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May 26, 2000


The opinion of the court was delivered by: Flannery, District Judge.


I. Introduction

On June 23, 1997, this Court granted Plaintiffs' motion for summary judgment on the issue of liability, finding that Defendant Islamic Republic of Iran ("Iran"), acting through its co-defendants, had expropriated Plaintiff McKesson's 31% interest in an Iranian dairy company, the Sherkat Sahami Labaniat Pasteurize Pak ("Pak Dairy"), in April of 1982.*fn1 See McKesson Corp. v. Islamic Republic of Iran, Civ. A. 82-220, 1997 WL 361177 at *12 (D.C. June 23, 1997). This Court further held as a matter of law that Iran had wrongfully withheld from McKesson the payment of dividends declared by Pak Dairy in 1981 and 1982 (hereinafter the "1981 dividend" and "1982 dividend" respectively) and that Iran could be held liable in federal court for the expropriation and failure to pay dividends under the Treaty of Amity and customary international law. Id., Mem. Op. at 24-31, 1997 WL 361177 at *12-*15; see Treaty of Amity, Economic Relations, and Consular Rights Between the United States of America and Iran, 8 U.S.T. 899 (1957). Between January 18 and February 17, 2000, a bench trial was held to determine the appropriate amount of damages. Iran was the only defendant appearing at trial.*fn2 In their case-in-chief, Plaintiffs first presented the testimony of Fred A. Loichinger ("Loichinger"), Chief Engineer of Pak Dairy from 1976 to 1978, and Robert C. Carpenter ("Carpenter"), a financial investment analyst and foreign investment manager for McKesson during the relevant period. Both testified regarding the condition of Pak Dairy up to 1978 and certain proposed expansions of its business. Plaintiffs also read into the record certain portions of the deposition of Alireza Dadyar ("Dadyar"), the then-Senior Accountant of Pak Dairy and in 1982 its Deputy Chief Accountant. As their fourth fact witness, Plaintiffs put on Leonard A. Patterson ("Patterson"), McKesson's Associate General Counsel, who testified chiefly regarding the value of McKesson's dividends for the years 1981 and 1982. Finally, Plaintiffs put on an appraisal expert, Robert Reilly ("Reilly"), to offer an expert opinion on the value of McKesson's equity interest in Pak Dairy at the time of the expropriation.

In Iran's case-in-chief, it put on Dadyar as a fact witness to testify to the condition of Pak Dairy in the early 1980s, Dr. Gholam H. Vafai ("Vafai") as an expert on Iranian law to authenticate certain Iranian legal documents and Anatole Richman ("Richman") as an appraisal expert offering a contrary view of the value of McKesson's interest in Pak Dairy in April of 1982.

In Plaintiffs' rebuttal case, Reilly gave further testimony. Plaintiffs also put on Professor Shaul Bakhash ("Bakhash") as an expert on Iranian history to testify to the absence of bombing in Tehran in 1981 and 1982.

On March 16, 2000, the parties made their closing arguments. Now, upon reviewing the testimony and exhibits in evidence, as well as the relevant law, the Court enters the following findings of fact and conclusions of law in accordance with Fed.R.Civ.P. 52(a). In making its findings and conclusions, the Court bears in mind that the burden of proving the amount of damages is upon the Plaintiffs. See Samaritan Inns, Inc. v. District of Columbia, 114 F.3d 1227, 1235 (D.C.Cir. 1997); Gould v. U.S., 160 F.3d 1194, 1197 (8th Cir. 1998); Aeronca, Inc. v. Style-Crafters, Inc., 546 F.2d 1094, 1096 (4th Cir. 1976).

II. Findings of Fact

A. The Plaintiffs

The Plaintiffs include four United States corporations which hold formal title to the expropriated shares in Pak Dairy: McKesson HBOC, Inc. and three wholly owned subsidiaries, Foremost Tehran, Inc., Foremost Shir, Inc. and Foremost Iran Corp. When this litigation commenced, McKesson HBOC, Inc. was named Foremost McKesson, Inc. It changed its name to McKesson Corporation on July 27, 1983 following the sale of all of its dairy interests around the world. In January of 1999, it adopted its current name. McKesson's total equity interest in Pak Dairy is 31%, with 10% held by each of the three subsidiaries and 1% held by McKesson HBOC, Inc.

The remaining co-plaintiff is the Overseas Private Investment Corporation ("OPIC"), an agency of the United States which insures private overseas investments of United States nationals. See 22 U.S.C. § 2191. OPIC had insured McKesson's interests in Pak Dairy and seeks to recover monies paid in settlement of McKesson's insurance claim.

B. Iran

Throughout the 1960s and for most of the 1970s, Iran was governed by Mohammad Reza Pahlavi ("the Shah"). However, political turmoil began in the last half of 1978 with labor strikes and general unrest and culminated later that year in the Iranian Revolution ("Revolution"). In December of 1978, the Shah left the country and in February of 1979, a new government was formed based on the rule of Islamic law and following a far more socialist approach to regulating the economy than the previous regime had taken. Most dramatically, the new government nationalized a number of industries such as oil, gas, railways, fisheries, metal, shipping, aircraft and automobiles. While it did not nationalize the dairy industry, it maintained strict price controls over dairy products and also controlled the distribution of raw dairy materials including milk and butter. For example, all foreign imports of raw butter were obtained directly by the government, which then redistributed allotments of butter to the various dairy companies. In addition, Iran set up new labor laws, which inter alia established Worker's Islamic Councils. A Council for a particular company was elected by the company's employees and had an ambiguous role to play in influencing corporate policies and decisions regarding working conditions and pay. All of these new laws and policies were in place by the middle of 1979, and continued to apply through April of 1982.

In November of 1979, Americans at the United States Embassy in Tehran were taken hostage and shortly thereafter, Iran was subjected to an international trading embargo. However, after the release of the hostages in January of 1981, most nations lifted the economic embargo, the notable exception being the United States. All the economic data in 1981-82 indicates a relatively quick return to normalization of international trade. In particular, Japan, West Germany and Holland engaged in substantial trade with Iran. However, Iran's international trade overall was still lower in 1982 than it had been prior to the Revolution.

On September 22, 1980, Iraq commenced a war against Iran (the "Iran-Iraq war") by a surprise attack on Iran's southwestern border. Initially, Iraq was successful, seizing Iranian territory along the border that included several important oil fields. During 1981, the war was largely or solely fought in Iranian territory. However, around the start of 1982, the tide turned and Iraqi ground forces were driven from much of the territory they had occupied, including the oil fields. Iraqi retreat from Iran was substantially complete by April of 1982.

On the first day of the war, Iraq bombed several military bases and airfields in Iran, including the Tehran Marahab Airport which was situated on property adjacent to Pak Dairy. In October, Iraq bombed several oil refineries. The bombing campaign proved, however, to be a failure overall. Several bombs did not go off; others missed their targets. The Tehran Airport specifically suffered slight damage to its runway, which was repaired quickly.

After these early attacks, bombing in Iran was minimal. There was no bombing of Tehran at all in 1981 or 1982. However, sorties and bombing runs were made on cities a few hundred miles to the southwest (i.e. near the border between Iran and Iraq where the ground fighting was taking place). Further, Iraqi jets were occasionally seen making flights over Tehran.*fn3

Inflation was a serious problem for Iran both before and after the Revolution, running about 20% between 1977 and 1982. In the dairy industry specifically, inflation rates were 14% in 1978, 15% in 1979, 18% in 1980 and 24% in 1981.*fn4 High inflation prior to the Revolution was a result primarily of excessive growth in certain sectors of the economy and an imbalance between supply and demand. After the Revolution, it continued in part due to the embargo and the Iran-Iraq war.

C. Pak Dairy

In 1959, a group of private Iranian citizens asked McKesson, a Maryland corporation (then operating under the name Foremost-McKesson, Inc.), to join them in establishing a dairy business in Tehran, Iran. McKesson agreed to provide half of the required capital, all management and personnel, procurement services, ingredients and packaging. A joint venture agreement was executed and, through a separate agreement, McKesson agreed to provide technical assistance, licensed its trademark and provided procurement and engineering capability.

Pak Dairy was incorporated and formally registered as an Iranian private joint stock company on March 12, 1960. From 1960 until 1979, McKesson provided the company's top management. Until October 1981, McKesson representatives sat on the Board of Directors of Pak Dairy. Although McKesson initially owned a 50% interest in the company, by 1978 it had reduced that interest to 31 percent.

Frank Fisher ("Fisher") was the managing director of Pak Dairy from shortly after its founding until November of 1979, when he left Iran to return permanently to the United States. As managing director, Fisher had performed duties equivalent to a chief executive officer of a corporation. In October of 1980, Mohamad Khabiri ("Khabiri") was elected Managing Director by the Board and held the position through the date of expropriation.

Pak Dairy's operations occurred at two plants located in Tehran: a main dairy plant at Old Karaj Road on land immediately adjacent to the Tehran Airport, and an ice cream production plant known as Canada Frost approximately a quarter mile away. Principle products at the main facility included fluid milk in white, chocolate and strawberry flavors, a heavy breakfast cream, butter, yogurt and cottage cheese. At the ice cream facility, Pak Dairy made a variety of ice cream products in various flavors.

Pak Dairy did not produce its own raw milk or raw butter. The company obtained 17% of its daily supply of fresh milk from a dairy herd company called Sepahan, in which Pak Dairy had approximately a 20% ownership interest. The remainder came from contracts with government-run dairies. Pak Dairy purchased butter in frozen blocks on the international market. Because storage room at the plant was insufficient to contain all of its frozen butter, Pak Dairy stored most of its supply in cold storage warehouses downtown and would bring a block to the main dairy plant as needed for processing and repackaging into butter packs wrapped in foil. As with butter, the foil and other packaging materials were also purchased on the international market.

Between the two plants, Pak Dairy was capable by 1978 of producing 175 tons of milk, 60 tons of butter and 60 tons of ice cream per day. By the end of 1966, Pak Dairy's operations were profitable and remained so every year thereafter through 1982.

D. Procedural History

McKesson commenced the instant action on January 22, 1982 alleging that Iran, acting through its agents, had inter alia illegally withheld dividends issued by Pak Dairy in 1979 and 1980 and that as a result of this and other interferences with its property rights, McKesson's equity interest had been effectively expropriated as of May 27, 1980. Pursuant to Executive Order No. 12294, 46 Fed. Reg. 14111 (1981), this Court stayed the action pending an adjudication of McKesson's claims by the Iran-U.S. Claims Tribunal ("the Tribunal") in The Hague.

On April 10, 1986, the Tribunal issued a ruling. See Foremost-Tehran, Inc. v. Government of the Islamic Republic of Iran, Award No. 220-37/231-1 (filed April 11, 1986), reprinted at 10 Iran-U.S. Cl. Trib. Rep. 229 (1987). It found that the 1979 and 1980 dividends had been illegally withheld from McKesson and that Iran was responsible for the nonpayment. Id. at 252. It therefore ordered Iran to pay McKesson an amount equal to the dollar value of the two dividends plus interest. Id.

However, the Tribunal also found that Iran's "creeping" interference with McKesson's property rights did not, by January 19, 1981, ripen into the sort of "irreversible deprivation" of property which amounts to a de facto expropriation. Id. at 249-50. Because a claim must have been "outstanding" on January 19, 1981 to fall within the Tribunal's jurisdiction, see Foremost-McKesson, Inc. v. Iran, 905 F.2d 438, 441 (D.C.Cir. 1990); Foremost Tehran, Inc., 10 Iran-U.S. Cl. Trib. Rep. at 233 n. 5, the Tribunal did not consider whether the property was expropriated subsequent to that date.

Plaintiffs then revived this action on April 1, 1988 by filing a motion for partial summary judgment on liability, alleging that Iran's conduct subsequent to January 19, 1981 when viewed in addition to Iran's earlier conduct did constitute a legal expropriation after the Tribunal's jurisdictional cut-off date.*fn5 The Court subsequently found as a matter of law that Iran had illegally withheld from McKesson its share of the dividends issued in April of 1981 and 1982, and that by April 1982, Iran's interference with McKesson's property rights amounted to an expropriation.

E. Summary of the opposing valuations of McKesson's equity interest in Pak Dairy

Plaintiffs' valuation expert, Reilly, used two methods of valuation: (1) the discounted cash flow ("DCF") method and (2) the direct capitalization ("DCAP") method. Both methods measured the value of Pak Dairy as a going concern by converting a projection of future income into an equivalent April 1982 present value. However, the DCAP method projects income only one year into the future based on a historical annual income average and assumes that the company will have steady growth rate in perpetuity. The DCF method forecasts income a number of years into the future based on factors or assumptions that may not reflect historical patterns and does not assume that each future year will have the same amount of growth.

For each method, Reilly made two calculations of value. In one calculation, he adjusted the value of the company upward to account for the potential income of certain Pak Dairy projects (hereinafter the "New Projects") which had been planned but not yet fully implemented by the valuation date. In the second calculation, Reilly determined the value of the company ignoring any potential income from the New Projects. Using the DCF method, he calculated the value of Pak Dairy with the New Projects to be $88.4 million. Using the DCAP method, he calculated the value of Pak Dairy with the New Projects to be $68.4 million. Because he found these two methods equally reliable, he concluded that the value of the entire company with the New Projects was the average of these two figures, $78.4 million, and that the value of McKesson's 31% interest was $24.3 million.

He then calculated the value of Pak Dairy without the New Projects using both methods. Using the DCF method, he calculated the value to be $56.2 million. Using the DCAP method, he calculated the value to be $55.7 million. Again averaging the two values, he concluded that the value of Pak Dairy without the New Projects was $55.95 million, and that McKesson's 31% interest was equal to $17.4 million.

Richman rejected the DCF method as overly speculative, and applied only the DCAP method. He found that no adjustment should be made for the potential income of the New Projects. Using the DCAP method, he determined the value of Pak Dairy to be $7,302,835. He then applied a 10% lack of marketability discount, and took a further discount of 35% for McKesson's minority status. His final valuation of McKesson's 31% interest was approximately $1.3 million. In contrast, Reilly took no lack of marketability discount, testifying that one was not appropriate in a forced-sale situation. He also took no minority discount, testifying that his valuation was already performed on a minority basis.

Both Plaintiffs and Iran introduced evidence in support of their respective valuations which was only available after the valuation date. However, under the "known or knowable" rule, a retrospective appraisal (where the effective date of the appraisal is prior to the date of the appraisal report) should be based on information which would have been known or knowable by an investor at that time. The sole appropriate use of information available only after the valuation date would be to establish by inference the existence of a fact that would be known to an investor prior to that date. Accordingly, in connection with the valuation of Pak Dairy, the Court considers only the facts that would be known or knowable by April of 1982.

F. Direct Capitalization Method

The DCAP method is one of the income-based methods of valuation, which are used to value a company as a going concern by converting a projection of the company's future profits into an equivalent equity value. Both experts relied on this method to value Pak Dairy. Under the DCAP method, the valuator first calculates the historical average annual cash flow over a period of years approximating one business cycle and then, based on that average and the company's long term growth rate, projects income one year into the future. This projected or "normalized" income is what will be converted into equity value or "capitalized." The projected income is obtained by multiplying the average historical net cash flow by (1 G) where G is the estimated long term growth rate of the company. The value of the company is then equal to the projected income divided by the "capitalization rate." The capitalization rate in turn is equal to the "present value discount rate" minus the long term growth rate. In sum, the overall DCAP formula is as follows:

Value = C (1 G)/D - G

Where C = Historical Average Annual Net Cash Flow

G = Long Term Growth Rate

D = Present Value Discount Rate

The key factors to be determined are thus the long term growth rate, the average historical net cash flow, and the present value discount rate.

1. Long Term Growth Rate

The long term growth rate is that rate of growth expected to continue in perpetuity. Reilly estimated the long term growth rate to be twenty (20) percent. In highly significant contrast, Richman estimated the growth rate to be zero (0) percent.

In arriving at a growth rate of 20%, Reilly estimated the long term growth in real value at 15% and, because he calculated his other values with inflation built in, added 5% to account for expected growth in prices due to inflation. The Court finds that the 5% inflationary component of growth is appropriate but that the prediction of 15% long term real growth is excessive.

Reilly based his prediction of real growth primarily on two factors: first, a 1978 report, prepared by Carpenter based on projections provided by Pak Dairy's management, forecasting 15% growth in sales of Pak Dairy's existing products each year from 1978 through 1982; second, a substantial increase in population subsequent to the 1978 projection.

The 1978 report prepared by Carpenter in turn made its projections based on a number of factors. First, in the preceding relatively low-inflation years, Pak Dairy had experienced steady and very significant growth in product sales, from approximately $13 million in 1973 to $31 million in 1976. Further, trends within the dairy market in Iran indicated that this growth would continue. The report also predicted continuing economic growth in Iran's economy overall based in part on a combination of political stability, favorable government attitude towards private enterprise, a favorable environment for foreign investment and an expectation of government growth-oriented expenditures in its next five-year economic plan (the Sixth plan adopted by the Shah).

All of these assumptions soon turned out to be incorrect, as the Iranian Revolution took place shortly after Carpenter issued his report, leading to an Islamic regime with strong socialist characteristics and a hostility to Western culture, management style and investment. The Sixth Plan was of course never adopted, and the Iran-Iraq war, another unforeseen development, added to the economic disruption and the drain on Iran's resources. However, although the impact of these unforeseen events was dramatic in 1980, the effect had significantly although not entirely diminished by April of 1982.

For example, contrary to Carpenter's prediction, total gross domestic product for Iran dropped considerably between 1979 and 1981. However, this loss was almost entirely due to the drop in oil revenues that resulted from Iraq's seizure of Iran's southwestern oil fields early in the Iran-Iraq war. By April of 1982, Iraq had been largely pushed out of Iran and Iran's oil fields had been reclaimed. The effect of Iran's battle victories was noted in a March 1982 report by the Tehran Stock Exchange:

The beginning of the year 1982 coincided with the brilliant victory of the Iranian army in the war fronts against the aggressor, Iraq, which, in itself, paved the way for reconstruction and revival of the country's economy. The increase of the public confidence in the banking system, the considerable growth of the private sector's savings with the banking system and rapid increase of oil export during this year, were amongst the significant consequences of these victories.

Pl.Ex. 51 at IR670 (emphasis added). This turnaround, coming after the end of the international trade embargo in early 1981 and the return of substantial amounts of foreign trade thereafter supports the conclusion that, as of 1982, real growth in Iran's economy could be reasonably expected notwithstanding the new socialist regime and the ongoing war. Indeed, the agricultural sector, which is the sector in which Pak Dairy operated, not only grew every year between 1977 through 1981 notwithstanding the war and the new regime but had its highest rate of growth in 1981. Further, in that year, new investment in most forms of business rose from $18,152,000 in 1980-81*fn7 to $29,728,000 in 1981-82, a real increase in investment of roughly 30 percent. Thus, as of April of 1982, real growth could reasonably be expected in the economy overall and the agricultural sector in particular.

As with Iran as a whole, Pak Dairy faced difficulties which Carpenter had not foreseen. The war with Iraq, while not inflicting any direct damage on Pak Dairy's operations, nevertheless impacted on it in several ways. In 1981, Pak Dairy had made a substantial financial contribution to the war effort. It also contributed food, refrigerated trucks (used in the war for the purposes of transporting the dead), payments to the relatives of martyrs and payments to employees serving in the military for the difference between their military salary and their civilian salary. In addition, the war caused labor shortages, resulting in a decrease in Pak Dairy's workers from 743 in December of 1980 to 707 by the end of 1981. Given that the war was ongoing in April of 1982, it is reasonable to expect that Pak Dairy would continue to provide some form of resource for the war-effort and be limited in its ability to obtain new labor. However, as the trend in the war in April of 1982 was dramatically in Iran's favor, a reasonable investor would expect such collateral expenses from the war to decrease in the future.

Pak Dairy's problems also included shortages of raw materials such as liquid milk, butter and spare parts and an underutilization of capacity due to these shortages. Supply of raw milk was a critical problem for Pak Dairy, as the amount declined in 1981 from around 120 tons per day to only 75 tons per day, less than half the company's production capacity. This reduction followed a threat in 1980 from the Iran Milk Industries Company ("IMIC"), an Iranian instrumentality responsible for the payment of government milk subsidies. IMIC warned Pak Dairy to reduce its milk purchases to no more than 100 tons or else forfeit milk subsidies for any milk over that amount. IMIC indicated that the reduction was necessary because of a general shortage and the need to equitably distribute the available supply. However, in light of the fact that total milk production in Iran rose in both 1980 and 1981, and considering the Board's confidence in early 1982 that they would receive a "fair" distribution of this supply by the beginning of 1983, it is reasonable to expect that Pak Dairy's allotted supply of milk would grow. The Managing Director actually predicted in February of 1982 that the company would later in the year be able to obtain raw materials necessary to maximize production, and Dadyar testified that milk supply in 1982 had already risen to 80 tons per day, a 7% increase over 1981. In addition to the increasing milk supply, shortages in other areas were also being addressed. The Board of Directors noted on April 4, 1982 that it had succeeded in obtaining 25 million rials worth of spare parts for its production machines. The Court finds that as of the valuation date, a reasonable investor would conclude that Pak Dairy's supply shortage problems would continue to improve after the valuation date.

Price controls imposed by the government represented another hindrance to new growth, as they constrained Pak Dairy's ability to respond to rising costs. Carpenter noted that such controls operating before the Revolution "had seriously reduced business profits and created a significant uncertainty in business circles." Pl.Ex. 4 at MC 8623. He predicted that the new government put in place by the Shah in 1976 would begin modifying the price control policy to allow reasonable price increases and generally speaking take a more favorable approach to business. This prediction proved unreliable after the Shah's "new government" was removed and replaced by an Islamic regime which maintained strict price controls during the high-inflation years after the Revolution. Although Pak Dairy had success in those days in obtaining permission to increase prices as needed, it is likely that the effects which Carpenter noted in 1978, which he assumed would diminish under a more business-favorable regime, would at least continue under the socialist post-Revolution regime. However, the price control system existed before the Revolution, yet from 1973 to 1977, Pak Dairy's sales grew at a compound growth rate of 22.1% a year.

The overall impact of these problems can best been judged by Pak Dairy's actual revenue results in 1980 and 1981. Although in 1980, Pak Dairy's revenues dropped more than 65% from the previous year before adjusting for inflation, the company returned in 1981 to its historic pattern of real growth. Overall, its net profit before taxes increased from 134 million rials in 1980 to 178 million rials, roughly 33% or approximately 9% after adjusting for inflation in the dairy market. This improvement could reasonably be expected to continue in 1982 because of the improvements in both the Iranian economy and the dairy industry and because of reasonably expected increases in supplies.

The population statistics relied upon by Mr. Reilly add further support to the conclusion that Pak Dairy would continue to experience real growth after April 1982. In Iran overall, population significantly expanded every year between 1976 and 1982, from 33.7 million in 1977 to 40.8 million in 1982, a 21% overall increase. The rate of increase was even higher in Tehran because the Iranian Revolution precipitated an acceleration of migration from rural to urban areas. Between 1978 and 1980, the population of downtown Tehran alone (ignoring the suburbs of Tehran) increased from 4 million to 6 million, a fifty percent increase in population in three years or less. That was particularly significant for Pak Dairy because Tehran was its principle market and Pak Dairy controlled about a third of the milk market in that city. There is a strong correlation generally between population and the consumption of dairy products. The correlation would be particular strong here for two reasons. First, the population ...

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