Christou v. Beatport, LLC, 2013 U.S. Dist. LEXIS 9034 (Jan. 23, 2013)

In a suit (D.C. Colo.) involving dueling dance club owners and their businesses, the defendants filed a Daubert motion to exclude expert testimony regarding lost profits and lost enterprise value.

The plaintiff owned two Colorado nightclubs that gained national attention for electronic dance music (EDM), featuring live DJs. The defendant worked for the plaintiff as a “talent buyer,” booking “A-List” and other DJs. While employed, he also developed an “enormously successful” EDM e-commerce site. The parties had a falling out, and, in 2008, the defendant set up a competing club. In 2010, the plaintiffs sued, alleging various antitrust violations, trade secret theft, and interference with prospective business expectancies. The plaintiffs claimed that, by threatening A-List DJs that he would not feature their work on his site, the defendant coerced them into performing primarily in his club and took over the relevant market.

To quantify lost profits and lost enterprise value damages, the plaintiffs presented testimony from a CPA who was also certified in business valuation and financial forensics.

Lost profits. His methodology for calculating lost profits met both AICPA and accounting industry recommendations, the expert stated. First, he projected revenues that the business probably would have realized had it continued as in the past; next, he accounted for factors unrelated to the case that likely would have affected revenues; finally, he deducted projected expenses.

He first determined the cover charge revenue the plaintiff’s two clubs realized in 2006 and 2007 on their respective EDM nights—Thursdays and Saturdays. Assuming “things would stay about the same,” he then calculated “expected” cover charge revenue for 2008 through 2010. Acknowledging the economic downturn at that time, he adjusted by using statistics from the North American Industry Classification System specific to Colorado bars, nightclubs, and other drinking establishments during that period. Similarly he calculated the clubs’ historical revenue (2006-2007) from food, drinks, and various sales and assumed he could use the average percentage of revenue from those years for his forecasts. These data gave him “total” revenue projections.

He next projected the clubs’ variable expenses (cost of goods sold, advertising, bank fees, equipment rental, and payroll taxes) from 2006 to 2007 to 2008 through 2010. After subtracting them, he concluded that lost profits for both clubs were about $1.2 million.

The defendants’ objections focused on how he applied his methodology:

• He did not consider revenue from other club nights and the plaintiff’s other clubs that could have offset the losses specific to Thursday and Saturday nights;
• He failed to consider additional factors that might have reduced revenues, including the entry of a new and stronger competitor;
• He omitted 2005 revenue data;
• His conversion of lost sales for Thursday and Saturday nights to lost profits, using a variable cost-to-sales ratio that applied to all nights, was problematic;
• His reliance on information he obtained from the plaintiff’s counsel raised questions about his numbers; and
• Cross-examination revealed at least one mistake in his lost profits chart.

There was “nothing mysterious” about the expert’s calculation, the court stated. Daubert merely requires that an expert’s testimony be relevant and reliable. Here, the expert’s explanation as to “how he went about” calculating lost profits would be helpful to the jury. Saying that challenges to his assumptions and even mistakes in his calculations were issues for cross-examination, it admitted this part of the testimony.

Lost enterprise value.

The expert stated that there were three standard methods to determine the value of a business: 1) calculation of net asset value; 2) comparable sales; and 3) capitalization of earnings (income method). He rejected the first method because it did not account for goodwill, which he considered a significant component of the value of the plaintiff’s business. Also, he could not find comparable sales. This left the third method.

The expert’s calculation rested on the assumptions that the plaintiff intended to sell the two clubs around December 2010 and that events occurring after Dec. 31, 2010, would not be relevant. He relied on the plaintiff’s deposition testimony that, in 2006 or 2007, both parties had conversations to the effect that the defendant might buy one of the plaintiff’s clubs and turn the other into a condominium. “They were pretty close to the numbers,” the plaintiff stated. Given the reduction in profitability, the plaintiffs lost $2.1 million in enterprise value, the expert concluded.

The defendants did not challenge the expert’s method or his capitalization rate (not specified). But the court found his opinion left too many issues unanswered. The question, it said, is “fit,” that is, whether there was a logical relationship between his calculation of lost enterprise value and the facts of the case. “Vague” testimony about conversations between the plaintiff and the defendant, before the defendant even left the plaintiff’s business, was not necessarily relevant to establishing the value of his clubs at the end of 2010. Even assuming the plaintiff wanted to sell at that time, “is the alleged loss in enterprise value perpetual?” Moreover, the court asked: “What is the value today?” And if the plaintiff prevailed in this action, “would damages for lost enterprise value as of December 31, 2010 permit [him] to have his cake and eat it too?”

The court noted that in their motion to supplement the expert’s opinion—which it granted—the plaintiffs argued that, under the law, past lost profits and present lost enterprise value were not mutually exclusive. But this proposition still did not answer its basic questions and reserved final judgment of this part of the testimony for trial.