Avoiding or Defending a Daubert Challenge

Written by: Megan Ramey, CPA

An extensive amount of hard work, preparation, and money can go into a high-stakes damages case when utilizing a financial damages expert. The expert prepares an analysis, writes a report, participates in depositions, and ultimately testifies at trial. However, an expert can only give compelling testimony if he or she is even allowed to testify. The hurdle to testifying at trial is surviving a Daubert challenge.

A Daubert challenge occurs when opposing counsel argues the admissibility of an expert’s testimony based on the qualifications of the expert or the methodology used to arrive at the expert’s opinion. In Daubert v. Merrell Dow Pharmaceuticals, Inc., the U.S. Supreme Court made judges the gatekeepers of expert testimony and set forth specific factors to decide admissibility.

A recent PricewaterhouseCoopers survey, “Daubert Challenges to Financial Experts (2000-2021)” found that out of 272 challenges in 2020, 33 percent of challenges against financial experts resulted in partial or full exclusion. Of the three most common financial experts (appraisers, accountants, and economists), appraisers had a 38 percent exclusion rate, followed by accountants (32 percent), and economists (22 percent). To minimize this risk, experts and their attorneys should understand the qualifications and methodologies required for admissible testimony and always prepare long and hard for the possibility of a challenge before ever stepping foot into a courtroom.

The Ninth Circuit has said that “Shaky but admissible evidence is to be attacked by cross-examination, contrary evidence, and attention to the burden of proof, not exclusion.” They also said the judge is “supposed to screen the jury from unreliable nonsense opinions, but not exclude opinions merely because they are impeachable.” Further, the court said, “it is not the correctness of the expert's conclusions but the soundness of his methodology.”

Know the Expert’s Qualifications

Federal Rule of Evidence 702 states that a witness will be qualified as an expert based on skill, knowledge, experience, education, or training. It is critical that an expert testify only about analyses and opinions that specifically align with his or her specialized training and expertise. Even the most experienced experts can be challenged if their testimony steps outside the expert’s scope of expertise.

In addition, an expert must be objective and independent. There should be no conflicts of interest, and the expert must avoid any appearance of bias toward one party that is not supported by fact or assumptions the expert has been asked to rely upon. For example, an expert should not cherry-pick information that supports one side, without a basis for relying on that information. And, obviously, calculations should be accurate, and opinions must be supported. Significant inaccuracies or unsupported opinions may lead a judge to exclude an expert’s testimony.

Understanding the Expert’s Methodology

Methodology is one key to admissibility of testimony for any expert witness. During a challenge, a judge will scrutinize an expert’s methodology utilizing the four factors established in Daubert, including testing, peer review, rates of error, and general acceptance within the specific professional community in which the methodology is used. It is always advisable for attorneys and experts to discuss the methodologies up front and in-depth to survive, or better yet entirely circumvent a Daubert challenge.

 Trouble Spots

Below are some common, but fundamental factors from a Business Valuation Resources (BVR) article that they say experts should consider to avoid a Daubert challenge.

Misdirected advocacy. One of the major problems courts see is advocacy by the experts – not for their opinions, but for the client’s position. Don’t be an advocate for the client! That is the attorney’s job. Be independent, unbiased, thorough, and objective. Expert testimony is better—more authentic, more reliable—if the expert truly comes to an independent conclusion; rather than the attorney’s desired expert conclusion. Experts that show advocacy and bias severely undercut their credibility and effectiveness.

Assumptions without support. One area that is a slippery slope for experts to stray into bias is in the inputs, assumptions, and other support used in his or her damages conclusion. Gone are the days where an expert can merely rely on “my professional opinion.” Often millions of dollars are at stake when an input or assumption shifts, so the data has to be thoughtfully considered and analyzed by the expert. Remember that the financial damages expert is relying on discovered facts, legal assumptions, and expected testimony to be offered by fact witnesses and other experts.

Bloated reports. While Judges want to review a thorough well drafted report, an overblown, cumbersome report runs the risk of losing its effectiveness. Reports must be clear, concise, and direct in addressing the specific issues at hand. This is more important than the sheer bulkiness of the report. We’re not in school anymore - there is no word count requirement!

Disconnects. Judges need to be able to take the damages conclusion and connect it to the underlying data. An expert must show that the methodology used can be replicated through independent testing and that the conclusions are based on the use of sufficient, relevant data. Experts should document all sources and findings to create this trail. 

A qualified financial expert with a reliable and proven methodology can significantly strengthen a high-stakes damages case, but only if the expert makes it to the witness stand. Take the time to make sure the financial forensics expert you put on your litigation team has the analytical skills and experience you need to best serve your client. The recognition Cogence Group gets from litigators is what we bring to the litigation process from start to finish. Litigators know how important the team and process are in a case, and that’s why they keep calling Cogence Group…and you should too.  You and your client will be glad you did!