The class-action price-fixing lawsuit looming over the United States’ four largest railroads will likely rival the attention analysts give to sluggish coal traffic during second quarter earnings calls, and for good reason.
BNSF Railway, Union Pacific Railroad, Norfolk Southern Railway and CSX Transportation risk more than having to pay billions of dollars in damages if the lawsuit goes to trial or is settled. In a larger sense, the case in the U.S. District Court for the District of Columbia could provide shippers ammunition in their larger fight to bring railroads back under government control for the first time in 30 years.
“The case is a reflection of the market power of the railroads and how they abused it in this instance,” said Stephen Neuwirth, former White House counsel and lead co-counsel for the eight shipper plaintiffs.
Although the railroads and shippers will likely settle the case, “plaintiff attorney rhetoric” will ramp up, spurring concern in the marketplace, Morgan Stanley analyst William Greene wrote in a June 29 research note. That rhetoric or, at the very least, attention to shippers’ plight — depending on one’s point of view — comes as shippers, particularly those reliant on a single line, are experiencing higher pricing despite weak volume growth.
Efforts seeking relief from Congress and the Surface Transportation Board, the railroad regulatory agency, appear stymied, leaving the lawsuit as shippers’ likely best shot at attracting attention and to support their cause.
The lawsuit alleges the railroads conspired to fix, raise, maintain or stabilize prices, leading to shippers being overcharged from mid-2003 until 2008. The railroads have consistently denied the allegations, originally leveled through lawsuits in 2007.
Before conspiring, the railroads unfairly hiked fuel surcharges for “a limited number of shippers,” so as not to lose a competitive edge with their rivals, the shippers allege. In 2003, the lawsuit states, UP and BNSF linked their fuel surcharges to the On-Highway Diesel Fuel index, while NS and CSX linked theirs to the West Texas Intermediate index. The shippers say the railroads were able to conspire on fuel surcharges by creating a cost escalation index at Association of American Railroads meetings.
The shippers point to a letter in which BNSF Chief Economist Sam Kyei praised his boss, Chairman and CEO Matt Rose, for “steering the AAR” to create the index. “The combination of sound price escalation using this index and a fuel surcharge should tremendously help our bottom-line for years to come,” Kyei wrote in the March 2005 letter cited by the shippers.
Following shipper complaints, the STB in 2007 ruled carriers couldn’t charge fuel surcharges to base rates and had to calculate the fees using factors directly affecting fuel consumption. The board, however, added it would be impossible to determine how much shippers were overcharged.
It’s unclear how much railroads could be on the hook for, because the damages sought by the eight shippers are sealed, and as many as 30,000 shippers could join the lawsuit. An appeal of the class certification, filed by the railroads this month, states the railroads could be liable for more than $10 billion, while the American Chemistry Council, a shippers association, estimates railroad customers were overcharged $6.5 billion in a shorter time frame.
The shipper plaintiffs are Olin, US Magnesium, Dust Pro, Carter Distribution, Dakota Granite, Donnelly Commodities, Nyrstar Taylor Chemicals and Strates Showes. Cargill also accuses BNSF of using fuel fees to overcharge the agriculture shipper about $560 billion.
The STB is handling that case because it relates to tariff rates, a matter falling under the agency’s regulatory oversight. Contract rates, which account for 80 percent of rail shipments, are outside the STB’s purview, hence the filing of the civil lawsuit.
To no one’s surprise, the railroads aren’t buckling down to the attacks and have a strong defender in attorney Carter Phillips, who has argued extensively for clients in the Supreme Court and federal courts of appeal. He argued the certification is unfair because no wrongdoing has been proved and the carriers could receive “unwarranted pressure” to settle.
“Members of the class have very different circumstances, defying common proof that they were all injured by the alleged conspiracy to fix rail fuel surcharges,” Phillips wrote in his appeal. “Many shippers, including those in the largest category of rail traffic (intermodal), paid surcharges under the same formulas that were in place well before the alleged conspiracy, which plaintiffs concede were non-collusive.”
“The court finds a preponderance of the evidence that the fuel surcharge programs applied before the class period were nothing like the widespread and uniform application of standardized fuel surcharges during the class period,' wrote Judge Paul Freidman
He is pressuring the parties to settle, and the shippers will likely oblige, transportation attorney Michael McBride said in a conference call with Morgan Stanley’s Greene.
McBride doubts the antitrust nature of the allegations will attract scrutiny from the Department of Justice, because the agency tends to avoid interfering if the issue already is being addressed and doesn’t directly harm the public. Although the statute of limitations for criminal charges tends to be five years, “it is exceedingly unlikely there would be any criminal charges brought,” he said.
Allegations of price-fixing aren’t restrained to the rails, as seen by the recent controversy regarding U.S.-Puerto Rico ocean carriers’ collusion of rates and the European Union antitrust fines against 13 air forwarders. Escalating fuel price volatility and carriers’ drive to increase profit on weak volume growth will likely translate to more price-fixing suspicion — true or not — on all modes of transport.
An earlier version of the story incorrectly stated Judge Paul Friedman would hear the appeal of class action certification. The U.S Court of Appeals will address the appeal.