State of S.D. v. Kansas City Southern Industries, Inc.

• Citation: 880 F.2d 40
• Decision Date: 08 August 1989
• Docket Number: Nos. 88-2158,88-5375 and 88-5422,s. 88-2158
• Parties: 1989-1 Trade Cases 68,635 STATE OF SOUTH DAKOTA, South Dakota Conservancy District, an Agency of the State of South Dakota, Appellee, v. KANSAS CITY SOUTHERN INDUSTRIES, INC., a Foreign Corporation; Kansas City Southern Railway Company, a Foreign Corporation, Appellants. STATE OF SOUTH DAKOTA, South Dakota Conservancy District, an Agency of the State of South Dakota, Appellants, v. KANSAS CITY SOUTHERN INDUSTRIES, INC., a Foreign Corporation; Kansas City Southern Railway Company, a Foreign Corporation, Appellees (Two Cases).
• Court: U.S. Court of Appeals — Eighth Circuit

Page 40

880 F.2d 40

1989-1 Trade Cases 68,635

STATE OF SOUTH DAKOTA, South Dakota Conservancy District, an Agency of the State of South Dakota, Appellee, v. KANSAS CITY SOUTHERN INDUSTRIES, INC., a Foreign

Corporation; Kansas City Southern Railway

Company, a Foreign Corporation, Appellants.

STATE OF SOUTH DAKOTA, South Dakota Conservancy District, an Agency of the State of South Dakota, Appellants, v. KANSAS CITY SOUTHERN INDUSTRIES, INC., a Foreign

Corporation; Kansas City Southern Railway

Company, a Foreign Corporation,

Appellees (Two Cases).

Nos. 88-2158, 88-5375 and 88-5422.

United States Court of Appeals Eighth Circuit.

Submitted Dec. 13, 1988.

Decided June 29, 1989.

As Amended on Denial of Rehearing and Rehearing En Banc Aug.

8, 1989.

John J. Shenefield, Washington, D.C., for appellant.

Glen H. Johnson, Rapid City, S.D. and Thomas J. Welk, Sioux Falls, S.D., for appellee.

Before LAY, Chief Judge, and HEANEY ^* and FAGG, Circuit Judges.

LAY, Chief Judge.

Kansas City Southern Industries and The Kansas City Southern Railway Company ¹ appeal a judgment in favor of the State of South Dakota and the South Dakota Conservancy District, ² of $600,000,000 which represents a trebled jury verdict of $200,000,000 based on a federal antitrust claim. KCS also appeals a verdict of $244,200,000 awarded to SD on a state law claim of tortious interference with a contractual relationship. KCS claims SD has no standing to assert a federal antitrust action and that any anti-competitive activity KCS may have committed is protected by the Noerr-Pennington doctrine. See infra note 23. KCS also asserts that the contract between SD and Energy Transportation Systems, Inc. (ETSI), cannot be the basis for recovery under either an antitrust or a tort theory because the contract was invalid. KCS further appeals other issues relating to the jury instructions, the statute of limitations, personal jurisdiction, venue, and the entry of judgment. The State of South Dakota cross-appeals the trial court's exclusion of its claim for lost tax revenues, failure to properly secure the judgment, and refusal to instruct the jury on certain theories. We reverse and dismiss the judgment on the antitrust claim for lack of standing. We further reverse and dismiss the judgment on the tortious interference claim for reasons set forth in our opinion.

I. Background

Energy Transportation Systems, Inc., was created during the early 1970's for the purpose of constructing a pipeline through which coal could be transported from mining sites in north central states to utility companies in south central states. This project occurred in response to the energy crisis arising in the oil industry. ETSI, which was a joint venture composed of a number of large corporations, ³ intended to transport coal in "slurry" form. Coal slurry is a mixture of roughly half coal and half water. Consequently, large quantities of water were required to operate the pipeline.

ETSI initially proposed the Madison Formation Aquifer (Madison) as the source of water for the pipeline. The Madison is an enormous, mostly subterranean body of water which exists under several states including South Dakota and Wyoming. The State of South Dakota opposed this proposal on the grounds that the pipeline's use of Madison water would be detrimental to its environment and would deplete the water supply of residents in the western part of the state. ETSI nonetheless sought and received Madison water permits from Wyoming authorities.

The ETSI pipeline project also faced opposition from the railroad industry which opposed the construction of coal slurry pipelines generally. During the mid-1970's to the end of 1981, this opposition manifested itself in the railroads' refusal to grant ETSI permission to cross under existing railroad tracks. Crossing rights were fundamental to the construction of the pipeline since there was no way to build around the railroads. ETSI was eventually forced to litigate for the right to cross under the tracks. After determining that the railroads' right-of-way interests stemmed from easements rather than from ownership in fee, ETSI purchased crossing rights from the abutting fee owners. ETSI then filed quiet title actions against the railroads. In defending these cases, the railroads pursued full exhaustion of their appellate remedies. ⁴ However, their efforts were to no avail. From the middle of 1976 to the end of 1981, ETSI prevailed in all of the more than sixty quiet title actions.

Well into this period of "window litigation," ⁵ in the late 1970's, KCS and the other railroads determined that they would also oppose the ETSI pipeline project in the administrative forum. In order to construct the pipeline, ETSI was required to obtain a great number of permits and approvals from local, state, and federal agencies. The railroads focused their collective efforts in opposing the pipeline project in proceedings in which ETSI sought the various permits and approvals necessary for construction. Although they were participants in scores of administrative proceedings, the railroads' efforts were uniformly unsuccessful. KCS' most significant opposition related to the submission by ETSI of its Environmental Impact Statement (EIS). The railroads focused much of their resources toward criticism of this EIS with the intention of making the "environmental evaluation as difficult as possible * * * [and h]opefully, the State Agencies (with suggestions from Railroad people) could bog down the study with numerous statistical studies which we would hope to show would have an adverse effect on labor, local communities, and perhaps on other industries." SD supp. app. at 1001-02 (letter from W.A. Thie to Ed. Dudley, General Counsel, Oklahoma Railways Committee (June 13, 1979)). The State of South Dakota also opposed ETSI in the EIS proceedings, labeling the project "inadequate and almost cavalier in its attitude and treatment of impacts to South Dakota" and advising the Department of the Interior (Interior) to order the redraft and recirculation of ETSI's proposed EIS. KCS app. at 540. South Dakota Governor William Janklow joined with the Governors of the States of Wyoming, Montana, and Nebraska to petition the Secretary of the Interior to delay the decision on ETSI. KCS app. at 790. Despite this opposition, the EIS process was completed in the early 1980's.

As previously stated, before late 1981 South Dakota also participated in opposition to the pipeline proposal in the administrative forum. This opposition was inspired by SD's concern that ETSI would use Madison water for the pipeline and thereby deprive residents of western South Dakota of their prime water source. For a long time, South Dakota had also opposed the use of water from the Oahe Reservoir. The Oahe Reservoir is a large body of water located in central South Dakota along the Missouri River. In 1975, Janklow, then SD's Attorney General, had officially concluded that South Dakota lacked authority to transfer or assign Oahe water rights. KCS app. at 774-786. Subsequently, a proposed sale of Oahe water by South Dakota was vetoed in 1977 by then-Governor Richard Kneip. KCS app. at 787-89.

South Dakota officials formally dropped their opposition on December 23, 1981, when the South Dakota Conservancy District (SDCD) executed an agreement with the ETSI Pipeline Project (SDCD/ETSI contract) in which ETSI agreed to use water from the Oahe Reservoir rather than from the Madison Formation. The SDCD/ETSI contract provided that the SDCD would issue ETSI a permit to draw 50,000 acre-feet of Oahe water per year. SDCD did obtain such a permit with the aid of the legislature and subsequently transferred this permit to ETSI in February of 1982. In exchange for this permit, ETSI agreed to make payments to SDCD in the following manner: $2,000,000 upon the issuance of the permit; $2,000,000 if SDCD's authority to issue such a permit was unchallenged or, if challenged, was affirmed by the state's courts; $3,000,000 on the anniversary of the issuance of the permit and every anniversary thereon until construction of the pipeline was commenced; $9,000,000 upon commencement of construction; and every year thereafter, for fifty years, payments based on an amount adjusted according to the Fixed-Weighted Price Index for the Gross National Product. ⁶ Additionally, ETSI agreed to pay SDCD $1,500,000 if the West River Aqueduct, which was the pipeline that would carry Oahe water from central South Dakota to Wyoming, was not constructed on or before July 1, 1984. As part of the agreement, residents of western South Dakota would be allowed to tap water for their own consumption from the West River Aqueduct. ETSI retained the right to cancel this contract on thirty days notice where there was pending litigation or if it intended to abandon the pipeline project, and on sixty days notice if it intended to secure an alternative water source. If ETSI did not invoke its cancellation rights, this contract had a potential term of fifty years following completion of the pipeline.

On July 2, 1982, the ETSI Pipeline Project and the Department of the Interior, through the Bureau of Reclamation (BOR), executed a contract which authorized ETSI to withdraw at least 20,000 acre-feet of water annually from the Oahe Reservoir (BOR/ETSI contract). The States of Iowa, Missouri, and Nebraska, as well as KCS and several additional interested parties, filed an action to enjoin the contract and sought a declaration that Interior officials violated several federal statutes by their execution of the ETSI contract. The United States District Court for the District of Nebraska permanently enjoined the BOR/ETSI contract on the ground that Interior was not empowered to furnish Oahe water for industrial use. Missouri v. Andrews, 586 F.Supp. 1268, 1281 (D.Neb.1984). In reaching its conclusion, the court interpreted the Flood Control Act of 1944, 33 U.S.C. Secs. 701-1-709b (1982 &...