ELI LILLY DO BRASIL, LTDA, Plaintiff-Appellant, v. FEDERAL EXPRESS CORPORATION, Defendant-Appellee, 502 F.3d 78

Judge MESKILL dissents in a separate opinion. B.D. Parker, Jr., Circuit Judge: Eli Lilly do Brasil (“Lilly”) contracted with Federal Express (“FedEx”) to ship drums of pharmaceuticals from Brazil to Japan. 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. I.

BACKGROUND 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 Yira-copos, 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. The limitation of liability on the face of the waybill was conspicuous. 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&emdash;and corollary standards of care to be exercised by&emdash;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 Laws. See Pescatore v. Pan Am. World Airways, Inc., 97 F.3d 1, 12 (2d Cir.1996); see also Daimler-Chrysler 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.” Id. § 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 option of securing more insurance if it paid a higher premium-an option Lilly did not avail itself of.

Lilly has offered no satisfactory justification for expecting that it would be permitted to finesse this commitment. Lilly’s principal contention is that the District Court erred in attaching a presumption of validity to the contract because it is commonplace in the sphere of international common carriage, including in Brazil, that a carrier who acts with gross negligence will be precluded from relying on a contractual liability limitation. While acknowledging that the contractual limitation provision controls for simple negligence, Lilly, relying on § 6(2)(

c) of the Restatement, contends that under the laws of Brazil-the other interested state-the limitation provision is void if FedEx acted with willful misconduct or gross negligence. Lilly has not convinced us that this contention is correct. Lilly relies on a declaration by Brazilian transportation attorney, Paulo de C. Machado, which Lilly submitted in support of its motion for

summary judgement. The declaration initially states that “there is NO legal limitation for carriers in road or railroad transportation.” As the sole authority for this proposition, the declaration refers to a Brazilian legislative decree which states that “[t]he railroads are responsible for the total or partial loss, pilferage or damage to the merchandises which they received to transport.” According to the declaration, this decree has been applied to transportation by truck.

With regards to air transportation, both domestic and international, the declaration asserts that “[tjhere is limitation of liability only in air carriage, but it does not apply in case of gross negligence.” The following Brazilian law provisions are offered as support for this proposition: Decree No. 20.704/31, art. 25: 1) The carrier has no right to benefit of the dispositions of the [Warsaw] Convention, which exclude or limit their liability, if the loss is consequence of their malice or of then- fault, when according to the law of the court analyzing the case fault is equivalent to malice.

Law No. 7.565/86: The limits of the indemnity, stated in this Chapter, are not applicable if it is proved that the loss resulted from malice or gross fault of the carrier or of their employees. Lilly’s statements of Brazilian law prove too much. Brazilian law does not provide for any specific limitations on liability for losses occurring during truck carriage. Limitations of liability, under Brazilian law, are only expressly allowed in air carriage and are then subject to an exception for gross negligence.

Given no real support in the record for Lilly’s contention that Brazil’s gross negligence exception even applies during ground carriage — let alone support for the proposition that Brazil’s interest in applying such an exception outweighs the value of upholding the contract, cf. Restatement § 197 cmt. c.^ — we are hard-pressed to see how the parties could have had a justified expectation to that effect. In the absence of such support, we are comfortable concluding that our own firmly grounded policy of enforcing contractual obligations assumed by sophisticated commercial entities should apply. III.

CONCLUSION The judgment of the District Court is affirmed. . The waybill provides: If the carriage involves an ultimate destination or stop in a country other than the country of departure, the Warsaw Convention may be applicable and the convention governs and in most cases limits the liability of the Carrier in respect of loss, damage, or delay to cargo to 250 French gold francs per kilogramme [indicated to be approximately USD $20.00 per kilogram], unless a higher value is declared in advance by the shipper and a supplementary charge paid if required.

(4) Except as otherwise provided in Carrier’s tariffs or conditions of carriage, in carriage to which the Warsaw Convention does not apply Carrier’s liability shall not exceed U.S. $20.00 or the equivalent per kilo-gramme of goods lost, damaged or delayed, unless a higher value is declared by the shipper and a supplemental charge paid. .

The limitation specifies: ALL GOODS MAY BE CARRIED BY ANY OTHER MEANS INCLUDING ROAD OR ANY OTHER CARRIER UNLESS SPECIFIC CONTRARY INSTRUCTIONS ARE GIVEN HEREON BY THE SHIPPER, AND SHIPPER AGREES THAT THE SHIPMENT MAY BE CARRIED VIA INTERMEDIATE STOPPING PLACES WHICH THE CARRIER DEEMS APPROPRIATE. THE SHIPPER'S ATTENTION IS DRAWN TO THE NOTICE CONCERNING CARRIER’S LIMITATION OF LIABILITY. Shipper may increase such limitation of liability by declaring a higher value for carriage and paying a supplemental charge if required. .

The dissent suggests that the United States does not have a ''significant” or ''close” relationship with the contract for purposes of § 197. See Dissenting Op. at 87-88, 88-89. As we have already noted, the United States is the domicile of FedEx. Moreover, the § 197 comments suggest that the very fact that one interested state's laws would render a contract valid, while another’s would not, bolsters the "significance” of the first state’s relationship to the transaction and the parties. See Restatement § 197 cmt. c. .

We also disagree with the dissent that we are required to take Machado's articulation of various propositions of Brazilian law at face value, see Dissenting Op. at 90-91, when Ma-chado then refers to and quotes specific provisions of Brazilian law that do not support those representations. Unlike Curley v. AMR Corp., 153 F.3d at 12, we do not find that Lilly's submissions of Brazilian law were insufficient to conduct a proper choice of law analysis; instead, we find that Lilly’s representations contradict the actual provisions of Brazilian law that govern. .

The dissent argues that a State’s strong policy interest predominates over the justified expectations of the parties that a contractual damages provision is valid. See Dissenting Op. at 89-90. While it is possible that evidence of a strong policy interest may overcome the presumption of enforceability of a contract provision, no such Brazilian policy has been identified. Confoundedly, the dissent argues that we need not concern ourselves with what Brazilian law is, in determining Brazil’s policy interests. See Dissenting Op. at 90.

It seems obvious to us that whether or not Brazilian law has an invalidating rule governing ground transport is particularly relevant to whether Brazil, in fact, has a strong policy interest in this issue that is owed deference. The Restatement acknowledges that "[t]he content of the relevant local rule of a state may be significant in determining whether this state is the state with the dominant interest.” Restatement (Second) Conflict of Laws § 6 cmt. f.

In this case, the provisions of Brazilian law submitted by Lilly reflect policies that are either completely at odds with what the parties contracted for (i.e., would never allow a provision that limits ground carriage damages) or that have no relationship to the issue before us (i.e., would only apply to air carriage losses and not ground carriage).