newsworthy
Judge grants shippers “class” status in rail surcharge fight
In a decision that could cost the railroad industry billions of
dollars, a federal district judge in Washington granted class
certification to a lawsuit alleging the four major U.S. railroads conspired for five years to fix the prices of fuel surcharges imposed on shippers.
A class-certification ruling is significant in that it centralizes
all plaintiff claims into one consolidated case rather than forcing each individual plaintiff to bear the time and cost burdens
of litigating its own case. It also makes the economics of winning a case more compelling for plaintiffs’ attorneys.
The ruling, issued June 22 by Judge Paul L. Friedman, is a
legal victory for the eight shippers seeking class certification
for their claim. The shippers allege that, from mid-2003
through 2008, Burlington
Northern Santa Fe Railway
(BNSF), Norfolk Southern
Corp., CSX Corp., and
Union Pacific Corp. (UP)
colluded to set rail rates on
unregulated shipments
through a coordinated effort
to set fuel surcharges that
would appear on their customers’ bills.
The shippers also charge
that the fuel surcharge levels
often exceeded the pace of
the fuel-cost increases
absorbed by the railroads. The result was that the industry
collected billions of dollars more in revenues than it should
have, according to plaintiffs’ attorneys.
BNSF, UP, and CSX said they planned to appeal the ruling. Norfolk Southern declined comment.
Since the first shipper lawsuit was filed in 2007, the railroads have argued that because the national system functions as an integrated network, it is important that they be
able to discuss joint pricing and routing actions to facilitate
interline movements, a service considered beneficial to
shippers and the economy.
William Greene, lead transport analyst for Morgan
Stanley & Co., said in a research note that the railroads will
claim that any “appearance of collusion in this case is merely the result of coordinated joint pricing mechanisms” of
which the fuel surcharges are a portion.
The four defendants control an estimated 90 percent of
all U.S. rail traffic. The ruling does not affect Kansas City
Southern Inc., which is one of the seven so-called Class I
American railroads but does not have the geographic footprint of the four defendants. Likewise, the two Canadian
railroads—Canadian National and Canadian Pacific—as
well as U.S. short-line railroads, are not parties to the case.
Judge Friedman gave the parties until July 10 to appeal
the ruling. In his decision, the judge included an opinion
that has been sealed due to confidentiality concerns. The
rails are expected to ask that the opinion be kept sealed.
COST ESTIMATES IN BILLIONS
Estimates of potential damages vary all over the place.
Investment firm Wolfe Trahan & Co. said in a research note
that attorneys have set the potential liability at $30 billion,
based on $7 billion for fuel-surcharge recovery and up to
three times that amount for punitive damages. However,
the firm said it disagrees with that estimate, adding its
internal analysis suggests the railroads did not “
over-recov-er” their fuel costs during the
five-year period.
Morgan Stanley said shippers might seek at least $10
billion in damages. While
that figure “may strike us as
absurdly high,” the firm said,
there is no way to determine
what amount the damages
would be set at in an out-of-court settlement or if the
case went to trial.
The firm said that estimates from attorneys not
involved in the case put the
cost to the industry for an out-of-court settlement at
between $500 million and $2 billion.
ROOTS OF THE LAWSUIT
Prior to 2007, railroads customarily applied fuel surcharges
to their base rates. That year, the Surface Transportation
Board (STB), the federal agency overseeing the rail industry, ruled that the carriers must base fuel surcharges on
their operating costs, not on revenues derived from their
services. Following that decision, the railroads changed
their practice to impose fuel surcharges based on miles
traveled rather than revenue generated.
Although the STB ordered the railroads to change their
processes, it offered shippers no mechanism for recapturing
any past fuel surcharges that may have been higher than the
fuel costs incurred by the carriers.
And in language that effectively triggered the five-year
legal battle, the agency said its jurisdiction in the matter
applied only to shipments moving under a regulated tariff.
As a result, the charges imposed on shipments under contract—and thus outside the province of the STB—could be
challenged in federal court under antitrust laws. ;
—M.S.
