Florida East Coast Ry. Co. v. CSX Transp., Inc.

• Decision Date: 06 February 1995
• Docket Number: Nos. 93-2601,s. 93-2601
• Citation: 42 F.3d 1125
• Parties: 1994-2 Trade Cases P 70,830 FLORIDA EAST COAST RAILWAY COMPANY, a Florida Corporation, Plaintiff-Appellant/Cross-Appellee, v. CSX TRANSPORTATION, INCORPORATED, Defendant-Appellee/Cross-Appellant. & 93-2742.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1125

42 F.3d 1125

1994-2 Trade Cases P 70,830

FLORIDA EAST COAST RAILWAY COMPANY, a Florida Corporation Plaintiff-Appellant/Cross-Appellee, v. CSX TRANSPORTATION, INCORPORATED, Defendant-Appellee/Cross-Appellant.

Nos. 93-2601 & 93-2742.

United States Court of Appeals Seventh Circuit.

Argued Feb. 11, 1994.

Decided Dec. 21, 1994.

Rehearing and Suggestion for Rehearing

En Banc Denied Feb. 6, 1995.

Jerome H. Torshen, Abigail K. Spreyer, Torshen, Schoenfield & Spreyer, Chicago, IL, Eugene Crew (argued), Richard L. Grossman, Amy Slater, Townsend & Townsend Khourie & Crew, San Francisco, CA, for plaintiff-appellant.

Paul V. Esposito, James R. Gannon, Lewis, Overbeck & Furman, Chicago, IL, Richard McMillan, Jr. (argued), Alexandre de Gramont, Scott L. Winkelman, Thomas P. Humphrey, Crowell & Moring, Washington, DC, for CSX Transp., Inc.

Frederick L. Wood, Nicholas J. DiMichael, Richard D. Fortin, John S. Markle, Donelan, Cleary, Wood & Maser, Washington, DC, for National Industrial Transp. League.

Richard A. Allen, Richard P. Schweitzer, Zuckert, Scoutt & Rasenberger, Washington, DC, for American Bus Ass'n.

Before BAUER, FLAUM and ROVNER, Circuit Judges.

ILANA DIAMOND ROVNER, Circuit Judge.

Florida East Coast Railway Company ("FEC") has sued CSX Transportation, Inc. for breach of a 1978 Settlement Agreement requiring that "[w]henever [CSX] establishes routes and rates ... it will also establish routes and rates on the same basis to or from any point served by FEC...." CSX argues that the Settlement Agreement does not apply to privately negotiated contract rates, which were legalized only after execution of the Agreement by the Staggers Rail Act of 1980, and that even if it did, application of the Agreement to those rates would violate Section 1 of the Sherman Antitrust Act, 15 U.S.C. Sec. 1. The district court found that the Settlement Agreement applied to contract rates, but that its application in that context was indeed prohibited by the Sherman Act. Because we believe that the Settlement Agreement does not apply to contract rates, we affirm the judgment of the district court, but do so without reaching the antitrust issue.

I.

In 1963, the Seaboard Air Line Railroad Company ("SAL") and the Atlantic Coast Line Railroad Company ("ACL") merged to form the Seaboard Coast Line Railroad ("SCL"). SCL later became part of the Family Lines Rail System, which was ultimately acquired by CSX Corporation in 1979. Prior to the 1963 merger, SAL and ACL had competed for rail traffic in the southeastern United States. Because only SAL and FEC had tracks that served areas in Florida south of Jacksonville, ACL and FEC had together established a joint rate for traffic moving from the north to points south of Jacksonville, which competed with the single-line rate offered by SAL for those same routes. When the SAL/ACL merger was proposed, FEC protested, fearing that because ACL would now send its southern Florida traffic via SCL's new single-line service, FEC would lose the southern Florida traffic it had formerly received from ACL. In response to FEC's complaint and consistent with the then-favored policy of rate equalization, the Interstate Commerce Commission ("ICC") imposed several conditions on the SAL/ACL merger. Relevant among those was the requirement that SCL maintain through routes with FEC to southern Florida and establish joint rates for those routes that would be no higher than SCL's single-line rates. ¹ Such rate equalization was possible because ICC approval exempted the merger from operation of the antitrust laws. ²

The parties then coexisted without dispute until 1977, when FEC filed a complaint before the ICC, alleging that SCL was not abiding by the merger conditions. That dispute was ultimately resolved by way of an April 10, 1978 Settlement Agreement, to which CSX became subject when it acquired SCL in 1979. The stated purpose of the Settlement Agreement was "to reaffirm Conditions 1 through 6 prescribed in the SAL/ACL Merger case ... and to provide ... additional provisions to govern the relationship between SCL and FEC only, in light of those conditions." (Settlement Agreement at 1.) The Agreement further provided that:

In interpreting the substantive provisions of the Agreement, it shall be borne in mind that it is the intent of the parties that SCL will not take steps to place FEC in a position so that it cannot fairly compete with SCL on an equal basis on traffic destined to the South Florida Area ... served by them both and that SCL will, insofar as it is within the power of SCL to do so, take the steps specified herein so that FEC may fairly compete with SCL.

(Id.) Specifically relevant here, the Agreement provided in Paragraph J:

SCL agrees that it will maintain rates and keep open routes, including transit, from and to FEC stations via existing junctions and gateways.

Whenever SCL establishes routes and rates, including transit, to or from any point served by it on SCL's line between West Lake Wales and Sunniland or on its line between West Lake Wales and Homestead, including lines branching therefrom, it will also establish routes and rates on the same basis to or from any point served by FEC via the Jacksonville Gateway at FEC's election.

In 1980, Congress passed the Staggers Rail Act, Pub.L. No. 96-448, 94 Stat. 1895 (1980), with the goal of introducing competition into the railroad industry. (See 49 U.S.C. Sec. 10101a.) The Staggers Act changed the face of the railroad industry and as a result brought into question the continued viability of the Settlement Agreement. In particular, CSX pointed to two new circumstances in which it believed that compliance with the Agreement was no longer possible. First, in 1981, pursuant to the authority provided by 49 U.S.C. Sec. 10505, the ICC deregulated trailer-on-flat-car ("TOFC") and container-on-flat-car ("COFC") traffic and, as part of the exemption of that service from its jurisdiction, removed antitrust immunity for collective rate-making as to that traffic. In response to this change, CSX contended that it could no longer comply with paragraph J of the Settlement Agreement for TOFC/COFC service without violating Section 1 of the Sherman Act. Second, although rates had previously been established only by way of published tariff, Staggers Act Sec. 208(a), 49 U.S.C. Sec. 10713, now allowed railroads to privately negotiate rates with shippers. ³ CSX contended that Paragraph J of the Settlement Agreement did not apply to privately negotiated contract rates, which had been illegal both when the merger conditions were imposed and when the Settlement Agreement was executed, and that even if it did, rate equalization for that service would violate Section 1 of the Sherman Act.

In response, FEC filed a federal suit in the District of Columbia seeking enforcement of the Settlement Agreement as to both TOFC/COFC and contract rate traffic. Following a bench trial, the court found that the deregulation of TOFC/COFC service did not affect the antitrust immunity of the 1963 merger conditions, so that abiding by the terms of the Settlement Agreement for that traffic would not violate the Sherman Act. Florida East Coast Ry. Co. v. Seaboard Coast Line R.R. Co., 1982-83 Trade Cas. p 65,111 at 71,213-16, 1982 WL 1926 (D.D.C.1982). The court abstained from deciding whether application of the Settlement Agreement to contract rates would violate the Sherman Act, finding that the issue was not yet justiciable because FEC had not identified any particular instance in which CSX had actually refused to abide by the Settlement Agreement when negotiating contract rates. Id. at 71,217-18. ⁴

FEC ultimately returned to federal court in 1991, this time in the Northern District of Illinois, after General Motors Corporation, in response to the submission of competitive bids, discontinued its use of joint-line CSX/FEC service for shipments to southern Florida in favor of CSX single-line service. Count I of FEC's complaint asserted that CSX had breached the Settlement Agreement when it contracted with General Motors and other unnamed parties to provide single-line service without offering FEC the opportunity to provide joint-line service under the same rate. Count II asked the district court to declare that the Settlement Agreement required CSX to set joint-line contract rates with FEC that match its single-line contract rates and that this requirement did not violate Section 1 of the Sherman Act. Count III claimed that by refusing to set joint-line rates with FEC, CSX was attempting to monopolize the southern Florida market in violation of Section 2 of the Sherman Act.

Following an eight-day bench trial on Counts I and II, the district court found that the Settlement Agreement did extend to contract rates, but that compliance with its terms in that context amounted to per se price-fixing in violation of the Sherman Act. The court therefore determined that insofar as it applied to contract rates, the Settlement Agreement was "illegal and unenforceable." FEC subsequently agreed to the dismissal of its Count III monopolization claim with prejudice and filed this appeal. CSX cross appeals, contesting the court's finding that the Settlement Agreement applies to contract rates.

II.

Our first task, then, must be to determine whether the Settlement Agreement applies to contract rates, because only if it does would there be a potential Sherman Act violation. The construction of a contract is a question of law that is subject to de novo review. Vernon v. Resolution Trust Corp., 907 F.2d 1101, 1109 (11th Cir.1990); DEC Elec., Inc. v. Raphael Constr. Corp., 558 So.2d 427, 428 (Fla.1990); Royal Oak Landing Homeowners Ass'n, Inc. v. Pelletier, 620 So.2d 786, 788 (Fla.Dist.Ct.App.1993). The Settlement Agreement provides that it is to be governed by Florida law. (Settlement Agreement p DD.)

The district court determined that the term "rates" as used in Paragraph J was...