California Court of Appeals Rules that Sargon Standard Governing Reliability and Admissibility of Expert Opinion Applies in All Stages of Litigation – Including Class Certification

Bethany Caracuzzo
Pritzker Levine LLP

On January 29, 2018, the California Court of Appeal for the Fourth Appellate District ruled, in Apple Inc. v. Shamrell, et al, 2018 WL 579858, that a California state trial court may consider only reliable expert opinion evidence on class certification.  This is the first time a California appellate court has held that Sargon Enterprises, Inc. v. University of Southern California (2012) 55 Cal.4^th 747—the state law equivalent of the federal Daubert standard governing the reliability and admissibility of expert opinion—applies at any stage of the trial court proceedings, including class certification.

Background

Plaintiffs alleged that Apple’s iPhone 4, 4S, and 5 smartphones were sold with a defective power button that began to work intermittently or fail entirely during the life of the phones.  The button, which is used to power the phone on or off, reboot the phone, lock the phone’s screen, and put the phone to sleep, is important to the operation of all iPhones.   Plaintiffs asserted that Apple knew of the defects in the power buttons based on pre-release testing and post-release analysis, yet sold the phones anyway.  2018 WL 579858, at * 1.  The proposed class was comprised of California citizens who purchased the iPhones at issue and whose power button stopped working or worked intermittently, and plaintiffs asserted claims under the Consumer Legal Remedies Act, the Song-Beverly Consumer Warranty Act, the Unfair Competition Law, and the common law for breach of express and implied warranty.  Id.

Plaintiffs’ motion sought to certify two classes in California, one for iPhone 4 and 4s purchasers and one for iPhone 5 purchasers, because the length of warranty period differed between the 4-series and 5-series iPhones.  Plaintiffs offered “several” classwide damages theories, including the cost to repair the defective power button, the diminution in value, the “difference in value (what was paid versus what was received),” and restitution.  Id., at *2.  Plaintiffs supported their damages theories with a declaration by expert Heather Xitco, an accountant, who asserted that classwide damages and restitution could be calculated based upon diminished trade-in value or Apple’s profits.  Id., at *3.  In two rounds of supplemental briefing, plaintiffs submitted a supplemental declaration by Xitco, as well as declarations from three additional experts, including Fred Schenkelberg, a specialist in quality control and statistics, who indicated he believed he could calculate a power button failure rate in the affected iPhones using Apple’s own quality control documents.  Id.

Apple, citing to Sargon, criticized Xitco as being unqualified to opine regarding economic loss, and that the Apple documents she purported to rely upon had no relevance to the economic value or loss for which Xitco was using them, and criticized Schenkelberg’s reliance on Apple’s quality control documents because they did not show the failure rates Schenkelberg attributed to them, but instead showed warranty returns. Id. at *4.

In discussing Sargon at the second hearing on class certification, the trial court expressed concern that applying Sargon would “turn class certification motions into these massive hearings”, and its final order granting class certification confirmed that the trial court did not believe Sargon applied at the class certification phase and that plaintiffs met their initial burden of establishing a method by which damages could be proven on a classwide basis.  Id., at *4, *6.   Apple challenged the order by petition for peremptory writ of mandate to the Court of Appeal, arguing that the trial court had erred by failing to apply Sargon and for two other grounds that were later deemed moot by the appellate panel.  Id., at *6.

Sargon Enterprises v. University of Southern California

In Sargon, a small dental implant company sued the university in California state court for breach of a contract for the university to clinically test a new implant the company had patented.  The company sought damages for lost profits ranging from $200 million to over $1 billion, claiming that, despite its size, it would have become a worldwide leader in the industry and made many millions of dollars a year if not for the university’s breach. The trial court, following an evidentiary hearing and applying California Evidence Code sections 801 and 802, excluded the proffered expert damages testimony on the grounds that it was speculative.  55 Cal.4^th 753.

The California Court of Appeal held that the trial court erred in excluding the testimony, but the California Supreme Court reversed, agreeing with the trial court that while, “lost profits need not be proven with mathematical precision,…they must also not be unduly speculative.” Id.  “Under Evidence Code section 801, the trial court acts as a gatekeeper to exclude speculative or irrelevant expert opinion.  The expert’s opinion many not be based ‘on assumptions of fact without evidentiary support or on speculative or conjectural factors…’” Id., at 770 (internal citation omitted).

The California Supreme Court cautioned that a trial court’s preliminary determination of whether an expert opinion is founded on sound logic is not a decision on the opinion’s persuasiveness, and that the trial court’s gatekeeping role with respect to expert opinion does not involve choosing between competing expert opinions, and exactitude in calculating damages is not required.  Id., at 772, 779.  For example, 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.  Id., at 779.  But, the Supreme Court explained, exactitude was not the problem in Sargon; the speculative nature of the basis of the expert’s opinion was. Id., at 779-780.

California State Courts Must Apply Sargon Standard for Admissibility of Expert Opinion at Every Stage of Trial Court Proceedings

1.     Sargon standard for admissibility of evidence applies at the class certification stage

In Shamrell, the California Court of Appeal identified the sole issue on appeal as “simply whether the Sargon standard of admissibility applies to expert opinion evidence submitted in connection with class certification motions”, reviewing de novothe proper standard of admissibility. 2018 WL 579858, at *8. The Court found that the trial court was bound to adhere to Sargon at class certification and wherever the Evidence Code applies.  Id., at *9.  There is only one standard for admissibility of expert opinion evidence in California, and Sargon describes that standard, and requires trial courts to consider the materials and methodologies of proposed expert opinion evidence. Id., at *9, and *10, citing to Sargon, supra, 55 Cal.4^th at pp. 771-772. If the matter the expert relies upon does not provide a reasonable basis for the opinion, because it is irrelevant or is based on a leap of logic or conjecture, the opinion may be excluded.  Id., at *10. The Court of Appeal found that the trial court erred by holding otherwise.  Id.

The Court of Appeal acknowledged that federal courts apply an analogous standard under Daubert v. Merrell Dow Pharmaceuticals, Inc., (1993) 509 U.S. 579, and that such application shows both the feasibility and desirability of ensuring the reliability of expert opinion evidence at the class certification stage.  Id., at *10.    Similarly, it held, where expert opinion evidence provides the basis for a plaintiff’s arguments regarding numerosity, ascertainability, commonality, or superiority (or a defendant’s opposition thereto), a California trial court must assess that evidence under Sargon, and whether the trial court needs to hold a hearing under Evidence Code section 802 to determine the admissibility of the testimony is within the trial court’s discretion at any stage of the litigation. Id. 

2.      Trial court’s error in disregarding Sargon was prejudicial

Once determining that the trial court erred in disregarding Sargon, the Court of Appeal was then required to find whether the error was prejudicial, i.e. whether there was a reasonable probability that would have been more favorable to Apple absent the error. Id., at *11.  Looking to the proceedings below, the record showed that plaintiffs’ expert opinion evidence was crucial to the trial court’s decision regarding certification, and that the trial court had twice refused to grant certification on the grounds that plaintiffs had not shown classwide injury and damages. Id.  It was only after the third round of briefing, and supplemental and new expert declarations, that the trial court granted certification. The Court of Appeal understood the trial court’s reticence reflected, in part, that the plaintiffs’ allegations raised “a number of significant individual questions”, and that, therefore, their experts’ claims that that they could prove the fact of damage on a classwide basis “would have been persuasive to the trial court in establishing predominance of common questions and the superiority of the class action procedure.” Id. 

Plaintiffs’ theory of recovery was that every iPhone purchaser in the proposed class was harmed at the time of purchase because the power button on their iPhone was defective and would later stop working or work intermittently, yet three of plaintiffs’ four experts focused on other measures of damages that only arose after purchase and even then, only affected certain purchasers in the proposed class. Id. (emphasis in original).  For example, expert Xitco claimed that she could use Apple documents to calculate Apple’s internal costs of repair and the diminished trade-in value, but did not explain how those calculations would lead to a reasonable estimate of the damage suffered by the class at the time of purpose.  Id.  Furthermore, the Court of Appeal noted, Xitco was not an economist and not qualified to opine on the issue of whether the cost of repair or diminished trade-in value would be equivalent to the diminution in value suffered by class members at the time of purchase. Id. “An unknown methodology is the equivalent of no methodology…[u]nder Sargon, expert opinions based on irrelevant or unreliable materials are also suspect.” Id.   The Court found similar problems with plaintiffs’ other three experts’ opinions, including but not limited to finding “serious flaws” in expert Schenkelberg’s formula to determine class size based upon his admitted failure rate. Id., at *12.

Plaintiffs argued that even if Sargon applied, it wouldn’t change the trial court’s ruling because the evidentiary standards did not change. Id.  The Court of Appeal disagreed, holding that, “Sargon now provides the applicable standard for admissibility at the trial court level, at class certification and otherwise…[;] a trial court must examine the type of material on which an expert relies, whether that material actually supports the expert’s reasoning, and whether the expert’s methodology is sound.”  Id., at *13, citing to Sargon, 55 Cal.4^th at 772.   The Court found that, had the trial court undertaken such an analysis, there was a reasonable probability it would have excluded substantial portions of plaintiffs’ expert opinion evidence and declined to certify the proposed classes.  Id.  A peremptory writ of mandate issued, directing the superior court to vacate its order granting class certification and to reconsider the motion in accordance with the opinion. Apple’s other grounds for appeal were mooted by the ruling. Id.

Conclusion

This is the first California appellate decision to hold that Sargon applies to class certification motions – reaffirming the court’s gatekeeping role to assess and evaluate the reliability and admissibility of expert testimony at all phases of the litigation, including class certification.  Although courts may not weight expert opinion testimony, determine its persuasiveness, or require exactitude, Shamrell and Sargon now require that trial courts evaluate, at class certification, the reasoning of, and underlying support for, the expert’s opinion, including determining whether the information upon which the expert relies is speculative, irrelevant, or unreliable.