Several factors are to be considered when a court determines the admissibility of an expert witness. The Federal Trade Commission (FTC) brought action against multi-level marketing business under the Federal Trade Commission Act alleging unfair and deceptive practices for business’s alleged operation of a pyramid scheme. Part of this appeal concerned the admissibility of an expert witness.
Defendant operated a multi-level marketing business that offered customers three tiers of service: (i) they could simply buy music and merchandise; (ii) they could be “Independent Retailers” of music and other merchandise and earn points redeemable for music or merchandise; (iii) or they could pay an additional fee to achieve a higher lever and become “Moguls” with the ability to earn cash rewards. The higher-level packages included access to a ready-made and customizable web page. This page was the vehicle through which the customers sold music, music-related merchandise, or packages of music-related merchandise to customers in return for Defendant’s rewards in its program.
Defendants appealed the district court’s order granting a permanent injunction against its continued operation based on the court’s finding that Defendant was an illegal pyramid scheme and the district court’s denial of their motion to exclude the testimony of the FTC’s expert.
Defendants moved to strike the testimony of the FTC’s expert as inadmissible under Daubert v. Merrell Dow Pharmaceuticals (U.S. 1993), but the district court denied the motion. The Ninth Court of Appeals Circuit Judge explained that the admission of expert testimony is governed by Federal Rule of Evidence 702 and wrote that Daubert held that “the trial judge must ensure that any and all scientific testimony or evidence admitted is not only relevant, but reliable.” This is a flexible inquiry, the judge explained, in which several factors must be considered. The Daubert Court pointed out that these factors are not exhaustive—but that the trial court must base its inquiry on the facts of each case. Further, the Judge noted that when considering the admissibility of expert testimony, there is less danger that a trial court will be “unduly impressed by the expert’s testimony or opinion” in a bench trial.
The Judge said that the expert’s testimony was relevant because he testified about whether Defendant was a pyramid and regarding the degree of consumer harm. In addition, the Circuit Judge explained that his testimony was reliable in light of several other factors: (i) his doctorate in economics and advanced degree in mathematics, which was essential to interpret Defendant’s sales data; (ii) his previous experience analyzing pyramid schemes; (iii) his prior experiences testifying in court in five similar cases and providing expert deposition testimony in seven similar cases; (iv) his published article on the difference between pyramids and legal MLMs; and (v) his personal experience spending several weeks analyzing Defendant’s business model.
Defendants also argued that the district court’s reliance on the expert’s mathematical projections and formulas was an abuse of discretion. They claimed that Ger–Ro–Mar, Inc. v. FTC (2nd Cir. 1975) held that the math itself was insufficient. However, the judge stated that Defendant’s reliance on that case was misplaced. In Ger–Ro–Mar, the Second Circuit found that the FTC “relied solely upon an abstract mathematical theorem without any attempt to relate the theory to the marketplace.” Here, the FTC made use of the expert’s analysis of Defendant’s own data to illustrate how its business worked in practice. The Judge said that Defendant’s data was adequate to show the disproportionate rate at which top level customers were driven by the opportunity to get cash rewards rather than merchandise included in the packages. The expert was qualified to testify, and it was proper for the trial court to decide that his testimony would be helpful to the trier of fact.
Finally, Defendants claimed that the expert didn’t base his analysis on the definition of “pyramid” accepted by the Ninth Circuit, and that he used his own four-pronged test. Judge Christen disagreed and stated that the expert testified about pyramids in terms not materially different from those used by the Ninth Circuit in past decisions.
The “four-prong test” referred included the expert’s consideration of Defendant’s terms and conditions, marketing materials, an optimal scenario for the Defendant model (illustrating the results if all participants performed at their best), and Defendant’s sales data. This was not a new four-prong test, the Judge said, and the expert’s consideration of these characteristics of the business was allowable.
To cap it off, the Judge noted that Defendant had plenty of time to cast doubt on the expert’s testimony at trial because it cross-examined him for a solid two days.
The district court was affirmed.