Eli Lilly Do Brasil, Ltda. v. Federal Exp. Corp.
C.A.2 (N.Y.),2007.
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United States Court of Appeals,Second Circuit.
ELI LILLY DO BRASIL, LTDA, Plaintiff-Appellant,
v.
FEDERAL EXPRESS CORPORATION, Defendant-Appellee.
No. 06-0530-cv.
Argued: Sept. 22, 2006.
Decided: Sept. 11, 2007.
Martin F. Casey, Casey & Barnett, LLC, New York, N.Y., for Appellant Eli Lilly do Brasil, Ltda.
Robert R. Ross, Federal Express Corporation, Memphis, Tenn., for Appellee Federal Express Corporation.
Before MESKILL, B.D. PARKER, & RAGGI, Circuit Judges.
BARRINGTON D. PARKER, Circuit Judge:
Eli Lilly do Brasil (“Lilly”) contracted with Federal Express (“FedEx”) to ship drums of pharmaceuticals from Brazil to J § apan. While being trucked in Brazil, the shipment was stolen. This appeal considers whether the limitation on liability in FedEx’s waybill is enforceable and the answer depends on whether federal common law or Brazilian law applies.
The United States District Court for the Southern District of New York (Lynch, J.) agreed with FedEx that federal common law applied, under which the limitation was enforceable. The District Court declined Lilly’s invitation to apply Brazilian law, under which Lilly contended the clause would have been invalid if gross negligence were shown. The District Court concluded that to do so would serve “to invalidate the liability limitations to which the parties voluntarily bound themselves” and would disturb the parties’ justified expectation that their contract was enforceable. We agree and we affirm.
In October 2002, Lilly contracted with Nippon Express do Brasil, who, in turn, subcontracted with FedEx to transport fourteen drums of Cephalexin from Lilly’s factory in Guarulhos, Brazil to Narita, Japan, through FedEx’s hub in Memphis. FedEx received the cargo and consigned it to Jumbo Jet Transportes Internacionais Ltda. for transportation by truck to Viracopos, Brazil. The truck was hijacked en route and the cargo, worth approximately $800,000, was stolen.
The waybill for the shipment limited FedEx’s liability for stolen goods to $20 per kilogram. If a customer, such as Lilly, was dissatisfied with the limitation, it was given the option of securing additional coverage by declaring a higher value and paying additional charges.FN1
The limitation of liability on the face of the waybill was conspicuous.FN2 Lilly did not elect to declare a higher value or to pay for additional coverage. The record is silent as to the circumstances of the theft. It is not disputed that, if the limitation applied, FedEx’s exposure for the loss was approximately $28,000.
Lilly, a Brazilian firm, chose not to sue FedEx in Brazil but instead sued in the Southern District of New York. The parties cross-moved for partial summary judgment. FedEx sought to limit its liability in accordance with the waybill and Lilly sought to have Brazilian law applied, believing that the limitation might not be enforceable if it could prove that the trucking company acted with gross negligence. Both parties assumed that federal common law choice-of-law analysis applied but they disagreed as to the results of that analysis.
The District Court granted FedEx’s motion, ruling that substantive federal common law, not Brazilian law, applied and, as a result, the limitation was valid. The court’s choice-of-law analysis, relying on the Restatement (Second) of Conflict of Laws (the “Restatement”), determined that Brazil had an interest in “regulating the liability of-and corollary standards of care to be exercised by-carriers transporting goods within its borders.”The court then reasoned that because of Brazil’s numerous contacts with the transaction, it undoubtedly had a significant interest in regulating the transaction, while the United States had only a “general policy interest in limiting the liability of FedEx as a federally-certified air carrier.”
After considering all the Restatement factors, however, including several that favored Lilly, the court concluded that federal common law, which accords primacy to vindicating the parties’ justified expectations, trumped Brazilian law. Specifically, Judge Lynch found that because United States law would enforce the contract as written and Brazilian law might permit the contract to be disregarded, “Brazil’s interests in defining the liability of carriers operating within its borders, even taking into account its considerable contacts with the transaction, are not so strong here as to occasion unsettling the private agreement of these particular parties, who, to the extent they were aware of Brazilian law, opted to contract around it.”Heavily weighting this factor, the court concluded that the United States is “the jurisdiction with the most significant relationship to the transaction and the parties.”After the parties stipulated the amount of damages, the court entered a judgment for Lilly in accordance with the limitation in the waybill. This appeal followed.
II. DISCUSSION
A. Standard of Review
We review de novo the district court’s determination that federal law applies, Curley v. AMR Corp., 153 F.3d 5, 11 (2d Cir .1998); the district court’s determinations regarding questions of Brazilian law, id.;Fed.R.Civ.P. 44.1; as well as the district court’s resolution of the cross-motions for summary judgment, Terwilliger v. Terwilliger, 206 F.3d 240, 244 (2d Cir.2000).
B. Choice of Law Analysis
Although the Supreme Court has cautioned that it is appropriate for courts to apply federal common law in only a “few and restricted” instances, O’Melveny & Myers v. FDIC, 512 U.S. 79, 87, 114 S.Ct. 2048, 129 L.Ed.2d 67 (1994) (internal quotation marks omitted), this Court has recognized that cases involving the liability of air carriers for lost or damaged freight are controlled by federal common law, see Nippon Fire & Marine Ins. Co., Ltd. v. Skyway Freight Sys., Inc., 235 F.3d 53, 59 (2d Cir.2000). Because this appeal requires us to consider FedEx’s liability for lost shipment of freight, and since the parties have conceded the issue, a federal common law choice-of-law analysis is appropriate.
As our prior cases indicate, when conducting a federal common law choice-of-law analysis, absent guidance from Congress, we may consult the Restatement (Second) of Conflict of Law. See Pescatore v. Pan Am. World Airways, Inc., 97 F.3d 1, 12 (2d Cir.1996); see also DaimlerChrysler Corp. Healthcare Benefits Plan v. Durden, 448 F.3d 918, 923 (6th Cir.2006) (turning to the Restatement where prior caselaw did not address the choice-of-law question at issue); Huynh v. Chase Manhattan Bank, 465 F.3d 992, 997 (9th Cir.2006) (“Federal common law follows the approach outlined in the Restatement (Second) of Conflict of Laws.”).
In general, “[t]he federal common law choice-of-law rule is to apply the law of the jurisdiction having the greatest interest in the litigation.”In re Koreag, Controle et Revision S.A., 961 F.2d 341, 350 (2d Cir.1992). As to the transportation of goods, § 197 of the Restatement provides:
The validity of a contract for the transportation of passengers or goods and the rights created thereby are determined, in the absence of an effective choice of law by the parties, by the local law of the state from which the passenger departs or the goods are dispatched, unless, with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the contract and to the parties, in which event the local law of the other state will be applied.
Restatement (Second) of Conflict of Laws § 197 (emphasis added).
Section 6 identifies a number of factors relevant to determining which state has the more significant relationship with the parties and the contract:
a) the needs of the interstate and international systems,
b) the relevant policies of the forum,
c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue,
d) the protection of justified expectations,
e) the basic policies underlying the particular field of law,
f) certainty, predictability and uniformity of result, and
g) ease in the determination and application of the law to be applied.
Restatement (Second) of Conflict of Laws § 6(2).
Brazil’s interests in the contract and the parties are by no means insignificant. The contract was negotiated and executed in Brazil, between a Brazilian company and a United States company that regularly transacts business in Brazil. The purpose of the contract was to ship goods located in Brazil, out of Brazil to Japan. The goods did not enter the United States and would have done so only because Memphis is the FedEx transship center. These considerations are important ones to the § 6 analysis. See id. § 188(2) (stating that the principles of § 6 should be analyzed taking into account, among other things, the place of negotiation of the contract, the place of performance, and the place of business of the parties). As explained in the Restatement, the § 188 contacts serve to identify “[t]he states which are most likely to be interested,” namely those states “which have one or more of the [section 188] contacts with the transaction or the parties.”Id. § 188 cmt. e (emphasis added).Section 188, like § 197, thus establishes something akin to a default rule based on a non-exhaustive list of contacts. In moving beyond the default rule to a determination of what rule of law applies in a particular circumstance, the contacts are “to be taken into account in applying the principles of § 6.”Id. § 188(2). However, they do not subsume those principles and are not determinative in themselves. To hold otherwise would render § 6 superfluous.
Thus, our recognition that Brazil’s interest, based only on § 188 contacts, is greater than the United States’ cannot be the end of our inquiry or determinative of its conclusion. The United States also has some interest in this transaction and the parties, being FedEx’s domicile. See id. § 188(2)(e). Which state is most interested under § 188 is a different question from which state has the more significant relationship with the parties and the contract for purposes of § 197.
In this case, even taking account of Brazil’s superior § 188 contacts, two of the § 6 factors emerge as determinative of United States venue: (1) the relevant policies of other interested states and the relative interest of those states in the determination of the particular issue in dispute, § 6(2)(c), and (2) protection of the parties’ justified expectations, § 6(2)(d). Once Lilly-for whatever reason-asked a United States court to consider its contract, it invited application of the well-settled “presumption in favor of applying that law tending toward the validation of the alleged contract.”Kossick v. United Fruit Co., 365 U.S. 731, 741, 81 S.Ct. 886, 6 L.Ed.2d 56 (1961); see also Pritchard v. Norton, 106 U.S. 124, 137, 1 S.Ct. 102, 27 L.Ed. 104 (1882) (“The parties cannot be presumed to have contemplated a law which would defeat their engagements.”(internal quotation marks omitted)). This presumption is consistent with the general rule of contract construction that “presumes the legality and enforceability of contracts.”Walsh v. Schlecht, 429 U.S. 401, 408, 97 S.Ct. 679, 50 L.Ed.2d 641 (1977); see Nat’l Labor Relations Bd. v. Local 32B-32J Serv. Employees Int’l Union, AFL-CIO, 353 F.3d 197, 202 (2d Cir.2003) (acknowledging the presumption that an ambiguous contract should not be interpreted so that it is rendered invalid and unenforceable); Restatement (Second) of Contracts § 203(a) (“[A]n interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect.”); cf. Kipin Indus., Inc. ., v. Van Deilen Int’l, Inc., 182 F.3d 490, 495-96 (6th Cir.1999) (observing that under the Restatement, even an explicit choice of law provision is to be considered a mistake if the chosen law would invalidate an express portion of the contract).
The paramount importance of enforcing freely undertaken contractual obligations, especially in commercial litigation involving sophisticated parties, was obvious to the District Court and is obvious to us. The Restatement expressly provides that the justified expectation of enforceability generally predominates over other factors tending to point to the application of a foreign law inconsistent with such expectation. Comment b of § 188 of the Restatement provides:
Parties entering a contract will expect at the very least, subject perhaps to rare exceptions, that the provisions of the contract will be binding upon them. Their expectations should not be disappointed by application of the local law rule of a state which would strike down the contract or a provision thereof unless the value of protecting the expectations of the parties is substantially outweighed in the particular case by the interest of the state with the invalidating rule in having this rule applied.
Id. § 188, cmt. b (emphasis added). Likewise, the comments to § 197 note that the default rule favoring the local law of the state of dispatch may not apply when the contract would be invalid under such law “but valid under the local law of another state with a close relationship to the transaction and the parties.”FN3Id . § 197 cmt. c. In such a situation, the default shifts to favor the validating law “unless the value of protecting the expectations of the parties by upholding the contract is outweighed in the particular case by the interest of the state of departure or dispatch in having its invalidating rule applied.”Id.
Under federal common law, the limitation in the waybill is valid. The “release value” doctrine recognizes the validity of provisions limiting the liability of carriers for lost or damaged cargo. See Nippon Fire, 235 F.3d at 59-60(validating such provisions where they are “set forth in a ‘reasonably communicative’ form so as to result in a ‘fair, open, just and reasonable agreement’ between carrier and shipper” and “offer the shipper a possibility of higher recovery by paying the carrier a higher rate”); accord Shippers Nat’l Freight Claim Council, Inc. v. Interstate Commerce Comm’n, 712 F.2d 740, 746 (2d Cir.1983); Hill Constr. Corp. v. Am. Airlines, Inc., 996 F.2d 1315, 1317 (1st Cir.1993).
We have little difficulty concluding that this case does not present a rare exception and that the parties reasonably expected-or certainly should have expected-that their contract would be enforceable. As we noted, the contract contained not only a loss limitation clause, but offered Lilly the
