year Study of Trends and Outcomes, 2000 to 2009. After examining over 5,200 Daubert challenges to expert witnesses of all types, in federal and state courts, the PwC study concludes:
- Since Kumho Tire, the number of challenges to all types of expert witnesses has increased rapidly, rising from 253 in 2000 to 704 in 2007 to a record 869 in 2009.
- The number of Daubert challenges to financial expert witnesses has also increased every year: For example, financial experts met 168 challenges in 2009, representing an 8% increase over 2008, which saw a 34% increase from 2007.
- Economists, accountants, and appraisers are more frequently challenged than all other financial experts, accounting for 23%, 21%, and 8% of all challenges to financial experts, respectively, during 2000–2009.
- Although more frequently challenged, economists, accountants, and appraisers were more likely to survive a Daubert challenge, enjoying a 51% higher success rate than other financial types.
- Courts excluded appraisers much less frequently in 2009 compared with the 10-year average. Conversely, courts excluded economists more frequently.
The frequency of Daubert motions also vary widely by jurisdiction, the PwC study found, and plaintiff’s experts are challenged two to three times more often than defense experts (but notably, their exclusion rate is lower).
The Daubert standard applies in most courtrooms today (some states still apply the “general acceptance” or so-called Frye rule). The Supreme Court’s discussion of the Frye rule, the gate-keeping function of trial judges generally—and its four-part test for admissibility of expert evidence under the Federal Rules—is a critical reading for any financial expert.
The full-text of both opinions are available at BVLaw™, of course. For your reference library, updated the BVR digest Daubert. Few decisions have had as much impact on valuation work for litigation support.
Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579, 113 S.Ct. 2786 (1993)
‘In this case, we are called upon to determine the standard for admitting expert scientific testimony in a federal trial. . .’So begins the landmark decision by the U.S. Supreme Court, which ended by promulgating a new “gatekeeping” function for federal judges and developing an evidentiary standard now known by a single name: Daubert.
Former standard was rigid, austere. The case originated in California, when two sets of parents sued Dow pharmaceuticals for marketing an anti-nausea drug that had allegedly caused birth defects in their children (one with the last name Daubert). The defendant drug company moved for summary judgment, submitting evidence from a credentialed medical expert who had reviewed over 30 published studies and found the drug posed no risk to developing fetuses. In response, the plaintiffs enlisted eight equally established experts, who each concluded that the drug caused birth defects in humans based on in vitro and animal studies as well as the “reanalysis” of prior epidemiological (human statistical) studies.
The federal district court reviewed the pleadings under the then-applicable “general acceptance” rule; i.e., scientific evidence is admissible only if it is based on a principle or technique that is “sufficiently established to have general acceptance in the field to which it belongs.” The rule was first articulated in Frye v. United States, a short, citation-free 1923 decision by the U.S. Court of Appeals for the D.C. Circuit (referred to since as the Frye standard).
In the Daubert case, the district court concluded that the plaintiffs’ evidence did not meet the Frye standard because it was based on studies—including the expert’s reanalyses—that had not met general scientific acceptance through peer-review and publication. On appeal, the U.S. Court of Appeals for the Ninth Circuit affirmed, citing the Frye standard. It also emphasized cases in which other courts had refused to admit reanalysis studies that had not been published or subject to peer review and were generated solely for use in litigation.
The plaintiffs petitioned the U.S. Supreme Court, which granted certiori in light of “sharp divisions among the courts regarding the proper standard for the admission of expert testimony.” Since the 1920s, a majority of federal courts had adopted the Frye rule, but not without creating substantial controversy. Indeed, the “well-established” debate over Frye’s merits had “divided courts and commentators,” the Court explained.
Federal rules supercede Frye. In this case, the petitioners did not attack the content of the Frye standard so much as its continuing authority. They contended that the Frye test was superceded by the passage of the Federal Rules of Evidence (FRE)—and the Court agreed.
In particular, Rule 401 FRE permits the admission of “all relevant evidence,” defined as “that which has any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probably than it would be without the evidence.” “The Rule’s basic standard of relevance thus is a liberal one,” the Court observed. In addition, Rule 702 speaks specifically to the admission of expert evidence, stating:
If scientific, technical, or otherwise specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education may testify thereto in the form of an opinion or otherwise.
Frye predated the Federal Rules by half a century, so the drafters of the Federal Rules could have incorporated the Frye standard into Rule 702—but they did not. “Nothing in the text of this Rule establishes ‘general acceptance’ as an absolute prerequisite to admissibility,” the Court said. Indeed, the rigid Frye rule would be at odds with the “liberal thrust” of the Federal Rules and their overall “relaxing” of the traditional barrier to opinion testimony. Accordingly, “that austere standard, absent from and incompatible with the Federal Rules of Evidence, should not be applied in federal trials,” the Court held, effectively banishing the Frye standard to the history books.
(Note: Pursuant to the Court’s Daubert holding, the Frye standard no longer applies in federal trials, but many states—including California, Florida, Illinois, Maryland, Michigan, Minnesota, New Jersey, New York, Pennsylvania, and Washington—still apply the Frye rule, and practitioners should always check the law applicable to their case when developing expert opinion evidence.)
New standard under Daubert. The Federal Rules may have displaced Frye—but they did not leave the admission of expert opinion evidence without limits. “Nor is the trial judge disabled from screening such evidence,” the Court noted. “To the contrary, under the Rules the trial judge must ensure that any and all scientific testimony or evidence is admitted is not only relevant, but reliable.” (In a footnote from Chief Justice Rehnquist, the Court declined to define the by now-familiar “gatekeeping function,” believing the “better course” was to note the nature and source of the duty and let the courts develop what the role entailed.)
Rule 702 clearly contemplated some degree of regulation regarding the subject and theories about which an expert may testify, the Court added. To qualify as “scientific knowledge,” an expert’s opinion must be derived by the scientific method; that is, it must be reliable. Further, Rule 702 requires the expert testimony to assist the trier of fact to understand the case; thus, it must be relevant.
(Final note: Rule 702 also applies to “technical or other specialized” expert testimony, but the Court limited its discussion to scientific evidence because that was the nature of the expertise offered in this case. Six years later, it extended its Daubert ruling to “engineers and other experts who are not scientists” (including financial experts and business appraisers) in Kumho Tire Co. v. Carmichael, 119 S. Ct. 1167 (1999). The digest of the Kumho Tire decision and the full text of the Court’s opinion are both available at BVLaw™.)
“We are confident that federal judges possess the capacity to undertake this review” of reliability and relevance, the Court stated. “Many factors will bear on the inquiry, and we do not presume to set out a definitive checklist.” At the same time, the Court cited four factors that would help trial judges to determine the admissibility of federal evidence under the new standard:
- Testing. A key question is whether the expert’s theory or technique can be (or has been) tested.
- Peer review and publication. “Another pertinent consideration is whether the theory or technique has been subjected to peer review and publication,” the Court said. Publication is not a “sina qua non” of admissibility, nor does it necessarily equate with reliability—but it is a relevant consideration in assessing the scientific validity of an expert’s methodology and opinion.
- Error-rate. Trial courts should also consider the known or potential rate of error of the expert’s technique.
- General acceptance. Finally, the Court incorporated the general acceptance test into the reliability inquiry. “Widespread acceptance can be an important factor in ruling particular evidence admissible, and a known technique which has been able to attract only minimal support within the community…may be properly viewed with skepticism.” (internal citations omitted)
Dealing with ‘shaky but admissible’ evidence. “The inquiry envisioned by Rule 702 is…a flexible one,” the Court emphasized. “Its overarching subject is the scientific validity and thus the evidentiary relevance and reliability of the principles that underlie a proposed submission.” In an oft-cited phrase, the Court added, “The focus, of course, must be solely on the principles and methodology, not on the conclusions they generate.” Finally, the Court allayed any concerns that the new rule will open the gates to “absurd and irrational pseudoscientific assertions.” In yet another familiar, often repeated ruling, it held: “Vigorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence.”
To summarize the Court’s ruling: “General acceptance” is no longer a necessary precondition to the admission of scientific evidence under the Federal Rules. Instead, the Rules—in particular, 702—assign the trial judge the task of ensuring that an expert’s testimony “both rests on a reliable foundation and is relevant to the task at hand,” the Court held. Accordingly, it vacated the prior evidentiary rulings and remanded the case for findings consistent with the new Daubert standard.