Opinion
No. 86-CV-810.
November 17, 1989.
James K. Manning, New York City (Paul Windels, III and Elizabeth Storch, of counsel), for Trustee in Bankruptcy of plaintiff.
McNamee Lochner Titus Williams, Albany, N.Y. (Scott A. Barbour, of counsel), and Pepper Hamilton Scheetz, Philadelphia, Pa. (Thomas E. Zemaitis, of counsel), for defendant.
MEMORANDUM-DECISION AND ORDER
In Del. Hudson Ry. Co. v. Consol. Rail Corp., 654 F. Supp. 1195 (N.D.N.Y. 1987), this court denied Consolidated Rail Corporation's ("Conrail's") motion to stay or dismiss the plaintiff's complaint pursuant to the doctrine of primary jurisdiction. Id. at 1203. In this proceeding, Conrail moves for summary judgment against the plaintiff, Delaware Hudson Railway Company ("D H"). For the reasons stated below, defendant's motion for summary judgment is granted.
Conrail sought a stay or dismissal of the plaintiff's complaint, so that the Interstate Commerce Commission could consider D H's claims prior to this court's determination.
Background
Familiarity with this case is presumed, and the following is based primarily on the background presented in Del. Hudson Ry. Co., 654 F. Supp. 1195, 1197-98 (N.D.N.Y. 1987).
D H is a Delaware corporation which provides rail transportation services throughout the mid-Atlantic region. Conrail is a Pennsylvania corporation, established pursuant to the Regional Rail Reorganization Act of 1973, Pub.L. No. 93-236, 87 Stat. 985 (codified as amended at 45 U.S.C. § 741). Conrail was organized by Congress in part because of the collapse of regional railroads in the 1970's. See Blanchette v. Connecticut Gen. Ins. Corp., 419 U.S. 102, 95 S.Ct. 335, 42 L.Ed.2d 320 (1974). Conrail provides rail transportation services to both the Northeast and the Midwest.
Since the commencement of this lawsuit, D H has filed a petition for reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq.
D H and Conrail are competitors. However, because of the nature of the railroad business, railroads jointly participate in the use of rail facilities, since no one railroad can provide service to every shipper location in the United States.
To enable railroads to provide national service, railroads participate in "through routes", which are business arrangements made between two or more railroads where they agree to move freight in continuous carriage between the origin on one railroad and the final destination on another. Railroads also operate "single line routes". On a single line route, the entire railway, from origin to destination, is owned by one railroad. Larger railroads, such as Conrail, own many of these single line routes. Smaller railroads, such as D H, often must interconnect with the larger railroads, via through routes, to provide service to major metropolitan areas.
Competition between different companies is affected, to an extent, by regulations that railroads must follow. Prior to the late 1970's, price competition between railroads was considered to be unhealthy for both the railroad industry and the consumer. Consequently, the establishment and regulation of rates was the province of the Interstate Commerce Commission ("I.C.C."). This situation changed with the passage of the Railroad Revitalization and Regulatory Reform Act of 1976, Pub.L. No. 94-210, 90 Stat. 31, and the Staggers Rail Act of 1980, Pub.L. No. 96-448, 94 Stat. 1895 ("Staggers Act"). The Staggers Act was enacted in order to "allow, to the maximum extent possible, competition and the demand for services to establish reasonable rates for transportation by rail." 49 U.S.C. § 10101a(1). Among other changes resulting from this Act, the Staggers Act stripped the I.C.C. of all jurisdiction to review rates and charges except in limited circumstances. See 49 U.S.C. § 10701a and 10709.
In October 1982, Conrail implemented a rail-rate policy in order to maximize its profits. This rate-making policy, known as Conrail's "make or buy" policy, is central to the instant dispute. D H alleges that this policy is exclusionary and unlawful in its implementation, while Conrail asserts that the make or buy policy is a legitimate, profit-maximizing program.
D H has sued Conrail, alleging violations of Section 2 of the Sherman Act, 15 U.S.C. § 2 (1982). D H claims that Conrail has monopolized, and attempted to monopolize, the market consisting of the transportation of newsprint from Eastern Canada to the mid-Atlantic states. D H claims that certain policies of Conrail, in particular Conrail's make or buy policy, are anti-competitive. Conrail has moved for summary judgment on all claims against D H.
The plaintiff, at oral argument, conceded that the relevant market here is one which is much narrower than the market it alleged when it originally brought this lawsuit. Both sides agree, for purposes of this motion, that the market defined by D H, which Conrail is alleged to have monopolized, and attempted to monopolize, is the aforementioned market.
DISCUSSION
1. The monopolization claim.
(a) Elements
For D H to successfully prove a violation of the Sherman Antitrust Act, it must meet the requirements stated in United States v. Grinnell Corp., 384 U.S. 563, 86 S.Ct. 1698, 16 L.Ed.2d 778 (1966). The Supreme Court held that:
(t)he offense of monopoly under § 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.Grinnell at 570-71, 86 S.Ct. at 1704.
The first step in a court's analysis of a claim involving alleged monopolization is a definition of the relevant markets. Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 268 (2d Cir. 1979), citing United States v. E.I. du Pont Nemours Co., 351 U.S. 377, 391-93, 76 S.Ct. 994, 1005-06, 100 L.Ed. 1264 (1956).
The plaintiff bears the burden of establishing the relevant market in a monopolization claim. Walker Process Equipment Co. v. Food Machinery Chemical Corp., 382 U.S. 172, 177-78, 86 S.Ct. 347, 350-51, 15 L.Ed.2d 247 (1965), Neumann v. Reinforced Earth Co., 786 F.2d 424, 429 (D.C. Cir. 1986).
A determination of the relevant market in an antitrust claim requires inquiry into both the nature of the product, E.I. du Pont, 351 U.S. at 391, 76 S.Ct. at 1004-05, and the geographical area in which the alleged illegal conduct took place. Grinnell, 384 U.S. at 575-76, 86 S.Ct. at 1706. See also Oahu Gas Service Inc. v. Pacific Resources, Inc., 838 F.2d 360, 364 (9th Cir. 1988).
For purposes of this motion, both parties agreed, at oral argument, that the relevant market is the transportation of newsprint from Eastern Canada to the mid-Atlantic states. As a result of this narrow market definition, many of the claims against Conrail in D H's complaint, including claims pertaining to Conrail's reciprocal switching rates, have been abandoned and are no longer an issue before this court.
While Conrail alleges that it does not possess monopoly power in the relevant market, since this court finds that the second element of an antitrust violation has not been proven by the plaintiff, the court will presume, for purposes of this motion, that Conrail does have monopoly power in this market.
The mere existence of monopoly power is not a violation of the Sherman Act. Rather, "the offense of monopolization under Section 2 of the Sherman Act requires proof of monopoly power . . . plus conduct designed to maintain or enhance that power improperly." Olympia Equip. Leasing v. Western Union Telegraph, 797 F.2d 370, 373 (7th Cir. 1986), citing United States v. Grinnell Corp., 384 U.S. 563, 570-71, 86 S.Ct. 1698, 1703-04, 16 L.Ed.2d 778 (1966), Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 596 n. 19, 105 S.Ct. 2847, 2854, 86 L.Ed.2d 467 (1985).
See Von Kalinowski, Antitrust Laws and Trade Regulation, vol. 3, § 8.02(4) (Bender 1989), where it is noted that:
Under Section 2, actual monopolization consists of the power to control prices or exclude competition, coupled with "the purpose or intent to exercise that power for anticompetitive or exclusionary purposes."See also Sullivan, Antitrust, § 36 (West 1976), where, in differentiating between permissible and exclusionary conduct on the part of an organization, it is stated that
First, [the exclusionary conduct test] should discriminate between conduct which is harmful in some economic sense, and conduct which is not; second, it ought to discriminate between alternative courses of action in the marketplace in a manner which would be meaningful to an actor there, so that those whose conduct the law would shape can be guided in meaningful ways; third, it should not ban conduct which is no more than the normal, rational response of a business manager seeking to maximize profits, sales, or revenues.
In determining whether a plaintiff has satisfied the second Grinnell requirement, the Aspen court held that proof of a general intent to monopolize was necessary to establish a Section 2 Sherman Act claim. Id. 472 U.S. at 602, 105 S.Ct. at 2857. In proving this intent on the part of Conrail, the plaintiff offers a memorandum of John H. Williams, Conrail's former assistant vice-president in charge of strategic analysis and planning. In this memo, written to Richard B. Hasselman, Conrail's Senior vice-president for operations, Williams said, concerning D H, "I'm for a monopoly in total! . . . So lets Conrail take and rationalize the entire D H."
This is relatively clear proof of Conrail's monopolistic intent. However, "the desire to crush a competitor, standing alone, is insufficient to make out a violation of the antitrust laws". Ocean State Physicians Health Plan, Inc. v. Blue Cross, 883 F.2d 1101, 1113 (1st Cir. 1989).
A monopolist is not prohibited from engaging in business transactions merely because it is a monopolist. Thus, in U.S. Football League v. National Football League, 842 F.2d 1335 (2d Cir. 1988), this circuit recently upheld the following jury instruction:
A monopolist has the same right to compete as any other company. Under the antitrust laws, a monopolist is encouraged to compete vigorously with its competitors and to remain responsive to the needs and demands of its customers.Id. at 1361. See also Ocean State, where the court noted that "Section 2 does not prohibit competition on the part of a monopoly. To the contrary, the primary purpose of the antitrust laws is to encourage competition." Id., 883 F.2d at 1110 (citations omitted).
Nor is a monopolist required to engage in business transactions without taking into account how such transactions would affect the monopolist's business. Accordingly, in Aspen the Supreme Court approved the following jury instruction:
a company which possesses monopoly power and which refuses to enter into a joint operating agreement with a competitor in some manner does not violate Section 2 if valid business reasons exist for that refusal. In other words, if there were legitimate business reasons for the refusal, then the defendant, even if he is found to possess monopoly power in the relevant market, has not violated the law.Id. 472 U.S. at 597, 105 S.Ct. at 2854.
Thus, the issue before this court is whether Conrail's make or buy policy was a legitimate business practice, and therefore not violative of Section 2, or whether this program was exclusionary and therefore impermissible under the Act. Accordingly, an examination of this policy is appropriate.
(b) The make or buy rail-rate policy.
In 1982, Conrail instituted what it refers to as its make or buy rail-rate policy. Under this program, Conrail informed D H that it would concur in rates proposed by D H over short haul routes as long as Conrail received the same contribution that it would receive if Conrail carried the freight by itself along one of its own long haul routes.
Contribution is the revenue that a carrier receives for moving freight over part of a route, less the costs associated with that movement.
Conrail offered the following example as illustrative of this policy: A Canadian rail carrier sought to offer a rate to a shipper in Quebec, Canada concerning the transportation of paper from Quebec to Lancaster, Pennsylvania, a point served only by Conrail. This freight could be transported over several possible through routes. One route would be from the shipper's location in Quebec over the Canadian carrier, to D H at Rouses Point, New York, for interchange with Conrail at Harrisburg, Pennsylvania, and for final delivery by Conrail to the consignee at Lancaster. Alternatively, the paper could be delivered from its place of origin to Conrail's station in Quebec, where Conrail could then directly carry the freight to the consignee in Lancaster, Pennsylvania.
The Canadian carrier contacted both D H and Conrail, and sought to establish an equal joint rate for each route. Conrail did not concur in the joint rate proposal concerning the route involving D H, because in the D H/Conrail route, Conrail would have received less contribution than it would had Conrail carried the freight by itself.
D H alleges that Conrail's refusal to concur in joint rates such as the aforementioned is exclusionary. The plaintiff argues that since it would cost Conrail less money to participate in rates with D H, rather than for hauls involving Conrail alone, Conrail's refusal to concur is anticompetitive conduct. This contention is incorrect. Of course, it would cost Conrail more money to haul the paper from Quebec to Lancaster than it would had Conrail chosen to transport it only from Harrisburg to Lancaster. However, the contribution Conrail would have received for hauling the paper from Harrisburg would have been significantly less than the contribution it would have obtained for transporting the paper from Quebec to Lancaster. Conrail's profits are directly tied to the contribution it receives, so as the overall contribution it collects increases, so does Conrail's potential for profits. It therefore would have been unprofitable for Conrail to concur in joint rates with D H in situations where it would have received more contribution if Conrail, alone, carried the freight. A monopolist is not required to engage in practices which are less profitable than other, legitimate practices. U.S. Football League, 842 F.2d at 1361.
For example, if it cost Conrail $20,000 to carry paper from Quebec to Lancaster, and it was offered $30,000 to transport the paper by a Canadian company, Conrail would receive a contribution (or profit) of $10,000. Had it cost Conrail $750 to carry the paper from Harrisburg to Lancaster in a joint rate proposal with D H, and it was paid $2,000, it would have only received a $1,250 contribution.
In U.S. Football League, the second circuit approved a jury instruction which stated, inter alia, that:
a monopolist is under no duty to help or aid its competitors and is free to set as its legitimate goal the maximization of its own profits so long as it does not exercise its [monopoly] power to maintain that power (emphasis added).
The plaintiff claims that Conrail's make or buy policy is the "exact counterpart" of the conduct of the defendant in Aspen, where the defendant's conduct was found to violate section 2 of the Sherman Act. However, this is not the case. In Aspen, the Court found that it would be logical for a jury to conclude that:
[the defendant] Ski Co. elected to forgo . . . short run benefits because it was more interested in reducing competition . . . over the long run by harming its smaller competitor.Id. 472 U.S. at 608, 105 S.Ct. at 2860. The Court also found that the defendant "was willing to sacrifice short run benefits and consumer goodwill" in order to harm its competitor in the long run. Id. at 610-11, 105 S.Ct. at 2861. In the instant case, D H has failed to proffer evidence of a similar sacrifice on the part of Conrail. The plaintiff has not provided this court with one instance where Conrail refused to concur in joint rates with D H where concurrence with D H would have been more profitable for Conrail than non-concurrence.
Thus, D H has failed to show how this make or buy policy, as implemented by the defendant, was anything but a valid business policy of Conrail, and therefore not violative of Section 2.
Having analyzed Conrail's rail-rate making policy, the court must next consider whether it is appropriate, on a motion for summary judgment, to conclude as a matter of law here that Conrail's make or buy policy is a legitimate business policy and therefore not violative of Section 2.
(c) The appropriateness of summary judgment.
In Bouldis v. U.S. Suzuki Motor Corp., 711 F.2d 1319 (6th Cir. 1983), the plaintiff appealed a district court's granting of summary judgment in favor of the defendant in a suit based on both the Sherman Antitrust Act and the Clayton Act, § 3, 15 U.S.C. § 14. In upholding the district court's granting of summary judgment, the court stated:
a decision to extend or withhold credit which is based upon valid business considerations does not violate § 2(a) [of the Clayton Act], and since the only record evidence establishes that [the defendant's] refusal to extend credit to [the plaintiff] . . . was based upon valid considerations, it was not error for the district court to grant summary judgment on this issue.Id. at 1326. Similarly, in Bell v. Dow Chemical Co., 847 F.2d 1179 (5th Cir. 1988), while finding a triable issue of fact in the Section 2 case that was before it, the fifth circuit noted:
Defendants can offer business justifications for the refusal to deal. If the justifications are supported by legitimate business concerns . . . then the district court may decide as a matter of law that the defendant's refusal "`was actuated by innocent motives rather than by an intention and desire to perpetuate a monopoly.'" Eastman Kodak Co. v. Southern Photo Materials Co., 273 U.S. 359, 375, 47 S.Ct. 400, 404 [ 71 L.Ed. 684] (1927).Bell, 847 F.2d at 1185.
Thus, it is appropriate for this court, on a motion for summary judgment, to find as a matter of law that a defendant's business practices are legitimate and not violative of the Sherman Act. Clearly, profit maximization is a legitimate business goal. The defendant's make or buy policy's sole goal is profit maximization. Therefore, this court finds that the defendant has not engaged in exclusionary conduct violative of Section 2 of the Sherman Antitrust Act.
(d) The essential facilities doctrine.
In addition to a traditional Section 2 analysis, the plaintiff argues that the defendant is not entitled to summary judgment on its monopolization claim because of the "essential facilities" doctrine. This doctrine is based on the theory that a monopolist in control of a scarce or essential facility must give competitors reasonable access to the facility. Since, as discussed below, the plaintiff has failed to prove one of the elements of this doctrine, it is precluded from invoking the same.
Byars v. Bluff City News Co., Inc., 609 F.2d 843, 856 (6th Cir. 1979), citing United States v. Terminal Railroad Assoc., 224 U.S. 383, 32 S.Ct. 507, 56 L.Ed. 810 (1912).
There are four elements necessary to establish liability under the essential facilities doctrine:
(1) control of the essential facility by a monopolist; (2) a competitor's inability practically or reasonably to duplicate the essential facility; (3) the denial of the use of the facility to a competitor; and (4) the feasibility of providing the facility.MCI Communications v. American Tel. Tel. Co., 708 F.2d 1081, 1132-33 (7th Cir. 1983), cert. denied 464 U.S. 891, 104 S.Ct. 234, 78 L.Ed.2d 226 (1983).
Assuming, arguendo, that the relevant essential facility in this case is defendant's tracks, the defendant must prove that it could not duplicate this facility, and that Conrail refused D H permission to use it.
Here, there can be no dispute that a physical duplication of defendant's lines would be an impractical and unreasonable project to undertake. Thus, this facility could only have been "duplicated" by Conrail allowing D H the use of Conrail's tracks. An absolute refusal to allow a competitor the use of its facilities is not required in order to satisfy the third element of the essential facilities doctrine. Rather, if a company's offer to allow its competitor to use its facilities is unreasonable, then such an offer can be viewed as a refusal to deal at all. Consolidated Gas Co. of Fla. v. City Gas Co. of Fla., 665 F. Supp. 1493, 1534 (S.D.Fla. 1987), aff'd 880 F.2d 297 (11th Cir. 1989).
Here, unlike in Consolidated Gas, this court has determined that defendant's make or buy policy is a reasonable, profit maximizing practice. The defendant was, at all times, willing to allow D H the use of Conrail's tracks, via joint rates with D H, as long as the overall contribution Conrail received for the job would have been no less than the amount it would receive for non-participation.
In Laurel Sand Gravel, Inc. v. CSX Transp. Inc., 704 F. Supp. 1309 (D.Md. 1989), the plaintiff brought an action claiming, inter alia, that defendant's joint rate proposal was unreasonable and therefore violative of the Sherman Act. In Laurel, as here, the court found the defendant's proposal to be reasonable. Id. at 1324. As a result, the Laurel court ruled that the plaintiff had failed to prove the third element of the essential facilities doctrine, and accordingly granted defendant's motion for summary judgment. Id. at 1324-25.
In the instant case, the plaintiff has failed to prove that Conrail denied D H the use of Conrail's tracks. Therefore, the plaintiff cannot prevail in its antitrust claim utilizing the essential facilities doctrine.
2. The attempt to monopolize claim.
The second count in plaintiff's complaint alleges that the defendant has attempted to monopolize the market consisting of the transportation of newsprint from Eastern Canada to the mid-Atlantic states. The elements for an attempt to monopolize claim were recently set forth in International Distribution Centers, Inc. v. Walsh Trucking Co., 812 F.2d 786 (2d Cir. 1987), cert. denied 482 U.S. 915, 107 S.Ct. 3188, 96 L.Ed.2d 676 (1987). The Second Circuit stated that:
[l]iability for attempted monopolization rests on proof of three elements: (1) anti-competitive or exclusionary conduct; (2) specific intent to monopolize; and (3) a "dangerous probability" that the attempt will succeed.Id. at 790 (citations omitted).
In Neumann v. Reinforced Earth Co., 786 F.2d 424 (D.C. Cir. 1986), the court discussed at some length the general scope and philosophy behind a violation of Section 2 of the Sherman Act concerning an attempt by a company to monopolize a market. The court held:
When the law speaks of attempts to monopolize, it generally refers to predation. Predation involves the deliberate seeking of monopoly power by means other than superior efficiency, by means that would not be employed in the normal course of competition. Thus, predation involves aggression against business rivals through the use of business practices that would not be considered profit maximizing except for the expectation that (1) actual rivals will be driven from the market, or the entry of potential rivals blocked or delayed, so that the predator will gain or retain a market share sufficient to command monopoly profits or (2) rivals will be chastened sufficiently to abandon competitive behavior the predator finds threatening to its realization of monopoly profits.Id. at 427.
In addition to defendant's make or buy policy, which this court has already found to be a legitimate practice on the part of Conrail, the plaintiff refers to three specific actions taken by Conrail which D H alleges proves Conrail's specific intent to monopolize the relevant market.
One of these acts was the installation of a fueling facility at Rockeville, Pennsylvania. The plaintiff alleges that Conrail persistently delayed D H's trains while it refueled its own trains, and that if Conrail was refueling one of its trains, it would send the waiting D H train on a different, longer route, causing additional delays and expense to D H. Clearly, the installation of a fueling facility is not exclusionary conduct per se. In response to defendant's motion, the plaintiff has failed to proffer any evidence proving that this facility was installed with the specific intent of monopolizing the market concerning the transportation of newsprint from Eastern Canada to the mid-Atlantic states. The second anti-competitive act alleged by plaintiff was Conrail's ruling permitting its dispatchers to prevent engineers, including those from D H, from continuing travel along Conrail's tracks, upon a determination by Conrail that the engineer in question had worked too many hours. This policy was adopted by Conrail to improve safety over its railways. While there is no dispute that Conrail did, in fact, adopt such a policy, as with Conrail's conduct concerning the installation of the fueling facility, the plaintiff has not proffered any evidence which links this practice on the part of Conrail to the defendant's attempt to monopolize the relevant market. Additionally, there is no evidence before this court that any newsprint traffic from Eastern Canada moved over either of these areas, let alone that such traffic was delayed or diverted by the fueling facility or Conrail's application of the "hours of service" rule.
Finally, the plaintiff claims that Conrail arbitrarily refused to permit D H to adjust its trains at facilities in Allentown, Pennsylvania. Once again, however, the plaintiff has proffered no proof which links this refusal to the plaintiff's claim that Conrail has attempted to monopolize the market concerning the transportation of newsprint from Eastern Canada to the mid-Atlantic states. In fact, the plaintiff, itself, in its memorandum opposing defendant's motion for summary judgment, claims that this conduct resulted in the loss to D H of its ferro-manganese ore traffic, but is silent concerning a loss of any newsprint traffic. Thus, this evidence, too, is insufficient to prove anti-competitive conduct on the part of the defendant sufficient to withstand defendant's motion for summary judgment concerning plaintiff's attempt to monopolize claim.
Conclusion
The plaintiff has failed to prove that the defendant's make or buy rail-rate policy was anything other than a legitimate, profit-maximizing program on the part of the defendant. Therefore, defendant's conduct did not violate the Sherman Antitrust Act, under either traditional Section 2 analysis or under the essential facilities doctrine.
Additionally, the plaintiff has failed to prove that the defendant engaged in any exclusionary acts with the specific intent of monopolizing the market consisting of the transportation of newsprint from Eastern Canada to the mid-Atlantic states. Thus, the plaintiff has not proven its attempt to monopolize claim. Accordingly, this court grants defendant's motion for summary judgment on both counts of plaintiff's complaint.
IT IS SO ORDERED.