(CN) - Two of the nation's largest railroads should not face claims that they conspired to fix exorbitantly high freight rates, a federal judge ruled.
While the plaintiffs, six subsidiaries of the Oxbow Group, failed to state claims under the Sherman Act, they can still amend their complaint to cure these defects, according to the ruling.
Oxbow had sued Union Pacific Railroad and BNSF Railway, which primarily serve the western United States. It claimed the companies colluded to take advantage of the deregulation of their industry and fix prices for freight with nonparties CSX Transportation and Norfolk Southern Railway, the two Class 1 railroads operating largely east of the Mississippi River.
Congress deregulated the railroads in 1980 with the intention of introducing competition, but Oxbow said the railroads "abused the freedoms granted them by deregulations in a number of ways."
One way allegedly involved a price-gouging fuel surcharge that is unrelated to actual fuel costs.
"That surcharge yielded enormous revenues to the railroads, far in excess of the actual costs for fuel incurred by the railroads," Oxbow said. "UP boasted to its shareholders that its revenues from this surcharge were over $1 billion in 2005," according to the complaint.
As a direct purchaser of rail freight services, Oxbow said it has paid more than $30 million in wrongfully imposed fuel surcharges.
Oxbow said the defendants also collude to raise prices by controlling where coal is shipped and the route by which it's sent. This drives up the cost of coal and "cause(s) the public to pay inflated prices for electricity and other products," according to the complaint.
U.S. District Judge Paul Friedman concluded Tuesday, however, that the Oxbow companies "framed their allegations in a curious manner."
"Plaintiffs price-fixing allegations, which in the [previous] Rail Freight Action were brought only under Section 1 of the Sherman Act, are cast here as violating both Sections 1 and 2 of the act," he wrote. "Plaintiffs' allegations of market allocation by defendants - conduct that typically gives rise to claims under Section 1 - are presented only as part of plaintiffs' Section 2 monopoly claim."
Fighting the Section 1 claim, the railroads said there can be no injury from anticompetitive conduct where there is no competition between rail freight providers. In this case, Union Pacific alone serves the Oxbow entities' Colorado mine.
Friedman noted, however, that there is precedent for a sole-served shipper suffering antitrust injury as a matter of law.
The railroads fared better by arguing that Oxbow had failed to sufficiently allege the surcharges each of its entities paid.
"While there are six plaintiffs in this case, the complaint lacks adequate facts concerning how any individual plaintiff was harmed by the alleged conspiracy," Friedman wrote.
Oxbow also conceded that it did not actually pay the uniform standard fuel surcharge described in the complaint, but instead paid only a "non-uniform, coal-specific fuel surcharge."
Friedman declined to accept that the charges were sufficiently similar to those identified in their complaint.
"Even if the court were to accept plaintiffs' characterization of the coal surcharge as sufficiently similar to the fuel surcharge referenced in the complaint, the court cannot identify within the complaint the basic facts to support an inference that each plaintiff was harmed by the imposition of any surcharge," Friedman wrote.
By omitting basic facts about each entities business operations, Oxbow failed to meet the threshold requirement for stating a claim, Friedman concluded.
The Section 2 claim meanwhile failed to allege that the railroads engaged in a conspiracy to monopolize because a "shared monopoly" cannot support a Section 2 claim.
"In enacting the prohibitions on monopolies, Congress was concerned about 'the complete domination of a market by a single economic entity,' and therefore did not include 'shared monopolies' or oligopolies within the purview of Section 2," Friedman wrote.
The railroads had argued that parallel conduct sums up Oxbow's allegations that they are "dramatically increasing prices, ceasing efforts to compete for each other's customers, changing contract terms, and using public pricing announcements," according to the ruling. But Friedman noted that the U.S. Supreme Court has already deemed parallel conduct insufficient to support a monopoly claim.
It may be an overstatement to classify the allegations as only parallel conduct, but nevertheless the complaint "lacks factual allegations about how the alleged agreement came about, the basic terms of the agreement itself, or how the defendants used the agreement to monopolize the rail freight market," according to the ruling.
"If plaintiffs intended to allege that UP and BNSF conspired to allocate an entire market to UP, they have failed to do so with the requisite specificity," Friedman added. "Plaintiffs do not once explicitly specify which market UP and BNSF allegedly agreed to allocate to UP, but rather suggest that UP and BNSF continued to serve their respective incumbent customers within the same markets."
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