Power Standards Lab v. Federal Exp. Corp.

• Decision Date: 25 March 2005
• Docket Number: No. A103021.,A103021.
• Citation: 26 Cal.Rptr.3d 202,127 Cal.App.4th 1039
• Court: California Court of Appeals Court of Appeals
• Parties: POWER STANDARDS LAB, INC., Plaintiff and Respondent, v. FEDERAL EXPRESS CORPORATION, Defendant and Appellant.

26 Cal.Rptr.3d 202

127 Cal.App.4th 1039

POWER STANDARDS LAB, INC., Plaintiff and Respondent, v. FEDERAL EXPRESS CORPORATION, Defendant and Appellant.

No. A103021.

Court of Appeal, First District, Division 4.

March 25, 2005.

Rehearing Denied April 22, 2005.

Review Denied July 27, 2005.

Certiorari Denied February 21, 2006. See 126 S.Ct. 1335.

Shane & Taitz, David R. Shane, Timothy A. Ginn, Marion, AR, for Defendant and Appellant.

Michael A. Mazzocone, San Francisco, for Plaintiff and Respondent.

KAY, P.J.

Damage to electronic equipment being shipped by defendant Federal Express Corporation (Federal Express) led to litigation that culminated in a judgment in favor of Plaintiff Power Standards Lab, Inc. (PSL) for $78,000 in compensatory damages and $600,000 in punitive damages. The dispositive question is whether federal law—in the form of a preemption provision in the Airline Deregulation Act of 1978 and a doctrine of federal common law—precludes a state court from awarding any relief greater than was expressly and contractually negotiated between the carrier and the shipper. We answer this question in the affirmative. We hold that once the shipper has paid the contractual limit of its liability, state common law and statutory remedies cannot augment that recovery.

BACKGROUND

Because issues of law resolve this appeal, it is not necessary to recount the evidence introduced at the trial except in the briefest form most favorable to PSL. (Cassim v. Allstate Ins. Co. (2004) 33 Cal.4th 780, 787, 16 Cal.Rptr.3d 374, 94 P.3d 513.)

PSL shipped a prototype piece of electronic equipment from its Emeryville factory to San Diego, using Federal Express as the shipper. The shipping airbill stated Federal Express's liability policy:

"Limitations On Our Liability And Liabilities Not Assumed

"Our liability in connection with this shipment is limited to the lesser of your actual damages or $100, unless you declare a higher value, pay an additional charge, and document your actual loss in a timely manner. You may pay an additional charge for each additional $100 of declared value. The declared value does not constitute, nor do we provide, cargo liability insurance. [¶] In any event, we will not be liable for any damage, whether direct, incidental, special, or consequential in excess of the declared value of a shipment, whether or not Federal Express had knowledge that such damages might be incurred including but not limited to loss of income or profits." PSL paid for $20,000 of additional "declared value" coverage from Federal Express.¹ The airbill also set forth the procedures for "Filing A Claim," which included: "For us to process your claim, you must make the original shipping cartons and packing available for inspection."

The shipment arrived badly damaged. PSL's president called Federal Express's 800 telephone number and was repeatedly told that no inspection was necessary, and that after PSL had the equipment repaired, it should submit a claim for the amount of repair expenses. PSL paid $17,450 to have the equipment repaired, and submitted a claim for that amount. Federal Express denied the claim because the equipment had not been inspected before it was repaired. Four months of repeated entreaties produced no change in Federal Express's position. Having been told "the only way FedEx pays claims like this is if you sue us," PSL reluctantly did so.

Six weeks before the scheduled trial date, Federal Express sent PSL a check for $18,409.45 (the $17,450 costs of repair, plus a refund of the $959.45 originally charged to ship the equipment). By that time PSL had incurred more than $78,000 of attorney fees. It therefore proceeded to trial on its causes of action for breach of contract and recovery of attorney fees based upon breach of the implied covenant of good faith and fair dealing. The jury found that Federal Express breached its contract with PSL, and also breached "the duty of good faith and fair dealing it owed to [PSL] by unreasonably denying the claim." The jury awarded PSL $78,027.08 representing "the amount of attorney's fees ... [PSL] reasonably incurred to collect the benefits due under the contract." The jury also awarded PSL punitive damages of $1.5 million. The trial court denied Federal Express's motion for judgment notwithstanding the verdict, but it conditionally granted a new trial unless PSL agreed to accept only $600,000 of punitive damages. After PSL consented to this reduction, Federal Express perfected this timely appeal.

REVIEW

Federal Express advances a number of contentions centered on the argument that federal law limited PSL's damages to recovery of no more than PSL's original claim for repair costs of its equipment, which Federal Express paid. This case should never have been tried because PSL was seeking forms of relief under California law that are precluded by federal law. The Airline Deregulation Act of 1978(ADA) and two decisions of the United States Supreme Court interpreting the ADA establish that Federal Express cannot be made to pay for more than the declared value of the equipment. The same result is also compelled by the federal common law doctrine limiting a carrier's liability to the value of a shipment declared by a shipper to the carrier. Anything more than the amount of PSL's repair costs, which Federal Express paid prior to trial, cannot be recovered in a California court. As we explain, both of the grounds cited by Federal Express support its argument.

I

The ADA enacted by Congress in 1978 largely deregulated air transport service within the United States. Congress determined that the quality and efficiency of air carrier service would be better promoted by relying on competitive market forces instead of the existing system of pervasive federal regulation. A major congressional concern was that carriers should not be burdened with conflicting state laws and policies that would have adverse economic consequences on the goal of increasing competition among carriers. (See 49 U.S.C. § 40101(a)(6); H.R. Conf. Rep. No. 95-1779, 2d Sess., 1, 53 (1978) U.S.Code Cong. & Admin.News 1978, 3737, 3773; American Airlines, Inc. v. Wolens (1995) 513 U.S. 219, 222, 228, 230, 115 S.Ct. 817, 130 L.Ed.2d 715; Morales v. Trans World Airlines, Inc. (1992) 504 U.S. 374, 378-379, 112 S.Ct. 2031, 119 L.Ed.2d 157.) To avoid state frustration of its purposes, Congress included a provision preempting conflicting state law. In its current version, the provision reads in pertinent part: "[A] State ... may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of an air carrier...." (49 U.S.C. § 41713(b)(1).) The United States Supreme Court has twice considered the scope of this provision.

In Morales v. Trans World Airlines, Inc., supra, 504 U.S. 374, 112 S.Ct. 2031, the attorneys general of seven states notified airlines that they would enforce certain nonstatutory "guidelines" related to the content of the airlines' advertising concerning frequent flyer programs and overbooking. The court held the guidelines "relat[ed] to" fares and were thus preempted. The court noted the wide and inclusive scope of the preemption provision; the statute was described as having an "`expansive sweep'" granted by "`broadly worded'" language that is "`deliberately expansive'" and "`conspicuous for its breadth.'" From this language the court concluded "State enforcement actions having a connection with, or reference to, airline `rates, routes or services' are preempted" even if consistent with federal law. (Id. at pp. 383-384, 386-387, 112 S.Ct. 2031.) The court further concluded that the states threatened action against what it termed "fare advertising" related to the rates charged by the airlines and was therefore preempted. (Id. at pp. 387-391, 112 S.Ct. 2031.)

In American Airlines, Inc. v. Wolens, supra, 513 U.S. 219, 115 S.Ct. 817, members of an air carrier's frequent flyer program brought suit in state court alleging that a change in the way the program was administered constituted a breach of contract, and violated an Illinois consumer fraud statute. Refusing to retreat from the broadly inclusive reading given the preemption provision in Morales, the court held that preemption was not restricted to matters that were "essential" to airline operations. "Nonessential" matters were also preempted if they "relate[d] to" the objects of the preemption provision. (Id. at p. 226, 115 S.Ct. 817.) The Illinois statute could not be employed because it was intended "to guide and police the marketing practices of the airlines," a matter "le[ft] largely to the airlines themselves, and not at all to States" by the ADA. (Id. at p. 228, 115 S.Ct. 817.)

The breach of contract part of the action, however, was not a "state-imposed obligation" and was thus not preempted. (American Airlines, Inc. v. Wolens, supra, 513 U.S. 219, 228-229, 115 S.Ct. 817.) Helpful to understanding what is and what is not prohibited to state involvement is the distinction between what the parties bargain for and what is externally imposed upon that bargain by a state. Terms, conditions, and remedies offered by the carrier and accepted by the customer qualify as "privately ordered obligations," and therefore are not enacted or enforced by the state. (Id., 513 U.S. 219, 228-229, 115 S.Ct. 817.) "A remedy confined to a contract's terms simply holds parties to their agreements ... [and] business judgments ...." (Id. at p. 229, 115 S.Ct. 817.)

These considerations persuaded the United States Supreme Court to formulate the following rule—the preemption provision "permits state-law-based court adjudication of routine breach-of-contract claims" although it "stops States from imposing their own substantive standards with respect to rates, routes, or services, but not from affording relief to a party who claims and proves that an airline dishonored a term the airline itself...