This is the second in a series of ten Daubert Tutorials. The series parses the Daubert line of cases, paying special attention to explaining and translating the sometimes opaque scientific language that Daubert and its progeny import into the law. The most important of these progeny is Kumho Tire and its extension of Daubert’s core holding to govern all expert testimony proffered in federal court. This second tutorial discusses a key aspect of Kumho Tire’s application, explaining the difference between the scientific testimony that Daubert addresses and the nonscientific testimony that Kumho Tire brings under the Daubert rubric.
The difference between Daubert’s treatment of scientific issues and Kumho Tire’s treatment of nonscientific issues turns out to be a central question in a great deal of the litigation that business defense lawyers handle, and having scientific testimony evaluated as nonscientific, or vice versa, can change the outcome of most matters. Beyond that, several additional things make this an important issue. The easiest of these is that the issue arises so often: most significant matters have expert testimony issues that beget Daubert challenges, and many of those matters have experts for whom the science/non-science issue is pertinent. But perhaps the most interesting thing pertinent to this discussion is that so much of the expert testimony proffered in commercial litigation is perceived as being close to the line on this question. Part of what makes this particular issue so interesting is that, contrary to popular perception, most of this testimony is not really close to what we call the Daubert/Kumho dividing line at all. There is a lot of confusion in the cases and commentary over this distinction, but there turns out to be a very clear line between scientific and nonscientific inquiry, and it’s articulated right in Daubert.
The Daubert/Kumho Tire Dividing Line
It is well established that Daubert v. Merrell Dow governs the admissibility of federal court scientific expert testimony and that Kumho Tire v. Carmichael extends Daubert’s gatekeeper requirements to expert testimony that is not scientific in nature. As a result, expert testimony dichotomizes into two classes that can be conveniently characterized as scientific testimony and nonscientific testimony. Daubert issues relate to expert testimony that is scientific in nature and Kumho Tire issues relate to expert testimony that is not scientific in nature.
Getting testimony onto the proper side of this Daubert/Kumho Tire dividing line is turning out to be a dispositive issue in an increasing range of commercial litigation matters. Examples that support this proposition arise in engineering expert testimony in products liability matters, in physician expert testimony in medical malpractice matters, and in economics and accounting expert testimony in a range of litigation areas. This tutorial uses an example from economics testimony in a securities matter to illustrate the difference, but the example has broad application beyond economics and securities.
As mentioned in the introduction, part of the reason that the Daubert/Kumho Tire distinction is so important in commercial litigation may be that so much of the expert testimony that is proffered in commercial litigation is perceived as being close to this dividing line between science and non-science. Testimony proffered by economists and by accountants offers good examples of this perception, but the emphasis here is on the word “perceived,” because most economics and accounting testimony is not particularly near the science/non-science line. Rather, most of it is clearly on one side or the other, although frequently not on the side that legal proceedings place it.
Daubert on the Daubert/Kumho Dividing Line
In its discussion of the four factors that have been so widely discussed, Daubert said that scientific testimony must follow the scientific method and that the scientific method is what distinguishes scientific from nonscientific inquiry.
In briefest summary, the scientific method involves posing well-reasoned hypotheses, collecting appropriate data, and testing the hypotheses at professionally acceptable error rates.
The line between scientific disciplines and nonscientific disciplines is established by whether the discipline’s non-forensic incarnations predominantly use the scientific method of hypothesis testing and error rate analysis to conduct its inquiry. In parallel, the line between Daubert testimony and Kumho Tire testimony is whether the discipline that the expert claims as her intellectual home uses testing and error rate analysis to conduct the type of inquiry that the expert's testimony has as its basis.
Recalling that Daubert’s four factors are testing, peer reviewed publication, calculation of error rates, and general acceptance in the relevant learned community, it is no coincidence that the elements of the scientific method sound like the testing and error rate factors. So if the discipline that the expert claims as her intellectual home uses the scientific method in its non-forensic inquiry into the issue, the expert’s testimony uses a full Daubert four-factor analysis. If the discipline that the expert claims as her intellectual home does not use the scientific method in its non-forensic inquiry into the issue, then the issue is probably a Kumho Tire issue, rather than a Daubert issue. In terms of Daubert’s four basic factors, it is easy to make the case, at least as a presumption, that both scientific and nonscientific testimony must analyze factors two and four, while only scientific testimony must also analyze factors one and three.
Although economics and accounting-type testimony is often seen as being a close call on the science/non-science question, and therefore close to the Daubert/Kumho line, the reality is that neither type is a close call. Careful analysis reveals that almost all of perfectly reliable accounting does not use testing and the scientific method, while almost all of reliable economics does. So, almost all accounting testimony uses a Kumho review, while almost all economics testimony uses a Daubert review.
The following discussion of the Daubert/Kumho Tire distinction is couched in terms of economics expert testimony in securities litigation, but that is only because there is a line of securities cases that is familiar to many litigators which illustrates that most of economics testimony fits the Supreme Court’s definition of scientific, and therefore gets full Daubert treatment, and a related line of cases that shows the very limited circumstances under which the testimony of an economist might qualify for an exception to that general rule.
A Simple Example of the D/K Dividing Line
Securities fraud litigation has been in the news on a regular basis recently and it provides a good example of why economics almost always applies Daubert treatment.
To calculate securities fraud damages, experts find total damages by, first, estimating the per share damages due to the fraud using what is called an event study, second, estimating the total shares damaged due to the fraud, and third, multiplying these two magnitudes together, resulting in total damages.
Economists do both of these analyses. The regression analysis that is the analytic core of the event study is an example of the type of economic analysis that meets the Supreme Court’s definition of scientific analysis performed using the scientific method. It poses and tests hypotheses at specified error rates, and there are criteria for the employment of these techniques. Therefore, the gatekeeper’s evaluation of these techniques should involve a scientific four-factor analysis, and regression-based economics always uses a full Daubert analysis. Because this regression analysis is the analytic core of the majority of economics testimony, this assertion has implications for many types of litigation beyond those that we discuss here as being related to securities litigation. The regression analyses of contract damages discussed in Adventures of an Econometrician Lawyer: Controlling Regression based Litigation with Daubert and Statistical Analysis, found in the lead article of Daubert Online, issue 1, and the discussion contained in the first Daubert Tutorial are both examples of the rule that the majority of economics gets full Daubert treatment.
Science, Non-Science, Event Studies and the Daubert Factors
Properly executed event studies apparently meet all of the Daubert criteria. They are based upon tests conducted at appropriate error rates. They have been peer-reviewed and published hundreds of times, and the technique is generally accepted in the relevant scientific community. There are well-established standards that govern their use and these standards point to proper hypothesis tests and the error rates of those tests as the proper instruments of investigation. Event studies are widely used by economists in non-litigation settings to investigate the impact of the release of new information on the price of a stock that is actively traded in an efficient market. They most certainly meet the Daubert criteria for what constitutes scientific inquiry, and while dissenting views on this point exist, they are virtually always rooted in misconceived notions of what constitutes scientific inquiry.
(1) A brief note on asking the right questions
Much of what is written on this topic does not always seem to properly apprehend the parameters of the Daubert/Kumho Tire discussion. The Daubert/Kumho Tire distinction is between scientific and non-scientific testimony, not between hard science, social science and soft science. Neither Daubert, nor the scientific literature that it cites, distinguishes between hard and soft science. The correct distinction is, rather uniformly, between science and non-science. Lower courts and commentators have been all over the place on whether Daubert applies to social science or not, and while this seems to be the wrong question, there is more informed evidence that supports, rather than opposes, applying Daubert to social science testimony, and the scant arguments that exist for opposing this application do not bear up under even cursory sophisticated analysis.
For example, In re Executive Telecard, Ltd. Securities Litigation, 979 F.Supp. 1021 (S.D.N.Y. 1997) recounts Daubert’s basics and then goes on to state that “valuation of damages in a securities class action such as this does not appear to be the sort of ‘hard science’ that requires application of the specific factors set forth in Daubert.” 979 F. Supp. at 1024. The court instead requires that “an expert’s opinion should at least ‘have a reliable basis in the knowledge and experience’ of the particular ‘discipline’ involved.” Id. at 1024. But the court fails to reconcile that, so far as the recognized regression literature is concerned, the latter apparently requires the former.
Stephen Mahle is a scientifically trained lawyer who concentrates his practice in litigating Daubert and expert testimony issues for insurance companies and their outside counsel. He has a doctorate in economics, has been a finance professor at several major universities, is webmaster of daubertexpert.com, serves as Articles Editor for DRI’s Daubert Online newsletter, and lectures and publishes regularly on Daubert and expert testimony issues. He can be reached at email@example.com, or (561) 451-8400.
[PRINTER FRIENDLY VERSION]