Credit Report Expert testimonyThe California Court of Appeals recently held that expert testimony about manufacturer’s financial condition based solely on a Dun & Bradstreet report was properly excluded as an improper conduit for hearsay.

Plaintiff was a small business in California that imported products from Israel. Defendant “A” was a foreign manufacturer that wanted to sell its products in the DIY (“do-it-yourself”) retail market. Defendant “B,” a co-defendant, was also an Israeli-based manufacturer.

The dispute centered on the breach of an exclusive distribution contract by the manufacturers and the calculation of punitive damages. On that issue, Plaintiff argued that both defendants were joint tortfeasors and liability should be imposed. Defendant A claimed that Plaintiff must prove the actual damages caused by each defendant. Plaintiff’s expert was unable to allocate damages between the two defendants, and the Defendant A asked that the testimony be stricken as speculative. The trial court agreed.

Plaintiff sought Defendant B’s financial information in the event of a punitive damages finding. Plaintiff attempted to offer the testimony of its economic expert that Defendant B’s financial condition was as reported in Dun & Bradstreet (D&B). The judge rejected it, ruling that it was inadmissible hearsay and granted Defendant B’s motion for non-suit on Plaintiff’s claim for punitive damages.

Plaintiff argued that the trial court abused its discretion in excluding the D&B report showing Defendant B’s $15.6 million net worth. Defendant B argued that the documents were inadmissible hearsay and an improper basis for any award of punitive damages in that the expert’s testimony was based solely on a D&B report. The trial court agreed with the defendant and excluded the expert testimony, finding that the D&B report contained “hearsay within hearsay.”

The report constituted financial information purported to be provided by Defendant B’s General Manager. The trial court rejected Plaintiff’s argument that the party-admission exception to hearsay applied, and Plaintiff provided only a few lines in the D&B Report where the GM was possibly interviewed by D&B. The trial court determined that Plaintiff hadn’t adequately shown the elements of an authorized admission. Plaintiff next provided a declaration of D&B’s Director of National Customer Relations, who said the statements in the D&B report were made “at or near the time of the occurrence … by … a person with knowledge of those matters.” This was hardly enough to establish the D&B report as a business record, the Court of Appeals affirmed.

With the D&B report found to be inadmissible hearsay, the trial court addressed whether Plaintiff’s expert could still rely on the report in rendering his opinion. The court said no, and the appellate court agreed, holding that although an expert may rely on inadmissible matter in forming an opinion, that matter is admissible only to explain the basis for the witness’s testimony.

The expert may not serve as a mere conduit for the admission of otherwise inadmissible hearsay. Here, the expert’s testimony regarding the net worth of Defendant B was “derived directly, and apparently solely from the D&B Report.” Because Plaintiff’s expert had no other competent basis to testify about A defendant’s net worth or financial condition, any testimony on those subjects would result in the inadmissible D&B Report being introduced to the jury through the expert. “This is precisely what the law does not allow,” the appellate court held, citing another recent California Supreme Court decision.

Plaintiff argued that it is well settled that an expert may rely on reports and market data to establish a company’s valuation, pointing to the Law Revision Commission Comments to section 801 of the Evidence Code. The trial court acknowledged that “[a] qualified expert may fortify his opinion by reference to materials … prepared by similarly qualified experts.” The trial court was aware that just because “such independent information/opinions are not themselves admissible does not prevent a testifying expert from relying on them as a basis for his own opinion…” However, the trial court noted that there are limits to a testifying expert’s ability to reference inadmissible hearsay.

The trial court relied on People v. Gardeley (Cal. 1996), in which the California Supreme Court provided a thorough discussion of the circumstances under which a testifying expert may rely on inadmissible evidence: “Expert testimony may … be premised on material that is not admitted into evidence so long as it is material of a type that is reasonably relied upon by experts in the particular field in forming their opinions.” However, the Supreme Court stressed the point that “a witness’s on-the-record recitation of sources relied on for an expert opinion didn’t transform inadmissible matter into ‘independent proof” of any fact.” “A trial court has discretion,” the Supreme Court wrote, “to weigh the probative value of inadmissible evidence relied upon by an expert witness … against the risk that the jury might improperly consider it as independent proof of the facts recited therein.”

Here, the Court of Appeals said this was the risk that the trial court considered when it made its ruling excluding the D&B report, holding the expert can’t serve as a mere conduit for the introduction of otherwise inadmissible hearsay. All of the expert’s knowledge on Defendant B’s financial condition was derived directly and solely from the D&B Report. Since the D&B report was the only evidence of Defendant B’s net worth, the jury might use the information in the report as independent evidence of the defendant’s net worth. Balancing the value of the hearsay against this risk, the trial court properly excluded the evidence.

The judgment was affirmed.



I–CA Enterprises, Inc. v. Palram Americas, Inc., — Cal.Rptr.3d —-, 2015 WL 1212707 (Cal.App. 2 Dist.), 15 Cal. Daily Op. Serv. 2733 (Cal.App. 2 Dist. February 18, 2015).