Tenth Circuit En Banc Splits 5-4 On Expert Proponent’s Daubert Obligations

In reversing the decision of a three-judge panel that overturned an insider trading conviction of former Qwest CEO Joseph Nacchio, an en banc Tenth Circuit split on whether the trial judge appropriately excluded defense expert testimony regarding economic diversification as a better explaination for the pattern of defendant’s stock trades than his insider information, in United States v. Nacchio, 555 F.3d 1234 (10th Cir. Feb. 25, 2009) (No. 07-1311).

The recent decision of the Tenth Circuit en banc highlights the burden and obligations of the proponent of expert evidence. There have been two divided panel rulings in the case, including a split decision by the three-judge panel reversing the conviction, and now the five to four en banc panel opinion reinstating the conviction. Is this now the end of the line in this publicized case? What lessons does the decision hold for admitting expert testimony?

The Tenth Circuit en banc majority concluded that the trial court acted “well within its discretion” to exclude the expert testimony and that on appeal the defendant presented “no more” than an unjustified “run-of-the-mill lament of unfair surprise” at the trial court’s action. However, the four dissenters to the en banc case cited “nagging doubts about the district judge's sense of fairness” and the traditional application of federal criminal trial procedure as part of their underlying disagreement in the case.

The Underlying Prosecution

In 2007, a jury convicted CEO Nacchio of 19 counts of insider trading and acquitted him on another 23 counts. The government had alleged that the defendant sold $52 million of stock despite having insider information that Qwest Communications International Inc., which he managed, was at risk. The criminal conviction still leaves Nacchio to face a fraud lawsuit filed by the SEC, alleging that he and other executives improperly forced the company they managed to restate $2.2 billion of revenue. In reinstating Nacchio’s conviction, the circuit revoked his bail and the defendant now must report to prison on March 23, 2009.

Key Expert Defense Evidence

At trial, Nacchio's defense counsel sought to call Northwestern University professor Daniel Fischel to assess the fall in Qwest stock prices and whether Nacchio's trading pattern was suspicious. In his proffer the defendant noted that Fischel would explain that the defendant’s stock sales were consistent with plans he previously announced to sell the company’s stock and that his sales were not prompted by insider knowledge about the troubled state of the company. Nacchio's attorneys argued during his appeal that the trial judge failed to hold a separate Daubert hearing and that the court failed to allow the defendant to explain why Fischel's testimony was reliable expert evidence.

Reversal By Three-Judge Panel

The majority of the three-judge panel’s split decision concluded that the trial court’s failure to hold a hearing before excluding the Fischel testimony was reversible error. One reading of the panel decision was that at least in criminal cases in the Tenth Circuit, the district courts would have to hold Daubert hearings sua sponte even when not requested in order to survive appellate challenge to a decision to exclude expert evidence. As the majority panel noted:

“we conclude that at a minimum it is an abuse of discretion to exclude an expert witness because his methodology is unreliable without allowing the proponent to present any evidence of what the methodology would be. The proponent bears the burden of establishing the admissibility of the evidence under Rule 702, but it must be given an opportunity to do so before the testimony may be ruled inadmissible.”
United States v. Nacchio, 519 F.3d 1140, 1154 (10th Cir. 2008). As the majority panel explained:

“The judge could have put Professor Fischel on the stand to ask him about his methodology, allowed the government to do so, asked Mr. Nacchio’s lawyers if they would like to address the issue for the first time, or even simply let them speak to see if they had a meritorious objection. Having permitted none of those things, however, it would have been an abuse of discretion to make a Daubert finding of unreliability.”
Nacchio, 519 F.3d at 1155.

Conviction Reinstated En Banc

In its 5-4 decision, the en banc majority placed to the side the argument that the defendant was never allowed to explain why the expert opinion should be admitted. Instead, the majority focused on the question of when a criminal defendant was obliged to seek a hearing on admission of expert testimony or waive that right by failing to do so.

Uncertainty Resolved For The Trial Court Under Sprint

The en banc court noted that the three-judge panel interpreted the district court to have excluded the Fischel testimony on the basis of pretrial expert discovery under Fed. R. Crim. P. 16. The en banc majority rejected this argument, explaining that the defendant’s “failure to establish that the testimony was reliable under Daubert and FRE 702” was the basis for the trial court action. The majority criticized construing the trial court action as premised on the basis of the criminal rule. “A fair, natural reading of the district court’s decision,” noted the circuit majority, “indicates that the basis for the ruling was Daubert. And, the Supreme Court’s guidance [from Sprint/United Management Co. v. Mendelsohn, 128 S.Ct. 1140, 1146 (2008) (“An appellate court should not presume that a district court intended an incorrect legal result when the order is equally susceptible of a correct reading, particularly when the applicable standard of review is deferential.”)] further demonstrates the impropriety of presuming that the district court based its ruling on purportedly erroneous Rule 16 grounds.” Nacchio, 555 F.3d at 1244.

Defendant Received All The Notice He Was Entitled To

The en banc majority rejected the suggestion that the defendant lacked notice of the Daubert challenge. The majority found that the government’s motion to exclude Professor Fischel as unreliable sufficiently placed the defendant on notice of the challenge to the expert’s reliability was at issue under Daubert. It placed on the defendant the obligation to satisfy its burden to establish the admissibility of the expert evidence. The court rejected the defense contention that “the presumptive time for establishing the reliability of the expert’s testimony is on the witness stand and that he had every right to assume that the court would conduct voir dire or permit the questioning of Professor Fischel before ruling on admissibility.” Nacchio, 555 F.3d at 1244-45.

The circuit admitted this expectation was “reasonable” but that was not the test. The defendant “had no entitlement to a particular method of gate keeping” in light of the decision in Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999) vesting in the trial judge “considerable leeway in deciding in a particular case how to go about determining whether particular expert testimony is reliable.” Nacchio, 555 F.3d at 1245. (citing Kuhmo Tire, 526 U.S. at 152). The panel rejected the defense contention of unfair surprise as well, noting that the admissibility of Fischel’s testimony “had been put before Mr. Nacchio multiple times, and the district court’s ruling offered specific support for its determination [to exclude] and referenced relevant filings by both Mr. Nacchio and the government.” This made for a “woeful deficient” claim of unfair surprise.

Defendant Neglected Opportunities To Make His Expert Evidence Case

The circuit examined the trial record and identified numerous times when the defendant could have presented evidence and argument regarding the admissibility of the expert’s testimony. It found no evidence that the defendant took advantage of these opportunities, nor did it find that the trial court “imposed filing restrictions or had otherwise prohibited Mr. Nacchio from offering evidence or making a request.” While acknowledging the tight time deadlines as a trial date looms, the circuit noted that the defendant sought to make no request for a continuance in order to meet its burden.

Defendant Failed To Meet His Burden of Seeking A Hearing

The circuit majority stated flat-out that if the defendant “desired an evidentiary hearing, he bore the burden of requesting one.” Nacchio, 555 F.3d at 1251. The trial court was not mandated to hold one and could rule on expert reliability when the record had sufficient information for making that determination. In the defendant’s case, both parties had submitted information upon which the court could make a decision on admissibility. No party was entitled, after having sufficient notice of the issue at stake, that the trial court conform to their schedule.

Abuse of Discretion & Consistency Of Trial Courts

The circuit majority found no basis in the argument that “Professor Fischel generally has been permitted to testify in the past, and a district court might well respect his credentials,” so that the decision by the trial judge in defendant Nacchio’s case was an abuse of discretion. The court had an obligation to assess the methodology that Professor Fischel employed in terms of its relation to the particular facts and issues of the case at hand. The defendant could not “assume that his expert’s testimony would be admitted because other courts had allowed it in; he had to carry his burden of demonstrating the admissibility of Professor Fischel’s testimony in this particular case.” Nacchio, 555 F.3d at 1258.

The Dissent And Primacy Of Criminal Discovery Process

Four judges of the Tenth Circuit (McConnell, Henry, Kelly and Murphy) dissented and two of them had formed the majority of the three-judge panel. They would have found that the defendant had a right to establish the reliability of Professor Fischel through testimony and would have required, if the trial court intended a different procedure, that the defendant receive notice of this. In addition, the minority considered to be erroneous an action by the trial court to exclude evidence that constituted a criminal defendant’s primary line of defense. The minority decried that the defense was punished for “an understandable and inconsequential mistake." The minority accused the majority of imposing the “nuclear option” for a minor “violation of procedural rules,” essentially depriving the defendant of the right to present his defense.

End Of The Line?

Now that the circuit has acted en banc it is unclear that the issues addressed by the case would have likely prospects for review on certiorari. The decision largely turns on the obligations of the proponent of expert testimony. Additionally, the opinion does not indicate a split in the circuits requiring resolution by the Supreme Court. It therefore appears that this protracted case may have come to a final conclusion.

Nonetheless, the decision does serve as a warning concerning the obligations in offering expert testimony. While the trial court has an independent gatekeeping role in admitting expert testimony, the proponent of the evidence should satisfy its burden to ensure the record establishes the admissibility of the expert testimony.

Prior Coverage In The Blog And Review

Both the Federal Evidence Blog and the Federal Evidence Review have highlighted the expert evidence issues involved the Nacchio case. On the Blog, coverage started with the Tenth Circuit's grant of a rehearing on the circuit panel’s reversal of the trial court decision to exclude expert evidence. The Blog followed up when the en banc court entertained oral arguments in the case . Of course, coverage of both the Nacchio and Sprint cases appeared in volume 5 (2008) of the Federal Evidence Review, and the coverage will continue with issues in volume 6 (2009) of the Review.

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