McKesson Corp. v. Islamic Republic of Iran
400 U.S. App. D.C. 1, 2012 WL 615831, 672 F.3d 1066 (2012)
Rule of Law:
The act of state doctrine does not apply to commercial disputes involving foreign government agents acting in a corporate capacity rather than exercising distinctly sovereign powers. While U.S. law generally disfavors implying private rights of action from treaties, a bilateral investment treaty, such as the Treaty of Amity, can provide such a right against a foreign state in U.S. courts if interpreted under the foreign state's law to create an actionable claim.
Facts:
- Sherkat Sahami Labaniat Pasteurize Pak (Pak Dairy), a joint venture between McKesson Corporation (a U.S. company) and private Iranian citizens, was incorporated in 1960, with McKesson holding a 31% ownership interest.
- Following the Islamic Revolution, agents and instrumentalities of the Iranian government allegedly seized control of Pak Dairy's board of directors.
- Through a series of hostile actions allegedly instigated by the Iranian government, Pak Dairy's board effectively froze out McKesson's stake in the company.
- The Pak Dairy board blocked McKesson's receipt of dividend payments.
- Iran did not pass a law, issue an edict, or engage in formal governmental action explicitly taking McKesson's property for a public purpose.
- The Iranian government neither offered nor provided any compensation to McKesson for its interest in Pak Dairy or for the withheld dividend payments.
Procedural Posture:
- In 1982, McKesson Corporation, joined by the Overseas Private Investment Corporation (OPIC), filed suit in the U.S. District Court for the District of Columbia, alleging that Iran had unlawfully expropriated its property without compensation.
- Pursuant to Executive Order 12,294, the case was stayed while the plaintiffs presented their claims to the Iran-United States Claims Tribunal.
- The Tribunal held that interference with McKesson’s rights did not amount to expropriation by the last date of its jurisdiction but ruled that Pak Dairy had unlawfully withheld cash dividends declared in 1979 and 1980, awarding McKesson $1.4 million.
- McKesson revived its suit in April 1988 in the U.S. District Court for the District of Columbia.
- The District Court denied Iran's motion to dismiss, holding that McKesson had properly pleaded jurisdiction under the commercial activities exception of the Foreign Sovereign Immunities Act (FSIA).
- On appeal, the D.C. Circuit Court of Appeals (McKesson I) remanded for further development of the record regarding whether Pak’s board of directors was an agency or instrumentality controlled by the state for FSIA purposes.
- On remand, the District Court found the necessary principal-agent relationship, and the D.C. Circuit (McKesson II) affirmed these findings.
- The District Court subsequently granted McKesson’s motion for summary judgment on the issue of liability, holding that Iran had wrongfully withheld dividends and could be held liable under the Treaty of Amity and customary international law.
- Between January and February 2000, the District Court held a bench trial to determine damages, awarding McKesson $20,071,159.14.
- Iran appealed again, and the D.C. Circuit (McKesson III) affirmed jurisdiction under the FSIA, upheld that the Treaty of Amity provided a cause of action, and affirmed the asset valuation, but remanded for trial on two factual issues concerning a 'come-to-the-company' requirement for dividend payments.
- Iran petitioned the Supreme Court for certiorari to review McKesson III; the Solicitor General advocated for denial of certiorari and stated that the United States did not interpret the Treaty of Amity as providing a private right of action. The Supreme Court denied certiorari.
- In light of the U.S. government’s changed position, the D.C. Circuit (McKesson IV) vacated the portion of McKesson III addressing the Treaty of Amity cause of action and instructed the District Court to reexamine that issue.
- On remand, the District Court (McKesson 2007) essentially affirmed its earlier conclusion that the Treaty provides a cause of action.
- In a subsequent appeal, the D.C. Circuit (McKesson V) reversed the District Court’s ruling that the Treaty of Amity provides a private cause of action under United States law, and remanded for the District Court to consider causes of action under Iranian law or customary international law, and the applicability of the act of state doctrine.
- Upon review of the parties’ submissions, the District Court (McKesson 2009) held that McKesson had a cause of action under Iranian law and customary international law, and that the act of state doctrine did not apply.
- Following additional briefing, the District Court (McKesson 2010) entered judgment for McKesson on its Iranian law causes of action and awarded $43,980,205.58 in damages and prejudgment interest.
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Issue:
Does the act of state doctrine preclude U.S. courts from adjudicating claims against a foreign sovereign when its agents' actions constitute commercial or corporate misconduct, and does the Treaty of Amity, interpreted under Iranian law, provide a private right of action for expropriation in a U.S. court?
Opinions:
Majority - Circuit Judge Brown
No, the act of state doctrine does not preclude adjudication, because the Iranian government's agents engaged in commercial, corporate actions rather than distinctly sovereign acts. Yes, the Treaty of Amity, when interpreted under Iranian law, provides McKesson with a private right of action against Iran in U.S. courts for expropriation. The Court first addressed the act of state doctrine, affirming the district court's finding that it did not apply. The doctrine precludes U.S. courts from inquiring into the validity of public acts committed by a recognized foreign sovereign within its own territory. However, the Court distinguished between "distinctly sovereign" acts (e.g., passing a law or issuing a decree) and actions that could be undertaken by private individuals or entities. McKesson's claim arose from Iran's agents taking control of Pak Dairy's board, freezing out McKesson, and withholding dividends, which the Court characterized as a corporate dispute akin to majority-minority shareholder issues, not a public act of expropriation. This interpretation aligns with precedents like Banco Nacional de Cuba v. Sabbatino and Alfred Dunhill of London, Inc. v. Republic of Cuba, which declined to extend the doctrine to purely commercial operations. The Court further noted that factual findings on the corporate nature of these actions were settled law of the case. Next, the Court addressed the availability of a private right of action. It reversed the district court's conclusion that customary international law (CIL) provided a cause of action. The Court reiterated that the Foreign Sovereign Immunities Act (FSIA) is purely jurisdictional and does not create substantive causes of action, citing Republic of Austria v. Altmann. Unlike the Alien Tort Statute (ATS) examined in Sosa v. Alvarez-Machain, the FSIA's text and legislative history provided no indication that Congress intended courts to use it as a vehicle for creating new CIL-based causes of action. The Court emphasized caution in judicial lawmaking, especially when it implicates foreign relations. It also rejected McKesson's arguments relying on FSIA's expropriation exception (§1605(a)(3)) and the Second Hickenlooper Amendment, finding them inapplicable or not creating causes of action. However, the Court affirmed that the Treaty of Amity, construed under Iranian law, provides McKesson with a private right of action. Iran conceded that the Treaty creates such a right under its own law but argued it mandated suit in Iranian courts. The Court rejected Iran's textual arguments (Articles III, IV, XXI), finding they ensured access to courts or addressed inter-governmental disputes, not exclusive forum selection. It found the Treaty's silence on forum selection to mean that nationals could sue in their preferred forum. The Court distinguished this holding from its prior decision in McKesson V (where it found no cause of action under U.S. law) by explaining that U.S. law has a strong presumption against implying treaty-based causes of action, whereas Iran's legal system, by its own expert's testimony, does not share this presumption, and views the Treaty as "lex specialis" (special law) superseding general Iranian laws. Finally, the Court affirmed Iran's liability under the Treaty for expropriation and dividend withholding, rejecting Iran's defenses regarding attribution under Iranian law, currency controls, and a 'come to the company' requirement. It found Iran's attribution defense contradicted the Treaty's plain language and the principle that the Treaty supersedes general Iranian law. The other defenses were barred by the law of the case. The Court did, however, reverse the district court's award of compound interest, finding no evidence that Iranian law recognizes compound interest. It clarified that 'delay damages' under Iranian law are distinct and relate to actual losses from currency fluctuations, not compound interest, and Iranian law generally disfavors interest. The case was remanded for calculation of an award with simple interest.
Analysis:
This case is highly significant for clarifying the application of the act of state doctrine, particularly in situations where foreign state entities engage in commercial activities that resemble private corporate misconduct rather than overt sovereign acts. It reinforces the narrow scope of judicial discretion in implying causes of action from jurisdictional statutes, especially concerning customary international law, as cautioned by Sosa v. Alvarez-Machain. Furthermore, it highlights the critical distinction in how bilateral investment treaties are interpreted under different domestic legal systems, demonstrating that a treaty's impact on private rights can vary significantly depending on whether it is construed through the lens of U.S. or foreign law.
