Daubert Challenges: How Expert Testimony Works — or Doesn’t
For expert financial witnesses, it all comes down to the two “R’s”: reliability and relevance. These are the two “must-haves” for expert testimony as outlined in the 1993 U.S. Supreme Court case that gave Daubert challenges their name: Daubert vs. Merrell Dow Pharmaceuticals.

Since then, countless experts have been challenged in court, and many have had their testimony excluded because it didn’t meet the Daubert standard. For attorneys and their clients, a successful case often rides on expert valuation testimony, so it’s imperative to know how and why a challenge might occur.

Daubert Basics
Testimony by expert witnesses is addressed by Federal Rules of Evidence No. 702. This rule states that a witness is qualified as an expert by his or her “knowledge, skill, experience, training or education.” The rule says an expert can offer an opinion in a trial if:
• The expert’s scientific, technical or other specialized knowledge will help the trier of fact to understand the evidence or determine a fact in issue;
• Testimony is based on sufficient facts or data;
• Testimony is the product of reliable principles and methods; and
• The expert has reliably applied the principles and methods to the facts of the case.

Two court cases created the basis for current-day Daubert challenges of expert witnesses. The first, the aforementioned Daubert vs. Merrell Dow Pharmaceuticals, Inc., established a “gatekeeping” role for judges in determining the reliability and relevance of expert scientific testimony in federal trials.

The second, Kumho Tire Co. v. Carmichael, decided in 1999, affirmed that the Daubert criteria applied to all types of expert testimony, including financial expert testimony. After this case was decided, many state courts adopted the Daubert standard for expert witnesses.

Just the Facts
For the last 17 years, PwC has done an annual analysis of Daubert cases. In its most recent report, “Daubert Challenges to Financial Experts: A yearly study of trends and outcomes, 2000-2016,” PwC identified 2,200 challenges.

Of those challenges, the most common occurred in cases involving breach of contract or breach of fiduciary duty. Litigation involving securities, intellectual property and fraud have the highest rates of exclusion for this type of testimony.

Historically, there have been twice as many Daubert challenges to plaintiff-side experts (67 percent) as there have been to defendant-side experts (33 percent). In 2016, things evened out a bit, with 58 percent of challenges to plaintiff-side experts and 42 percent to defendant-side experts.

The most recent report includes some interesting findings about what gets financial expert witnesses in trouble in court. These include:
Reliability: Lack of reliability was the main reason for financial expert testimony exclusion. In their role as gatekeepers, judges have to carefully evaluate testimony.
Sometimes judges will find that an expert’s opinion is admissible, but will assign it more or less weight based on its reliability. Over the years, it appears that judges often allow testimony, leaving the issues of weight and validity to be handled via cross-examination.
Data: Questionable data is the most frequent reason for testimony to be deemed unreliable. Among experts’ most common mistakes: Not collecting sufficient data, using data selectively, and failing to evaluate the accuracy of data provided by third parties.
Qualifications: While an expert may indeed be an expert in one type of calculation or industry, this background may or may not qualify him or her as “expert” in the testimony required.
For example, despite one expert’s advanced business degree, he was not a licensed financial professional and was not particularly qualified to offer an opinion on damages calculations in a breach of contract case.
Legal conclusions: In order for their testimony to be deemed relevant, valuation experts cannot offer opinions or make conclusions about legal issues, nor should they be asked to. They must stick to what they know and avoid testifying about issues outside their valuation purview.
Of all of the cases included in the report, a little over 10 percent involved testimony excluded purely for its lack of relevance.
Some in, some out: A Daubert exclusion doesn’t always mean that the witness’s entire testimony will be excluded. Interestingly, 38 percent of expert financial testimony in 2016 was only “partially excluded,” with some testimony deemed admissible, and some not.

Also, in recent years, judges have often given financial experts a chance to revise their testimony to address issues in a challenge.

What to Do
Lawyers often challenge the opposing valuation expert in court — that’s to be expected. But there are a few tactics legal teams and their clients can use to avoid a Daubert challenge. For example:
Ask for references. The outcome of your case may depend on expert testimony. Therefore, be sure you’re working with an experienced, credentialed valuation analyst who can defend his or her valuation opinion. Check the expert’s references and ask for details to learn about what went well (or not so well) during prior cases.
Get the expert involved early. A valuation analyst can be helpful early in the litigation process, especially in the discovery phase when he or she can assist with document and information requests. Also, the expert and the legal team need sufficient time to not only complete the valuation, but also review all of the data and the report in the context of the expected testimony.
Be forthcoming. To be credible, valuation analysts must be neutral. They must base their opinions on all of the relevant facts and data. Providing an expert with information that supports only one side of the case is destined to backfire and will not reflect well on your team.
Understand the facts. If you don’t grasp the data, approach or analysis behind the valuation testimony, it can be hard to convince a judge of its reliability and relevance. Good valuation analysts are happy to explain their process and valuation methodology and can defend their conclusions. Be sure the legal team is well versed in the valuation report to avoid stumbles or surprises.

What If Testimony Is Challenged?
Of course, if the valuation expert’s testimony is challenged, he or she is the first person to turn to for a defense. The expert knows the valuation report and opinion better than anyone else and will be the best resource for a rebuttal.

Lessons learned? Hiring a qualified expert, working closely with him or her on the case, sticking to relevant data and opinions, and being prepared for testimony are the keys to successfully avoiding a Daubert challenge.