Financial experts must constantly be aware of threats to their work. Similarly, financial experts engaged in disputes understand there are risks associated with the Daubert challenge. With this in mind, studies on this subject matter can provide meaningful information to inform practitioners on areas of increased sensitivity. This is where PwC’s annual study on Daubert challenges comes into the conversation. PwC, a Big 4 CPA firm, released a few months ago its 2016 edition of its study, which spans written court opinions from the last 16 years.
History
To put the study into context, there are two notable court cases addressing the standard for admitting expert testimony in U.S. federal courts. These cases expanded the role of the trial judge as a gatekeeper for expert testimony:
- Daubert v. Merrell Dow Pharmaceuticals Inc., 509 U.S. 579 (1993)
- Kumho Tire Co. vs. Carmichael, 526 U.S. 137, 119 S.Ct. 1167, 1179 (1999)
In essence, the court found in the Daubert v. Merrell Dow Pharmaceuticals Inc. case that trial judges are to ensure expert witness testimony is based on a reliable foundation and is relevant to the task at hand. Furthermore, this court ruling may be dissected into two parts:
- Is the expertise and testimony of the expert witness relevant to matters at issue in the trial?
- Is the testimony of the expert witness reliable because the theory or technique used by the expert?
The second question on expert testimony reliability might be further analyzed as follows:
- Can and has been tested?
- Has been subjected to peer review and publication?
- Identifies the known or potential error rate?
- Is standardized and generally accepted within the relevant peer community?
A few years later, in the Kumho Tire Co. v. Carmichael case, the court ruling expanded the gatekeeping function of the trial judge under Daubert v. Merrell Dow Pharmaceuticals Inc. to all (not just scientific) expert testimony based on scientific, technical, or other specialized knowledge, including experience-based technical testimony.
Study background
In connection with its study, PwC identified written court opinions issued between 2000 and 2015 that cited the Kumho Tire case and that related to financial experts. The resulting pool of cases totaled 2,014 Daubert challenges for further analysis in the study.
Study observations
Of course, there are multiple aspects of the study, some of which I do not intend to cover in today’s post. Nevertheless, the study identified the following trends in the last 16 years:
- Often, rather than excluding financial expert testimony, judges prefer that flaws in the testimony be exposed through cross-examination at trial. The study observed, on average, that approximately 53% of financial experts admitted by courts after being challenged.
- The use and misuse of data is a common stumbling block for financial experts and the most common reason for financial expert exclusion. The study observed that financial experts are excluded for various reasons, including not providing sufficient support for calculations and not performing due diligence on data received from clients.
- Rule 702 of the Federal Rules of Evidence states that experts may testify if they are qualified based on their knowledge, skill, experience, education, or training. However, the interpretation of what that requisite knowledge, experience, and skill is can vary widely.
- In 2011 the Federal Circuit made a landmark decision in Uniloc USA, Inc. v. Microsoft Corp., Nos. 2010-1035, 2010-1055 (Fed. Cir. Jan. 4, 2011). The court described the royalty rate rule of thumb in intellectual property cases as a “fundamentally flawed tool” that fails to tie the royalty rate to the specific facts and circumstances of the case. The PwC study identified other instances in 2015 where expert testimony was excluded due to the use of rules of thumb and generalizations that did not relate to the specific facts of the case.
- In the past few years, the study observed several instances where the court allowed the expert to remedy challengeable issues in his or her original report by submitting a revised report. While a Daubert exclusion typically means “game over” for an expert’s involvement in a case, the study has recently observed that courts provide financial experts a chance to revise or update their testimony before providing a final decision on the expert’s admissibility.
- Financial expert testimony is often excluded if the court considers it a legal conclusion. Such legal conclusions are typically the domain of the trier of fact. The study notes that this can often happen when financial experts opine on contractual obligations or conclude on the interpretation of disputed contracts in the context of their financial testimony.
Some of the above observations may seem self-explanatory and straight-forward, yet they continue to surface as reasons for Daubert challenges and exclusions.
The study identified lack of reliability (as opposed to relevance or qualification) as the number one cause of financial expert exclusion in the last 16 years. Moreover, the study calculated that approximately 44% of financial experts have been excluded over the same time frame. Another statistic of relevance is that plaintiff-side financial experts experienced almost twice as many challenges as defendant-side experts, but only had a slightly higher exclusion rate of 47%.
More information
The study includes additional statistics not covered in this post which may be of interest to practitioners. Those interested in learning more can find the study here.
Additionally, the Daubert Tracker database is a valuable resource for checking “gatekeeping history” of experts, which is a benefit to AICPA Forensic and Valuation Services (FVS) members.