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Third Circuit Holds That “Stigma Damages” for Pipeline Projects Must be Supported by Objective, Reliable Evidence

They say stigmas are social constructs. In court, however, they must be based on relevant and objective evidence, so says the Court of Appeals for the Third Circuit in a precedential opinion involving the amount of compensation owed to private landowners for easements over their properties to allow the installation of an underground pipeline. In UGI Sunbury LLC v. A Permanent Easement for 2.4645 Acres, Nos. 18-3126, 18-3127 (Feb. 11, 2020), the appellant UGI Sunbury, LLC (UGI) sought vacatur of a decision from the District Court of the Middle District of Pennsylvania in a condemnation proceeding under the Natural Gas Act, which based the compensation awarded in part on a claim that the public perception of natural gas pipelines on or near real property will permanently reduce the value of the property due to the stigma that the property is “damaged goods.” While the Third Circuit did not opine on the validity of the theory in general, it did find that the expert testimony upon which the award was based utterly failed to meet the requirements of Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), and thus should not have been admitted nor relied upon. 

UGI obtained authorization under the Natural Gas Act, 15 U.S.C. §§ 717 et seq., to construct and operate an underground pipeline across an approximately 34-mile stretch of land in Pennsylvania, which included the properties owned by the Appellees. UGI was awarded temporary and permanent easements in condemnation proceedings over the Appellees’ property to construct the pipeline. During the bench trial to determine just compensation for the taking, the Appellees argued that the amount must account for the fact that the properties were now “damaged goods” because an alleged stigma is attached to natural gas pipelines which goes beyond any reduction in value that might attach to the easements themselves. The Appellees’ witness who devised the “damaged goods” theory, however, admitted at various points in his testimony that elements of his theory were subjective and speculative, and that he did not collect data to appraise the loss of value from the placement of the pipeline. For that reason, UGI sought to exclude the witness’s testimony for failing to meet the standards required by Federal Rule of Evidence 702. The trial court denied UGI’s motion in limine and admitted his testimony into evidence based in part on a generalized preference for the admission of expert testimony in a bench trial.

On appeal, UGI argued that the trial court abused its discretion under Rule 702 by both admitting the expert testimony and relying on it in reaching a decision. First, the Court confirmed that Rule 702 is as applicable to bench trials as it is to jury trials, particularly in light of its requirement that such evidence assist the trier of fact, rather than the jury. And while there may be some latitude given to a judge to decide how and when to make a final determination as to whether the expert testimony meets the admissibility standards of Rule 702 and Daubert, the Third Circuit held that it would be (and was) an abuse of discretion to conduct no pre-trial assessment of the admissibility of the proffered opinion testimony.

The Court then went on to expand on when such testimony may be admitted and explained expert testimony must be based on methods and procedures of science, not on subjective belief and unsupported speculation. Here, the Court held that the testimony lacked both the reliability and fit required under Rule 702. The Court noted that the witness’s theory had not been subjected to peer review, was derived from anecdotal experience (which itself was unrelated to real estate valuation), and was highly speculative, thereby calling its reliability into doubt.

Secondly, the Court found that the evidence did not fit the facts in this case, because the witness’s report and testimony contained no examples of properties whose valuates decreased after installation of a natural gas pipeline. Acknowledging that determining whether expert testimony “fits” a case in not always obvious, the Third Circuit held that it is nevertheless necessary for a court to determine whether the opinion is relevant to the facts and purpose of the case. Here, for example, the proffered expert relied on evidence of decreasing property values near Three Mile Island after the nuclear accident and near oil spills, and not on any evidence related to the mere location of a pipeline, or indeed any utility. As a result, the Third Circuit found that the testimony was not relevant to the facts of the case.

Accordingly, the Court held that the trial court mistakenly admitted and relied on such evidence to UGI’s detriment and vacated and remanded the case for further proceedings. The Court left open the possibility that the landowners might yet be able to produce an expert opinion that supported their claim that their property values diminished as a result of the stigma of the pipelines or otherwise supported compensation claims consistent with state common law. Finally, the Court made clear that district courts must provide clear findings of fact and conclusions of law to support their final decisions and cannot rely on conclusory statements lacking in evidentiary support.