Third Circuit Vacates Pipeline Easement Compensation Awards, Sets Precedent Addressing Speculative Testimony

Recently, a Third Circuit panel said a U.S. District Court judge abused his discretion in admitting the testimony of the landowners’ expert, who significantly devalued property based on the supposed “stigma” of the property being located near a natural gas pipeline.¹ 

There, UGI Sunbury, LLC (UGI), a company that builds natural gas pipelines under the authorization of the Natural Gas Act, had condemned easements for the construction of a natural gas pipeline. The issue of damages accounting for the diminution in value to the property due to the condemnation was before the District Court. 

In a bench trial before a Judge in the United States District Court for the Middle District of Pennsylvania, the landowners employed an expert who opined that the value of the property had been severely decreased by the pipeline based on his “damaged goods theory.” The expert devised the theory based on his experience working as a sales representative in his grandfather's appliance shop when he was in high school and college. He observed that “the obvious appraisal question is, [d]id my grandfather get more, the same or less for the ‘scratch and dent’ models than the undamaged models and items?” While the expert testified that a purchaser of the property would discount the price due to the stigma of the pipeline and the “damaged goods” aspect of the property, he offered no hard evidence in the form of paired sales to support his contention. Beyond that, he pointed to the impact on property values from the 1979 Three Mile Island nuclear accident and the 1989 Exxon Valdez oil spill in Alaska. However, these comparisons failed to demonstrate any actual, irremediable harm because the expert presented no quantifiable data to explain or clarify his assumptions. 

Nonetheless, the District Court found that the expert’s testimony was admissible and accepted that some type of stigma existed (although it reduced the amount of stigma damages testified to by the expert).

On appeal, the Third Circuit vacated the District Court’s decisions and remanded the matters for new valuation proceedings, criticizing the District Court’s acceptance of the expert’s speculative testimony. First, the Third Circuit confirmed that the gatekeeping function of the trial judge and the standards of Rule 702 apply in both bench trials and jury trials. Second, the Third Circuit detailed how the expert’s testimony lacked the requisite reliability and fit for admissibility. The expert’s testimony was bound only to speculation and conjecture, not good science or other “good grounds.” It explained that the “speculative and subjective nature of this testimony…severs the necessary relationship to ‘methods which have established to be reliable.’” Thus, the expert’s testimony on damages did not “fit” the proceedings or have the “requisite nexus to the fair market value of the property at issue.” Because the expert’s testimony failed to meet the mandatory requirements for admissibility under the Federal Rules of Evidence, the District Court’s admission of the testimony was deemed detrimental to UGI and new trials on compensation owned to the landowners will follow.