The Nexus between FRE 702 Reliability And Reasonable Reliance

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In royalty underpayment dispute, expert testimony about the amount of underpayment was properly excluded as the expert failed to meet scientific standards for calculating 20 years of royalty underpayments by basing it on data the expert “had never previously seen or worked with” and since he “did not know what items were included or excluded” and was “unaware of any occasion where someone else had used” similar data “to test the accuracy of a royalty payment,” in Wasson v. Peabody Coal Co., 542 F.3d 1172 (7th Cir. Sept. 8, 2008) (No. 07-2758)

Expert evidence that frequently fails to meet the admissibility standards of FRE 702 (requiring that the expert testimony be based on reliable principles and methods) also can tend to have difficulty meeting the requirements of that the expert opinion be based on facts or data “reasonably relied upon by experts in the particular field.” See FRE 703; see e.g., United States v. Cormier, 468 F.3d 63, 73 (1st Cir. 2006) (ATF agent testimony to prove interstate nexus requirement of felon in possession of a firearm charge [based on technical manuals, conversations with manufacturers and the agent’s prior experience] did not violate FRE 702 because it concerned “specialized knowledge” reflecting use of facts and data used by other experts in the field of firearms; “We see no reason why an expert in firearms identification could not reasonably rely on ATF manufacturing records to determine the provenance of a weapon,” under FRE 703.) In a appeal considered several years ago, the Seventh Circuit carefully affirmed the exclusion of expert testimony, in large part because the data the plaintiff's expert used was not reasonably relied upon.

In the case, Plaintiff Wasson sued defendant Peabody for underpaying royalties it owed under a contract allowing defendant to mine for coal on Wasson’s property. In a bifurcated trial, the jury first found that the royalty contract had been breached by the defendant. On the second liability phase, the plaintiff offered his accountant as an expert witness. This expert submitted a report which “was actually Wasson’s” that simply “asserted that the coal price Peabody was using to calculate Wasson’s royalties was too low” based on the “difference between the ‘average gross invoice sales price’ used by Peabody when calculating royalties for August 1999 and the fuel cost data reported for that same month by IP & L, one of Peabody’s customers, to the Federal Energy Regulatory Commission (‘FERC’).” Wasson, 542 F.3d at 1176.

The trial court excluded the expert testimony as unreliable. The jury awarded plaintiff only $350,000 of the $10 million Wasson asked in damages. However, the trial court granted the defendant judgment as a matter of law and reduced the award to under one thousand dollars, an amount the defendant acknowledged underpaying in royalties. The plaintiff appealed, contending that the court erred when it excluded his expert witness on damages.

The circuit affirmed the exclusion of the plaintiff’s expert testimony. The circuit indicated that had the trial judge not excluded the expert evidence, they "would probably have reversed that decision for abuse of discretion." The basis for this finding was that the basis of the expert’s conclusion was deficient and it simply retreaded argument asserted by the plaintiff:

  • First, the expert used the fuel cost data of only one of the defendant’s customers as was reported to Federal Energy Regulatory Commission (FERC), thus excluding the non-utility company customers coal costs.
  • Second, the expert’s calculation of royalties underpaid was extrapolated by a method that did not meet scientific standards. One month’s cost data was stretched to arrive at twenty years of alleged underpayments.
  • Third, the defendant presented expert testimony from an economist who "testified that [plaintiff expert] Swan’s extrapolation did “not meet scientific standards for use of mathematical statistics."
  • Finally, the expert admitted that he had never previously seen or worked with an FERC report and “did not know what items were included or excluded in the fuel cost data found in such reports, and was unaware of any occasion where someone else had used FERC data to test the accuracy of a royalty payment.”

All of these reasons demonstrated that the proffered expert opinion from the plaintiff's expert "was not 'based upon sufficient facts or data,' nor was it 'the product of reliable principles and methods,' as required by FED. R. EVID. 702." But much of the failure, as detailed by the four reasons above, involved a lack of reasonable reliance, such as used generally by experts in the field.

Federal Rules of Evidence