UP’s Court Challenge to CPKC: More Than Meets the Eye

Written by David Peter Alan, Contributing Editor
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On May 3, Union Pacific (UP) filed a case in the District of Columbia Circuit (D.C. Circuit), captioned Union Pacific Railroad Company v. Surface Transportation Board and United States of America (Case No. 1125-23). UP challenged the Surface Transportation Board’s (STB’s) approval of the acquisition by Canadian Pacific (CP) of Kansas City Southern (KCS), which formed the new railroad CPKC “on the grounds that the agency action is in excess of the Board’s authority, that it is arbitrary, capricious, an abuse of discretion, and otherwise not in accordance with law, and that it is not supported by substantial evidence.” UP sought relief as follows: “Union Pacific requests that this Court vacate the order under review and grant such additional relief as may be necessary and appropriate.”

By now, the word of that court challenge has gotten around. Railway Age Editor-in-Chief William C. Vantuono reported the court filing on May 7 in a story headlined UP Challenging CPKC Merger—After the Fact, and he also summarized some of the important points in the Board’s March 15 decision and commented on UP’s action. The next day, Railway Age Capitol Hill Contributing Editor Frank N. Wilner called the challenge a “shockah” (as they say in Boston) and noted in his headline that “UP Pursues Self Interest.” He began by saying: “Is this the same UP that is so zealously fighting shipper efforts to increase competition by assuring a minimum of two-railroad competition (reciprocal switching, also known as competitive access) where prior mergers, including its own, have eliminated for shippers any effective transportation alternatives to the sole-surviving railroad?” Later in his commentary, Wilner traced the history of UP’s political strength during the past several decades, both at the STB and in the halls of Congress. He also said: “In defense of UP, the seeking of monopoly is an understandable human condition” and concluded: “It ain’t personal. It’s business. And that shouldn’t be a ‘shockah.’”

Wilner’s assertion about monopolies is a subject of debate, but commentators are still having their say about this apparently strange turn of events, and we may yet hear from fellow Contributing Editor Jim Blaze about the economic fallout that can reasonably be expected from the exit of KCS and the entry of CPKC. For his own part, Vantuono said: “Frankly, UP’s after-the-fact, after-the-wedding-reception court filing puzzles me. What’s the point?”

After almost 42 years of practicing law, I’m puzzled, too, but not merely because UP filed its Petition to the Circuit court when it did. There is more to it. Wilner seems to be on the right track, but certain aspects of the case do not appear to make much sense, even though UP might have found a hook on which to hang its corporate hat.

A Look at the Decision

UP’s Petition cited some statutes as the basis for the DC Circuit’s jurisdiction over the case and included a list of 261 persons who had been served with the document, including STB General Counsel Craig M. Keats and U.S. Attorney General Merrick Garland, but did not specify any legal argument to support its request for relief. UP did say: “The petition is timely because UP is seeking review within 60 days after entry of the order under review.” The STB decision in Case No. FD-36500, totaling 212 pages, is annexed to the Petition as “Exhibit A,” the only exhibit that UP filed.

In his May 7 report and commentary, Vantuono included a link to UP’s court filing, all 234 pages of it, and almost all of which is the STB decision. I reviewed it, and it is certainly thorough. It begins: “This decision authorizes the combination of the Canadian Pacific Railway system with the Kansas City Southern Railway system. CP and KCS are Class I railroads, but individually they are far smaller than any of the other five Class I railroads with which they compete for business. Even after they merge, the combined system—to be known as Canadian Pacific Kansas City (CPKC)—will continue to be the smallest Class I railroad. This merger will create the first railroad providing single-line service spanning Canada, the United States, and Mexico. Among many other new single-line options, this new direct service will facilitate the flow of grain from the Midwest to the Gulf Coast and Mexico, the movement of intermodal goods between Dallas, Tex., and Chicago, Ill., and the trade in automotive parts, finished vehicles, and other containerized mixed goods between the United States and Mexico” (at 3, footnote omitted, page numbers refer to original document pagination, not PDF pagination). The Board went on to explain other benefits of the acquisition: “The Board expects that this new single-line service will foster the growth of rail traffic, shifting approximately 64,000 truckloads annually from North America’s roads to rail, and will support investment in infrastructure, service quality, and safety. The transaction is also expected to drive employment growth across the CPKC system, adding more than 800 new union-represented operating positions in the United States” (Id.). There is also some recognition of benefits for Amtrak: “Of additional importance, the merger will foster new National Railroad Passenger Corporation (Amtrak) passenger rail opportunities, as Applicants have committed to support Amtrak’s existing plans for expanded service on the new railroad’s lines. These commitments, along with CP’s strong record as an Amtrak host railroad, have won Amtrak’s endorsement of the merger” (Id.).

The final paragraph of the “Summary” portion of the Decision foreshadows a potential controversy: “The Board recognizes that some in the shipping community and among antitrust commentators are not satisfied with the consolidation among Class I railroads that occurred following the Staggers Rail Act of 1980, and the Board itself has done its best to address how the Class I railroads behave today. Indeed, there is an ongoing debate about whether there has already been too much consolidation in the rail industry. Regardless of which side one takes in that debate, the Board is charged by Congress with reviewing the proposed merger in light of the state of the industry as it actually exists. Given the current realities and the limited opportunities to provide meaningful competition for the largest Class I railroads, as outlined above and discussed at length in this decision, the Board concludes that this transaction should improve rather than degrade the performance of the industry. It is for these reasons that the Board approves the merger” (at 5).”

As I shall explain later, Board member Robert Primus is now one of those “antitrust commentators” and said so in his “separate expression” included in the decision.

In the Introduction (at 5-13), the Board sets out the nature of the transaction and the network that CPKC would operate, the procedural history, environmental review, oversight, and other matters. The “Preliminary Matters” section (at 13-17) mentions issues including those raised by Metra (which operates local trains in Chicagoland), concerning how new freight operations could affect the communities it serves. The “Overview” section (at 18-20) begins with an explanation of the “Public Interest Standard” governing Board decisions, including a discussion of the criteria which the Board used in imposing conditions on the transaction. The “Discussion and Conclusions” section (at 21-172) begins by spelling out certain public benefits and quantitative benefits associated with the Transaction.

Even a thorough summary of the decision lies far beyond the scope of this article, so there is room only for a brief summary. The document concentrates on specifics about economics, transportation on many of the lines and service points on the former CP and KCS networks, and explains a number of conditions that accompany the Board’s permission for the merger to go forward. The Board paid particular attention to the situations in the Chicago and Houston areas, and also to a number of gateways for freight interchange. There is some discussion of the Metra situation, and about a proposal to add service on Amtrak, including a new train between Meridian, Miss. and Dallas on the Meridian Speedway to Shreveport (historically owned by the IC) and the Wylie Sub the rest of the way. (Author’s note: former Amtrak Board Chair and Meridian Mayor John Robert Smith had described such a proposed route to me in 2001, when I visited his city, with no further action until now.) The Decision also deals with Labor, Financial, Environmental, and Safety matters, as well as community concerns. The brief Conclusion and Order (at 172-75) marked the end of the main body of the document.

Call for Cooperation with Communities

Board Member Karen Hedlund issued a concurrence (at 175-76). She said: “I concur in the Board’s decision approving the Transaction, as I believe that it strikes an appropriate balance of addressing potential harms while not undermining potential public benefits—given current circumstances and conditions. However, I wish to comment further specifically on concerns various communities have raised about grade crossing delay and the deterioration of emergency response times due to blocked crossings, and their requested mitigation to improve overall traffic flow” (at 175).

Hedlund specifically mentioned conditions in Chicago and Houston, and called on railroad management to work with the communities to mitigate the problems caused by blocked grade crossings and by congestion generally. While reaffirming that she believes that the Transaction was “on balance, in the public interest,” she said: “However, future events could affect my view of this public interest determination, potentially weighting in favor of a more robust exercise of the Board’s conditioning authority in this proceeding—perhaps even beyond what the Board’s general policies or practices regarding the imposition of merger conditions would otherwise suggest” (at 175, n.2).

“Shockah” of a Dissent

Board member Robert Primus issued a strong dissent (at 176-186). He ended his first paragraph by saying: “Not only do I not share Applicants’ optimism, but I disagree with the Board’s approval of this transaction. According to Applicants, there will be no detriment to the public interest—no disruption of service, no significant harm to surrounding communities, and no consequences from allowing even further concentration of economic power in the freight rail industry. If it all sounds too good to be true, we are in agreement. Not only do I not share Applicants’ optimism, but I disagree with the Board’s approval of this transaction” (at 177, footnote omitted). He then criticized his colleagues for not enforcing more-recent and more-stringent rules: “More than a year ago, I dissented from the Board’s decision to waive its current regulations and instead rely on the regulations in effect before July 11, 2001 in evaluating this transaction. I continue to disagree strongly with that decision. In choosing to consider this transaction under the pre-2001 rules, the Board forfeited its opportunity to impose the appropriate degree of regulatory scrutiny—a much greater degree than the pre-2001 rules provide. As I stated then, special treatment for this proposed merger between Class I railroads runs counter to the Board’s statutory responsibility to review such major mergers and to protect the public interest. See 49 U.S.C. §11324(c). KCS has grown in size and significance since 2001, this is the very type of transnational transaction the current merger rules contemplate, and the Board should have evaluated it under the more robust standards of the current rules” (Id.).

Primus then summarized his objections to the transaction: “Given this fundamental problem, my objections to the transaction approved today are threefold. First, the transaction will further concentrate control over the nation’s railroads, which have already experienced massive consolidation in recent decades—a development that has not been favorable to rail customers or the network as a whole. Second, in the absence of a service assurance plan (which would have been required under the current rules), the decision does not adequately guard against merger-related service disruptions, at a time when rail service in general has been historically poor. Third, the transaction will harm communities along the path of the newly combined network. Because these detriments to the public interest outweigh the expected benefits, I dissent” (Id.).

He went on to explain the problems associated with increasing concentration in the railroad industry (at 177-81) with a look at vertical mergers, which he warned expand a railroad’s monopoly power in the region where it operates. Addressing “Concentration of Market Power” (at 179-81), he said: “The Biden Administration has raised concerns about concentration of market power in U.S. industries and called on agencies to be more active in guarding against excessive concentration. Executive Order 14,036, Promoting Competition in the American Economy, observes that ‘decades of industry consolidation have often led to excessive market concentration,’ that the consolidation has been harmful to workers and consumers, and that ‘Federal Government inaction has contributed to these problems’” (at 179, citation omitted). Then he went on to say that the Antitrust Division of the Department of Justice (DOJ) “shares the Board’s serious concerns about increasing consolidation in the [railroad] industry.” He continued: “As DOJ explained, ‘[t]he consolidation of Class I railroads presents substantial concerns, including: (i) lessened competition among Class I railroads to attract new industry locations; (ii) reduced incentive to invest in research and implementation of important new technologies such as Positive Train Control; and (iii) the danger of industry-wide understandings and agreements that become more likely as the industry becomes more concentrated’” (Id.).

In his analysis, Primus mentioned Antitrust policy, labor impacts (lower wages, worse working conditions, and impairment of organized labor), capital investment and productivity impacts (less money spent on capital investment and more on dividends and stock buybacks), and other negative effects, saying: “This tremendous consolidation has had predictably negative effects on rail customers, employees, and consumers” (at 180), especially shippers. He also criticized the Service Assurance Plan connected with the transaction as inadequate to protect against service disruptions (at 181-83).

Finally, Primus addressed five topics concerning “Impacts on Adjacent Communities” (at 183-86): Air Pollution, Noise and Vibration, Grade Crossing Delays, Rail Traffic Increases Below NEPA [National Environmental Policy Act] Thresholds, and Environmental Justice. In his Conclusion, he said: “For the sake of the nation’s rail network and the many people who depend on it, I hope that Applicants’ claims to a perfect merger will be matched in reality. But for all the reasons stated above, I conclude that this transaction is not consistent with the public interest, and I respectfully dissent” (at 186).

Back to the Court Case, and Another “Shockah”

Before the “separate expressions” filed by Hedlund and Primus, the Board concluded with its Order (at 173-75), which included some deadlines. Paragraph 15 (at 174) states: “Petitions for reconsideration of this decision must be filed by April 4, 2023. Requests for stay must be filed by March 27, 2023.” Paragraph 16 (at 175) states: “This decision will be effective on April 14, 2023.” Deadlines of this sort are sometimes called a “rocket docket” in legal circles, but 30 days’ notice for a change to become effective is not uncommon, and it matters whether UP filed a Petition to Reconsider or requested that the STB stay the actual implementation of the merger, as part of its preparation for a court appeal.

I reviewed the post-decision filings with the Board in the matter at issue, Docket No. FD-36500. There were 13 “Section 5 summaries” of meetings released with the Decision on March 15, but there were no further filings until April 4, eight days after the deadline for filing a petition to reconsider the Board’s March 15 decision. There were 11 more filings through May 9, but none of them requested that the STB stay the implementation of the transaction. Rather, they concerned fine points of the conditions imposed by the Board, interchange points, freight service in Metra’s service area, and the like.

Rule 18(a) of the Federal Rules of Appellate Procedure governs motions for a stay, pending review by a circuit panel of the Court of Appeals. Subsection (1) states: “A petitioner must ordinarily move first before the agency for a stay pending review of its decision or order.” Under subsection (2), “a motion for a stay may be made to the Court of Appeals or one of its judges” but the motion must (A)(i): “show that moving first before the agency would be impracticable” or (A)(ii): state that the agency denied the motion or failed to afford the relief requested.

Without UP having requested a stay from the STB in a timely fashion, it is unclear what the D.C. Circuit court could do. On its face, it does not appear that the court could act on UP’s challenge to the Board’s decision, without proof on UP’s part that it would have been “impracticable” to make a motion to the Board for a stay. Courts generally require petitioners to “exhaust their administrative remedies,” a condition that would call for UP to have requested a stay from the STB first. There is a subtle difference between the legal term “impracticable” and the meaning in common parlance of “absolutely impossible,” and the court could conceivably proceed on UP’s Petition, if the judges wish to do so.

Under the facts that now appertain, this, in itself, might be “impracticable.” The transaction was implemented on April 14, as the Board had ordered. Former FRA Administrator Ronald L. Batory, who acted as Trustee for the KCS voting stock, advised the STB in a letter filed that day that he had transferred the stock and terminated the voting trust. That, in effect, terminated KCS as a corporation. On the operating side, CPKC is already making changes. Executive Editor Marybeth Luczak reported here in Railway Age on May 11 that the newly created railroad has launched “Mexico Midwest Express Intermodal Service.”

In theory, at least, the D.C. Circuit could accept UP’s Petition and reverse the STB’s decision. Robert Primus dissented, saying that the merger goes against the public interest. Even though Primus called for stricter regulation, rather than a more-lenient approach, an appellate court is more likely to accept a case for review when there was a dissent below, than when the decision was unanimous.

In practice, it seems “impracticable” to break CPKC up and restore CP and KCS (which no longer exists) to the way they were. Even if the court were to hold that the merger contravened public policy and/or that the STB exceeded its authority, it is difficult to see how the judges could fashion a remedy.

So why did UP file its Petition? Wilner explained that move as an expression of UP’s self-interest, an explanation which makes sense. UP absorbed a lot of railroads during the past few decades, including the C&NW, D&RG, Missouri Pacific and SP, the latter merger having caused a major operational meltdown after it occurred. This time, though, UP is opposing a merger, apparently inconsistent for an acquisitive firm, but understandable. This time, it’s another railroad’s acquisition, and not UP’s.

Was UP somehow firing a shot at the STB, an agency that has shown a degree of independence lately that it had not shown during the heyday of UP’s corporate power? Wilner highlighted the history of UP’s success during its merger-mania that could be described as a textbook example of a purportedly regulated firm capturing its regulator. Current Board Chair Martin J. Oberman does not seem so willing to have one of the railroads that his agency regulates call the shots. His performance and that of his members during the recent “Second Battle of Mobile” over future Amtrak service between there and New Orleans demonstrated that. Could the case at issue represent UP’s reaction to recent developments at the STB? I don’t know, and I certainly don’t know why UP did not first ask the Board for a stay.

Getting to the Supreme Court

Whatever the D.C. Circuit does, it appears likely that the case will go to the top. UP’s Petition is not against CPKC, but against the STB and the United States itself. If the D.C. Circuit issues a decision on the merits of UP’s arguments, which have not been briefed yet, it is difficult to fathom that the United States government would not appeal that action. If the circuit court declines the case, whether for lack of a stay or any other reason, UP will almost certainly petition the Supreme Court for review.

In the past, such a petition would probably have been considered an exercise in futility, but there have recently been changes at the Court. With the Trump appointees joining former dissenters like Clarence Thomas to form a 6-3 majority, the new majority are rapidly changing the legal landscape, including that of administrative law. If four members of the Court want to review UP’s case, they can do so, even if the effect of their review is not so much to grant specific relief to UP, but to set policy prospectively.

Administrative law is a relatively new field. Prior to the Great Depression of the 1930s and President Franklin D. Roosevelt’s efforts to mitigate its effects through his “New Deal” legislation that expanded the public sector by establishing new regulatory agencies, there were few such agencies. The STB’s predecessor, the Interstate Commerce Commission (ICC), was the first, founded in 1887 to regulate railroads. Then came the Federal Trade Commission (FTC) in 1916, and the Federal Radio Commission in 1927. The latter was created to curb new entrants into the broadcasting field because so many stations had been interfering with signals from other stations. The agency’s jurisdiction was expanded when it became the Federal Communications Commission (FCC) in 1934.

During the early days of the Roosevelt Administration, the “nine old men” on the Court (as they were often called) struck down the National Recovery Act and other regulatory legislation in cases like Panama Refining Co. v. Ryan, 293 U.S. 388 (1935) (the “hot oil” case), Schechter Poultry Corp. v. U.S., 295 U.S. 495 (1935) (the “sick chicken” case) and Carter v. Carter Coal Co., 298 U.S. 238 (1936). Roosevelt then threatened to “pack the Court” by persuading Congress to authorize an expansion of the Court and appointing more members. That plan was unpopular with the public and was never implemented, but the Court started to render opinions that were more favorable to regulatory bodies, like National Labor Relations Board v. Jones & Laughlin Steel Corp., 301 U.S. 1 (1937).

As regulatory agencies have proliferated since then, Congress and other policymakers have relied increasingly on those agencies’ expertise in their fields when promulgating policies, and have left much of the policy-making authority to the agencies themselves. The Court has often gone along with that scenario, as shown in Chevron USA, Inc. v. National Resources Defense Council, Inc., 467 U.S. 837 (1984). That case established the doctrine of “Chevron Deference” where courts recognize the expertise that agencies possess and defer to that expertise when the statute at issue unambiguously calls for that treatment. Courts have more discretion when a statute is unclear, ambiguous or lacks direct language.

The Court’s attitude toward Chevron Deference may be changing. Justices Clarence Thomas and Neil Gorsuch have written opinions opposing the concept, saying that it improperly takes authority away from judges and gives it to administrative agencies. There are cases before the Court that challenge Chevron Deference, and some states have abolished or restricted its use in the courts within those states.

Looking at the near future for the Court concerning administrative agencies, UP’s challenge might end up becoming a footnote to the history of administrative law, unless the Court decides to say something more substantial than it is expected to say within the next month or so, or at least before the end of next June. With or without an opinion from the Court on the matter at issue, there could be serious repercussions for agencies like the STB and the FRA, no matter how strong their technical expertise or their intentions to make life easier for the likes of freight shippers, railroad passengers or communities.

An Antitrust Crusader?

Since the Reagan Era in the 1980s, the Justice Department’s Antitrust Division has drawn criticism for its alleged leniency toward large mergers in many industries. That component of the DOJ is still alive, even if some commentators believe that it is not healthy, which means it could regain strength someday, if circumstances change. Of course, that will require a political climate where that change would be feasible, which is not the political climate that prevails in the nation today. But demographics can change, as can the issues that concern enough Americans to rally them to use their voting power to elect leaders who will change policies. It does not appear that anybody expects major change soon, at least not the sort of “progressive” change that would strengthen government and move it toward the direction of stronger regulation “in the public interest.” If nothing else, recent changes in the Court will prevent that, as the opposite appears to be in store: that the jurisprudence which prevailed before 1937 will come back, even though nearly everybody once thought such a dramatic change to be impossible.

In the meantime, Robert Primus seems to be holding the torch for regulation in the public interest. In his dissent, he noted how the level of concentration in the railroad industry has increased sharply since the year Amtrak was founded. He said: “The perils of allowing significant concentration of market power are not merely theoretical when it comes to the railroad industry. In 1970, more than 70 Class I railroads existed in the United States. Following this transaction, six will remain. These include two duopolies, one in the east and one in the west, and will now include a single company with single-line service north and south through the center of the United States. This tremendous consolidation has had predictably negative effects on rail customers, employees, and consumers” (at 180, citation omitted).

Primus continued: “Against this backdrop, I cannot agree with the majority’s decision to allow two of the remaining Class I carriers to combine subject only to oversight and a behavioral remedy. Notwithstanding Applicants’ assurances that rail customers will benefit, further concentrating control in so few hands will be to the ultimate detriment of those customers, as well as railroad employees, consumers, and the supply chain in general” (at 181).

With these statements, Primus seems to relate back to the legendary “trust-busters” of the late 19th and early 20th centuries, like John Sherman, Henry De Lamar Clayton, Jr., and Theodore Roosevelt. They had their “progressive” policies, as did Theodore’s distant cousin Franklin. The sort of community-related ideas they espoused have been receding during recent decades, which would make Primus’s concerns appear to be nothing more than a footnote to history. Then, again, attitudes could change going forward, which would elevate him to the status of a prophet on the issues of industry concentration and its adverse effects on people and communities.

Is America Close to One Class I?

This discussion might all become a matter for legal historians to ponder over coffee or a stronger drink someday, maybe before long. Today there are only six Class I railroads: two in the eastern part of the country, two in the western part, and two running on roughly north-south alignments in the middle. To make the situation international, two of the six are the two major railroads in Canada. That means three duopolies in the U.S., which can effectively act as monopolies when charging for services and as monopsonies when hiring workers. Even with an Antitrust Division at the Justice Department that has been criticized as overly lenient about mergers, it seems likely that having one of those duopolies turn into a genuine monopoly would be too obvious, too much, or both. That could trigger Antitrust action.

Primus’s concern appears well-founded, his scholarship is strong, and his reasoning makes sense. He was not on the Board in the past, when his view might have helped nurture a more-competitive railroad industry. He appears to be saying things that should be heard, but it seems that the time for his message has passed. It looks like the Merger Express has not only left the station, but CPKC may serve as the culmination of its successful journey. Primus could someday become a hero in the chapter set today of an alternate view of North American railroad history, but it will be up to somebody else to write it.

David Peter Alan is one of America’s most experienced transit users and advocates, having ridden every rail transit line in the U.S., and most Canadian systems. He has also ridden the entire Amtrak network and most of the routes on VIA Rail. His advocacy on the national scene focuses on the Rail Users’ Network (RUN), where he has been a Board member since 2005. Locally in New Jersey, he served as Chair of the Lackawanna Coalition for 21 years, and remains a member. He is also Chair of NJ Transit’s Senior Citizens and Disabled Residents Transportation Advisory Committee (SCDRTAC). When not writing or traveling, he practices law in the fields of Intellectual Property (Patents, Trademarks and Copyright) and business law. The opinions expressed here are his own.

Comment: Michael F. McBride, Van Ness Feldman LLP

Regarding the “what can the Court do” discussion of UP not seeking a stay, etc., UP will almost certainly pursue in court what it pursued at the STB—primarily the issue of preserving competition at existing interchanges. Recall that the STB said that competing railroads (and shipper associations) could not file a complaint against CPKC’s practices; that may be a particular focus of UP’s challenge. 

Under DC Circuit procedures, UP is required to provide a statement of issues about 30 days after filing of the petition, which will clarify things. The decision would be vacated to the extent necessary to provide that relief. That would not require undoing the merger.

Surely, UP knows how unlikely it is that the Court would require the merger to be undone; had it had any desire to do so, it surely would have sought a stay.

While UP could raise issues raised by others, and not just by it, that is uncommon. It is overwhelmingly likely that UP will raise issues it raised at the STB, and seek the relief it sought at the STB about such issues, rather than to seek to undo the merger.

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