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Pyramid Techs., Inc. v. Hartford Cas. Ins. Co.

United States Court of Appeals, Ninth Circuit

May 19, 2014

PYRAMID TECHNOLOGIES, INC., Plaintiff-Appellant, ALLIED PUBLIC ADJUSTERS, INC.; DOUGLAS W. SCHROEDER, Lien Claimant / Former Attorney for Plaintiff Pyramid Technologies, Inc., Claimants,
v.
HARTFORD CASUALTY INSURANCE COMPANY, Indiana corporation, Defendant-Appellee

Argued and Submitted, Pasadena, California April 11, 2013

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[Copyrighted Material Omitted]

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Appeal from the United States District Court for the Central District of California. D.C. No. 8:08-cv-00367-AHS-RNB. Alicemarie H. Stotler, District Judge, Presiding.

Herbert Dodell (argued), The Dodell Law Corporation, Woodland Hills, California, for Plaintiff-Appellant.

Miriam A. Vogel (argued), David F. McDowell and Purvi G. Patel, Morrison & Foerster, LLP, Los Angeles, California, for Defendant-Appellee.

Before: Johnnie B. Rawlinson and Jay S. Bybee, Circuit Judges, and Michael H. Simon, District Judge.[*] Opinion by Judge Simon; Dissent by Judge Rawlinson.

OPINION

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SIMON, District Judge:

After a flood occurred in the warehouse of a business that purchased and resold electronic parts, a dispute arose between the business and its insurer. The insured sued, alleging express breach of contract and breach of the implied covenant of good faith. The insurer moved for summary judgment. Without holding a Daubert hearing,[1] the district court excluded the insured's expert witnesses and granted summary judgment to the insurer, finding insufficient evidence that the flood caused damage to the insured's inventory.

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Because the district court abused its discretion by not allowing a jury to resolve contested but otherwise admissible expert testimony, we reverse and remand for trial.

FACTS

Pyramid Technologies, Inc. (" Pyramid" ) purchased an insurance policy (the " Policy" ) from Hartford Casualty Insurance Company (" Hartford" ). The Policy provides coverage limits of $1 million for building replacement costs, $5.5 million for business personal property replacement costs, and $3 million for lost business income and additional expenses due to the interruption of business operations. To trigger coverage for building or business personal property replacement costs, the Policy requires damage to property or its direct physical loss.

Pyramid purchased and resold electronic parts, many of which were out-of-date or not state-of-the-art. It did not test the inventory unless required to do so by a customer or prospective customer. Pyramid stored its inventory on shelves in a warehouse that did not have air conditioning or humidity control. Pyramid had approximately 52 million items in its warehouse at the time of the flood.

In the morning hours of August 11, 2005, Pyramid employees arrived at work to find the warehouse and certain other building locations flooded with one to two inches of water. Although the flood water did not reach the shelves on which inventory items were located, several employees saw visible condensation on packages in the lower three to four shelves. ServPro, a professional cleanup company, performed cleanup operations from August 11 through August 16, 2005.

After discovering the flood, Pyramid was concerned about the humidity level in the warehouse and the condensation found on its packages. Pyramid asked Hartford to test the inventory. Hartford's expert, Peter Helms from Belfor USA Technical Services, visited the site after cleanup and, relying on humidity tests conducted after most of the water had been removed and drying equipment had been in place for more than 24 hours, determined that the humidity did not reach a level that could have caused damage to any of the inventory. Hartford refused to test the inventory, which would have cost more than $13 million to test every item. Hartford based its decision largely on Helms' conclusion that the inventory was not damaged by the flood.

While Hartford was visiting the site after the flood, a potential Pyramid customer, WMS Gaming, Inc. (" WMS" ), was conducting a quality control site visit before approving Pyramid as a parts supplier. The Hartford representative told this potential customer that the water intrusion was " no big deal" and that Hartford would not test the parts. The customer replied that the flood was a " big deal" to WMS. Shortly thereafter, WMS declined to approve Pyramid as a parts supplier.

One month after the flood, Pyramid hired Allied Public Adjusters, Inc. to assist in pursuing an insurance claim. Pyramid also hired its own expert, David Spiegel, to determine what the humidity levels were at the time of the water intrusion. Spiegel opined that the humidity level in the warehouse rose to more than 90% and that the conditions caused by the flood exceeded the protection levels of the moisture-proof packaging. During routine inventory checks after the flood, Pyramid employees quarantined more than 250,000 items, looking for visible signs of corrosion, tarnish, or discoloration. In August 2007, Hartford finally agreed to conduct limited testing

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of a small subset of parts identified by Pyramid as being damaged.

Hartford retained Dr. Arum Kumar of SEAL Laboratories to conduct tests on 374 items out of Pyramid's inventory. These parts were selected by Pyramid as exhibiting signs of water damage. Dr. Kumar determined that 147 of those items exhibited corrosion, tarnish, or discoloration. Dr. Kumar conducted additional tests on those 147 items. He found that two parts failed the additional testing, and they were deemed unsuitable for commercial applications. Dr. Kumar stated that corrosion, tarnish, and discoloration are always caused by moisture, but he concluded that the August 11, 2005 flood was not the cause of the corrosion damage to the parts he examined.

Pyramid hired two additional experts, Del Mortenson and Ken Pytlewski, to evaluate the validity of Dr. Kumar's report. Mortenson questioned Dr. Kumar's opinion on the grounds that Dr. Kumar used " military" standards of suitability instead of " commercial" standards. Pytlewski challenged other opinions of Dr. Kumar's, including his opinions that any corrosion caused by the flood would necessarily have been uniform and that visible corrosion is not a failure criteria under military standards. Pytlewski also noted the internal inconsistency in Dr. Kumar's report between his statement that the cause of the moisture-related corrosion cannot be determined and his conclusion that the flood was not the cause of any moisture-related damage. Pytlewski testified at a deposition that in his opinion, some of the corrosion to Pyramid's inventory occurred as a result of the high humidity caused by the August 11, 2005 flood.

By May 2010, approximately 17 million of Pyramid's 52 million parts in inventory at the time of the flood had been sold, and approximately 35 million parts remained in Pyramid's inventory. In October 2010, Pyramid sold most of its remaining inventory at a distress sale price of $125,000.

PROCEDURAL BACKGROUND

Pyramid filed this civil action in California state court. Hartford removed the lawsuit to federal court. On March 21, 2011, Hartford moved for summary judgment. In opposition to Hartford's motion, Pyramid offered the expert reports of Spiegel, Mortenson, and Pytlewski, among other evidence. In reply to Pyramid's opposition, Hartford argued that the expert reports of Spiegel, Mortenson, and Pytlewski, and much of the testimony of Tony Mavusi, the president of Pyramid, was inadmissible. The district court did not hold a Daubert hearing.

The district court also did not hold oral argument on Hartford's motion for summary judgment. Instead, on June 1, 2011, the district court granted summary judgment in favor of Hartford, sustained many of Hartford's objections to the testimony of Mavusi, and excluded the expert reports of Spiegel, Mortenson, and Pytlewski. The district court excluded the reports of Mortenson and Pytlewski as being " illegible," and the court excluded the Spiegel report on the grounds that Spiegel was not a qualified expert and that his report was not based on sufficient facts or data and was not the product of reliable principles and methods.

Pyramid moved for reconsideration and submitted enlarged and more legible versions of the Mortenson and Pytlewski reports. The district court accepted the enlarged reports as sufficiently readable, but then excluded them as unreliable and not based on sufficient facts or data. The district court also concluded that even if these reports were admissible, they fail to raise a genuine dispute of material fact

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because they do not sufficiently address causation. The district court denied Pyramid's motion for reconsideration.

STANDARD OF REVIEW

We review a district court's order granting summary judgment de novo. Ford v. City of Yakima, 706 F.3d 1188, 1192 (9th Cir. 2013) (per curiam). We review evidentiary rulings for abuse of discretion and reverse if the exercise of discretion is both erroneous and prejudicial. Nev. Dep't of Corr. v. Greene, 648 F.3d 1014, 1018 (9th Cir. 2011). We review underlying factual determinations for clear error. United States v. Lukashov, 694 F.3d 1107, 1114 (9th Cir. 2012).

DISCUSSION

A. Exclusion of Pyramid's Expert Witnesses

1. Legal Standards

Rule 702 of the Federal Rules of Evidence provides that expert opinion evidence is admissible if: (1) the witness is sufficiently qualified as an expert by knowledge, skill, experience, training, or education; (2) the scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue; (3) the testimony is based on sufficient facts or data; (4) the testimony is the product of reliable principles and methods; and (5) the expert has reliably applied the relevant principles and methods to the facts of the case. Fed.R.Evid. 702.

Under Daubert, 509 U.S. at 579, and its progeny, including Daubert v. Merrell Dow Pharm., Inc., 43 F.3d 1311 (9th Cir. 1995), a district court's inquiry into admissibility " is a flexible one." Alaska Rent-A-Car, Inc. v. Avis Budget Grp., Inc., 738 F.3d 960, 969 (9th Cir. 2013) (citation omitted), cert. denied, 134 S.Ct. 644, 187 L.Ed.2d 420 (2013). In evaluating proffered expert testimony, the trial court is " a gatekeeper, not a fact finder." Primiano v. Cook, 598 F.3d 558, 565 (9th Cir. 2010) (citation and quotation marks omitted).

" [T]he trial court must assure that the expert testimony 'both rests on a reliable foundation and is relevant to the task at hand.'" Id. at 564 (quoting Daubert, 509 U.S. at 597). " Expert opinion testimony is relevant if the knowledge underlying it has a valid connection to the pertinent inquiry. And it is reliable if the knowledge underlying it has a reliable basis in the knowledge and experience of the relevant discipline." Id. at 565 (citation and quotation marks omitted). " Shaky but admissible evidence is to be attacked by cross examination, contrary evidence, and attention to the burden of proof, not exclusion." Id. at 564 (citation omitted). The judge is " supposed to screen the jury from unreliable nonsense opinions, but not exclude opinions merely because they are impeachable." Alaska Rent-A-Car, 738 F.3d at 969. Simply put, " [t]he district court is not tasked with deciding whether the expert is right or wrong, just whether his testimony has substance such that it would be helpful to a jury." Id. at 969-70.

Like the test for admissibility in general, the test of reliability is also flexible. Estate of Barabin v. AstenJohnson, Inc., 740 F.3d 457, 463 (9th Cir. 2014) (en banc). To determine reliability, the Supreme Court has suggested several factors: " 1) whether a theory or technique can be tested; 2) whether it has been subjected to peer review and publication; 3) the known or potential error rate of the theory or technique; and 4) whether the theory or technique enjoys general acceptance within the relevant scientific community."

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Id. (quoting United States v. Hankey, 203 F.3d 1160, 1167 (9th Cir. 2000)); see also Primiano, 598 F.3d at 564. These factors are " meant to be helpful, not definitive, and the trial court has discretion to decide how to test an expert's reliability as well as whether the testimony is reliable, based on the particular circumstances of the particular case." Primiano, 598 F.3d at 564 (citations and quotation marks omitted); see also Barabin, 740 F.3d at 463. The test " is not the correctness of the expert's conclusions but the soundness of his methodology," and when an expert meets the threshold established by Rule 702, the expert may testify and the fact finder decides how much weight to give that testimony. Primiano, 598 F.3d at 564-65.

After an expert establishes admissibility to the judge's satisfaction, challenges that go to the weight of the evidence are within the province of a fact finder, not a trial court judge. A district court should not make ...


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