Ninth Circuit Holds That Expert Opinion Regarding Source Of Perchlorate Passes Daubert Test, Reinstates Expert Testimony; Upholds Denial Of Defendant’s Summary Judgment Motion On Statute Of Limitations And “Economic Loss Rule” Issues
The Ninth Circuit issued an opinion on May 2, 2014 reversing the district court for the Central District of California regarding the admissibility of the opinion offered by the plaintiff’s expert regarding the source of perchlorate contamination in groundwater, but upholding the district court’s denial of defendant’s motion for summary judgment on statute of limitations and “economic loss rule” issues.
The appeal in City of Pomona v. SQM N. Am. Corp., Nos. 12-55147, 12-55193, 2014 U.S. App. LEXIS 8308 (9th Cir. Cal. May 2, 2014) primarily concerned the City of Pomona’s (“Pomona”) action against SQM North America Corporation (“SQMNA”), alleging SQMNA caused perchlorate contamination in the City’s groundwater. Pomona retained an expert witness who opined that that SQMNA’s imported sodium nitrate was the primary source of the perchlorate in the City’s groundwater. The district court held an evidentiary hearing to determine whether that expert opinion testimony was admissible under Federal Rule of Evidence (FRE) 702 and legal standards established in the seminal case of Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993)(Daubert) and subsequent cases. The district court excluded Pomona’s expert witness testimony on this issue as unreliable. The Ninth Circuit reversed, however, finding that the district court abused its discretion.
The Ninth Circuit, however, upheld the district court’s earlier denial of defendant SQMNA’s motion for summary judgment, claiming that Pomona’s suit was barred on two grounds: (1) California’s “economic loss rule,” and (2) the three-year statute of limitations for injury to real property. SQMNA subsequently brought an in limine motion to exclude testimony by Pomona’s expert witness, who used a “stable isotope analysis” methodology to conclude that the perchlorate contamination in Pomona’s groundwater was caused by SQMNA’s sodium nitrate. The parties stipulated to dismissal of the case to permit both parties to appeal the district court’s decisions.
Daubert analysis of Pomona’s proposed expert witness testimony.
The Ninth Circuit first addressed the district court’s exclusion of Pomona’s expert witness. The expert used a stable isotope analysis methodology based on the Guidance Manual for Forensic Analysis of Perchlorate in Groundwater using Chlorine and Oxygen Isotopic Analysis (“Guidance Manual”), a compilation of 12 peer-reviewed articles describing the methodology. The expert had samples collected from Pomona’s groundwater, analyzed the isotopic composition of the perchlorate, and compared his results to a reference database of known perchlorate sources. He concluded that the samples matched SQMNA’s imported sodium nitrate and concluded SQMNA was the source of the contamination on that basis.
Under FRE 702, expert evidence is admissible if (1) the witness is qualified, (2) the opinion will help the trier of fact, (3) the opinion is based on sufficient facts or data, (4) the opinion is based on reliable principles, and (5) the expert reliably applied the principles and methods to the facts of the case. Under Daubert, the trial court must act as a gatekeeper to assure that the expert testimony is both reliable and relevant. Relevancy is determined by whether the expert’s knowledge has a connection to the issues in the case. Reliability is determined by whether expert opinion is based on scientific methodology, the validity of which is analyzed by considering several non-exclusive factors, such as whether the methods used are testable, if they have been peer reviewed or published, if there is a known error rate, and if they are generally accepted.
The district court concluded that the Pomona’s expert opinions were unreliable on several grounds, but the Ninth Circuit disagreed as to each and explained why the district court had abused its discretion in excluding the expert. First, the district court found that the opinions were not generally accepted because the procedures used were subject to further testing and refinement, as the Quality Assurance/Quality Control (QA/QC) parameters were still being refined, and because the methods were not certified by the EPA. The Ninth Circuit found that methods subject to further testing and refinement still may be “generally accepted”, and that a “‘disagreement over, not an absence of, controlling standards’ is not a basis to exclude expert testimony. City of Pomona v. SQMNA, at *14-15, quoting United States v. Chischilly, 30 F.3d 1144, 1154 (9th Cir. 1994). In particular, the Court noted that the Guidance Manual represents the most up-to-date QA/QC parameters. The Court also found that the lack of EPA certification is not a precondition to admissibility, because the stable isotope analysis is a published, peer-reviewed method and the product of inter-laboratory collaboration that began before the litigation. The Ninth Circuit stated that a party may establish that evidence is scientifically valid by “‘pointing to some objective source to show that the conclusions are based on ‘scientific method, as it is practiced by (at least) a recognized minority of scientists in the [ ] field.’” City of Pomona v. SQMNA, at *17, quoting Southland Sod Farms v. Stover Seed Co., 108 F.3d 1134, 1141 (9th Cir. 1997).
Second, the district court held that the expert’s methods had not been tested by others and were not subject to retesting. The Ninth Circuit disagreed, holding that “[t]he test under Daubert is whether the method ‘can be or has been tested’” and that “under Daubert’s testability factor, the primary requirement is that ‘someone else using the same data and methods . . . be able to replicate the results.” City of Pomona v. SQMNA, at *21-22, quoting Cooper v. Brown, 510 F.3d 870, 880-81 (9th Cir. 2007) and Zenith Elecs. Corp. v. WH-TV Broad. Corp., 395 F.3d 416, 419 (7th Cir. 2005). The Ninth Circuit found that the district court erred because (1) several laboratories have tested the Guidance Manual methods used by the expert; and (2) another laboratory may retest the expert’s procedures. SQMNA argued that Pomona’s expert did not follow the procedures properly and did not independently verify his test results with a separate lab. The Ninth Circuit found that attacks on an expert’s alleged failure to strictly adhere to protocol and on the expert’s results do not bar their admission, but go to the weight of the evidence and are therefore questions for a jury. The court also noted that the alleged protocol defect was described as an “optional” step by the Guidance Manual. The Ninth Circuit stated that “expert evidence is inadmissible where the analysis ‘is the result of a faulty methodology or theory as opposed to imperfect execution of laboratory techniques whose theoretical foundation is sufficiently accepted in the scientific community to pass muster under Daubert.’” City of Pomona v. SQMNA, at *24-25, quoting Chischilly, 30 F.3d at 1154. Accordingly, the Ninth Circuit found that the district court’s misapplication of law was an abuse of discretion.
Third, the district court ruled that the expert’s opinion was unreliable because the reference database of known perchlorate sources on which he relied was too small to identify SQMNA as the source of contamination with an acceptable rate of error. SQMNA had proffered a rebuttal expert in support of its “reliability” argument. Pomona’s expert responded that: (1) the reference database was sufficient; (2) that the rebuttal expert’s opinion was based on outdated publications; and (3) the area from which SQMNA imported sodium nitrate is well known and characterized. The Ninth Circuit characterized this as a disagreement between two credible experts that would be best settled by a “battle of the experts before the fact finder, not by judicial fiat.” City of Pomona v. SQMNA, at *29. In addition, the Ninth Circuit stated that Daubert does not require absolute certainty, so the reference database does not need to include “every source of perchlorate in the world.” Id., at *28. Accordingly, the Court held that the district court abused its discretion by resolving a matter properly left to a jury, and reversed the exclusion of Pomona’s expert.
Economic loss rule
In its motion for summary judgment, defendant SQMNA argued that Pomona’s damages are barred by the economic loss rule. Under California’s economic loss rule, a party that suffers only economic harm, rather than injuries to person or property other than the allegedly defective product, may not recover under tort theories. Economic losses include damages for inadequate value, cost of repair, cost of replacement of defective products, and lost profit. The Ninth Circuit affirmed the district court’s denial of SQMNA’s motion on these grounds, finding that Pomona properly alleged damage to its property, distinct from economic loss due to SQMNA’s sodium nitrate fertilizer as the allegedly defective product in the case. The Court noted that “California and federal courts have held that pollution of groundwater is damage to property” and that a Pomona’s right to use the groundwater confers it with standing to bring the lawsuit. City of Pomona v. SQMNA, at *31-32, 34.
Statute of limitations
The district court also denied SQMNA’s summary judgment motion on statute of limitations grounds. California Code of Civil Procedure (CCP) § 338(b) provides a three year limitations period for injury to real property, which starts to run when the last essential element of the cause of action occurs. On this point, the Ninth Circuit found that “[w]hen the last element to occur is damage, the limitations period starts upon the occurrence of ‘appreciable and actual harm, however uncertain in amount, that consists of more than nominal damages.’” City of Pomona v. SQMNA, at *35. The Court noted that the test for when this occurs in groundwater contamination cases is not well defined in California courts. Accordingly, the Ninth Circuit adopted an analysis formed by a federal district court in New York, which had applied California law and found that “appreciable harm occurs when the contamination ‘caused or should have caused’ the party to act in response to the contamination.” City of Pomona v. SQMNA, at *36, quoting In re MTBE Prods. Liab. Litig., 475 F. Supp. 2d 286, 293-95 (S.D.N.Y. 2006).
In response to Pomona’s claim, SQMNA argued that Pomona had discovered perchlorate in its groundwater many years before filing the lawsuit in 2010, at least as far back as 1999. However, the Ninth Circuit focused on the date when Pomona was required to remediate the perchlorate as the trigger date for the running of the limitations period. The California Department of Public Health (“CDPH”) is required to establish Notification Levels (previously known as “Action Levels”) and state Maximum Contaminant Levels (“MCLs”) for contaminants in drinking water. See, Cal. Health & Safety Code §§ 116275, 116455. In 1999, Pomona discovered that perchlorate in its groundwater exceeded Notification Levels, which require monitoring and reporting to CDPH, but not remediation. Cal. Health & Safety Code § 116455(c)(3). In 2007, CDPH established a lower MCL of six parts per billion (ppb). Since perchlorate was detected in Pomona’s groundwater in excess of 6 ppb, Pomona was required by law to take action to investigate and remediate the contamination, which it did.
SQMNA argued that Pomona should have acted to reduce perchlorate as soon as it knew of the contamination. Pomona argued that it relied on state MCLs as a trigger to determine whether action was required. The Ninth Circuit ruled that testing and reporting requirements, without more, do not constitute “appreciable harm” under California law. Accordingly, the Ninth Circuit found there was disputed factual evidence regarding the issue of whether Pomona was required to act prior to 2007, and therefore the district court was correct in denying summary judgment on the statute of limitations issue.