Tuesday, January 19, 2016

CP cries "antitrust!" to USDOJ

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Bill Ackman Bill Ackman

In the latest twist in the ongoing saga of Canadian Pacific’s increasingly hostile pursuit of a steadfast Norfolk Southern as a takeover target, CP is accusing several unnamed Class I railroads of joining forces to block the transaction, and prevailed upon its attorneys to submit a letter to the U.S. Department of Justice claiming that such actions are in violation of antitrust laws, illegal and anticompetitive.

The letter to the Department of Justice, submitted by Kevin J. Arquit and Matt J. Reilly of Simpson Thacher & Bartlett LLP, asks the department “to review recent actions by a number of major U.S. railroads who have stated publicly that they are organizing a collective campaign to block significant mergers in the railroad industry, including CP’s proposed offer for Norfolk Southern Corp. According to statements reported in the press, some of these railroads are concerned about the damage that increased competition from a CP-NS combination would have on “shareholder value” and on their own profitability.”

“[I]t is unfortunate that the company must take the very serious step of writing to the Department of Justice but ultimately concluded the unprecedented action of major competitors organizing to block a new entrant from enhancing competition to the U.S. merited the attention of the antitrust authorities,” CP said. “CP has confidence in the Surface Transportation Board and its regulatory process to analyze CP’s proposal impartially once an application is filed, and is disappointed that others appear not to share such confidence and have resorted to collective action to ensure no merger occurs.”

CP’s letter is addressed to William Baer, Assistant Attorney General, Antitrust Division, and Deputy Assistant Attorneys General, Antitrust Division David Gelfand and Renata Hesse. Following is the complete text, with emphasis placed on key points:

We are writing on behalf of Canadian Pacific Railway with respect to press statements from some of the largest U.S. railroad companies indicating that they are working closely with each other to block Canadian Pacific’s proposed merger with Norfolk Southern. We are deeply concerned that these actions are being taken for the primary purpose of restraining trade in violation of Section 1 of the Sherman Act, and not for any legitimate purpose that would benefit the public or enhance competition in the U.S. railroad industry.

Canadian Pacific announced a proposal to acquire Norfolk Southern in November 2015, and has made several revised proposals since then, each of which has been rebuffed by the Norfolk Southern board. As Canadian Pacific has stated repeatedly, it believes its proposal to acquire Norfolk Southern will have a significantly pro-competitive outcome. There is minimal overlap between the track networks of the two companies, and instead the merger would be a market extension, creating an end-to-end transcontinental solution for customers in large parts of the U.S. and Canada. This point-to-point connectivity would increase the efficiency of the existing infrastructure—by allowing through-shipments across and between both countries—and introduce options for rerouting traffic around critical areas of congestion like Chicago. Importantly, Canadian Pacific has publicly committed to unilaterally cease using “bottleneck pricing” for customers, instead quoting rates for whichever gateway a shipper requests, and also provide “modified terminal access” to allow other railroads to use CP tracks in terminal areas where CP’s service is not adequate and/or rates are non-competitive. All of these aspects of CP’s proposal should significantly enhance competition and improve rail efficiencies for customers everywhere.

In response, a number of the large (Class I) U.S. railroads appear to have begun a concerted effort to block CP’s proposed acquisition through a widespread campaign of meetings and solicitations with customers, the media, and other interested parties. The fact that these major railroads have joined to work so feverishly against CP’s proposal speaks volumes about their concerns regarding the impact the transaction would have on their competitive position. In fact, one CEO was quoted as saying that the merger “could actually be destructive of [its] shareholder value,” and another CEO publicly opined that a CP/Norfolk Southern merger “would make it hard for . . . CSX to survive alone.” Whether or not that latter statement is accurate, it really illustrates the level of enhanced competition these other railroads fear from a CP/Norfolk Southern merger. They are—with good reason—concerned that the proposed Norfolk Southern acquisition will lead to a more competitive industry: with the combined efficiencies, cost-savings, and the upgraded competitive advantages, the combined companies will be much better positioned to price competitively, improve service quality, and create the type of competitive environment that CP’s competitors are afraid of. But fear of competition does not justify the collective action of competitors. As the Department of Justice has said on many occasions, the antitrust laws are designed to protect consumers against unfair actions in restraint of trade, not to protect companies against price and other competition from their competitors.

The collective communication strategy of these competitor railroads is also likely illegal because it is anticompetitive: it is an agreement to collectively work together to prohibit the introduction of competition by a new competitor, which is akin to a group boycott in principle and intended effect. Such conduct is plainly anticompetitive and unlawful. At a minimum, they are not protected by Noerr-Pennington or any other defense or immunity. Indeed, Noerr-Pennington does not apply here for at least several reasons. First, the collective action has arisen prior to any transaction with Norfolk Southern having been agreed, let alone any application filed with a government agency, and thus before there was any government to be petitioned, before any judicial or administrative proceedings had begun, and before there was any need to protect freedom of speech or guarantee access to government. And although certain interested parties have submitted comments to the Surface Transportation Board concerning the proposed merger, the Board has made clear that “[a]t this time, there is no proceeding before the agency related to a merger of CP and NS.” Indeed, in response to several of these comments, the Board indicated that it would be premature for it to take a position on the proposed merger since no application has been filed, and thus “there are no proceedings . . . related to this potential merger.” In any event, the recent public statements by some of the railroads strongly suggest pre-existing collective agreement and action, such as the statement by one CEO that the competitor railroads have met more than once recently, but that they have not reached a “new consensus” because “we were all against mergers to begin with.” Any competitor communications that occurred so far in advance of any acquisition of Norfolk Southern would not qualify for immunity because they necessarily occurred outside the umbrella of protection afforded by Noerr-Pennington.

Second, Noerr-Pennington does not immunize statements to, and the petitioning of, private parties—parties such as customers, shareholders and the media. Here, it is clear that the competitor railroads are engaged in an active and coordinated campaign, both in the press and, according to comments in the press, “behind the scenes,” against the proposed Norfolk Southern acquisition—and appear to have collectively agreed to use the same talking points with customers, shareholders, and the media. Any agreement to influence these private parties is not protected by the Noerr-Pennington doctrine, and the collective efforts of these competitor railroads are intended to and (if left unchecked) might have the desired effect of preventing competition.

We believe strongly that Canadian Pacific’s proposed acquisition of Norfolk Southern would benefit competition and provide better services to customers at competitive prices, and we think that the actions by CP’s competitors in opposition to that goal merit a serious and impartial review by the U.S. government authorities responsible for antitrust enforcement.

Editor’s note: For further information, see Railway Age Capitol Hill Contributing Editor Frank N. Wilner’s analysis, “CP-NS: Government advocacy is protected speech.”CP-NS: Government advocacy is protected speech.”

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