On March 10, 2009, the U.S. District Court for the Southern District of Florida in a case entitled "Eli Lilly and Company, et al. v. Air Express International USA, Inc. d/b/a DHL Global Forwarding, et al." filed under Case No. 06-23047-CV-MOORE, found that plaintiffs Eli Lilly and its insurers could recover full damages, approximately $10 million, from defendant air carrier DHL.
Background
In explaining how the Court arrived at this ultimate decision, it is necessary to explain some background facts. Eli Lilly is a recognized leader in the manufacture and sale of insulin, a hormone used to treat diabetes. According to Eli Lilly, it is critical that insulin follow certain protocols for its manufacture, storage and transportation. In particular, insulin is not supposed to be exposed to below-freezing temperatures (i.e. below +32F or 0C). During air transportation from Europe to the United States, a certain shipment of insulin was exposed to below-freezing temperatures at some point during handling at Munich International Airport. The parties disputed the amount of insulin exposed to improper temperatures and the length of that exposure. The air carrier argued that only a small portion of the insulin was exposed to improper temperatures because only one of seven air containers showed a temperature drop below 0C. Eli Lilly argued that its own temperature sensors (commonly referred to as "TempTales") which were placed inside the air carrier's containers showed that seven of eight containers suffered below freezing temperatures. Upon receipt of the insulin at its facility in Indianapolis, Indiana, Eli Lilly confirmed by its own investigation that seven of eight containers suffered below freezing temperatures and destroyed the cargo almost immediately. Eli Lilly did not conduct any testing to confirm that the insulin had suffered any evidence of physical loss or damage. Eli Lilly ultimately submitted a claim in excess of $10 million to its insurers which was paid and its insurers sought recovery by way of subrogation.
Fear Of Loss vs. Actual Loss
Pharmaceutical companies are understandably careful not to put any drugs on the market which are questionable in any way. Pharmaceutical companies are so careful that they will simply dispose of drugs even if there is a "fear" or "suspicion" that the drugs have been harmed in some way. Carriers on the other hand have been reluctant to recognize these "fear of loss" claims because the international treaties governing the transportation of cargo by sea or air tend to characterize "damage" or "loss" as being "physical" or "actual".
In disposing of the air carrier's argument that Eli Lilly did not present any admissible evidence that the insulin suffered physical loss or damage, the Court first relied upon Eli Lilly's own TempTales to confirm that seven of eight containers were exposed to below-freezing temperatures. The Court noted the affidavit of a witness from the supplier of TempTales who confirmed that each of TempTales "thoroughly tested and certified for accuracy" and were designed for single use and were "returned for the supplier for re-testing before being re-used." Second, the Court agreed with Eli Lilly's expert witness who stated in his report that "insulin that has been exposed to sub-freezing temperatures may undergo subtle changes that are not detectable by physical inspection. In order to adequately test the exposed insulin to determine its integrity, the insulin best be destructively tested." The Court therefore concluded that the insulin was effectively unmarketable irrespective of whether any "actual" damage occurred. The fact that the insulin was "unsaleable" was enough for the Court to conclude that Eli Lilly had proved that the insulin had arrived "damaged" for the purposes of establishing a prima facie case against the air carrier.
Inter-Company Transfer Price Sufficient Measure Of Damages
Having concluded Eli Lilly established its prima facie case and that the air carrier was liable for the loss, the Court then addressed the measure of damages. The traditional measure of damages in a cargo case is the difference in fair market value of cargo in good condition at the port of destination, and the fair market value of the cargo in its damaged condition at the port of destination. In this case, Eli Lilly effectively owns a monopoly on the purchase and sale of insulin so there is no open market. Eli Lilly presented an inter-company price list as its measure of damages. In other words, Eli Lilly calculated its damages based upon an internal price list used for the purchase and sale of insulin between affiliated companies. From the opinion, it is unclear if Eli Lilly even presented evidence of the replacement cost or the manufacturing cost of the insulin.
It is interesting to note that the destroyed insulin was replaced with existing inventory and the inventory was replaced through Eli Lilly's normal manufacturing process. Thus, Eli Lilly never specifically sent a separate shipment to replace the destroyed insulin.
Rather than rule that the proper measure of damages was replacement or manufacturing cost, the Court surprisingly ruled that Eli Lilly was entitled to the transfer price between affiliated companies. The Court credited the testimony of an Eli Lilly tax manager who testified that all transactions between affiliated companies are conducted at arms length and that the pricing was calculated to include the manufacturing costs, research and development and a profit allocation.
This particular conclusion is intriguing in that it is one of the few cargo decisions which effectively confirms that a shipper or consignee is entitled to certain level of profit in its pricing.
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