The Daubert gate has moved again. Just months after the U.S. Supreme Court gave comfort to federal trial judges who exercise their so-called gatekeeping powers to exclude unfounded expert testimony on a question of fact, the Seventh Circuit Court of Appeals in Chicago has endorsed applying the four-part Daubert test to testimony on a threshold issue: whether the federal courts even have subject matter jurisdiction over the case. Target Market Publishing, Inc. v ADVO, Inc., 136 F.3d 1139 (7th Cir. 1998)

Not only that, the expert in Target Market was not a scientist offering a novel theory of medical causation in a products liability case, as the expert in Daubert was and those in most cases discussing that ruling have been; he was an economist whose estimate of the lost profits in a breach of contract action between two businesses was offered to justify a jurisdictionally sufficient level of damages

The effect of the decision is not so much that previously admissible evidence will now be excluded, since courts have always had the power to keep out speculative testimony of any kind. Rather, the Target Market opinion reaffirms that an appellate court should review a Daubert ruling under the abuse-of-discretion standard -- even on a jurisdictional question, which is normally subject to de novo review. Like the Supreme Court's decision in December in General Electric Co. v. Joiner, 118 S.Ct. 512 (1997) -- holding that a Daubert ruling is reversible only if it was an abuse of discretion -- the Seventh Circuit's holding could embolden judges to apply the Daubert test whenever expert testimony is offered.

The reasoning in Target Market also may fuel the currently hot debate over the scope of Daubert: whether it applies to "general scientific principles," as well as to novel theories based on supposedly empirical research. For if a court's gatekeeper function includes the duty to evaluate economic evidence, then it might also include the duty to apply the same test for reliability and relevance to general scientific principles. Among the factors that Daubert requires a court to consider to determine whether an expert's testimony is based on scientifically valid methodology are (1) whether the method can be tested; (2) whether it has been subjected to peer review; (3) whether it has a high rate of error; and (4) whether it has attained general acceptance. Daubert v. Merrell Dow Pharmaceuticals Inc., 509 U.S. 579 (1993).

Those four factors are easy to understand in the typical context of scientific testimony in a personal injury case -- such as where a medical professional seeks to establish a causal link between exposure to some substance and the plaintiff's contracting a disease, or where a plaintiff alleges that a product was defectively designed. But Target Market was a garden-variety commercial case, and the issue was not what evidence the jury would get to hear, but whether the case belonged in federal court at all.

Two companies, Target Market Publishing and ADVO, had agreed to jointly produce and promote a publication that would enable auto dealers to advertise to a select audience by direct mail. Before the one-year agreement was up, however, the project had proved a bust, losing 80% of its advertisers in its test market, Cleveland, and enlisting only one advertiser in the two other markets where the project was launched. When ADVO then announced it was pulling out of the deal, Target Market sued in federal court for breach of contract.

ADVO immediately filed a motion to dismiss, arguing that the profits lost from terminating an unprofitable business could not possibly reach the $50,000 minimum damages for federal jurisdiction (which has since been increased to $75,000). Although the district court denied that motion because it could not determine damages based only on the pleadings, ADVO raised the issue again in a motion for summary judgment at the close of discovery, arguing that the accountant and business appraiser who estimated lost profits at $1.4 million had made unwarranted assumptions and applied an unreliable methodology. The district court then granted summary judgment, explaining that the accountant's report "relies upon mere assumptions . . . from which no reasonable inference of lost profits could be drawn."

The first question for the Court of Appeal was whether the trial court had impermissibly weighed the evidence on a motion for summary judgment or had acted as a gatekeeper and simply ruled the evidence inadmissible. Acknowledging that the district court's order was "rather cryptic" about whether it was applying Daubert to the accountant's report, the Seventh Circuit nevertheless found that the trial judge had simply excluded the report as unreliable even if it hadn't gone through the four Daubert factors. Indeed, the court noted that the Supreme Court's holding in Joiner was similarly based on its finding that the expert testimony in that case "did not rise above 'subjective belief or unsupported speculation.' " As the Supreme Court had explained, "A court may conclude that there is simply too great an analytical gap between the data and the opinion proffered."

Interestingly, while the Court of Appeal complained gently that the district court had never explicitly said it was acting as a Daubert gatekeeper in ruling on admissibility, the Court of Appeals never explicitly acknowledged that it was unusual to act as a gatekeeper when the expert in the case was not a scientist at all, but an accountant. Of course, Federal Rule 702 applies equally to testimony concerning "scientific, technical or other specialized knowledge," but some courts have held that the reach of Daubert is limited to only the first of those -- "scientific" knowledge.

For example, in McKendall v. Crown Control Corp., 122 F.3d 803 (9th Cir. 1997), Ninth Circuit Judge Betty B. Fletcher cited a footnote in the 1993 Daubert opinion that limited the Supreme Court's discussion to "the scientific context." Judge Fletcher explained that scientific knowledge is the result of research following the scientific method, while technical knowledge can be based on an expert's experience. Thus, the Ninth Circuit reversed a district court's exclusion of a metallurgical engineer's opinion that a forklift should have been designed differently. The trial judge had said the opinion was not scientifically valid under the Daubert standard because the expert had never tested (or even built) the safety device he said the forklift should have had. But the Court of Appeal said Daubert simply didn't apply because the expert's opinion was based on his experience -- involvement in hundreds of forklift-accident cases.

Similarly, in Compton v. Subaru of America, Inc., 82 F.3d 1513 (10th Cir. 1996), cert. denied, 117 S.Ct. 611 (1996), the Court held Daubert did not apply to an engineer's opinion that the roof of a car that rolled over should have been built differently. The Tenth Circuit explained that the expert's opinion was based on his 22 years of experience in automotive design and "general engineering principles," not on any methodology, while Daubert provides a test for the validity of a methodology.

Other courts and commentators have criticized decisions such as McKendall and Compton for giving credence to expert testimony based on no methodology when a scientifically valid methodology is precisely what Daubert seems to require. For example, in Dancy v. Hyster Co., 127 F3d 649 (8th Cir. 1997), the Court of Appeals held that Daubert applied to an expert opinion almost identical to the one that had been offered in McKendall -- an engineer's conclusion that a forklift should have been designed differently. To determine if this conclusion was based on scientifically valid methodology, the Court considered the four Daubert factors and found the methodology lacking because the expert had never tested his alternative design.

All of these cases except Target Market predated the Supreme Court's ruling in Joiner. Perhaps the high court's directive in that case to apply the deferential abuse-of-discretion standard to Daubert rulings would have led the Ninth Circuit to take more of a hands-off approach to the district court's finding in McKendall. The Joiner decision clearly influenced the Seventh Circuit in Target Market. Thus, when the plaintiff argued that the accountant's report was reliable even under Daubert -- based in part on "the long experience and voluminous credentials of the report's author" -- the Court of Appeals began by noting the abuse-of-discretion standard of review that Joiner requires; and it ultimately concluded, "The district court did not abuse its discretion."

Indeed, the Tenth Circuit's opinion seems to say that a trial court's gatekeeping powers include the discretion to determine when and where Daubert should be applied -- a determination that, under Joiner, is reversible only if the discretion is abused.

So far, Target Market is the only case to apply Daubert to an opinion offered on a jurisdictional question. To the extent that it simply holds that the Supreme Court's four-part test is a sound way to evaluate the reliability and relevance of expert testimony, it suggests that the Daubert gate can be erected at almost any point in litigation -- whenever admissibility of any expert's testimony is at issue.