Page 29 - Acertaining Economic Damages Calculation

the incident. Per the plan, the projected profits were compared to the actual results over the damage pe-
riod, with the difference representing the lost profits damages. In addition, the expert also adjusted the
projections in various ways to evaluate alternative results. In doing so, he first assumed that instead of
tracking the five-year plan, revenues would have increased or decreased in line with overall industry
demand levels under the premise of no outbreak. He then made an alternative assumption that the profits
would have actually exceeded management’s expectations, as he asserted they did for a six-month peri-
od preceding the incident. In the district court’s view, the analyses performed by this particular expert
were flawed because they fundamentally relied on the five-year plan developed by Celebrity’s manage-
ment. Per the district court, the plan was wholly unreliable because the vessels included in the analyses
failed to meet budgeted revenue targets in the six-month period preceding the incident, a result that was
contrary to the expert’s assertions. Moreover, the district court noted that another Celebrity expert ex-
plicitly rejected the use of the plan in his lost profits analysis on the basis that the plan was prepared at a
point too remote in time, and that it failed to account for a variety of relevant factors.

The same flaws identified in the lost profits analysis performed by the third expert, namely reliance on
the five-year plan prepared by management, doomed the admissibility of the lost profits opinion pre-
pared by a fourth expert. The district court did note that the fourth expert performed an alternative anal-
ysis that calculated a lower bound of lost profits that did not rely upon the five-year plan but, rather, on
the assumption that Celebrity’s net revenue growth over the damage period should have nearly matched
that of RCCL. However, the district court concluded that the reliance on the five-year plan was not re-
paired by the lower bound methodology, which, standing alone, might have been more reliable.

Celebrity’s last expert on lost profits employed yet a different methodology than those used by the other
experts. The last expert quantified the lost profits as the difference between expected earnings before in-
terest, taxes, depreciation, and amortization (EBITDA) and actual EBITDA over the damage period. For
the first six months of the damage period, the expected EBITDA was based upon management projec-
tions. The expert, however, declined to use the projections beyond the initial six-month period on the
basis that they failed to consider certain company-specific and industry factors that affected the opera-
tions of Celebrity during the damage period and did not accurately anticipate when new vessels would
be added to Celebrity’s fleet. As such, for the remainder of the damage period he used a yardstick ap-
proach to project EBITDA growth based upon combined information for RCCL, Carnival and American
Classic Voyages (ACV). Specifically, he calculated the yardstick growth rate for EBITDA per available
passenger capacity day (ACD) and used this to derive the expected EBITDA for Celebrity during the
damage period.

Essef challenged the admissibility of the analysis, focusing on the appropriateness of the yardstick used.
In denying Essef’s challenge, the district court noted the following:

• The yardstick served as a rough control for factors other than the outbreak. For example, a factor
that would affect Celebrity’s profits, such as a particularly severe hurricane season was con-
trolled for because it would adversely affect the cruise lines that make up the yardstick. The
cruise lines that make up the yardstick made up a substantial portion of the North American
cruise market, and their itineraries and market segments overlapped with Celebrity.

• The yardstick served as a predictor of Celebrity’s performance because Celebrity matched up
with the yardstick companies in terms of positioning in the premium segment of the marketplace
and gross per diem growth.

• Essef’s experts accepted the yardstick approach employed and acknowledged that it controlled
for factors that affected the industry as a whole.

© 2020 Association of International Certified Professional Accountants 27