Orbitz 2011 Annual Report Download - page 76

ORBITZ WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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compensatory and punitive damages, disgorgement, restitution, interest, penalties and costs, attorneys' fees, and where a class
action has been claimed, an order certifying the action as a class action. An adverse ruling in one or more of these cases could
require us to pay tax retroactively and prospectively and possibly pay penalties, interest and fines. The proliferation of
additional cases could result in substantial additional defense costs.
We have also been contacted by several municipalities or other taxing bodies concerning our possible obligations with
respect to state or local hotel occupancy or related taxes. The following taxing bodies have issued notices to the Company: the
Louisiana Department of Revenue; the Montana Department of Revenue; the New Mexico Taxation and Revenue Department;
the Ohio Department of Taxation; the Wyoming Department of Revenue; an entity representing 84 cities and 14 counties in
Alabama; 43 cities in California; the cities of Phoenix, Arizona; North Little Rock and Pine Bluff, Arkansas; Aurora,
Broomfield, Colorado Springs, Golden, Greenwood Village, Littleton, and Steamboat Springs, Colorado; St. Louis, Missouri;
and the counties of Jefferson, Arkansas; Brunswick and Stanly, North Carolina; Duval, Florida; and Davis, Summit, Salt Lake
and Weber, Utah. These taxing authorities have not issued assessments, but have requested information to conduct an audit and/
or have requested that the Company register to pay local hotel occupancy taxes.
Assessments that are administratively final and subject to judicial review have been issued by the cities of Anaheim, Los
Angeles, San Francisco and San Diego, California; the counties of Broward, Miami-Dade and Osceola, Florida; the Hawaii
Department of Taxation; the City of Denver; and the Indiana Department of Revenue. In addition, the following taxing
authorities have issued assessments that are subject to further review by the taxing authorities: the Colorado Department of
Revenue; the Maryland Comptroller; the Texas Comptroller; West Virginia Department of Revenue; and the Wisconsin
Department of Revenue; the city of Philadelphia, Pennsylvania; the cities of Alpharetta, Cartersville, Cedartown, College Park,
Dalton, East Point, Hartwell, Macon, Rockmart, Rome, Tybee Island and Warner Robins, Georgia; and the counties of Augusta,
Clayton, Cobb, DeKalb, Fulton, Gwinnett, Hart and Richmond, Georgia; and Montgomery County, Maryland. The Company
disputes that any hotel occupancy or related tax is owed under these ordinances and is challenging the assessments made
against the Company. These assessments range from $250 to approximately $40.8 million, and total approximately $58.8
million. If the Company is found to be subject to the hotel occupancy tax ordinance by a taxing authority and appeals the
decision in court, certain jurisdictions may attempt to require us to provide financial security or pay the assessment to the
municipality in order to challenge the tax assessment in court.
In July 2011, related to the city of San Antonio, Texas hotel occupancy tax case, the United States District Court for the
Western District of Texas issued its findings of fact and conclusions of law in which it held the defendant online travel
companies, including Orbitz, liable for hotel occupancy taxes on markup, fees, and breakage revenue, and also imposed
penalties and interest. In November 2011, the online travel companies filed a motion with the Court, in which they requested
that the Court amend its findings of fact and conclusions of law to provide that defendants' services are not subject to local hotel
occupancy tax, as recently held by the Texas Court of Appeals in City of Houston v. Hotels.com. If the Court does not grant this
motion, and enters judgment against the online travel companies, we intend to appeal the ruling and expect to prevail.
Accordingly, we have not accrued any expenses related to this case. It is possible, however, that we will not prevail, and if that
occurs, we estimate that the amount of the judgment that we would be required to pay would be approximately $2.9 million.
Also in July 2011, Trilegiant Corporation filed an action for breach of contract and declaratory judgment in the Supreme
Court of New York against us, alleging that we are obligated to make a series of termination payments arising out of a
promotion agreement that we terminated in 2007. In 2007, we accrued the present value of the termination payments (see Note
6 - Accrued Expenses); in 2010, in connection with a dispute with Trilegiant, we ceased making termination payments, but we
continue to carry the remaining present value of the total liability and accrete interest on such liability.
We believe that we have meritorious defenses, and we are vigorously defending against these claims, proceedings and
inquiries. As of December 31, 2011, we had a $0.9 million accrual related to various legal proceedings. Litigation is inherently
unpredictable and, although we believe we have valid defenses in these matters, unfavorable resolutions could occur. We cannot
estimate our range of loss, except to the extent taxing authorities have issued assessments against us. Although we believe it is
unlikely that an adverse outcome will result from these proceedings, an adverse outcome could be material to us with respect to
earnings or cash flows in any given reporting period.
We are currently seeking to recover insurance reimbursement for costs incurred to defend the hotel occupancy tax cases.
We recorded a reduction to selling, general and administrative expense in our consolidated statements of operations for
reimbursements received of $2.5 million, $6.3 million and $6.0 million for the years ended December 31, 2011, 2010 and 2009,
respectively. The recovery of additional amounts, if any, by us and the timing of receipt of these recoveries is unclear.
Accordingly, as of December 31, 2011, we had not recognized a reduction to selling, general and administrative expense in our