Page 47 - Economic Damage Calculations

favor of Olson and awarded damages of $650,000, close to the $672,270 proposed in damages Model 1
by Olsen’s damages expert. On appeal, the appeals court affirmed the damages award and concluded
that the district court did not abuse its discretion in allowing Olson’s damages expert’s testimony on
damages.

Celebrity Cruises, Inc. v. Essef Corp., 434 F. Supp. 2d 169 (S.D.N.Y. 2006)

This case involved multiple types of damages claims, including a lost business value claim. The plain-
tiff’s damages expert’s model for the lost business value claim relied on a discount rate that was based
on a weighted-average cost of capital (WACC) computation. The trial court rejected the plaintiff’s ex-
pert’s damages model because the methodology used to develop the cost of equity was inconsistent with
the expert’s prior publications. In addition, the trial court found that the defendant’s expert’s computa-
tion, which also involved a discount rate developed using a WACC method, demonstrated that the plain-
tiff had not incurred any lost business value damages. In doing so, the court also considered the range of
discount rates identified in a fairness opinion supplied in connection with the relevant sale of the busi-
ness.

Celebrity operated a cruise ship business. In the summer of 1994, several passengers contracted Legion-
naires’ disease onboard a Celebrity cruise ship. The source of the outbreak was a defective filter in a
whirlpool spa. The sickened passengers sued Celebrity and Essef, the latter of which was responsible for
the design, manufacture, and distribution of the filter. The jury returned a verdict in favor of the passen-
gers, finding both Celebrity and Essef responsible and apportioned liability 70 percent to Essef and 30
percent to Celebrity.

Celebrity then sought damages from Essef, broken into four categories: (1) claims for indemnification of
attorneys’ fees, costs, and the amount paid to the passenger plaintiffs; (2) other out-of-pocket losses,
such as refunds to passengers, crew member housing costs, and decontamination costs; (3) lost profits
from the date of the outbreak until Celebrity was acquired by Royal Caribbean Cruise Lines in 1997;
and (4) the lost business value of Celebrity, based on the alleged discounted price paid for Celebrity by
Royal Caribbean.

The jury ultimately awarded more than $190 million in damages based on claims 2–4. Essef challenged
the verdict with respect to claims 3 and 4. The court denied Essef’s request with respect to the lost prof-
its calculation (claim 3), but it granted Essef’s motion for judgment as a matter of law with respect to
claim 4 related to the lost enterprise value as a result of the plaintiff’s experts failure to properly calcu-
late the discount rate.

Celebrity’s damages expert used an 11 percent discount rate that was developed using a WACC model.
In doing so, Celebrity’s expert used an unlevered beta for the cruise ship industry. The court, however,
found that a book written by Celebrity’s expert undermined this determination. In addition, the court
concluded Essef proved that, by using a levered beta, Celebrity’s enterprise value was not diminished at
the time it was sold. Moreover, the court observed that Goldman Sachs had provided a fairness opinion
at the time of the sale of Celebrity, which used a range of discount rates that included the WACC calcu-
lated by the defendant’s expert, and the WACC of the plaintiff’s expert was well outside the range. As a
result, the court granted Essef’s motion for judgment as a matter of law with respect to Celebrity’s claim
for lost enterprise value.

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