US Supreme Court Constricts Carmack Amendment

The Facts

This dispute began in China when Regal-Beloit Corp. and Victory Fireworks, Inc. (collectively the "cargo owners") delivered cargo to Kawasaki Kisen Kaisha, Ltd., and its agent K Line America, Inc. (collectively "K-Line") for transport to inland destinations in the United States. All parties agreed that the relevant contract terms governing shipping were included in the four through bills of lading issued from K-Line to the cargo owners. The fact that "through" bills of lading were issued was the key consideration in the Court's conclusion.

As described by the Court, a through bill of lading "covers both the ocean and inland portions of the transport in a single document." Id. at *18–20, quoting Norfolk S. Ry. Co. v. James N. Kirby, Pty Ltd., 543 US 14, 25–6 (2004). In the bills, K-Line was given authority to subcontract any phase of the journey. The bills also provided that the Carriage of Goods by Sea Act (COGSA) terms would apply to the entire journey, any dispute would be governed by Japanese law, and venue for any action stemming from the carriage would be in Japanese court in Tokyo.

The cargo was carried safely across the Pacific Ocean where it was met in California by Union Pacific for rail carriage for the rest of the journey. During its trip, the Union Pacific train derailed in Oklahoma, allegedly destroying the cargo onboard. The cargo owners brought suit in California state court, where the US portion of the carriage began, and after removal to federal district court, K-Line argued that the suit should be subject to the Tokyo forum selection clause in the through bills of lading, and should be dismissed from US court.

The Ruling

The district court granted the dismissal, and the Ninth Circuit reversed, stating that the Carmack Amendment applied to inland portions of international shipments under a through bill of lading, trumping the parties' forum selection clause. The Ninth Circuit joined the Second Circuit's interpretation that Carmack applies to all inland portions of rail carriage, while opposing the conclusions of the Fourth, Sixth, Seventh, and Eleventh Circuits. The Supreme Court granted certiorari to clear up this split.

The Court first notes that COGSA does not limit a party's ability to adopt forum selection clauses. COGSA governs the terms of bills of lading issued by ocean carriers engaged in trade between the United States and foreign ports. If COGSA were to apply to the through bills issued by K-Line, then the forum selection clause would be valid.

The Court next discuses the Carmack Amendment's coverage of bills of lading issued by domestic rail carriers. The Carmack Amendment imposes liability for any damage to cargo on rail carriers that receive property for transportation and then transport that property within the United States. Liability for cargo damage is imposed on every rail carrier used during the transportation, regardless of fault. Carmack also includes a limitation on where parties may bring suit against a rail carrier. A suit brought under Carmack may be brought in federal or state court and in all cases involving an originating rail carrier, in the judicial district in which the point of the cargo journey's origin is located. In this case, the cargo owners argued that Carmack's venue restrictions preempted the forum selection clause in K-Line's bills of lading, making suit in California District Court a viable forum over Tokyo.

Whether COGSA or Carmack applies is the underlying issue in this case. COGSA would impose no limitations on venue selection, and thus the terms of the bills of lading would control, and suit must be brought in Tokyo. If Carmack applied, however, its restrictions on venue would overrule the bills' forum selection clause and suit in California, not Tokyo, would be justified.

The Court held that because Carmack had no applicability in this case, COGSA terms would control, and the Tokyo forum clause in the through bills of lading would be enforced. A shipment of goods originating overseas, operating under a through bill of lading, will not be subject to the Carmack Amendment, and the terms of the bill of lading will control.

The Court reached this conclusion by breaking down important sections of the Carmack Amendment sentence by sentence. It determined that Carmack only requires a "receiving" rail carrier to issue a bill of lading. A receiving rail carrier is defined as the initial carrier who receives the cargo at the journey's point of origin. Determining the journey's point of origin is critical to the analysis of whether or not a rail carrier will be classified as "receiving" and whether it must issue a bill of lading. It follows that if the domestic rail carrier is not receiving cargo at the journey's point of origin, it cannot issue a Carmack bill of lading, and thus the journey is governed by whatever bill of lading was in place before the rail carrier obtained the cargo.

The Precedent

The Court cites precedent in three past cases to back up the assertion that only the receiving rail carrier must issue a bill of lading. See St. Louis, I.M.&S.R. Co. v. Starbird, 243 US 592 (1917); Mexican Light & Power Co. v. Texas Mexican R. Co., 331 US 731 (1947); and Reider v. Thompson, 339 US 113 (1950). Starbird provides that if every rail carrier were allowed to issue a bill of lading, each journey would include multiple bills, making Carmack's purpose of streamlining the shipping process and imposing liability for all carriers moot.

In Mexican Light, two bills of lading were issued at different junctures of the cargo's journey. The second bill differed from the initial bill that was issued at the journey's point of origin. The Court held that Carmack voided the second bill because it did not represent the start of a new shipment. It upheld the conclusion that only a receiving rail carrier must issue a Carmack compliant bill of lading.

The Reider case presented the fact that a through bill of lading was not issued at the international point of origin, so the Court held that the cargo's original journey terminated at the first US port, and the first rail carrier to receive the cargo would need to issue a Carmack-approved bill of lading. Because a through bill of lading was not originally issued, a new journey was to be initiated at the US border, and a bill of lading following Carmack rules was required.

The conclusion the Court reaches from these three cases illuminates the understanding that Carmack only applies when a receiving rail carrier is required to issue a bill of lading. It will not matter whether a rail carrier issues a bill of lading for Carmack to apply, the only question is whether a rail carrier was required to issue a bill. To this end, the Court concisely states:

It follows that Carmack does not apply if the property is received at an overseas location under a through bill that covers the transport into an inland location in the United States. In such a case, there is no receiving rail carrier that "receives" the property "for [domestic rail] transportation," § 11706(a), and thus no carrier that must issue a Carmack-compliant bill of lading. The initial carrier in that instance receives the property at the shipment's point of origin for overseas multimodal import transport, not for domestic rail transport.

Regal-Beloit at *25.

Carmack does not apply in the present case because, when Union Pacific obtained the cargo in California, it was not a "receiving" rail carrier as that term is to be understood under Carmack. The Court notes that:

A carrier does not become a receiving carrier simply by accepting goods for further transport from another carrier in the middle of an international shipment under a through bill.

Id. at *26. These carriers are simply one connecting piece operating under the original through bill of lading.

The Court notes that issuing two bills of lading for the ocean and land portions of the shipment would lead to a host of problems. First, this would defeat the purpose of the "through" bill of lading. These through bills are popular for their singular efficiency in contracting for both land and sea voyage in one transaction. Second, if two bills of lading were required, one set of rules (COGSA) would apply when the cargo is at sea, and another set (Carmack) would apply when the journey turns land-based. This defeats the purpose of singularity and efficiency set out in both COGSA's and Carmack's terms. Third, international shipping would be greatly affected if two different bills were required because rail carriers would be forced to search the cargo and make sure that no damage has occurred on the sea voyage before the rail carrier would be willing to take on liability for the land portion. This would disrupt two entire industries and cause havoc at seaports. Finally, requiring two bills would undermine sophisticated parties' ability to contract in the most efficient way they see fit.

In passing, the Court notes that the United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea, a.k.a. the "Rotterdam Rules," have not yet been ratified by the US government. These rules would allow the inland portion of an international shipment to be governed by different regulations than the ocean leg.

To conclude the Court's thought process: the cargo owners contracted with K-Line using through bills of lading for the shipment of their goods from China to midland America, K-Line was the receiving carrier of those goods in China, not in the United States, and thus not subject to Carmack's jurisdiction or requirement. Union Pacific obtained the cargo in the United States, but it was not a "receiving carrier" as that term has now been understood by this Court. Because there is no receiving carrier in the United States, Carmack would not apply. The terms of the bills of lading issued by K-Line would control; COGSA would apply; and because COGSA does not limit venue options, the Tokyo forum-selection clause was valid.

Conclusion

The significant circuit split over these issues has now been resolved, a benefit in itself to our justice system. However, American cargo importers should beware—your cargo damage suits are now less likely to be resolved in the United States. It is undoubtedly true that smaller claims will be nearly impossible to prosecute in foreign tribunals. In this instance, clarity in the law has created a hole that will swallow all smaller damage claims occurring on American soil caused by inland carriers.