Sargon Enters., Inc. v. Univ. of S. Cal.

• Decision Date: 26 November 2012
• Docket Number: No. S191550.,S191550.
• Court: California Supreme Court
• Parties: SARGON ENTERPRISES, INC., Plaintiff and Appellant, v. UNIVERSITY OF SOUTHERN CALIFORNIA et al., Defendants and Appellants.

55 Cal.4th 747

288 P.3d 1237

149 Cal.Rptr.3d 614

12 Cal. Daily Op. Serv. 12,935

2012 Daily Journal D.A.R. 15,846

SARGON ENTERPRISES, INC., Plaintiff and Appellant,

v.UNIVERSITY OF SOUTHERN CALIFORNIA et al., Defendants and Appellants.

No. S191550.

Supreme Court of California

Nov. 26, 2012.

See 1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 879 et seq.

Browne George Ross, Brown Woods George, Allan Browne, Eric M. George, Benjamin D. Scheibe, Ira Bibbero, Los Angeles; Glaser Weil Fink Jacobs Howard Avchen & Shapiro, Patricia L. Glaser, Elizabeth G. Chilton and Andrew Baum, Los Angeles, for Plaintiff and Appellant.

Quinn Emanuel Urquhart & Sullivan, Quinn Emanuel Urquhart Oliver & Hedges, Kathleen M. Sullivan, New York, Daniel H. Bromberg, Redwood Shores, John B. Quinn, Michael E. Williams and Michael T. Lifrak, Los Angeles, for Defendants and Appellants.

Cole Pedroza, Curtis A. Cole and Cassidy E. Cole, Pasadena, for California Medical Association, California Hospital Association and California Dental Association as Amici Curiae on behalf of Defendants and Appellants.

Daniel J. Popeo, Washington, 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, Palo Alto, for Actelion Pharmaceuticals U.S. as Amicus Curiae on behalf of Defendants and Appellants.

Ada Meloy, Washington; Hogan Lovells US, Michael Shepard, San Francisco, Martin Michaelson, Alexander Dreier, Washington, 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, San Francisco, for Asahi Kasei Pharma Corporation as Amicus Curiae on behalf of Defendants and Appellants.

CHIN, J.

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 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, 9 Cal.Rptr.3d 121, 83 P.3d 518;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 implantthat 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 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), 2005 WL 435413 [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.

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 implantmarket 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 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...