Coping with rising Daubert challenges

A reliable expert witness can help explain a case’s technical elements. But an expert who is unqualified or uses unsupported methods provides the court with little relevant information — and may even serve to mislead the judge or jury.

As more clients turn to expert witnesses to support their points of view, the number of experts challenged under the critical Daubert ruling has more than doubled over the last five years. In nearly half of Daubert challenges, part or all of the expert’s testimony has been excluded.

Refresh your memory - In 1993 in Daubert v. Merrell Dow Pharmaceuticals, Inc., the U.S. Supreme Court held that scientific expert witness testimony is only admissible if it is relevant and reliable. Under Rule 702 of the Federal Rules of Evidence, judges must act as “gatekeepers” and evaluate four considerations before allowing an expert witness to testify:

1. Testing. Has the expert’s theory or technique been tested (or can it be tested)?

2. Peer review. Has the expert’s theory or technique been subject to publication and peer review?

3. Error rates. What is the error rate for the expert’s theory or technique?

4. Acceptability. What is the theory’s or technique’s acceptance rate among members of the expert’s scientific community?

And in the 1999 case, Kumho Tire Company v. Carmichael, the U.S. Supreme Court extended the reliability-related factors outlined in Daubert to other types of technical expert witnesses.

Thus, failing a Daubert challenge can not only jeopardize your credibility, but also leave your client vulnerable — especially if the other side’s expert witness is still allowed to testify. Attorneys who advise their clients to hire valuation experts should understand the nature of these exclusions to prevent wasted time and expense.

Consider this example - Compared to scientists and engineers, relatively few valuation professionals have been subjected to Daubert challenges. But valuators are not immune to such judicial scrutiny. For instance, in Lippe v. Bairnco Corp., a U.S. district court judge used the four Daubert factors to disqualify two valuation experts.

In this fraudulent conveyance lawsuit, valuators were hired to evaluate the fairness of asset sales to two of the bankrupt entity’s new subsidiaries. The court refused to allow either valuator to testify because each one’s opinions were “speculative and conjectural.”

The judge cited numerous specific reasons for disqualifying these experts under Daubert, including failure to consider the discounted cash flow method, reliance on an attorney-generated list of market comparables, selective use of control premiums, lack of business valuation experience and erroneously providing a specific value (as opposed to providing a more appropriate range of fairness).

Keep Daubert in mind - When selecting a valuator, look beyond his or her curriculum vitae. Although previous courtroom experience and professional accreditation are important criteria, attorneys should take the time to review the expert’s report and understand the underlying techniques used.

Compare the appraiser’s techniques and theories with those published in business valuation textbooks and journals. If the techniques aren’t commonly accepted or appear unreasonable, it may be cause for concern.

Even if a case isn’t headed for federal court, Daubert may apply. (See “Other Daubert challenges” at right.) In addition, many states base their own evidentiary rules on the Federal Rules of Civil Procedure. Therefore, regardless of a case’s venue, attorneys should always assess whether their expert can pass the Daubert test.

Sidebar: Other Daubert Challenges

Koch v. Koch Indus., Inc. (2 F. Supp. 2d 1385, D. Kan., 1998)

In re: Dow Corning Corp. (237 B.R. 364, Bankr. E.D. Mich., 1999)

Atlantic Richfield Co. v. Farm Credit Bank (226 F. 3d 1138, 10th Cir., 2000)

Union Bank of Switz. v. Deutsche Fin. Serv. Corp. (No. 98 Civ. 3251[HB], 2000 U.S. Dist. LEXIS 1481, S.D.N.Y., Feb. 16, 2000)

Gross v. Commissioner (272 F. 3d 333, 6th Cir. 2001)

United States v. Sparks (No. 99-6387, 2001 U.S. App. LEXIS 8002, 10th Cir., May 2, 2001)

In re: Valley-Vulcan Mold Co. (237 B.R. 322, B.A.P. 6th Cir., 1999 and No. 99-4129, 2001 U.S. App. LEXIS 3212, 6th Cir., Feb. 26, 2001)

Daley v. Chang (In re: Joy Recovery Tech. Corp.) (286 B.R. 54, Bankr. N.D. Ill., 2002)

Okerlund v. United States (Nos. 99-133T & 99-134T, 2002, U.S. Claims LEXIS 221, Fed. Cl., Aug. 23, 2002)

Rogers v. United States (281 F. 3d 1108, 10th Cir., 2002)

Lippe v. Bairnco Corp. (288 B.R. 678; 2003 U.S. Dist. LEXIS 1133, January 28, 2003)