United States District Court, N.D. California, San Jose Division
IN RE: HIGH-TECH EMPLOYEE ANTITRUST LITIGATION. THIS DOCUMENT RELATES TO: ALL ACTIONS.
ORDER RE: DEFENDANTS' MOTIONS REGARDING DR. LEAMER AND DEFENDANTS' JOINT MOTION FOR SUMMARY JUDGMENT BASED ON MOTION TO EXCLUDE TESTIMONY OF DR. LEAMER
LUCY H. KOH, District Judge.
On January 9, 2014, Defendants jointly moved to strike portions of Dr. Edward Leamer's reply report. ECF No. 557 ("Strike Mot."). Plaintiffs filed an opposition. ECF No. 600 ("Strike Opp."). Defendants filed a reply. ECF No. 714 ("Strike Reply"). On January 10, 2014, Defendants jointly moved to exclude the testimony of Dr. Leamer. ECF No. 570 ("Leamer Mot."). Plaintiffs filed an opposition. ECF No. 604 ("Leamer Opp."). Defendants filed a reply. ECF No. 715 ("Leamer Reply."). On January 9, 2014, Defendants filed a joint motion for summary judgment based on their motion to exclude Dr. Leamer's testimony. ECF No. 556. Plaintiffs filed an opposition. ECF No. 603. Defendants filed a reply. ECF No. 712.
The Court held a hearing on these motions on March 27, 2014. Having considered the briefing, relevant law, and oral argument, the Court GRANTS in part and DENIES in part Defendants' motion to strike Dr. Leamer's report, DENIES Defendants' motion to exclude Dr. Leamer's testimony under Daubert, and DENIES Defendants' joint motion for summary judgment.
Plaintiffs Michael Devine, Mark Fichtner, Siddharth Hariharan, and Daniel Stover, on behalf of themselves and a class of those similarly situated, filed the instant litigation against Defendants Adobe Systems Inc. ("Adobe"), Apple Inc. ("Apple"), Google Inc. ("Google"), Intel Corp. ("Intel"), Intuit Inc. ("Intuit"), Lucasfilm Ltd. ("Lucasfilm"), and Pixar. ECF No. 65. Plaintiffs allege that the Defendants entered into several bilateral agreements with each other pursuant to which the parties to the agreement would not cold call each other's employees. Id. ¶ 55. The crux of Plaintiffs' complaint is that these bilateral agreements together form an overarching conspiracy that suppressed wages for all of Defendants' employees. Id. Plaintiffs contend that Defendants' agreements violated Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, and Section 4 of the Clayton Antitrust Act, 15 U.S.C. § 15.
Plaintiffs filed a Consolidated Amended Complaint, the operative complaint, on September 13, 2011. See id. Defendants filed a Joint Motion to Dismiss the consolidated amended complaint on October 13, 2011, see ECF No. 79, and, with leave of the Court, Lucasfilm filed its separate Motion to Dismiss on October 17, 2011, see ECF No. 83. Following full briefing on both motions and a hearing on January 26, 2012, see ECF No. 108, the Court granted in part and denied in part Defendants' Joint Motion to Dismiss and denied Lucasfilm's Motion to Dismiss on April 18, 2012, see ECF No. 119.
On October 1, 2012, Plaintiffs filed their motion for class certification, in which Plaintiffs sought to certify a class made up of all of Defendants' employees during the conspiracy period. After full briefing and a hearing, the Court granted in part and denied in part the motion on April 5, 2013. See ECF No. 382 ("April Order"). In that order, the Court denied the motion to certify the class, but appointed interim Co-Lead Counsel and Class Counsel. Id. The Court's analysis focused on the predominance requirement of Rule 23(b)(3) of the Federal Rules of Civil Procedure. The Court found that Plaintiffs had not demonstrated that common questions would predominate with respect to the antitrust impact element of Plaintiffs' claim. Id. at 29. The Court, however, gave Plaintiffs leave to amend to address the Court's concerns in light of the fact that Defendants had not produced the discovery needed for class certification. Id. at 47, 52.
On May 10, 2013, Plaintiffs filed a supplemental motion for class certification, seeking certification of a narrower class of technical employees. While the motion was pending, Plaintiffs reached a settlement with Pixar, Lucasfilm, and Intuit, which the Court has preliminarily approved. After full briefing and a hearing, the Court granted Plaintiffs' motion for class certification on October 24, 2013. ECF No. 531 ("October Order"). The Court certified the class of technical employees because Plaintiffs had met their burden under Rule 23. Defendants sought interlocutory review of the Court's class certification order. On January 14, 2014, however, the Ninth Circuit exercised its discretion to deny Defendants' petition for immediate review. ECF No. 594.
On March 28, 2014, after full briefing, the Court denied the Defendants' individual motions for summary judgment filed by Adobe, Apple, Google, and Intel. See ECF No. 771. This Order addresses Defendants' joint motion to strike Dr. Leamer's reply report, Defendants' joint motion to exclude Dr. Leamer's testimony under Daubert, and Defendants' joint motion for summary judgment based on their motion to exclude the testimony of Dr. Leamer.
II. LEGAL STANDARDS
A. Motion to Exclude Testimony under Daubert
Federal Rule of Evidence 702 allows admission of expert opinions based on "scientific, technical, or other specialized knowledge" if such an opinion would "help the trier of fact to understand the evidence or to determine a fact in issue." Fed.R.Evid. 702. Expert testimony is admissible if it is both relevant and reliable. Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 589 (1993). When considering expert testimony, the trial court acts as a "gatekeeper" by assessing the soundness of the expert's methodology to exclude "junk science." Estate of Barabin v. AstenJohnson, Inc., 740 F.3d 457, 463 (9th Cir. 2014); see Kumho Tire Co. v. Carmichael, 526 U.S. 137, 147-48 (1999); Daubert, 509 U.S. at 589-90. An expert witness may provide opinion testimony if: (1) the testimony is based upon sufficient facts or data; (2) the testimony is the product of reliable principles and methods; and (3) the expert has reliably applied the principles and methods to the facts of the case. Fed.R.Evid. 702. Under Daubert, in determining reliability, courts can consider (1) whether a theory or technique "can be (and has been) tested;" (2) "whether the theory or technique has been subjected to peer review and publication;" (3) "the known or potential rate of error;" and (4) whether there is "general acceptance" of the methodology in the "relevant scientific community." Daubert, 509 U.S. at 593-94. "[F]ar from requiring trial judges to mechanically apply the Daubert factors... judges are entitled to broad discretion when discharging their gatekeeping function." United States v. Hankey, 203 F.3d 1160, 1168 (9th Cir. 2000) (citation omitted). The proponent of the expert has the burden of proving admissibility by a preponderance of the evidence. Lust v. Merrell Dow Pharmaceuticals, Inc., 89 F.3d 594, 598 (9th Cir. 1996); Daubert, 509 U.S. at 592 n.10.
Rule 702 "mandates a liberal standard for the admissibility of expert testimony." Cook v. Rockwell Int'l Corp., 580 F.Supp.2d 1071, 1082 (D. Colo. Dec. 7, 2006); Daubert, 509 U.S. at 588 (Rule 702 is part of the "liberal thrust" of the Federal Rules of Evidence); Dorn v. Burlington N. Sante Fe R.R. Co., 397 F.3d 1183, 1196 (9th Cir. 2005) ("The Supreme Court in Daubert  was not overly concerned about the prospect that some dubious scientific theories may pass the gatekeeper and reach the jury under the liberal standard of admissibility set forth in that opinion[.]"). Thus, the inquiry into admissibility of expert opinion is a "flexible one, " where "[s]haky but admissible evidence is to be attacked by cross examination, contrary evidence, and attention to the burden of proof, not exclusion." Primiano v. Cook, 598 F.3d 558, 564 (9th Cir. 2010) (citing Daubert, 509 U.S. at 596). The "district judge is a gatekeeper, not a fact finder.' When an expert meets the level established by Rule 702 as explained in Daubert, the expert may testify and the jury decides how much weight to give that testimony." Id. (citation omitted).
B. Motion to Strike Testimony
Rule 26(a)(2)(B) provides that an expert witness's opening report must contain "a complete statement of all opinions the witness will express and the basis and reasons for them" together with "the facts or data considered by the witness in forming them" and "any exhibits that will be used to summarize or support them." Fed.R.Civ.P. 26(a)(2)(B)(i)-(iii). Rebuttal disclosures of expert testimony are "intended solely to contradict or rebut evidence on the same subject matter identified by another party" in its expert disclosures. Fed.R.Civ.P. 26(a)(2)(D)(ii). "Rule 37(c)(1) gives teeth to these requirements by forbidding the use at trial of any information required to be disclosed by Rule 26(a) that is not properly disclosed." Yeti by Molly, Ltd. v. Deckers Outdoor Corp., 259 F.3d 1101, 1106 (9th Cir. 2001). This rule requires the exclusion of untimely expert witness testimony, unless the "part[y's] failure to disclose the required information is substantially justified or harmless." Id. (citation omitted). The moving party bears the burden of showing a discovery violation has occurred. See Hernandez ex rel. Telles-Hernandez ex-rel. Telles-Hernandez v. Sutter Medical Center of Santa Rosa, 2008 WL 2156987, at *13 (N.D. Cal. May 20, 2008). Once that burden is satisfied, the burden shifts and the nonmoving party must prove that its failure to comply with Rule 26 was either justified or harmless. Yeti by Molly, 259 F.3d at 1107.
A. Defendants' Motion to Strike and Motion to Exclude Dr. Edward Leamer
Defendants move to strike portions of Dr. Leamer's December 2013 reply report and to exclude Dr. Leamer's testimony under Daubert. Specifically, Defendants move to strike Dr. Leamer's use of a 50% statistical significance theory to defend his "conduct regression, " Dr. Leamer's arguments relating to the "total new hires" variable in his conduct regression, and Dr. Leamer's arguments relating to his use of real compensation in his conduct regression. Defendants move to exclude under Daubert Dr. Leamer's testimony, raising four specific challenges to his conduct regression model.
The Court first sets forth the relevant history of expert reports submitted in this case, a summary of Dr. Leamer's conclusions, and a summary of significance testing as necessary context and background for Defendants' motions to strike and exclude Dr. Leamer's testimony. For reference, the Court notes that all the challenges in Defendants' motion to strike and motion to exclude pertain solely to Dr. Leamer's conduct regression model detailed below.
1. Summary of Expert Reports and Dr. Leamer's Analysis
At the class certification stage, Dr. Leamer submitted four expert reports on Plaintiffs' behalf: (1) October 1, 2012 ("Class Cert. Opening Rep."), ECF No. 190; (2) December 10, 2012 ("Class Cert. Reply Rep."), ECF No. 558-4; (3) May 10, 2013 ("Suppl. Class Cert. Rep."), ECF No. 558-5; and (4) July 12, 2013 ("Suppl. Class Cert. Reply Rep."), ECF No. 454-4. In addition, at the class certification stage, defense expert Dr. Kevin Murphy submitted a report on November 12, 2012 ("Murphy Class Cert. Rep."), ECF No. 230,  and a supplemental report on June 21, 2013 ("Murphy Suppl. Class Cert. Rep."), ECF No. 440.
On October 28, 2013, Dr. Leamer filed his opening merits report ("Leamer Opening"), ECF No. 558-6. On November 25, 2013, defense expert Dr. Lauren Stiroh submitted her rebuttal merits report challenging Dr. Leamer's analysis ("Stiroh Rebuttal"), ECF No. 558-7. On December 11, 2013, Dr. Leamer submitted his reply report ("Leamer Reply Rep."), ECF No. 558-8.
Plaintiffs submitted four reports from Dr. Leamer in support of their argument at the class certification stage that common issues predominate for the purpose of assessing classwide impact and damages. In Dr. Leamer's first report in October 2012, Plaintiffs asked him to evaluate whether classwide evidence was capable of showing that the anti-solicitation agreements artificially reduced the compensation of: (1) members of the class generally, and (2) all or most members of the class. Class Cert. Opening Rep. ¶ 10(a). In addition, Plaintiffs asked Dr. Leamer a second question-to assess whether there was a reliable classwide method capable of quantifying the amount of suppressed compensation suffered by the class. Id. ¶ 10(b). Dr. Leamer answered both questions in the affirmative.
As explained below, Dr. Leamer's analysis with respect to the first question proceeded in two steps. First, Dr. Leamer explained that economic theory, documentary evidence, and multiple regression analyses were capable of showing that the anti-solicitation agreements tended to suppress employee compensation generally by preventing class members from discovering the true value of their work. Id. ¶¶ 11(a)-(b), 63. Second, Dr. Leamer illustrated how economic theory, documentary evidence, and statistical analyses are capable of showing that this suppression of compensation affected all or nearly all class members. Id. ¶¶ 11(c), 64.
Dr. Leamer first concluded that classwide evidence was capable of showing that the anti-solicitation agreements suppressed compensation of class members generally. This first step was supported by principles of information economics, such as "market price discovery." Dr. Leamer noted that, when evaluating labor markets, economists often use a market equilibrium model, which "presume[s] that market forces... work rapidly enough that virtually all transactions occur at approximately the same price-the market price' which equilibrates supply and demand." Id. ¶ 71. In reality, when labor market conditions change, high transaction costs and limited information flow can slow the process by which transaction prices reach market equilibrium. Id. ¶¶ 72-73. "Market price discovery" is the process by which participants in a market search for this equilibrium. Id. ¶ 71.
Dr. Leamer opined that the high transaction costs-including time, money, and personal dislocation-involved in searching for high tech jobs limit the number of existing workers seeking new employment. Id. ¶ 74. Defendants and other high tech companies value potential employees who are not actively looking for new employment opportunities ("passive candidates") more than those who are looking for new jobs ("active candidates") because currently satisfied employees: (1) tend to be perceived as more qualified, diligent, and reliable; (2) often have training, on-the-job experience, and track records that save the hiring company search and training costs; and (3) are valuable assets that, if hired away from rivals, can harm competitors. Id. ¶ 62. Thus, recruiting these passive candidates by cold calling is both an important tool for employers and a key channel of information for employees about outside opportunities. Id. ¶¶ 57-62, 75.
Dr. Leamer hypothesized that, by restricting cold calling and other competition over employees, Defendants' anti-solicitation agreements impaired information flow about compensation and job offers. Defendants' inhibition of employees' ability to discover and obtain the competitive value of their services meant employees were afforded fewer opportunities to increase their salaries by moving between firms and deprived of information that could have been used to negotiate higher wages and benefits within a firm. Id. ¶¶ 71-76. In addition, by limiting the information available to employees, Defendants could avoid taking affirmative steps, such as offering their employees financial rewards and other forms of profit sharing, to retain employees with valuable firm-specific skills. Id. ¶¶ 77-80.
Dr. Leamer relied on documentary evidence as further support for the link between the anti-solicitation agreements and compensation reduction. Id. ¶¶ 81-88. He also performed regression analyses which utilized Defendants' internal compensation data to illustrate class members' undercompensation by comparing compensation during the conspiracy with compensation in a conspiracy-free, but-for world. Id. ¶¶ 135-46, Figs. 20-24. Dr. Leamer concluded that the regression analyses showed that the anti-solicitation agreements artificially suppressed compensation at each Defendant. Id.
Dr. Leamer's second step was to opine that economic theory, documentary evidence, and statistical analyses were capable of showing that this compensation suppression had widespread effects-i.e., that suppression of compensation affected all or nearly all class members. Id. ¶ 101. Dr. Leamer first relied on economic theories of loyalty, fairness, and internal equity to explain how the adverse effects on compensation due to Defendants' anti-solicitation agreements would have been felt by employees who would have received a cold call or had a significant chance of receiving a cold call and employees who are linked to these groups due to internal equity considerations. Suppl. Class Cert. Reply Rep. ¶¶ 27-28. In other words, Dr. Leamer contended that labor markets rely on committed long-term relationships built on trust, understanding, and mutual interests. Class Cert. Opening Rep. ¶ 102. Thus, both employers and employees seek ways to turn the market transaction into secure long-term relationships, which "can come either from commitment (emotional or financial) to the mission of the organization, or from jointly owned firm-specific assets." Id. Companies thus attempt to create loyalty "by getting buy-in from the firm's mission and by making the place of work as appealing as possible." Id. ¶ 103.
"One foundation of employee loyalty is a feeling of fairness that can translate into a sharing of... [a firm's] rewards with more equality than a market might otherwise produce." Id. ¶ 104. Firms seek to promote a feeling of fairness among employees to maintain or to increase employees' commitment and contentment, which also leads to higher levels of productivity. Suppl. Class Cert. Rep. ¶ 16. Dr. Leamer explained that, "[t]o maintain loyalty, it is usually better for a firm to anticipate rather than to react to outside opportunities, since if a worker were to move to another firm at a much higher level of compensation, coworkers left behind might feel they have not been fairly compensated. That can have an adverse effect on worker loyalty, reducing productivity and increasing interest in employment elsewhere." Class Cert. Opening Rep. ¶ 105.
Dr. Leamer opined that the information conveyed by an outside offer or a cold call could stimulate a response by management that could extend beyond the specific individual who received the cold call. Suppl. Class Cert. Rep. ¶ 15. Even though the market may not mandate a rise in compensation for these similar individuals until they actually receive an outside offer, "preemptive improvements" can minimize the disruption to employee loyalty that might occur when an employee discovers the she was undercompensated. Class Cert. Opening Rep. ¶ 105. Thus, "[c]old-[c]alling-as well as just the threat of [c]old-[c]alling-puts upward pressure on compensation." Id. ¶ 106. Dr. Leamer opined that "a broad preemptive response is completely analogous to salary increases that are tied to information provided by employment services regarding the compensation offered by the market.'" Suppl. Class Cert. Rep. ¶ 15. Essentially, Dr. Leamer opined that the "response to bursts of cold calls and, even more, the response to the threat of cold calls" would raise internal equity concerns that would spread the impact throughout the class. Suppl. Class Cert. Reply Rep. ¶ 27. Dr. Leamer also noted that ...