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Novel court ruling offers insight into antitrust exemptions and legitimate competitor communications

April 29, 2021
Jesse W. Markham and Erin Glavich

The District of Columbia District Court recently issued the first judicial interpretation of 49 US Code Section 10706(a)(3)(B)(ii), which sets out an evidentiary exemption relating to certain agreements among railroads. On its face, the decision’s reach appears limited. However, the opinion provides insight into the judicial interpretation of antitrust exemptions and practical reminders for rail and other industries that have legitimate, and sometimes legally protected, communications with competitors.

Staggers Act

In 1980 Congress enacted the Staggers Rail Act as part of the deregulation of the rail industry to allow for more competition between railroads and between rail and other modes of transport such as trucking. Section 10706(a)(3)(B)(ii), recodified without substantive changes in the Interstate Commerce Commission Termination Act 1995, provides for the exclusion of evidence relating to and bars inferences arising from discussions and agreements coordinating so-called ‘interline’ movements. Interline movements are shipments carried over two or more railroads to get to the shipment destination. Carriers do not compete with one another for carriage of interline traffic but act as a sort of joint venture for the movement, which necessitates cooperation and agreements on terms and rates (e.g., fuel surcharges).

However, the protection provided by Section 10706 is limited. It cannot be used to protect agreements that otherwise may be anti-competitive or that extend beyond “an interline rate or related matter”.

Facts

The underlying cases were consolidated in a multidistrict antitrust litigation, captioned In re Rail Freight Fuel Surcharge Antitrust Litigation, after a failed attempt at seeking class action status. The plaintiffs alleged that several railroads coordinated their fuel surcharge programs, including inflated fuel charges, to impose higher prices on shipper customers. The defendant railroads sought to exclude evidence of and block inferences from communications between railroads regarding interline movements, invoking protections set out in Section 10706.

Partially due to the novelty of the case, the court invited the government to submit its position. The Department of Justice, the Federal Trade Commission and the Surface Transportation Board submitted a combined statement on behalf of the government.

Unsurprisingly, the parties and the government all gave divergent interpretations for almost every phrase in Section 10706.

Decision

In the end, the court rejected the attempts to paint the provision with a broad brush:

  • The court rejected the plaintiffs’ attempts to circumvent Section 10706 entirely by arguing that all communications at issue were part of an overarching antitrust conspiracy.
  • The court equally rejected the defendants’ attempts to exclude whole documents or categories of communications where only portions related to interline movements.

Rather, the court framed its analysis using two widely accepted principles – namely, that:

  • exclusions of relevant evidence are strictly construed; and
  • antitrust exemptions must be interpreted narrowly.

Under this framework, the court took a scalpel to specific phrases of Section 10706, narrowly interpreting each phrase.

The court reasoned that to qualify for the exclusionary protections, a communication or agreement must be between railroads about a specific interline movement. The court found that the strict application of exemptions overruled business efficiency justifications for multi-party and multi-issue talks. Carriers not involved in the movement cannot participate in the discussion. Discussions that are not between carriers, including internal communications, are not excludable under Section 10706. Discussions or agreements beyond the covered interline movement are also not excludable.

Where evidence contains excludable and non-excludable information, the railroad may redact qualified interline discussions. Where redaction is impossible, the court may give a limiting instruction.

Comment

Narrow exemptions are the norm
The court’s approach in this decision was not unexpected. Excepting the Supreme Court’s expansive interpretation of the implied repeal doctrine in Credit Suisse Securities (USA) LLC v Billing, the courts have routinely construed antitrust exemptions narrowly. Similarly, the courts have had to struggle with the impact of the antitrust exemptions on evidentiary issues. For example, conduct that may be exempt under the Noerr-Pennington doctrine – a doctrine which confers limited antitrust immunity to joint efforts to petition the government – may still be admissible if used to show the purpose and character of non-exempt conduct.

Further, it is unlikely that this will change. Current trends seek to increase antitrust scrutiny. Several proposed bills have been introduced to expand and reinvigorate antitrust law at the federal and state levels, largely in response to an apparently universal concern with tech giants’ market power. At least one of these proposals seeks to narrow implied exemptions based on regulatory action.

While legislative outcomes remain to be seen, this decision offers a view of how the current construction of antitrust law can address some of the modern concerns seeking broader antitrust scrutiny. The court’s strict reading of exemptions allows for plaintiffs to make a case while the court retains tools (e.g., barring negative inferences and limiting the use of evidence) to prevent undue prejudice to defendants.

Broader implications for competitor collaborations
The decision has implications for how the courts treat legitimate collaborations among rivals. Railroads are not alone in forging procompetitive collaborations; several industries rely on competitor collaboration. For example, in banking, competitors consult on credit risks as a way of facilitating the competitive lending process. Property and casualty insurers collaborate by sharing loss data, as well as in developing standard insurance policy forms. Benchmarking and standard-setting practices are normal across a broad swath of economic activity. Despite the substantial body of applicable law and agency guidelines, the line between lawful and unlawful collaboration among rivals is often blurred.

In terms of practical business operations, the decision, along with other developments, suggests the need for care about potential spillover effects from legitimate competitor collaborations, including some vertical arrangements. For example, in dual distributorships, manufacturers both supply and compete with downstream resellers. In that context, arrangements such as minimum advertised pricing (MAP) policies can be lawfully imposed but risk antitrust exposure to the extent that the coordination spills over into areas where companies compete. Avoiding spillover may require isolating staff involved in setting MAP policies from staff involved in competitive strategy. More generally, staff dealing with legitimate coordination with rivals should be separated from those who are implementing competitive strategies.

Finally, the court’s use of redaction and limiting instructions highlights the tension between business efficiency and future litigation exposure. The court was unmoved by the railroad’s arguments that business needs required mixing interline communications with other business, as well as mixing participants in interline discussions. The court found that where possible, a railroad could redact or ask the court for a limiting instruction, but either of these present significant risks at trial.

 

This content was originally published on April 29, 2021, via the International Law Office (ILO) newsletter. It can be found here: Novel court ruling offers insight into antitrust exemptions and legitimate competitor communications

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