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IN THE UNITED STATES COURT OF FEDERAL CLAIMS __________________________________________ INNOVAIR AVIATION LIMITED, Plaintiff, v. THE UNITED STATES OF AMERICA, Defendant. ) ) ) ) ) ) ) ) ) ) )

DOCKET NO. 96-408C (Senior Judge Loren A. Smith)

PLAINTIFF INNOVAIR AVIATION LIMITED'S POST-TRIAL BRIEF PURSUANT TO THE COURT'S ORDER OF NOVEMBER 2, 2007

Respectfully submitted, s/Ty Cobb_________________________ Ty Cobb HOGAN & HARTSON L.L.P. 555 Thirteenth Street, N.W. Washington, D.C. 20004 (202) 637-5681 (direct) (202) 637-5910 (facsimile) Attorney of Record for Plaintiff Innovair Aviation Limited Of Counsel: H. Christopher Bartolomucci Audrey E. Moog HOGAN & HARTSON L.L.P. 555 Thirteenth Street, N.W. Washington, D.C. 20004 (202) 637-5810 (202) 637-5910 (facsimile) Dated: December 17, 2007

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TABLE OF CONTENTS Table of Authorities .................................................................................................................... iv INTRODUCTION ......................................................................................................................1

QUESTION ONE What is the proper legal standard for determining damages?..............................................3 QUESTION TWO What is the most appropriate economic measure of damages? ...........................................3 ANSWERS TO QUESTIONS ONE AND TWO............................................................................3 THE COURT SHOULD AWARD INNOVAIR THE LOST EXPECTANCY INTEREST VALUE OF THE TECHNOLOGY LICENSE AGREEMENT A. Innovair Is Entitled to "Just Compensation" for the Takings of its Property.................................................................................4 Lost Expectancy Interest Value Is the Best Method of Valuing the TLA ..........................................................................................6 Any Uncertainty That Inheres the Determination of Lost Expectancy Interest Value Is Attributable to the Government's Conduct and Is Not a Reason to Deny Innovair Just Compensation .........12 Innovair Is Entitled to Compound Pre-Judgment Interest .........................15

B.

C.

D.

QUESTION THREE What are the dates of the relevant damages period?..........................................................16 ANSWER.......................................................................................................................................16 THE DAMAGES PERIOD SPANS THE DATE OF THE TAKING, NOVEMBER 14, 1991, TO THE END OF THE TECHNOLOGY LICENSE AGREEMENT AND THE DISTRIBUTOR AGREEMENT, JUNE 23, 1998. QUESTION FOUR How many kits would Innovair have sold?........................................................................19 ANSWER.......................................................................................................................................19 INNOVAIR WOULD HAVE SOLD BETWEEN 90 TO 130 CONVERSION KITS OVER THE RELEVANT DAMAGE PERIOD.

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A.

Innovair's Status in 1991 ...........................................................................19 1. Innovair's Contemporaneous Business Plan and Operations ......................................................................................19 Innovair's Relationship with UTC and UTC's BT-67 Business Activities .............................................................23

2.

B.

There Was a Strong Market Demand for the BT-67 in the 1990s .............30 1. Contemporaneous Market Research, Sales Estimates, and Evidence of Market Potential for the BT-67...........................30 Sales of Competing Turboprop Aircraft ........................................34 BTC's Sales Do Not Represent The Maximum Sales Innovair or UTC Would Have Captured ......................................................36

2. 3.

C.

Cobb & Associates' Kit Sales Estimates Are More Than Reasonable .................................................................................................40

QUESTION FIVE What was the profitability of each sale? ............................................................................41 ANSWER.......................................................................................................................................41 INNOVAIR'S GROSS PROFIT ON EACH SALE RANGED FROM $556,700 TO $750,200. QUESTION SIX Did UTC and Innovair have an enforceable contract? If so, what were UTC's purchase obligations under the contract?...........................................................................45 ANSWER.......................................................................................................................................45 THE DISTRIBUTOR AGREEMENT WAS AN ENFORCEABLE CONTRACT THAT REQUIRED UTC TO PURCHASE FIVE KITS PER YEAR OR PAY INNOVAIR ITS NET PROFITS ON EACH KIT UTC FAILED TO PURCHASE AS PROMISED.

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QUESTION SEVEN What value would an investor have placed on the TLA with the UTC contract? .............49 ANSWER.......................................................................................................................................49 IN NOVEMBER 1991, AN INVESTOR WOULD HAVE VALUED THE TLA WITH THE UTC CONTRACT BASED ON SALES OF 90 KITS AT A 25% DISCOUNT RATE OR BASED ON SALES OF 130 KITS AT A 40% DISCOUNT RATE. QUESTION EIGHT Would Innovair have been profitable without access to the technology owned by BTC and BFS? ..............................................................................................................53 QUESTION NINE Would it have been more profitable than not that Innovair could have been the various optional parts, such as the long range fuel tank, without cooperation from BTC and BFS? ..........................................................................................................53 ANSWERS TO QUESTIONS EIGHT AND NINE......................................................................53 INNOVAIR HAD ACCESS TO THE TECHNOLOGY OWNED BY BASLER AND WOULD HAVE BEEN PROFITABLE EVEN WITHOUT SUCH ACCESS. INNOVAIR COULD HAVE OBTAINED THE VARIOUS OPTIONS, INCLUDING LONG RANGE FUEL TANKS, FROM BASLER AND, IF BASLER DID NOT COOPERATE, INNOVAIR COULD HAVE OBTAINED THE OPTIONS FROM OTHER SOURCES. CONCLUSION..............................................................................................................................59

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TABLE OF AUTHORITIES CASES PAGE(S)

Am. Movie Classics, Co. v. Time Warner Entm't, L.P., 2005 WL 3487852 (N.Y. Sup. Ct. July 8, 2005) ...................................................................... 47 Bassett, N.M. LLC v. United States, 55 Fed. Cl. 63 (2002) ............................................... 4, 15, 17 B.F. Goodrich Co. v. Vinyltech Corp., 711 F. Supp. 1513 (D. Ariz. 1989) ................................. 47 Bowles v. United States, 31 Fed. Cl. 37 (1994)............................................................................ 15 Brooks-Scanlon Corp. v. United States, 265 U.S. 106 (1924)...................................................... 11 C.J. Betters Corp. v. United States, 25 Cl. Ct. 674 (1992) ............................................................. 7 Citizens Fed. Bank, FSB v. United States, 59 Fed. Cl. 507 (2004) ................................................ 7 CSX Transp., Inc. v. Ga. State Bd. of Equalization, No. 06-1287, slip op. (U.S. Dec. 4, 2007) .................................................................................................... 4, 9 DSC Commc'ns Corp. v. Next Level Commc'ns, 107 F.3d 322 (5th Cir. 1997).................... 14-15 Energy Capital Corp. v. United States, 302 F.3d 1314 (Fed. Cir. 2002) .......................... 14, 50, 51 First English Evangelical Lutheran Church of Glendale v. County of L.A., Cal., 482 U.S. 3049 (1987)................................................................................................................ 10 Fla. Rock Indus., Inc. v. United States, 45 Fed. Cl. 21 (1999) ..................................................... 15 Goodstein Constr. Corp. v. City of N.Y., 604 N.E.2d 1356 (N.Y. 1992)..................................... 47 Kimball Laundry Co. v. United States, 338 U.S. 1 (1949) ....................................................... 6, 13 Monongahela Navigation Co. v. United States, 148 U.S. 312 (1893)........................................ 4, 8 Osprey Pac. Corp. v. United States, 41 Fed. Cl. 150 (1998) .................................................... 6, 15 Papa Gino's of Am., Inc. v. Plaza at Latham Assocs., 524 N.Y.S.2d 536 (App. Div. 1988)....................................................................................................................... 48 PGC Pipeline, Div. of LPC Energy, Inc. v. La. Intrastate Gas, Div. of Celeron Corp., 791 F.2d 338 (5th Cir. 1986) .................................................................................................... 46

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TABLE OF AUTHORITIES Continued CASES PAGE(S)

Prenalta Corp. v. Colo. Interstate Gas Co., 944 F.2d 677 (10th Cir. 1991).................................. 46 Questar Pipeline Co. v. Grynberg, 201 F.3d 1277 (10th Cir. 2000)............................................. 46 Rubinstein v. Rubinstein, 244 N.E.2d 49 (N.Y. 1968) ................................................................ 48 Seravalli v. United States, 845 F.2d 1571 (Fed. Cir. 1988)........................................................... 4 Shelden v. United States, 34 Fed. Cl. 355 (1995)......................................................................... 15 Sinclair Refining Co. v. Jenkins Petroleum Process Co., 289 U.S. 689 (1933) ............................. 9 Smith v. Atl. Props., Inc., 422 N.E.2d 798 (Mass. App. Ct. 1981)............................................... 54 Stearns Co. v. United States, 53 Fed. Cl. 446 (2002), rev'd on other grounds, 396 F.3d 1354 (Fed. Cir. 2005) ...................................................................................... 4, 13, 15 Stearns Co. v. United States, 58 Fed. Cl. 229 (2003), rev'd on other grounds, 396 F.3d 1354 (Fed. Cir. 2005)............................................................ 8 Tractebel Energy Mktg., Inc. v. AEP Power Mktg., 487 F.3d 89 (2d Cir. 2007)......................... 47 United States v. 564.54 Acres of Land, 441 U.S. 506 (1979) .................................................. 5, 11 United States v. Basler Turbo-67 Conversion DC-3 Aircraft, 1996 WL 88075 (9th Cir. Feb. 19, 1976)...................................................................................................... 6-7, 17 United States v. Commodities Trading Corp., 339 U.S. 121 (1950) .............................................. 5 United States v. Cors, 337 U.S. 325 (1949).................................................................................... 5 United States v. Va. Elec. & Power Co., 365 U.S. 624 (1961)....................................................... 5 Whitney Benefits, Inc. v. United States, 18 Cl. Ct. 394 (1989), aff'd, 926 F.2d 1169 (Fed. Cir.), cert. denied, 502 U.S. 952 (1991) ................................. passim Whitney Benefits, Inc. v. United States, 30 Fed. Cl. 411 (1994) ................................................. 15 Yuba Natural Res., Inc. v. United States, 904 F.2d 1577 (Fed. Cir. 1990) ............................. 10-11

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TABLE OF AUTHORITIES Continued PAGE(S) STATUTES N.Y. U.C.C. § 2-719 ................................................................................................................ 47-48 OTHER AUTHORITIES Restatement (Second) of Contracts § 344(a) (1981)....................................................................... 7

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INTRODUCTION In 2006, this Court ruled that the Government had effected a taking of Innovair's valuable property, the Technology License Agreement ("TLA"), and therefore the Government owed just compensation to Innovair. From October 17 to 26, 2007, this Court held a trial to determine what compensation is due. In calculating just compensation, the most significant variable is the number of sales Innovair would have made in the years following the taking of the TLA. Once the Court makes a factual determination as to the number of sales Innovair likely would have made in the damages period, the calculation of just compensation becomes a relatively uncomplicated task since the Government did not seriously dispute the price and cost figures offered by Innovair's expert and offered none of its own. There is no dispute that Innovair would have made a number of sales. Indeed, the Government conceded in its opening statement that Innovair would have sold two to three planes per year. See App425 (2007 Trial Tr. p. 23). Thus, the only question is how many sales would Innovair have made. Prior to the taking, Innovair entered into an agreement with United Technologies Corporation ("the UTC contract") under which UTC committed to purchase a minimum of five units per year over a seven-year period -- a minimum of 35 units over seven years. It seems highly likely, therefore, that Innovair would have sold at least that many units. Indeed, there is no basis for concluding that Innovair would not have sold at least 35 units to UTC. Innovair's expert, Arthur Cobb, projected sales under three different scenarios: 90 units, 50 units, and 130 units. He presented the different scenarios, and explained the bases and assumptions of each, in order to assist the Court.

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The 90 unit scenario is a very reasonable projection. It assumes the 35 UTC sales (five per year) plus an additional 55 sales (just under eight per year). The sale of 90 units is consistent with multiple contemporaneous projections, including UTC's own sales expectation of 87 units over seven years, the Warwick memorandum's projection of 96 units (through 1995). The 90 unit scenario is far more conservative than the projection of 174 units (through 1994) contained in the Deloitte report. The 90 unit scenario is also consistent with the sales of other turboprop aircraft in the era. The 90 unit scenario is a realistic scenario. The 90 unit scenario is also supported by the 1991 report of Madison Valuation Associates. See App249 (DX 105). The Madison Valuation report was commissioned by the Basler entities; Innovair and its principals had no input into the report. App304 (Cobb. Test. 1549-50). The Madison Valuation report projected Innovair sales (of both aircraft and kits) over a five year period, according to "low," "mid," and "high" scenarios. App242 (DX 105/35). The report projects an average of eight sales per year under the "low" scenario; 12 sales per year under the "mid" scenario; and 17 sales per year under the "high" scenario. Id.; App305 (Cobb Test. 1552-55). Over a seven-year period, these figures result in projected sales of 56 units ("low"), 84 units ("mid"), and 120 units ("high"). App242 (DX 105/35). Significantly, the Madison Valuation report and the projections therein were prepared before the UTC contract was executed and Innovair obtained a firm order for a minimum of 35 units from UTC. The 90 unit scenario involves a projection well below the projection that would result from combining 84 units (i.e., the average annual "mid" sales over seven years) plus 35 UTC units (which would be 119 units). The 50 unit scenario is a very conservative projection. It assumes the 35 UTC sales plus only an additional 15 sales (about two per year). This scenario projects fewer sales than the

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combination of the 35 UTC sales plus the Government's own concession of 2-3 sales per year. The 50 unit scenario is based on fewer average annual sales than the Madison Valuation report projected in its "low" scenario, and that report predated the UTC contract and hence did not take into account UTC's minimum order of 35 units. The 50 unit scenario is also consistent with UTC's expectation of "at least 50 conversions" over a four- (not even a seven-) year period. Given the high likelihood of at least 35 UTC sales, the 50 unit scenario projects is a very pessimistic scenario. Finally, the 130 unit scenario is also a quite reasonable projection. That scenario is based on average annual sales only slightly above (i) average annual sales in the "high" Madison Valuation scenario or (ii) average annual sales in the "mid" Madison Valuation scenario plus the 35 UTC sales. The sale of 130 units is also consistent with the "Sales Potential" of 129 units identified by UTC and the 174 unit projection in the Deloitte report. Pursuant to the Court's Order of November 2, 2007, Innovair hereby submits its opening post-trial brief and answers the nine questions posed by the Court in that Order. QUESTION ONE What is the proper legal standard for determining damages? QUESTION TWO What is the most appropriate economic measure of damages? ANSWERS TO QUESTIONS ONE AND TWO THE COURT SHOULD AWARD INNOVAIR THE LOST EXPECTANCY INTEREST VALUE OF THE TECHNOLOGY LICENSE AGREEMENT.

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A.

Innovair Is Entitled to "Just Compensation" for the Taking of its Property.

The proper legal standard for determining damages in this case is the standard stated in the Fifth Amendment: For the unconstitutional taking of its property, Innovair is entitled is "Just Compensation." "Just compensation requires that the government remunerate a deprived property owner so as to place the property owner in as good a position pecuniarily as if the government had not taken his property." Bassett, N.M. LLC v. United States, 55 Fed. Cl. 63, 69 (2002). The meaning of the term "just compensation" is "made emphatic by the adjective `just.' There can, in view of the combination of those two words, be no doubt that the compensation must be a full and perfect equivalent for the property taken." Monongahela Navigation Co. v. United States, 148 U.S. 312, 326 (1893). Just compensation is often measured by the fair market value of the property. The fair market value approach is commonly used, for example, in cases involving the taking of real estate. There are a number of ways to determine fair market value. As this Court has said, "the law is not wedded to any particular formula or method for determining fair market value as the measure of just compensation." Stearns Co. v. United States, 53 Fed. Cl. 446, 458 (2002), rev'd on other grounds, 396 F.3d 1354 (Fed. Cir. 2005). "The trial court has broad discretion to determine which valuation method is most appropriate given the facts of the case." Stearns, 53 Fed. Cl. at 458. Accord Seravalli v. United States, 845 F.2d 1571 (Fed. Cir. 1988). See also CSX Transp., Inc. v. Ga. State Bd. of Equalization, No. 06-1287, slip op. at 6 (U.S. Dec. 4, 2007) (Roberts, C.J., for a unanimous Court) (recognizing that there are multiple methods for determining market value).

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Fair market value is not the only permissible measure of just compensation, as the Supreme Court has repeatedly explained. See United States v. 564.54 Acres of Land, 441 U.S. 506, 512 (1979) ("[T]his Court has refused to designate market value as the sole measure of just compensation. For there are situations where this standard is inappropriate."); United States v. Va. Elec. & Power Co., 365 U.S. 624, 633 (1961) ("But this [fair market value] is not an absolute standard nor an exclusive method of valuation."); United States v. Commodities Trading Corp., 339 U.S. 121, 123 (1950) ("[W]hen market value has been too difficult to find, or when its application would result in manifest injustice to owner or public, courts have fashioned and applied other standards."); United States v. Cors, 337 U.S. 325, 332 (1949) ("The Court in its construction of the constitutional provision has been careful not to reduce the concept of `just compensation' to a formula...[The Court] has refused to make a fetish even of market value, since it may not be the best measure of value in some cases."); accord Seravalli, 845 F.2d at 1574 n.14. It must be remembered that the words "fair market value" do not appear in the text of the Fifth Amendment; one whose property is taken is entitled to just compensation. In response to a question posed by the Court, Mr. Cobb testified that lost expectancy interest value differs in certain respects from what he would characterize as "fair market value" and explained why he analyzed lost expectancy value rather than market value. See App294-96 (A. Cobb Test. at 521-29). Mr. Cobb also made clear that he was not offering the legal conclusion that lost expectancy interest value is not fair market value as a legal matter. See App296 (Cobb Test. at 530). A court could characterize Mr. Cobb's approach as one that determines "fair market value" for Takings Clause purposes. See id.

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B.

Lost Expectancy Interest Value Is the Best Method of Valuing the TLA.

The property that the Government took from Innovair was not a parcel of land or any other tangible property. Rather, the Government took a contract, the TLA. That contract, as one of the Government's own experts recognized, "gave Innovair a unique set of rights with respect to a unique product." App330 (Kaplan Test. at 1329); App200 (DX 323/28 ¶ 51). This case is therefore a very unusual takings case. A run-of-the-mill approach to setting just compensation will not work here. Cf. Osprey Pac. Corp. v. United States, 41 Fed. Cl. 150, 151 (1998) ("This is an unusual case. Its fact pattern does not fit the regular takings mold."). The TLA's value cannot be determined by resort to comparable sales -- a method often use to determine fair market value -- because no truly comparable licenses have ever existed or been sold. Cf. Kimball Laundry Co. v. United States, 338 U.S. 1, 6 (1949) ("[W]hen the property is of a kind seldom exchanged, it has no `market price,' and then recourse must be had to other means of ascertaining value"). The Government's expert agrees that the comparable sales approach is not useful here. See App202 (DX 323/30 ¶ 55) ("[T]he TLA involves a unique product and offers an unusual mixture of rights. It would be extremely difficult, therefore, to base valuations on sales of comparable licenses."); App330 (Kaplan Test. at 1330-31) (explaining that he did not use the comparable sales method because he could not find comparable sales and comparable assets and the TLA "is a unique asset"). This is a case involving "the absence of an established market for the type of property at issue." CSX Transp., supra, at 7. Another measure of the TLA's value is required. Lost expectancy interest value is the best measure. The term "lost expectancy interest value" comes from the Arizona District Court. On remand from the Ninth Circuit's decision in United States v. Basler Turbo-67 Conversion

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DC-3 Aircraft, 1996 WL 88075 (9th Cir. Feb. 19, 1996), the Arizona court stated that, according to the Ninth Circuit, "the value of the TLA should be measured by its expectancy interest." Findings of Fact, Conclusions of Law and Order at 35, United States v. Basler Turbo-67 Conversion DC-3 Aircraft (D. Ariz. Sept. 22, 1998). In the context of a breach of contract, an "expectancy interest" is a person's interest in "`being put in as good a position as he would have been in had [his] contract been performed.'" Citizens Fed. Bank, FSB v. United States, 59 Fed. Cl. 507, 514 (2004) (quoting Restatement (Second) of Contracts § 344(a) (1981)). Accord C.J. Betters Corp. v. United States, 25 Cl. Ct. 674, 677 (1992). In the context of a taking of property, the property owner's expectancy interest is his interest in being put in as good a position as he would have been in had his property not been taken. In the specific context of this case, Innovair's expectancy interest is its interest in being put in as good a position as it would have been in had the TLA not been taken. The TLA's expectancy interest value is the value that equals Innovair's expectancy interest. Plaintiff's expert Arthur Cobb calculated the lost expectancy interest value of the TLA by 1) identifying the availability of DC-3 airframes for conversion; 2) analyzing the market for BT67 aircraft and competitive aircraft; 3) analyzing the marketing of the BT-67 and sales of BT-67s by BTC; 4) establishing a damages period; and 5) estimating lost sales, incremental expenses, and lost income. See App204 (PX 9); App284-92 (Cobb Test. at 443-73). Mr. Cobb calculated expectancy interest value based on sales of 50 units, 90 units, and 130 units. The expectancy interest value based on such sales is $13.8 million, $36.4 million, and $57.9 million, respectively. See App207-09 (PX 9/53-55); App298-99 (Cobb Test. at 541-47). In a supplemental report, Mr. Cobb calculated lost expectancy interest value limited to sales pursuant to the Distributor Agreement between Innovair and UTC. Based only on sales of

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35 units to UTC under the terms of the Distributor Agreement, expectancy interest value is $17.7 million. See App237 (PX 305) (Supp. Cobb Report); App302 (Cobb Test. at 557). 1/ The lost expectancy interest value approach seeks to determine the value of taken property -- and hence the proper amount of just compensation -- by analyzing the expected income that the property owner lost out on receiving due to the taking. This is a legally and economically sound approach. Indeed, more than a century ago, the Supreme Court explained that in awarding just compensation, it is proper to consider the expected profitability of the taken property. In Monongahela Navigation, the Government took a privately-owned lock and dam on the Monongahela river, thereby depriving the owner of the tolls it had a franchise to collect. Asking "[h]ow shall just compensation for this lock and dam be determined?," the Supreme Court answered that "[t]he value of property, generally speaking, is determined by its productiveness, -- the profits which its use brings to the owner." 148 U.S. at 328. The value should be determined by "what the completed structure brings in the way of earnings to the owner." Id. This Court, too, in its just compensation cases has employed valuation methods that -much like the Cobb approach -- look to the income that the property owner would have obtained but for the taking. See Whitney Benefits, Inc. v. United States, 18 Cl. Ct. 394, 408-409 (1989) (holding that analysis of "projected income stream" was a "reliable method" for determining value where "the value of [the property] can be measured only by [its] ability to produce income"), aff'd, 926 F.2d 1169, 1177-78 (Fed. Cir.), cert. denied, 502 U.S. 952 (1991); Stearns Co. v. United States, 58 Fed. Cl. 229, 230 (2003) (awarding $10 million in just compensation

1/ The expectancy interest value under the UTC-only scenario is greater than the value under the 50 unit scenario because, in the UTC-only scenario, prices are set by the Distributor Agreement and certain expenses are lower. See App301-02 (Cobb Test. at 555-56).
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based on a "royalty income stream" analysis), rev'd on other grounds, 396 F.3d 1354 (Fed. Cir. 2005). 2/ Justice Cardozo's opinion for the Court in Sinclair Refining Co. v. Jenkins Petroleum Process Co., 289 U.S. 689 (1933), also supports Innovair's approach to valuing the TLA. Sinclair Refining involved the misappropriation of a unique and valuable -- although undeveloped -- invention. Justice Cardozo explained that market value -- what he called "value for exchange" -- is not the sole measure of damages. Indeed, to value such an invention by "imagining a forced sale" to a buyer acting upon the "scanty and imperfect" information "available at the moment of the" wrongdoing (when the invention is still undeveloped), would significantly undervalue the property. Thus, damages should be based on the property's "value for use" -- i.e., the value of the property that its owner would have "uncovered if he had kept it as his own." Justice Cardozo wrote: This is not a case where the recovery can be measured by the current prices of a market. A patent is a thing unique. There can be no contemporaneous sales to express the market value of an invention that derives from its novelty its patentable quality... Value for exchange is not the only value known to the law of damages. There are times when heed must be given to value for use if reparation is to be adequate. An imaginary bid by an imaginary buyer, acting upon the information available at the moment of the breach, is not the limit of recovery where the subject of the bargain is an undeveloped patent. Information at such a time might be so scanty and imperfect that the offer would be nominal. The promisee of the patent has less than fair compensation if the criterion of value is the price that he would have received if he had disposed of it at once, irrespective of the value that would have been uncovered if he had kept it as his own. Id. at 698-699.

2/ In the recent CSX Transportation case, the Supreme Court observed that an appraiser had used "the discounted cashflow approach" along with two other methods to value a railroad's real property. Slip op. at 6.
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So too here, Innovair should be compensated for the taking of the TLA based on the value that property would have brought to Innovair had it remained in Innovair's hands. To compensate Innovair based on what a buyer in 1991 would have paid for the TLA at the time of the taking would significantly undervalue the TLA and hardly constitute just compensation. The law of temporary takings provides further support for awarding Innovair lost expectancy interest value. The measure of just compensation for a temporary taking is "the value of the use of the property during the temporary taking, i.e., the amount which the owner lost as a result of the taking." Yuba Natural Resources, Inc. v. United States, 904 F.2d 1577, 1580-81 (Fed. Cir. 1990). See also First English Evangelical Lutheran Church of Glendale v. County of Los Angeles, 482 U.S. 304, 319 (1987) ("[T]he Just Compensation Clause of the Fifth Amendment requires the government to pay the landowner for the value of the use of the land during this period."). In Yuba, the Federal Circuit held that the owner of certain mineral rights was owed just compensation for the amount he would have received from those rights during the six years those rights were temporarily taken by the Government. The property owner was thus entitled to the rent and royalty income it would have received under a proposed joint venture agreement but for the taking. See Yuba, 904 F.2d at 1580-81. The Government's taking of the TLA was surely a permanent taking -- because the TLA was never returned to Innovair -- but the taking resembles a temporary taking in that the TLA was a contract with a ten year term, from 1988 to 1998, and the Government's taking deprived Innovair of its rights for a finite, discrete period of time, from 1991 to 1998. Thus, as in the case of temporary takings, the just compensation owed to Innovair is "the amount [Innovair] lost as a result of the taking" over that seven year period. Yuba, 904 F.2d at 1581. Just as the property owner in Yuba was entitled to compensation for the rent and royalties it would have earned

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during the five year taking in that case, Innovair is entitled to compensation for the income stream the TLA would have generated from 1991 to 1998. In Yuba, the Federal Circuit measured the value of the property rights by the property owner's expected earnings under a proposed joint venture agreement. Likewise, Innovair's property rights are worth at least the amount Innovair would have received from UTC under the Distributor Agreement, which obligated UTC to buy a minimum of 35 kits from Innovair over seven years. Significantly, the Government's economic and aviation experts do not quarrel with the approach used by Plaintiff's expert Arthur Cobb in valuing the TLA. The Cobb approach is essentially one of the three approaches that Government expert Daniel Kaplan identifies as a proper approach. See App200-01 (DX 323/28-29 ¶ 52) (describing cash flow analysis as a proper way of valuing an asset, such as the TLA, that can be expected to generate a stream of cash payments during its life). At trial, Mr. Kaplan agreed that Mr. Cobb's approach was "close" to the cash flow approach that he (Kaplan) identified as proper. App330 (Kaplan Test. at 1330). 3/ For his part, Government expert Ernest Arvai, in a prior engagement in which he was hired to value a proposed STC for the conversion of Falcon 20 aircraft, employed an approach eerily similar to the Cobb approach. Very much like Mr. Cobb, Mr. Arvai 1) identified the

3/ The other two approaches identified by Kaplan are the comparable sales approach -which, as noted above, he admitted cannot be used here -- and the replacement cost approach. The latter approach also cannot be used here because the TLA, a unique asset, could not have been replaced. Even if Innovair could have obtained a new Supplemental Type Certificate from the FAA, a new STC would not have given Innovair the exclusive right against BTC to make sales outside of the United States. See App331 (Kaplan Test. at 1332-33); App202-03 (DX 323/30-31) (Kaplan Report n.75). Moreover, the Supreme Court has rejected replacement cost. See 564.54 Acres of Land, supra (reversing lower court's use of replacement cost); BrooksScanlon Corp. v. United States, 265 U.S. 106, 125 (1924) ("We are of the opinion that value, so far as material, rather than replacement cost, should be taken into account, for the ascertainment of just compensation.").
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number of Falcon 20s in the market; 2) examined the potential market for the converted aircraft by comparing the performance characteristics of the aircraft with those of competitor aircraft; 3) predicted the number of sales of converted aircraft under an optimistic scenario, an expected scenario, and a pessimistic scenario, and 4) calculated expected cash flows based on each scenario. See App323-24 (Arvai Test. at 1183-87); App198 (DX 322/32, Arvai Report). The salient difference between the Cobb approach and the Kaplan and Arvai approaches is that Mr. Cobb does not discount to present value (as of 1991, when the taking occurred) the calculation of the TLA's expectancy interest value. Mr. Cobb explained that it would be improper to discount expectancy value. See App302, 306 (Cobb Test. at 558-59, 1572-75). Expectancy value measures the loss that the TLA's owners suffered over the years that the TLA would have produced earnings, and thereby, value, i.e., the years 1991 through 1998. See App306(id. at 1572). Those years already have come and gone. Thus, as Mr. Cobb explained, "there is no need in [the] economic model that I've use to discount back" because "[t]hose losses are already in the past." Id. "There simply is no point served by discounting this now completely historical analysis back to some point in time." App302 (Id. at 559). (Mr. Cobb testified that it would be proper to discount if he were valuing, as of November 14, 1991, a property that produces a stream of income today and in future years. Id. at 1573. Here, however, we are valuing a property that would have generated a revenue stream from 1991 to 1998 -- a period entirely in the past. App306 (Id. at 1573-74). C. Any Uncertainty That Inheres the Determination of Lost Expectancy Interest Value Is Attributable to the Government's Conduct and Is Not a Reason to Deny Innovair Just Compensation.

Arthur Cobb's determination of the lost expectancy interest value represents a distinguished expert's best effort to determine the value of the TLA. See App293 (Cobb Test. at

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519) (lost expectancy interest value is "best way to approach the valuation of the [TLA]"). Mr. Cobb carefully provided the Court with a sound method upon which to find lost value and provided the Court with alternative calculations of lost value, each based on substantive analysis and factual information, to support the Court's finding of an amount of lost value. Admittedly, we do not and will never know to a moral certainty how well Innovair would have fared in the aircraft market in the 1990s had the Government not taken the TLA. But the Government, not Innovair, is to blame for that. The knowledge of how successful Innovair would have been "has been foreclosed by the government's taking" and, as this Court has said, "it would be unjust to allow this uncertainty to prevent [plaintiff] from being adequately compensated for its loss." Stearns, 53 Fed. Cl. at 457. This Court expressed the point well in Whitney Benefits: "It would certainly undercut the protection of the Fifth Amendment if the Government could rely on the consequence of its taking a property to claim that compensation is speculative. Such an approach would turn the Fifth Amendment on its head." 18 Cl. Ct. at 410. The Supreme Court, too, has recognized that fixing just compensation inevitably involves a certain amount of educated guesswork. See Kimball Laundry, 338 U.S. at 6 ("But since a transfer brought about by eminent domain is not a voluntary exchange, [the amount of compensable value] can be determined only by a guess, as well informed as possible, as to what the equivalent would probably have been had a voluntary exchange taken place."). Perhaps the value of the TLA in Innovair's hands "cannot be determined with exactitude," but the Fifth Amendment entitles Innovair to compensation in "an amount that is just and as exact as can be determined in light of all available evidence." Stearns, 53 Fed. Cl. at 466. As this Court has said, "justice demands the court make its best decision on the preponderance of the evidence." Id.

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DSC Communications Corp. v. Next Level Communications, 107 F.3d 322 (5th Cir. 1997), a case the Federal Circuit has cited with approval, 4/ involved very similar product valuation issues. DSC sued Next Level for misappropriating trade secrets relating to a new telecommunications product known as SDV (switched digital video). The trial court found Next Level liable and awarded DSC more than $126 million in lost income damages. On appeal, Next Level attacked the damage award as "speculative," pointing out that DSC "has yet to sell its SDV product, and no market has been established for DSC's SDV system." Id. at 329. Next Level also argued that the market share assumptions on which DSC's damages expert had relied "were based on conjecture, not fact." Id. The Fifth Circuit rejected these arguments and affirmed the $126 million award. The fact that DSC had not yet sold its product or established a market, the court held, did not render the award speculative. The court ruled that DSC had "established with sufficient certainty" that its product was "likely to generate significant profits." And it explained that "[e]ven if a product is not yet fully developed, a plaintiff is not prevented from recovering lost profits if it was hindered in developing that product, and the evidence shows the eventual completion and success of that product is probable." Id. The Fifth Circuit also rejected the argument that the market share assumptions of DSC's expert were based on conjecture, holding that the assumptions were "adequately supported." Id. at 330. The court said: "It is true that these predictions are not guaranteed. No one can definitively say what the future holds for SDV technology, or DSC or Next Level in particular. However, uncertainty surrounding precisely how the industry will evolve does not render all analysis about future developments to mere speculation." Id. What

4/

See Energy Capital Corp. v. United States, 302 F.3d 1314, 1327 (Fed. Cir. 2002).

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the Fifth Circuit said in DSC Communications is equally true here. The Cobb analysis is not speculative. See App302 (Cobb Test. at 557-58). D. Innovair Is Entitled to Compound Pre-Judgment Interest.

As it has done many times before, the Court should award "compounded pre-judgment interest from the date of the taking until the date of the judgment." Bassett, 55 Fed. Cl. at 81. See id. (awarding compound pre-judgment interest); Stearns Co., 53 Fed. Cl. at 466 (same); Fla. Rock Indus., Inc. v. United States, 45 Fed. Cl. 21, 43 (1999) (same); Osprey Pac. Corp., 41 Fed. Cl. at 160 (same); Shelden v. United States, 34 Fed. Cl. 355, 377-78 (1995); Bowles v. United States, 31 Fed. Cl. 37, 52-53 (1994) (same); Whitney Benefits, Inc. v. United States, 30 Fed. Cl. 411 (1994) (same). Awarding compound interest is clearly right where, as here, "there has been a substantial time period between appropriation and compensation." Shelden, 34 Fed. Cl. at 378 (11 years between taking and judgment). Accord Bowles, 31 Fed. Cl. at 52 (nine years); Whitney Benefits, 30 Fed. Cl. at 415 (11 years). Furthermore, "[a]warding compound interest comports with the goal of making the plaintiff whole." Shelden, 34 Fed. Cl. at 378. "The economic reality is simply that if the full value of just compensation had been put in escrow contemporaneously with the alleged taking, the [property owner] would have been able to earn compound interest." Bowles, 31 Fed. Cl. at 52. It is axiomatic that national and international business is conducted on the basis of compound interest and not simple interest. "Simple interest cannot put the property owner in as good a position pecuniarily as he would have occupied if the payment had coincided with the appropriation, because it undervalues the worth of the property." Id. Accordingly, this Court should award Innovair compound pre-judgment interest. Consistent with Mr. Cobb's un-discounted lost expectancy interest value approach, pre-judgment

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interest on each year's loss in the period 1992 through 1998 should start to run on the year of the loss in question. See App302-03 (Cobb Test. at 559-60). Finally, Innovair also is, of course, entitled to post-judgment interest. QUESTION THREE What are the dates of the relevant damages period? ANSWER TO QUESTION THREE THE DAMAGES PERIOD SPANS THE DATE OF THE TAKING, NOVEMBER 14, 1991, TO THE END OF THE TECHNOLOGY LICENSE AGREEMENT AND THE DISTRIBUTOR AGREEMENT, JUNE 23, 1998. The damages period is the seven-year period from the date of the taking -- November 14, 1991 -- to the end of the initial term of the TLA and the Distributor Agreement between Innovair and UTC -- June 23, 1998. Innovair's property was taken on November 14, 1991. The Government seized the TLA on July 16, 1991. On November 14, 1991, the Government and BTC executed the Stipulated Substitute Res Bond ("Res Bond Stipulation"). In that agreement, the Government transferred the TLA to BTC and "authorize[d] BTC to immediately begin to conduct, facilitate and pursue the marketing and sales of aircraft" in Innovair's territory -- i.e., the territory in which Innovair had exclusive sales rights under the TLA. Res Bond Stipulation ¶ 6(A) (emphasis added). 5/ Thus, Innovair's exclusive rights under the TLA were abrogated and transferred to BTC "immediately" upon the execution of the Res Bond Stipulation. As the Ninth Circuit held, the moment the Res Bond Stipulation was executed, "Innovair's rights in the TLA were terminated at that point, no matter how valuable they may have been, and no matter how innocent [Innovair]

5/ In Paragraph 14 of the Res Bond Stipulation, the Government "agree[d] that the seized item above described as a Technology Licensing Agreement shall be delivered to and made available to claimant [BTC], and shall be available for use by BTC . . . ."
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was." United States v. Basler Turbo-67 Conversion DC-3 Aircraft, 1996 WL 88075, at *2 (9th Cir. Feb. 19, 1996) (emphasis added). The date of the taking thus is November 14, 1991, for two reasons. First, that is the date that the invasion of Innovair's legal rights under the TLA began. See Bassett, N.M. LLC v. United States, 55 Fed. Cl. 63, 81 (2002) (date of the taking was the date that "marks the beginning of the physical intrusion from which all damages in this matter arise"). Second, that is the date that the Government executed a legal instrument with the "inten[t] to affect" Innovair's property. Whitney Benefits, Inc. v. United States, 18 Cl. Ct. 394, 407 (1989), aff'd, 926 F.2d 1169, 1177-78 (Fed. Cir.), cert. denied, 502 U.S. 952 (1991). In Whitney Benefits, this Court held that the taking occurred on the date of enactment of the federal statute (SMCRA) prohibiting surface mining without a state permit -- not the date a permit was denied -- because the legislation "was intended to affect Whitney coal." 18 Cl. Ct. at 407. Likewise here, the Res Bond Stipulation was intended to -- and did -- divest Innovair of its rights under the TLA. The Government contends that the taking occurred on May 21, 1992, the date the Res Bond Stipulation was approved by the District Court in Arizona. See Defendant's Response to Innovair Interrogatory No. 7. But the taking of the TLA -- and the impairment of Innovair's rights thereunder ­ already had occurred upon the execution of the Res Bond Stipulation. The effect of court approval of the Res Bond Stipulation was to "forever extinguish the rights and duties regarding the [TLA] of all claimants or potential claimants," including Innovair. Res Bond Stipulation ¶ 6(B) (emphasis added). In other words, court approval made the taking permanent and irreversible. The taking, however, already had occurred. 6/

6/ Not only did the Res Bond Stipulation compromise Innovair's rights prior to any court approval of that agreement, but the Government argued in the Arizona District Court that the agreement did not require court approval in order to have legal effect. Specifically, the
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In sum, the Government took the TLA on November 14, 1991. If, however, the taking did not occur on that date, we agree with the Government that the taking occurred no later than May 21, 1992. The end date of the damages period is June 23, 1998. That date marks the end of the initial 10-year term of the TLA and the end of the seven-year term of the Innovair-UTC Distributor Agreement. See App021 (JX 1/6) (TLA § 3.13); App154 (PX 37/3) (Distributor Agreement § 3). The damages period should run at least through June 23, 1998, because Innovair's rights under the TLA and Distributor Agreement were in effect at least until that date. Thus, Innovair had the right to make sales, and would have made sales, at least through June 23, 1998. Furthermore, UTC had an obligation to purchase a minimum of five kits per year from Innovair through that date. See App158 (PX 37/13) (Distributor Agreement § 6.7). This damages period -- from the date of the taking in 1991 to the end of the TLA and Distributor Agreement -- is the damages period used by Innovair's expert, Arthur Cobb. See App293 (Cobb Test. at 516); App206 (PX 9/51) (Cobb Report). The damages period that Plaintiff proposes is actually "a conservative measure valuation" because both the TLA and Distributor Agreement contained renewal provisions. App293 (Cobb Test. at 517-18); see

Government argued that its agreement to substitute the TLA with a res bond did not require court approval so long as the U.S. Marshals Service and the U.S. Attorney's Office approved it. See United States Brief in Opposition to Claimant Innovair's Objections to Substitute Res Bond at 2 ("The only inquiry required is to determine if BTC...has posted a substitute res which has been approved by both the Marshals Service and plaintiff or plaintiff's attorney"). The District Court agreed with the Government's position. See May 21, 1992 Order at 12-13 (attached as Exhibit 6 to Innovair's Proposed Findings of Uncontroverted Fact). Thus, the Government should not now be heard to suggest that the Res Bond Stipulation lacked legal effect until it was approved by the District Court.
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App021 (JX 1/6) (TLA § 3.13); App154 (PX 37/3) (Distributor Agreement § 3). Thus, Innovair might have enjoyed rights under those contracts well past June 23, 1998. QUESTION FOUR How many kits would Innovair have sold? ANSWER TO QUESTION FOUR INNOVAIR WOULD HAVE SOLD BETWEEN 90 TO 130 CONVERSION KITS OVER THE RELEVANT DAMAGE PERIOD. A. Innovair's Status in 1991

Following the 1988 to early 1990 period, during which BTC and Innovair, under Bryan Carmichael's direction and management, focused on obtaining FAA certification of the BT-67, and the 1990 period, which focused on efforts to alleviate financial pressures and to reorganize the BTC and Innovair companies, in the late winter and early spring of 1991, Carmichael and Wilson determined that the shareholder groups should separate their businesses. To that end, they focused on advancing Innovair's business independently from BTC, except to the extent that the companies maintained mutual obligations under the TLA. 1. Innovair's Contemporaneous Business Plan and Operations

A few months before the TLA was seized, Innovair worked with Warwick Consulting to detail its business plan and strategy, ultimately memorialized in the Confidential Memorandum Warwick completed on May 18, 1991 ("Warwick Memorandum"). See App085 (JX 41). As set forth in the Warwick Memorandum, Innovair's short­term projection was to achieve sales of 92 aircraft (approximately 10% of the DC-3/C-47 airframes then operating outside of the United States) over the period 1991 to 1995. App087, 089 (JX 41/15, JX 41/34). It identified the target markets as small package freight-feeder route, general cargo, convertible cargo-passenger,

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commuter, fire jumpers, surveillance oil spills, and mapping on the commercial side and general cargo/passenger, surveillance, drug interdiction, intelligence gathering, and gunships on the military side. App088 (JX 41/26). Among those, Innovair's research indicated that small package freight was the fastest growing market in the developed world and that convertible cargo-passenger was the fastest growing market in the developing world. Id. Innovair's sales strategy was to focus on the low capital cost of the BT-67 by promoting a no-frills version of the BT-67, in order to offer commercial customers an affordable plane with great operating capabilities. App090 (JX 41/36) ("The pricing objective is to provide an Instrument Flight Rules (IFR) capable, minimum frills, converted aircraft for around $2.5 million and a Part 121 aircraft (conforming to current passenger carrying regulations) . . . for $2.8 to $3 million."). The Warwick Memorandum, prepared and produced before Innovair and UTC reached agreement and executed the Distributor Agreement, explains that Innovair's primary means of conducting business was to enter into distributor agreements with reputable companies in different regions in which Innovair would sell the distributor kits and the distributor would carry out the sales and marketing function, the installation of the conversions kits and any customerspecific fittings, and product support (including maintenance, spares support and training). App091 (JX 41/37). Thus, Innovair primarily planned to sell kits, not converted aircraft, to distributors, which in turn would control the manufacturing process and would be responsible for after-sales support. Alternatively, in territories in which Innovair had not established a distributor, Innovair would itself market converted aircraft (not kits), which Innovair would then have converted and configured to the customers needs at Air Asia (discussed below), or at another conversion facility. App097 (JX 41/54); see also App102-037-38 (JX 41/137-38) (letter from K. Brenneisen to B. Carmichael describing Air Asia's capabilities, certifications and

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readiness to perform conversions); App117 (PX 258/4) (June 19, 1992 UTC memorandum reflecting UTC's and Innovair's mutual interest in having UTC's conversion facility perform conversions for Innovair's aircraft sales outside UTC's contractual territory). 7/ To provide technical support to its distributors and customers, and to initiate a kit manufacturing operation, Innovair planned to hire (as employees or consultants) the key technical personnel who had led the technical component of the STC certification process, each of whom had informed Innovair of his willingness to work with Innovair. See App380-81 (Carmichael Test. PX 313-A/71-72, dep. p. 198:18-199:10) (hereinafter "Carmichael Test."); App266, 276, 277 (Clark Test. at 259:615, 314:11-18; 316:4-319:23). At the time the Warwick Memorandum was completed, Innovair anticipated that it shortly would enter into a distributor agreement with UTC covering the Pacific Rim, as indicated in the 1990 Purchase Agreement, although the negotiation process still was underway and the terms of agreement uncertain. Innovair also was in discussions with Lonrho, a large U.K.incorporated business with extensive African business enterprises, to become the company's distributor for Africa and was preparing a distribution agreement. App092 (JX 41/38); see also App256 (B. Wilson Test. at 91-92); App054 (PX 76); App062 (JX 14/1). Innovair was also planning to develop distributor relationships for each of the significant markets of South

7/ Innovair also intended to manufacture kits itself (or form a related entity to do so), rather than buying them at a 20% mark-up from BTC, see App086 (JX 41/10), although it had the contractual right to purchase them from BTC. See, e.g., App116 (PX 313-20/3). As Bob Clark testified, the vast majority of the kit is comprised of purchased parts, and little in the way of capital investment would be required to establish a kit manufacturing operation, only a small facility and a small amount of low-cost tooling and equipment. App274 (Clark Test. at 306:17307:1); see also App097 (JX 41/54). For purposes of computing lost expectancy value, Cobb & Associates applied a 20% mark-up in calculating kits costs ("cost of goods"); kit costs would have been greatly reduced had Innovair had the opportunity to pursue its business. Including the 20% mark-up in its calculations represents one of several ways in which Cobb & Associates took steps to avoid the risk of over-estimating the value of the TLA.
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America, Africa, Western Europe (to include Turkey), and Eastern Europe. App091 (JX 41/3738). 8/ Until such distributorships were established, Innovair had representation agreements with sales agents for South America, Europe, Zimbabwe and other parts of Africa, and Australia, and was working with and negotiating an agreement with an agent in Turkey with strong defense ministry contacts. Id. By the time the Warwick Memorandum was completed, Innovair also had introduced the BT-67 to various potential customers, and had reached the point in discussions with several potential customers and distributors in which Innovair determined that sales were likely. App093-96 (JX 41/40-43); see also id. at 133-148 (Ex. D, "Customer & Technical Reaction to Turbo-67). For example, Air Atlantique, a U.K. operator with 12 DC-3/C-47 aircraft was highly impressed with the BT-6's performance and expressed serious interest in acquiring at least one BT-67 in the short-term. App093, 108 (JX 41/40, 143); App270-71 (Clark Test. at 289:7-292:3). Innovair for some time had also been in communication with Affretair, a Zimbabwe airline owned by the Zimbabwe government, which had signaled a serious interest in obtaining airframes from the Zimbabwe military for conversion in its cargo/passenger airline. App091-92 (JX 41/42); see also App255 (B. Wilson Test. at 88) . In March 1991, Innovair also demonstrated the plane and made presentations to two separate Swiss operators, Zimex (which later leased the BT-67 owned by UTC, see App141 (PX 211) & App309 (Johnson Test. at 628:13-18)) and Swiss Atlantic, both of which operated aircraft in Africa and both of which expressed serious interest in the BT-67. Id. Also in March 1991, Innovair also had demonstrated the BT-67 and held meetings with high-level Turkish military personnel, including the Turkish Air Force Chief of Staff and the

8/ Under the 1990 Purchase Agreement with UTC, UTC had the right of first refusal for distributorships outside the UTC territory. See App053 (JX 20/22).
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Chief of Logistics, as well as other generals and members of the defense ministry. App093-92 (JX 41/40-41). 9/ The Turkish Air Force at that time operated 27 C-47s and owned another 12 C-47 airframes it used for spare parts. Id. at 40. After Innovair's presentation and flight demonstration, the Air Force Chief of Staff, a lieutenant general, indicated that the BT-67 met the Air Force's need for turbine powered light/medium transport and asked Innovair for a proposal to provide conversion kits for installation at the Air Force's facility in Kayseri. Id. at 41. Innovair's proposal was in the works when the government seized the TLA. Id.; see also App128 (JX 45) (B. Carmichael letter to Dr. Dinc dated July 2,1991 regarding Turkish Air Force proposal); App133 (JX 50) (Dr. Dinc letter to B. Carmichael dated July 10, 1991 stating that "the probability of being successful for this project is very great"); App148 (JX 53) (B. Carmichael letter to F. Johnson, UTC dated July 25, 1991 regarding Turkish Air Force conversions). As discussed below, other prospects were developed by UTC and by Jim Eckes, a Hong Kong-based aircraft broker and aviation consultant. 2. Innovair's Relationship with UTC and UTC's BT-67 Business Activities

Some time prior to 1990, UTC contacted BTC and Innovair to learn about their converted DC-3/C-47 using engines manufactured by UTC's Pratt & Whitney Canada. By early 1990, UTC had developed plans to form a joint venture in Taiwan to serve as the Pacific Rim distributor for the BT-67. See App109 (JX 41/144). At that time, UTC anticipated ordering conversion kits by the fall of 1990, and "[were] forecasting a market potential of 36-50 conversions over a 3 to 4 year period . . . based on [their] preliminary market surveys and the perceived market niche of the Turbo DC-3." Id. While UTC's primary motivation for a distributorship was to obtain offset credits (see App051 (JX20 at 17)), it also anticipated making

9/

This meeting was arranged by Innovair's prospective sales agent Dr. Dinc. 23

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profits from sales of the Pratt & Whitney Canada engines that were installed on the BT-67. App399-400 (Hayes Test., PX 315-A/31-2) ("[UTC] stood to make some sales of engines, because the major engine...is a Pratt & Whitney turbo prop engine. So I think it was primarily to get their offset requirements...but also to make a profit and to sell engines[.]"); see also App056-59 (JX 27/1, JX 27/4). But UTC's interest in leveraging the BT-67 to obtain offset credits was not limited to Taiwan. Rather, UTC planned to implement offset-credit projects based on BT-67 conversion businesses in several countries and regions, and calculated that it could obtain $240 million dollars in offset credits from the BT-67 in Taiwan, Poland, India, Turkey, Africa, China and South America. App002-03 (PX 313-9/2-3) (1990 UTC PowerPoint presentation on BT-67 business); see also App066 (JX 30/3) (Feb 1991- R. Stone letter addressing principles of agreement for Distributor Agreement; stating that UTC will provide "its projected business plan for each distributorship eastablished"). In connection with its plans to develop conversion operations, UTC conducted market assessments and related research to assess the viability of its plans. See, e.g., App004 (PX 247) (internal UTC memo referencing a separate document describing the market and stating that there are over 200 DC-3/C-47s operating in Pacific Rim and that UTC expects to do at least 50 conversions over 4 years). In early 1990, at a time when BTC was facing cash flow problems, Carmichael proposed that UTC purchase a BT-67, initially for use as a demonstrator aircraft, in order to bring needed revenue into BTC. App060 (JX 29/1) ("B.R.C. initiated in-depth discussions with U.T.C. to have them finance engines and purchase a demonstrator aircraft at the beginning of 1990[.]"). UTC agreed, and in June 1990, UTC, BTC and Innovair entered into the Purchase Agreement. In addition to setting the terms for the aircraft purchase, the Purchase Agreement also gave UTC the right to offset credits generated by BT-67 sales and called for UTC and Innovair to negotiate

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a distributor agreement for the identified Pacific Rim countries. App052 (JX 20/19) (Purchase Agreement § III.A.1). Following execution of the Purchase Agreement, UTC undertook various start-up activities to get its distributorship off the ground. First, it hired several retired Pratt & Whitney and Douglas Aircraft executives and managers to take charge of the effort. App392-99 (H. Hayes Test., PX 315-A/24-31). This project team was led by Herb Hayes, a recent Pratt & Whitney retiree whose last position with the company was heading its product support division for all military aircraft engines. App390-91 (Id. at 14-15). In that position, Hayes led a team of over 400 personnel located throughout the world. App390 (Id. at 15.) Another recent retiree on the project team was Brad Schikel, who recently had been the company's "highly regarded" representative in Japan. App.392-93 (Id. at 24-25). For marketing work, UTC hired Del Underwood, who had retired from Douglas. App396-97 (Id. at 28-29). Underwood left the project for personal reasons and was replaced in mid-1991 by Dusty Miller, who had recently retired as vice president of worldwide marketing at Pratt & Whitney Canada, the manufacturer of the BT-67's engines. App397 (Id. at 29). In addition, the project team included Kiko Brenneisen, who had performed much of the FAA-required inspections and certifications in the BT-67's STC process in Van Nuys and who was qualified as an FAA certified airworthiness representative. App393 (Id. at 25). Brenneisen's role was focused on inspecting the conversion facility and preparing documentation of conversion processes. App393-95 (Id. at 25-27.) In 1990, the UTC team identified Air Asia, a Taiwan aircraft facility certified as an FAAapproved repair station, as its potential conversion facility. App395 (Id. at 27). Air Asia had performed significant work for the United States military during the Vietnam War, and more recently was engaged in perf