In Re: Rail Freight Fuel Surcharge Antitrust Litigation - MDL 1869

Memorandum in opposition to re Joint MOTION to Dismiss DIRECT PURCHASER PLAINTFFS' CONSOLIDATED AMENDED COMPLAINT

D.D.C.July 8, 2008

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA In re RAIL FREIGHT FUEL SURCHARGE ANTITRUST LITIGATION ______________________________________ This document relates to: ALL CASES MDL Docket No. 1869 Misc. No. 07-489 (PLF) DIRECT PURCHASER PLAINTIFFS’ OPPOSITION IN RESPONSE TO DEFENDANTS’ JOINT MOTION TO DISMISS Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 1 of 71 i TABLE OF CONTENTS Page PRELIMINARY STATEMENT................................................................................................. 1 THE COMPLAINT’S ALLEGATIONS..................................................................................... 7 A. The Railroad Industry.......................................................................................... 7 B. Origins Of The Conspiracy.................................................................................. 8 C. Publication of the AIILF and Fixing Surcharge Rates .......................................... 9 D. The Conspiracy Operates Successfully .............................................................. 12 E. The STB Ruling ................................................................................................ 14 ARGUMENT ........................................................................................................................... 16 I. NO HEIGHTENED PLEADING STANDARDS APPLY............................................. 16 II. THE COMPLAINT ADEQUATELY ALLEGES AN UNLAWFUL PRICE- FIXING CONSPIRACY............................................................................................... 21 III. THE COMPLAINT’S CONSPIRACY ALLEGATIONS ARE COHERENT AND PLAUSIBLE................................................................................................................. 29 A. The Creation and Adoption of the AIILF is Probative of the Conspiracy ........... 29 1. Defendants’ Creation and Adoption of the AIILF was Key to their Price-fixing Conspiracy ......................................................................... 29 2. Defendants’ Agreement to Publish and Use the AIILF is Actionable Under the Sherman Act. ....................................................... 31 3. Defendants’ Post Hoc, Piecemeal Justifications for the AIILF are Unpersuasive ......................................................................................... 37 B. The Lockstep Fuel Surcharges of the Western and Eastern Railroads are Probative of the Conspiracy............................................................................... 41 1. The Complaint Explains How the Mechanisms and Timing of the Defendants’ Lockstep Pricing Fit Within the Allegations of Conspiracy............................................................................................. 42 2. Defendants’ Years of Lockstep Pricing Cannot Be Explained Away As Unilateral Conduct ................................................................. 45 Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 2 of 71 ii C. Defendants’ Numerous Breaks from Industry Practice Over a Short Period of Time Are Probative of Conspiracy ................................................................ 51 D. The Complaint’s Allegations of Defendants’ Other Conspiratorial Conduct Further Support the Plausbility of the Alleged Conspiracy................................. 55 1. Industry Communications ...................................................................... 56 2. Short-Term Contracts............................................................................. 58 3. Through Rates ....................................................................................... 59 4. Advance Publication of Fuel Surcharges ................................................ 60 5. Failure to Negotiate Fuel Surcharges...................................................... 61 6. Government Investigation ...................................................................... 62 7. Market Share Stabilization ..................................................................... 63 CONCLUSION ........................................................................................................................ 64 Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 3 of 71 iii TABLE OF AUTHORITIES Page Cases *Aktieselskabet AF 21. November 2001 v. Fame Jeans Inc, 525 F.3d 8 (D.C. Cir. 2008) ..................................................................... 4, 17, 21, 27, 34, 50 Am. Column & Lumber Co. v. U.S., 257 U.S. 377 (1921)............................................................................................................ 35 Am. Tobacco Co. v. U.S., 328 U.S. 781 (1946)............................................................................................................ 36 In re Automotive Refinishing Paint Antitrust Litig., 229 F.R.D. 482 (E.D. Pa. 2005) .......................................................................................... 57 In re Baby Food Antitrust Litig., 166 F.3d 112 (3d. Cir. 1999)..........................................................................................49, 50 Babyage.com, Inc. v. Toys “R” Us, Inc., Civ. Action No. 05-6792, 2008 WL. 2120493 (E.D. Pa. May 20, 2008) .........................28, 55 Beach v. Atlas Van Lines, Civ. Action No. 2:07-764-CWH, Order, (D.S.C. Mar. 31, 2008)....................................28, 48 Behrend v. Comcast Corp., 532 F. Supp. 2d 735 (E.D. Pa. 2007)........................................................................20, 23, 28 *Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007)..................................................................................................passim Brown v. Pro Football, Inc., 518 U.S. 231 (1996)............................................................................................................ 48 Callahan v. A.E.V., Inc., 947 F. Supp. 175 (W.D. Pa. 1996) ...................................................................................... 43 In re Carbon Black Antitrust Litig., MDL No. 1543, 2005 WL. 102966 (D. Mass. Jan. 18, 2005) .............................................. 57 Cement Mfrs’ Protective Ass'n v. U.S., 268 U.S.588 (1925)............................................................................................................. 35 In re Citric Acid Litig., 191 F.3d 1090 (9th Cir. 1999)........................................................................................49, 50 *City of Moundridge v. Exxon Mobil Corp., No. 04-940, 2008 WL. 1735856 (D.D.C. April 16, 2008)..................19, 20, 23, 25, 28, 38, 47 Clamp-All Corp. v. Cast Iron Soil Pipe Institute, 851 F.2d 478 (1st Cir. 1988) ..........................................................................................49, 50 Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 4 of 71 iv Conley v. Gibson, 355 U.S. 41 (1957) ............................................................................................................. 16 *Cont’l Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690 (1962)....................................................................................... 5, 17, 36, 38, 56 In re Coordinated Pretrial Proceedings in Petroleum Products Antitrust Litig., 906 F.2d 432 (9th Cir. 1990)............................................................................................... 61 In re Copper Antitrust Litig., 98 F. Supp. 2d 1039 (W.D. Wis. 2000) ............................................................................... 44 Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451 (1992)............................................................................................................ 38 In re Elevator Antitrust Litig., 502 F.3d 47 (2d Cir. 2007).................................................................................................. 26 *Erickson v. Pardus, 127 S. Ct. 2197 (2007)...........................................................................................4, 7, 16, 27 Esco Corp. v. U.S., 340 F.2d 1000 (9th Cir. 1965)............................................................................................ 48 *Fair Isaac Corp. v. Equifax Inc., 2008 WL. 623120 (D. Minn. March 4, 2008) ...........................................................19, 28, 52 Fed. Trade Comm’n v. Pac. States Paper Trade Ass'n, 273 U.S. 52 (1927) ............................................................................................................. 35 In re Fine Paper Antitrust Litig., 685 F.2d at 822..........................................................................................................5, 17, 38 In re Flat Glass Antitrust Litig., 385 F.3d 350 (3d. Cir. 2004)............................................................................................... 57 *In re Graphics Processing Units Antitrust Litigation, 540 F. Supp. 2d 1085 (N.D. Cal. 2007) .............................................................. 28, 43, 47, 52 In re High Fructose Corn Syrup Antitrust Litig., 295 F.3d 651 (7th Cir. 2002)............................................................................................... 63 Hyland v. Homeservices of America, Inc., No. 05-612, 2007 WL. 2407233 (W.D. Ky. Aug. 17, 2007) ...........................................20, 28 In re Hypodermic Prods. Antitrust Litig., MDL No. 1730, 2007 WL. 1959224 (D.N.J. June 29, 2007) ....................................18, 23, 28 Ice Cream Liquidation, Inc. v. Land O'Lakes, Inc., 253 F. Supp. 2d 262 (D. Conn. 2003).................................................................................. 44 *Jung v. Ass’n of Am. Med. Colls., 300 F. Supp. 2d 119 (D.D.C. 2004)......................................................................5, 17, 38, 53 Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 5 of 71 v *Jung v. Ass’n of Am. Med. Colls., 339 F. Supp. 2d 26 (D.D.C. 2004)..............................................................................5, 36, 37 Kendall v. U.S.A., Inc., 518 F.3d 1042 (9th Cir. 2008)........................................................................................26, 27 In re Late Fee and Over-limit Fee Litig., 528 F. Supp. 2d 953 (N.D. Cal. 2007) ................................................................................. 27 In re Linerboard Antitrust Litig., 504 F. Supp. 2d 38 (E.D. Pa. 2007)................................................................................38, 48 Maple Flooring Mfrs.’ Ass’n v. U.S., 268 U.S. 563 (1925)............................................................................................................ 35 In re Mercedes Benz Antitrust Litig., 157 F. Supp. 2d 355 (D.N.J. 2001).................................................................................26, 44 Moore v. Boating Indus. Ass’ns, 819 F.2d 693 (7th Cir. 1987)............................................................................................... 35 In re Motor Fuel Temperature Sales Practices Litig., 534 F. Supp. 2d 1214 (D. Kan. 2008).................................................................................. 23 NCAA v. Board of Regents of Univ. of Oklahoma, 468 U.S. 85 (1984) ............................................................................................................. 35 National Soc’y of Prof’l Eng’rs v. U.S., 435 U.S. 679 (1978)............................................................................................................ 35 In re Newbridge Networks Sec. Lit., 767 F. Supp. 275 (D.D.C. 1991).......................................................................................... 30 *In re OSB Antitrust Litig., No. 06-826, 2007 WL. 2253419 (E.D. Pa. Aug. 3, 2007) ..............5, 18, 25, 28, 44, 47, 57, 61 Poller v. Columbia Broadcasting, 368 U.S. 464 (1962)............................................................................................................ 26 Reserve Supply Corp. v. Owens-Corning Fiberglas Corp., 971 F.2d 37 (7th Cir. 1992)................................................................................................. 49 Schachar v. Am. Acad. of Ophthalmology, Inc., 870 F.2d 397 (7th Cir. 1989)............................................................................................... 35 *In re Southeastern Milk Antitrust Litig., MDL No. 1899, 2008 WL. 2117159 (E.D. Tenn. May 20, 2008) ........5, 17, 20, 23, 28, 38, 53 In re Static Random Access Memory (SRAM) Antitrust Litig., MDL No. 1819, 2008 WL. 426522 (N.D. Cal. Feb. 14, 2008)............................................. 57 In re Tableware Antitrust Litig., 363 F. Supp. 2d 1203 (N.D. Cal. 2005) ............................................................................... 62 Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 6 of 71 vi In re Travel Agent Comm’n Litig., MDL No. 1561, 2007 WL. 3171675 (N.D. Ohio Oct. 29, 2007).....................................27, 49 U.S. v. Container Corp. of America 393 U.S. 333 (1969) ........................................................................................................... 61 U.S. v. Nat’l Ass’n of Broadcasters, 536 F. Supp. 149 (D.D.C. 1982)...................................................................................... 5, 34 U.S. v. Patten, 226 U.S. 525 (1913)............................................................................................................ 17 U.S. v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940).......................................................................................................48, 51 United States v. Yonkers Contracting Co., Inc., 706 F. Supp. 296 (S.D.N.Y. 1989) ...................................................................................... 44 In re Vitamins Antitrust Litig., No. 99-197 (TFH), 2000 WL. 1475705 (D.D.C. May 9, 2000)............................................ 44 In re Western States Wholesale Natural Gas Antitrust Litig., MDL No. 1566, Order, (D. Nev. Feb. 19, 2008).......................................................28, 52, 53 Statutes 15 U.S.C. § 1............................................................................................................................ 16 49 U.S.C. § 10704 ...................................................................................................................... 8 49 U.S.C. § 10708 .................................................................................................................... 40 49 U.S.C. § 10709 ...................................................................................................................... 8 Interstate Commerce Act, Ch. 104, 24 Stat. 379 (1887) ............................................................ 15 ICC Termination Act, Pub. L. No. 104-88, 109 Stat. 803 (1995)............................................... 15 Staggers Rail Act, Pub. L. No. 96-448, 94 Stat. 1895 (1980)................................................... 7, 8 Rules *Fed. R. Civ. P. 8 .....................................................................................4, 16, 17, 21, 23, 27, 38 Other Authorities *Rail Fuel Surcharges, STB Ex Parte No. 661 (January 25, 2007) ..........14, 15, 16, 39, 46, 47, 53 Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 7 of 71 Direct Purchaser Plaintiffs respectfully submit this memorandum in opposition to the Joint Motion to Dismiss filed on May 30, 2008 by Defendants BNSF Railway Company (“BNSF”), Union Pacific Railroad Company (“UP”), CSX Transportation, Inc. (“CSX”) and Norfolk Southern Railway Company (“NS”) (together, “Defendants”). For the reasons set forth below, Defendants’ motion should be denied. PRELIMINARY STATEMENT Direct Purchaser Plaintiffs’ Consolidated Amended Class Action Complaint (“Complaint” or “Compl.”) sets forth in detail the price-fixing conspiracy orchestrated by the Defendant railroads, who together account for over 90 percent of the nation’s rail freight shipments. The Complaint describes how Defendants agreed, and successfully implemented their joint plan, to make unprecedented and widespread use of stand-alone “rail fuel surcharges,” which in fact were not correlated to actual fuel costs, as a means to broadly impose supracompetitive price increases for a period of almost four years or more. The Complaint here is nothing like the complaint dismissed in Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007) - a complaint the Supreme Court said included no specific allegations of an actual agreement and “proceed[ed] exclusively via allegations of parallel conduct,” Twombly, 127 S. Ct. at 1971 n.11 (emphasis added); see also id. at 1970 (“the complaint leaves no doubt that plaintiffs rest their § 1 claim on descriptions of parallel conduct and not on any independent allegation of actual agreement among the ILECs”). Instead, the Complaint here details the specific agreements made by Defendants, when they were made, and why. The Complaint explains that, unlike in the past era of regulation, when railroads could apply to the former Interstate Commerce Commission for across-the-board rate increases, by 2003 the vast majority of rail freight was shipped pursuant to private contracts with individual customers. These private contracts typically included rate-escalation provisions Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 8 of 71 2 based on weighted cost-adjustment indexes that already accounted for any actual fuel cost increases. Those indexes were the All Inclusive Index of Railroad Input Costs (“AII”), published by the Association of American Railroads (“AAR”) and the related Rail Cost Adjustment Factor (“RCAF”), based on the AII. As noted in the Complaint, Defendant UP’s president admitted in 2004 that the RCAF cost-adjustment index “looks at actual costs through the industry.” While at least some of the Defendants had used stand-alone fuel surcharges prior to 2003, these were only used in isolated instances, and the railroads all used different methods of calculating the surcharges. As the Complaint points out, Defendant UP’s president admitted that, prior to 2003, stand-alone fuel surcharges “were really non-existent.” The Complaint then sets forth that in mid-2003 the two major Western railroads (BNSF and UP) determined that they could increase profits by moving away from the then-prevailing AII and RCAF indexes (which only adjusted rates based on actual cost increases) and toward widespread use of separate fuel surcharges calculated as a percentage of the total base rate of the freight shipment (and thus not reflecting actual fuel costs). To facilitate this joint plan, BNSF and UP in mid-2003 brought their fuel surcharge programs into lockstep. As the Complaint explains, however, BNSF and UP still faced a critical barrier to widespread imposition of the stand-alone fuel surcharges that were now in lockstep: the prevailing use in private contracts of the AII and RCAF indexes that already provided for the full recoupment of any actual fuel cost increases. As detailed in the Complaint, the four Defendants conspired together to solve this problem by causing the AAR - which the four Defendants control and dominate - to publish an entirely new cost-adjustment index excluding fuel as one of the weighted factors. During the Fall of 2003, including at AAR board meetings specifically identified by date in the Complaint, Defendants BNSF and UP, along with the two major Eastern Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 9 of 71 3 railroads, Defendants CSX and NS, agreed together to make possible the broad imposition of stand-alone fuel surcharges by creating a new All Inclusive Index Less Fuel (“AIILF”). The four Defendants used their control and domination of the AAR to cause the AAR to publish the new index in December 2003. The Complaint points out, among other things, BNSF’s public admission in early 2004 that its chairman, president, and chief executive officer “led the charge” at the AAR on adoption of the new index. Defendants further agreed to impose both the new AIILF and stand-alone fuel surcharges on their customers. Thus, by January 2004, one month after publication of the AIILF through the AAR, all Defendants had publicly announced their intent to begin to impose widely stand- alone fuel surcharges. Freight shipment customers could not refuse, because they had no choice. Defendants simultaneously eliminated any remaining competition in their fuel surcharge rates. On the heels of the announcement of the new index without fuel, the two Eastern railroads, like the Western railroads before them, moved their stand-alone fuel surcharge rates into lockstep. Both the Eastern and Western railroads used the same complex methods to apply fuel to the overall cost of the freight transport and the same timetable for advance announcement of the fuel surcharges. For instance, Defendants all charged fuel surcharges that were a percentage of the total freight transport cost (and thus independent of actual fuel transportation costs); all established the same two-month time period following an increase to the fuel index to implement rate adjustments; all reported their fuel surcharges on their websites; and all adopted similar mechanisms for determining when and how their fuel surcharges would be calculated. Following adoption of the AIILF, the Eastern and Western railroad freight fuel surcharges remained in lockstep, respectively, through at least mid-2007. Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 10 of 71 4 The Complaint also details the Defendants’ other collective action to facilitate and enforce implementation of the conspiracy. These include offering more shorter-term contracts than in the past, decreasing the use of so-called “through rates,” and refusing to negotiate discounts or make other efforts to compete for market share. The Complaint thus more than satisfies the applicable notice pleading requirements of Rule 8 - requirements that, as the Supreme Court and D.C. Circuit have both explained, remain unchanged by Twombly. See Erickson v. Pardus, 127 S. Ct. 2197, 2200 (2007) (under Rule 8(a)(2), the complaint “need only ‘give the defendant fair notice of what the … claim is and the grounds upon which it rests’”) (quoting Twombly, 127 S. Ct. at 1964); Aktieselskabet AF 21. November 2001 v. Fame Jeans Inc. (“Aktieselskabet”), 525 F.3d 8, 15 (D.C. Cir. 2008) (“We conclude that Twombly leaves the long-standing fundamentals of notice pleading intact.”). Defendants do not dispute that the Complaint provides adequate notice. Rather, Defendants employ two improper approaches. The first is overtly to mischaracterize the Complaint, asserting without any basis, for example, that the allegations are purely conclusory. The second is to try to defend particular alleged acts by improperly disaggregating what the Complaint alleges and offering piecemeal, post-hoc justifications. For example, Defendants now try to explain away their years of lockstep pricing as a function of “price matching and follow- the-leader pricing,” (Defendants’ Brief at 13),1 simply disregarding the clear alleged connection between their lockstep pricing and their joint adoption of the new cost-adjustment index, excluding fuel, at the AAR. Similarly, Defendants’ suggestion that they are being charged merely with “participation in trade association activities,” (Defendants’ Brief at 1), takes their 1 As used herein, “Defendants’ Brief” refers to the Memorandum of Points and Authorities in Support of Defendants’ Joint Motion to Dismiss Direct Purchaser Plaintiffs’ Consolidated Amended Complaint (Docket No. 106). Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 11 of 71 5 conduct at the AAR out of the context of all of the related activity on fuel surcharges and enforcement of the agreed program.2 As this Court has observed, “allegations in antitrust cases cannot be compartmentalized and considered in isolation ‘as if they were separate lawsuits, thereby overlooking the conspiracy claim itself.’” Jung v. Ass’n of Am. Med. Colls., 300 F. Supp. 2d 119, 155 (D.D.C. 2004) (Friedman, J.) (quoting In re Fine Paper Antitrust Litigation, 685 F.2d 810, 822 (3d Cir.1982)). See also Cont’l Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 699 (1962) (“The character and effect of a conspiracy are not to be judged by dismembering it and viewing its separate parts, but only by looking at it as a whole.”)3 And with respect to trade organizations like the AAR, this Court has also noted that if a trade association takes action that is used “as the means to effectuate an antitrust conspiracy, the conspiracy itself is still unlawful.” Jung v. Ass’n of Am. Med. Colls., 339 F. Supp. 2d. 26, 37 (D.D.C. 2004). Furthermore, Defendants’ additional argument, that the AIILF could not be part of a conspiracy because it was not “mandatory” or coercive, has no legal or factual foundation.4 2 Defendants also add to the mix a series of self-serving “factual” arguments that effectively ask this Court not to accept the Complaint’s allegations as true - wholly inappropriate at the motion to dismiss stage, and all the more so here where Defendants have successfully argued that discovery should be stayed until this Court has ruled on the motion to dismiss. 3 As discussed below, post-Twombly rulings are to the same effect. See, e.g., In re Southeastern Milk Antitrust Litig., MDL No. 1899, 2008 WL 2117159 at *7 (E.D. Tenn. May 20, 2008) (rejecting defendants’ “attempt to parse and dismember the complaints”); In re OSB Antitrust Litig., No. 06-826, 2007 WL 2253419, at *5 (E.D. Pa. Aug. 3, 2007) (“an antitrust complaint should be viewed as a whole”). 4 See, e.g., U.S. v. Nat’l Ass’n of Broadcasters, 536 F. Supp. 149, 163 (D.D.C. 1982) (“it is well established that the parties to an agreement which per se violates the antitrust laws may not defend on the basis that they have applied no coercion to bring about adherence to the combination or to compel obedience to its terms.”); id. at 164 (“It is, indeed, difficult to see why legal unenforceability or lack of formal sanctions should be considered a valid defense.”). Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 12 of 71 6 As discussed below, Defendants’ motion to dismiss should thus be denied for the following reasons. First, Plaintiffs allege the existence of an unlawful price-fixing conspiracy in considerable detail, providing Defendants ample notice of precisely what they are charged to have done, and satisfying - indeed, far exceeding - all applicable pleading standards. Contrary to Defendants’ claims, Plaintiffs’ allegations are in no way “conclusory” or incoherent. See Points I & II, infra. Second, the Complaint’s allegations of Defendants’ use of the AAR to provide cover for entering into the conspiracy and fulfilling its objectives are fully sufficient to establish liability under the Sherman Act. Defendants are not charged with merely participating in trade association activities, or innocently publishing a purely voluntary index. Rather, Defendants are charged with working collectively through the AAR to implement a price-fixing agreement and agreeing to impose the AIILF and stand-alone fuel surcharges on their customers in a coordinated fashion. See Point III.A, infra. Third, the Complaint’s allegations surrounding Defendants’ years of lockstep pricing - which Defendants’ own submissions confirm - firmly support the existence and plausibility of the alleged conspiracy. Defendants improperly try to disaggregate their lockstep pricing from other allegations of their conspiratorial conduct. Moreover, their current post hoc explanation that they engaged in purposeful “price matching” only underscores the plausibility of the conspiracy, particularly given their simultaneous advance communications of the fuel surcharges and pretextual justifications for their behavior. See Point III.B, infra. Finally, the Complaint contains numerous additional allegations further supporting the existence and plausibility of the alleged conspiracy that Defendants do not and cannot dispute - Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 13 of 71 7 including numerous breaks with industry practice by Defendants over a short period of time made to facilitate and enforce the conspiracy and actions that were against each railroad’s independent self-interest, absent a conspiracy. Defendants’ post hoc attempts to justify their actions disregard the totality of facts alleged in the Complaint and, for that reason and others, are unpersuasive. See Points III.C & D, infra. THE COMPLAINT’S ALLEGATIONS Plaintiffs bring this action on behalf of themselves and a proposed nationwide class of entities (the “Class”) who purchased rate-unregulated freight transportation services directly from Defendants from July 1, 2003 until at least June 30, 2007 (the “Class Period”) and who were assessed a rail fuel surcharge. Plaintiffs seek treble damages arising from Defendants’ agreement to fix prices of rail freight transportation services sold during the Class Period. The Complaint alleges the following facts in detail to support its claim that Defendants engaged in unlawful concerted conduct under Section 1 of the Sherman Act.5 A. The Railroad Industry For about 100 years, the Interstate Commerce Commission (“ICC”) exercised almost total control over carrier rates and practices. (Compl. ¶ 49.) During this era, railroads generally charged only published tariff rates filed with the ICC. When railroads wanted a rate increase, they could apply to the ICC for across-the-board rate increases, which could lawfully be implemented on a collective basis. (Id. ¶¶ 48-49.) In 1980, Congress passed the Staggers Rail Act (“Staggers Act”). Pub. L. No. 96-448, 94 Stat. 1895 (1980). The Staggers Act substantially deregulated the rail industry, giving railroads greater freedom to price their services and encouraging greater reliance on competition to set 5 “[W]hen ruling on a defendant’s motion to dismiss, a judge must accept as true all of the factual allegations contained in the complaint.” Erickson, 127 S. Ct. at 2200. Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 14 of 71 8 rates. Rail regulation today is overseen by the successor to the ICC, the Surface Transportation Board (the “STB”). See 49 U.S.C. § 10704. The Staggers Act, however, also for the first time permitted the railroads and their freight shipping customers to enter into private contracts that are not subject to rate review by the STB. 49 U.S.C. § 10709. Today, 80 percent or more of all rail shipments move under the private contracts that are not rate-regulated, or are otherwise exempt from rate regulation. (Compl. ¶ 50.) Following the Staggers Act, the number of Class I railroads declined from 35 to just seven today (two of which are owned by Canadian entities). (Id. ¶ 51.) Four of these railroads - Defendants BNSF, UP, CSX, and NS - operate more than 90 percent of all railroad track in the U.S. (Id.) Given the high fixed costs in the railroad industry and the significant barriers to entry, there is only a fringe or niche market of smaller carriers, and the competition offered by these small carriers is negligible. (Id.) B. Origins Of The Conspiracy By the early 2000’s, the railroads could no longer turn to some agency - like the previously-existing ICC or the STB - to obtain a percentage increase across their freight rates. (Id. ¶ 54.) Instead, to raise prices across-the-board, they would have to negotiate new rates individually with all of their customers. Recognizing the time and costs involved in such a process, as well as the possibility of losing customers, the railroads opted for a different course. They decided to seize on a percentage-based “rail fuel surcharge” as the means to achieve an across-the-board rate increase on all unregulated traffic. (Id.) Defendants recognized, however, that it would be difficult to accomplish imposing the rail fuel surcharges widely if they competed with each other. Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 15 of 71 9 C. Publication of the AIILF and Fixing Surcharge Rates In July 2003, the two major Western railroads - Defendants BNSF and UP - agreed to impose the exact same fuel surcharges. (Id. ¶¶ 7, 58-63.) Indeed, not only did the Western railroads agree to use the same fuel index (the U.S. Department of Energy On-Highway Diesel Fuel Price Index (“HDF”)); they agreed to administer that index in precisely the same way. They agreed to add a surcharge of 0.5 percent to the transportation rate for every five cent increase in the HDF index above $1.35 per gallon. (Id. ¶¶ 59-60.) The Western railroads also coordinated when they would adjust their fuel surcharge rates: the surcharge would be applied to shipments beginning the second month after the month in which there was a change in the average price calculation. (Id. ¶ 61.) That the Western railroads got into lockstep at this time was a notable development, because only shortly before Defendant UP had adopted a different method of calculating fuel surcharges. (Id. ¶ 63.) Notwithstanding this agreement, the railroads still faced a significant barrier to widespread use of fuel surcharges. (Id. ¶ 64.) The great majority of rail freight at this time was transported pursuant to private contracts with rate-escalation provisions that already accounted for increases in fuel costs. (Id.) These rate-escalation provisions were based on two indexes: (1) the All Inclusive Index (“AII”) published by the Association of American Railroads (the “AAR”), a railroad trade organization; and (2) the Related Rail Cost Adjustment Factor (“RCAF”), which was based on the AII. (Id. ¶¶ 4, 55.) Both indexes included fuel as a factor and both accounted accurately for increases in the railroads’ fuel costs. The president of Defendant UP acknowledged in 2004 that the RCAF “looks at actual costs through the industry.” (Id. ¶ 4.) As long as these published and widely utilized indexes included fuel as a cost- adjustment component, the Defendants could not, as a practical matter, impose widely a percentage-based, stand-alone fuel surcharge on their freight customers. (Id. ¶¶ 8, 64.) Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 16 of 71 10 The Complaint alleges that Defendants agreed to solve this problem by using the AAR, which Defendants dominate and control, to create and disseminate to the market a new index that did not include fuel costs. (Id. ¶¶ 9, 66.) This would then allow the railroads to impose their new, percentage-based, stand-alone fuel surcharge program in a coordinated fashion across their customer base. (Id. ¶ 64.) The Complaint alleges that the agreement to remove fuel from the AII and RCAF took place in the Fall of 2003, and that the AAR, at the Defendants’ behest, published the new index, the All Inclusive Index Less Fuel (the “AIILF”) in December 2003. The Complaint alleges in detail how the new AIILF came about, when it was introduced, why the railroads did it, who was involved, and the crucial role the new index played in the implementation of Defendants’ price fixing conspiracy. (Id. ¶¶ 56 - 77.) BNSF has admitted that it had a leading role in these efforts. (Id. ¶ 68.) When asked how BNSF would be able to apply the new revenue-based fuel surcharges to contracts with coal shippers, John Lanigan, BNSF’s Chief Marketing Officer, pointed to the changes made to the RCAF through the AAR. (Id.). Referring to Matthew K. Rose - BNSF’s chairman, president, and CEO - Lanigan stated: “What happened last year, and Matt led the charge on there, is that there’s a new index that [the AAR] has that’s basically an index without fuel. … So we’ll do RCAF less fuel plus a direct fuel surcharge in the future.” (Id.) (emphasis added). The Complaint alleges specific meetings at which Defendants agreed to create and implement coordinated fuel surcharge programs, employing the AIILF. For example, the Complaint alleges that Defendants discussed this strategy at AAR board meetings on October 2- 3 and December 11-12 of 2003. (Id. ¶¶ 9, 65.) During these meetings and on other occasions, Defendants agreed to cause the AAR to adopt a new index without fuel. (Id. ¶¶ 9, 66.) Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 17 of 71 11 Defendants further agreed that they would impose their new, stand-alone fuel surcharge on shippers, using the new index, in a coordinated fashion to enhance profits. (Id. ¶¶ 64-67.) As the Complaint describes, the broad use of a stand-alone, rate-based fuel surcharge was a sharp break from past industry practice. Prior to 2003, while some of the Defendants imposed so-called “fuel surcharges” on private rail freight transportation, these fuel surcharges were applied only in isolated instances, reflecting the widespread use at that time of the AII and RCAF fuel-inclusive indexes. (Id. ¶ 57.) The Complaint specifically alleges that these fuel surcharges were the isolated exception, not the rule, and differed for each company, reflecting each railroad’s differing efficiencies and fuel costs. (Id. ¶¶ 7, 57.) The AAR had never previously published a cost index without fuel, and the railroads had never before applied their fuel surcharges on a coordinated, stand-alone basis as a revenue enhancement mechanism. (Id. ¶¶ 10, 67.) As UP’s James R. Young acknowledged in a July 2007 interview, the new stand-alone rail fuel surcharges were “really unique to the railroad industry. Three, four years ago they were really non-existent.” (Id. ¶10.) By removing fuel from the then-prevailing cost escalation indexes, Defendants could begin assessing stand-alone fuel surcharges on a widespread basis and in a coordinated manner. (Id. ¶¶ 11-13, 67, 69, 75.) Defendants could then implement their plan of applying broadly across their various private contracts a fuel surcharge percentage to the entire cost of the freight shipment (notwithstanding that fuel only accounts for a portion of the costs of the shipment). (Id.) Through their collective action, Defendants planned to use the stand-alone fuel surcharge as a way to increase revenue, not simply capture increases in fuel costs (which the AII and RCAF were fully able to capture already), thereby increasing prices far more than any cost increase actually attributable to fuel. (Id. ¶¶ 67, 75.) Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 18 of 71 12 Almost immediately after the Defendants’ joint effort to cause the AAR to publish the AIILF, the Eastern railroad Defendants (CSX and NS), pursuant to their agreement with BNSF and UP, began to charge the exact same surcharges based on the use of a common index - the West Texas Intermediate Crude Oil Index (“WTI”). (Id. ¶¶ 12, 69-73.) CSX, which already had a surcharge methodology in place, immediately began to apply the surcharge utilizing the new index. NS announced in January 2004, the first calendar month after the publication of the AIILF, that it would be changing its surcharge formulas and unveiled a surcharge formula identical to the CSX surcharge. (Id. ¶¶ 71, 82) (explaining that, notwithstanding a two-month lag, both Eastern railroads were assessing identical surcharges within three months of the first publication of the AIILF.) The Eastern railroads chose the WTI index because in early 2004, following the publication of the AIILF, it was at a higher rate than the HDF Index. (Id. ¶12.) As with the Western railroads, the Eastern railroads agreed not only to use the same index but the same trigger points and timing: the surcharges, applied to the entire base rate for the freight transport, would increase 0.4 percent for every $1 that the monthly average price of WTI oil exceeded $23 per barrel and the surcharge would be imposed two calendar months after the WTI Index had adjusted. (Id. ¶¶ 71-72.) D. The Conspiracy Operates Successfully With Defendants’ price-fixing conspiracy firmly in place, the surcharges of the Western railroads moved in lockstep - i.e., their customers were charged the exact same surcharges - from July 2003 through at least June 2007. (Id. ¶¶ 79-80.) Similarly, the Eastern railroads’ surcharges were identical starting in March 2004 and continuing through at least June 2007. (Id. ¶¶ 81-82.) Defendants published their surcharge rates on their websites so that the conspirators could monitor adherence to the price-fixing scheme. (Id. ¶¶ 14, 61, 71.) Railroad industry Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 19 of 71 13 analysts contemporaneously noted and were puzzled by the curious “convergence” in rail fuel surcharge methodologies adopted by the Defendants. (Id. ¶ 84.) As one analyst noted, “the way to gain significant market share is to lead the competition rather than following the competition.” (Id.) The Defendants used the new AIILF to apply stand-alone fuel surcharges in contracts extending over periods of time. Defendants also agreed not to negotiate discounts on their fuel surcharges and overall contract rates, even though prior to mid-2003 the custom had been for the railroads to do so. (Id. ¶¶ 88, 92, 95.) Indeed, when shippers from many different industries, some with significant economic power, tried to negotiate the fuel surcharge percentages, they were told by the railroads that the fuel surcharges were “not negotiable.” (Id. ¶ 92.) Industry analysts publicly questioned the railroads’ refusals to negotiate the fuel surcharges despite the opportunities to gain market share. (Id. ¶ 84.) Defendants also began moving from offering long-term contracts to more prevalent use of contracts that contained 30-day cancellation provisions or that were re-priced as often as monthly, another way to facilitate imposition of the stand-alone fuel surcharges. (Id. ¶ 15.) Previously, Defendants had typically preferred long-term contracts ranging up to five years, with rate increases usually governed by the AII or RCAF, that locked in market share. (Id. ¶ 89.) Defendants made this switch to more prevalent use of shorter term contracts even though most shippers preferred the former system, which for the freight shipment customer could minimize risk and make costs more predictable. (Id. ¶ 91.) Defendants were not deterred from this strategy by the risk of increased competition, because they had been guaranteed by their agreement that their “competitors” would be pursuing identical policies. (Id. ¶¶ 88, 95.) Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 20 of 71 14 At about the same time, Defendants collectively decreased the use of “through rates,” a longstanding practice in which a customer receives a single bill from either the originating or terminating railroad on a long-distance trip involving more than one railroad (so that a single fee would be allocated among the railroads that shipped). (Id. ¶ 94.) Instead, Defendants moved increasingly to having rates billed separately for each railroad involved in a multi-railroad shipment. This provided transparency as to what each railroad was charging on multiple line shipments, and allowed each Defendant to bill separately for its applicable fuel surcharge. (Id.) Defendants also agreed not to undercut each other’s pricing or to take market share from each other. (Id. ¶¶ 14, 75, 95.) As a consequence, Defendants’ market shares remained stable throughout the period of the conspiracy. (Id. ¶ 95.) Indeed, despite widespread imposition of unprecedented surcharges and inflexibility in negotiating shipping contracts, Defendants’ market shares remained essentially unchanged during the time the conspiracy was in effect. (Id. ¶¶ 88, 95.) As a result of their supracompetitive fuel surcharges, Defendants’ profits soared. (Id. ¶ 99). E. The STB Ruling After receiving complaints, the STB conducted a regulatory investigation into Defendants’ rail fuel surcharge program. This investigation culminated in a decision issued in January 2007 concluding that Defendants’ fuel surcharges were an “unreasonable practice.” (Id. ¶ 16.) (quoting Rail Fuel Surcharges, STB Ex Parte No. 661, January 25, 2007 at 6) (Reinhart Decl., Ex. A (“STB Ruling”)). The STB explained that “a fuel surcharge program that increases all rates by a set percentage stands virtually no prospect of reflecting the actual increase in fuel costs for handling the particular traffic to which the surcharge is applied.” (Compl. ¶ 16.) The STB added that the railroads’ fuel surcharge program was “a misleading and ultimately Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 21 of 71 15 unreasonable practice,” finding that “there is no real correlation between the rate increase and the increase in fuel costs for that to which the surcharge is applied.” STB Ruling at 7 (emphasis added). See also id. at 9 (“For carriers to continue to apply fuel surcharge programs that are calculated as a percentage of the base rate - when practical alternatives are available - would permit them to continue to mislead their customers and would be unfair.”) (emphasis added). (See generally Compl. ¶¶ 16, 96-98). Although the STB decision applied to rate-regulated rail freight traffic only, Defendants also applied the same misleading and unreasonable fuel surcharge practices to the private rail freight transportation contracts and other unregulated freight transport that are at issue in this case. (Id. ¶¶ 97-98.)6 In their statement of alleged facts, Defendants state that this “STB decision did not suggest, let alone find, any collusion. The STB did not award past damages or restitution for past surcharges, but, rather, explicitly provided a ‘rule of general applicability for future conduct.’” (Defendants’ Brief at 11.) However, no issues of collusion were before the STB, which does not have jurisdiction to enforce the antitrust laws.7 As the STB explained in its ruling, it was relying on its authority to “adopt rules of general applicability for future conduct to address an unreasonable practice” rather than addressing a single shipper complaint (which could lead to an award of remedies for past practices). STB Ruling at 8. Far from condoning or excusing the Defendants’ fuel surcharge program, the STB throughout its decision admonished the Defendants for misleading their freight shipment 6 As noted in the Complaint, the STB’s decision addressed rate regulated freight traffic only, which is not at issue in the Complaint here. The STB expressly stated that its jurisdiction does not reach the rail freight traffic under private contract, or otherwise exempted from rate regulation, that is the subject matter of this litigation. (Compl. ¶¶ 16, 97.) 7 The STB is limited by its enabling legislation which is the ICC Termination Act, Pub. L. No. 104-88, 109 Stat. 803 (1995), and the ICC was limited by the Interstate Commerce Act, Ch. 104, 24 Stat. 379 (1887). Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 22 of 71 16 customers through unreasonable practices. See, e.g., STB Ruling at 7 (“We believe that imposing rate increases in this manner, when there is no real correlation between the rate increase and the increase in fuel costs for that particular movement to which the surcharge is applied, is a misleading and ultimately unreasonable practice.”) (emphasis added).8 ARGUMENT I. NO HEIGHTENED PLEADING STANDARDS APPLY Plaintiffs bring a single claim for price fixing under Section 1 of the Sherman Act. 15 U.S.C. § 1. The Supreme Court, with express reference to its Twombly decision, has reiterated the governing notice-pleading standard under Rule 8 of the Federal Rules of Civil Procedure: Federal Rule of Civil Procedure 8(a)(2) requires only “a short and plain statement of the claim showing that the pleader is entitled to relief.” Specific facts are not necessary; the statement need only “give the defendant fair notice of what the … claim is and the grounds upon which it rests.” Bell Atlantic Corp. v. Twombly, []127 S. Ct. 1955, [1959] (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 … (1957)). Erickson v. Pardus, 127 S. Ct. at 2200. The Court has also directed, again with specific reference to Twombly, that “when ruling on a defendant’s motion to dismiss, a judge must accept as true all of the factual allegations contained in the complaint.” Id. (citing Twombly, 127 S. Ct. at 1965). 8 See also id. at 6 (“Because railroads rely on differential pricing, under which rates are dependent on factors other than costs, a surcharge that is tied to the level of the base rate, rather than to fuel consumption for the movement to which the surcharge is applied, cannot fairly be described as merely a cost recovery mechanism.”) (emphasis added); at 7 (“This sort of mislabeling appears designed to avoid the type of response a carrier would likely receive if it were to honestly inform a shipper that a higher rate was being imposed to recover not only the increased fuel cost of serving that shipper, but also the increased cost of fuel for another shipper’s traffic - which is what would often occur under rate-based fuel surcharges.”) (emphasis added); at 9 (“For carriers to continue to apply fuel surcharge programs that are calculated as a percentage of the base rate - when practical alternatives are available - would permit them to continue to mislead their customers and would be unfair.”) (emphasis added). (See also Compl. ¶¶ 16, 96-98.) Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 23 of 71 17 The D.C. Circuit similarly observed in a recent ruling applying Twombly that in evaluating the legal sufficiency of a complaint’s allegations, a court “constru[es] the complaint liberally in the plaintiff’s favor,” Aktieselskabet, 525 F.3d at 15 (quoting Kassem v. Wash. Hosp. Ctr., 513 F.3d 251, 253 (D.C. Cir. 2008)), and gives the complaint “the benefit of all reasonable inferences derived from the facts alleged,” id. (quoting Stewart v. NEA, 471 F.3d 169, 173 (D.C. Cir. 2006)). Allegations in a price-fixing case are to be considered as a whole, and not on a piecemeal basis. See Jung, 300 F. Supp. 2d at 155 (“[A]llegations in antitrust cases cannot be compartmentalized and considered in isolation ‘as if they were separate lawsuits, thereby overlooking the conspiracy claim itself.’”) (quoting In re Fine Paper Antitrust Litig., 685 F.2d at 822). See also Cont’l Ore Co., 370 U.S. at 699 (“The character and effect of a conspiracy are not to be judged by dismembering it and viewing its separate parts, but only by looking at it as a whole.”) (quoting U.S. v. Patten, 226 U.S. 525, 544 (1913)). Contrary to the implications in Defendants’ moving papers, Twombly created no new heightened pleading standard for price fixing cases.9 The D.C. Circuit in Aktieselskabet expressly observed that “Twombly leaves the long-standing fundamentals of notice pleading intact.” Aktieselskabet, 525 F.3d at 15.10 9 Nor could the Twombly Court have created such a heightened pleading standard. Any change to the applicable standards of Rule 8 would have required amendments to the Federal Rules. See Aktieselskabet, 525 F.3d at 16 (rejecting notion that Twombly introduced a heightened pleading standard, because any such standard “would have to arise from an amendment of the Federal Rules of Civil Procedure”). 10 Most cartel activity is secretive. If plaintiffs could not proceed to discovery without detailed knowledge of all facets of a price-fixing cartel’s conduct, private enforcement of the antitrust laws would be greatly diminished See, e.g., In re Southeastern Milk Antitrust Litig., 2008 WL 2117159 at *11 n.7 (“Defendants cannot be faulted for attacking plaintiffs’ complaints on the basis of Twombly. The level of factual pleading they seek, however, could rarely, if ever, (continued) Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 24 of 71 18 Defendants train their sights narrowly on Twombly, in which the Supreme Court considered a question particular to the complaint then before it: “whether a § 1 complaint can survive a motion to dismiss when it alleges that major telecommunications providers engaged in certain parallel conduct unfavorable to competition absent some factual context suggesting agreement . . .” Twombly, 127 S. Ct. at 1961. Plaintiffs in Twombly were two customers of their local telephone company. Their complaint alleged that the major incumbent local exchange carriers had conspired for seven years not to compete with each other for customers outside their respective market areas. The Telecommunications Act of 1996 required the defendants to open their local telephone service monopolies to competition. As factual support for their claim, plaintiffs pointed to the Telecommunications Act’s expectation of competition among defendants and the fact that the defendants had not actually engaged in the expected competition. The Supreme Court made clear that it considered the complaint in Twombly to “proceed exclusively via allegations of parallel conduct,” id. at 1971 n.11 (emphasis added), and “not on any independent allegation of actual agreement among the [defendants],” id. at 1970. The Complaint alleged parallel practices by the defendants and contained “a few stray statements” of an agreement by defendants to stay out of each other’s markets. Id. But it made no mention of the “specific time, place, or person involved in the alleged conspiracies.” Id. at 1970 n.10. be met by a plaintiff in an antitrust case before discovery.”); In re Hypodermic Prods. Antitrust Litig., MDL No. 1730, 2007 WL 1959224, at * 14 (D.N.J. June 29, 2007) (“adequate notice of the particular grounds upon which Plaintiffs’ claims rest” is all that is required “particularly given the fact that Plaintiffs have not yet had the benefit of discovery.”) (citing Hosp. Bldg. Co. v. Trs. of Rex Hosp., 425 U.S. 738, 746-747 (1976) (explaining that “in antitrust cases, where ‘the proof is largely in the hands of the alleged conspirators,’ dismissals prior to giving the plaintiff ample opportunity for discovery should be granted very sparingly”)); In re OSB Antitrust Litigation, 2007 WL 2253419, at *5 (“Twombly does not . . . require plaintiffs to prove their allegations before taking discovery.”). Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 25 of 71 19 Despite occasional reference in the complaint to an unlawful agreement, “[t]he nub of the complaint . . . is [defendants’] parallel behavior.” Id. at 1960, 1970-1971.11 On these allegations, the Supreme Court in Twombly held that the plaintiffs failed to state a claim for relief under Section 1. The Court explained that “an allegation of parallel conduct and a bare assertion of a conspiracy will not suffice . . . and a conclusory allegation of an agreement at some unidentified point does not supply facts to show illegality.” Id. at 1966 (emphasis added). A complaint alleging parallel conduct must provide “some setting suggesting the agreement to make out a § 1 claim.” According to the Court, “without some further factual enhancement,” the complaint in Twombly “stops short of the line between possibility and plausibility of entitlement to relief.” Id. The Court in Twombly emphasized that there was “an obvious alternative explanation” for defendants’ alleged agreement not to compete - that the former monopolies were merely doing the same thing they had done before the Telecommunications Act: keeping to their long- held geographical territories and “sitting tight, expecting their neighbors to do the same thing.” Id. at 1972.12 11 Courts have consistently recognized that the allegations in Twombly constituted mere parallelism and nothing more. See, e.g., City of Moundridge v. Exxon Mobil Corp., No. 04-940, 2008 WL 1735856, at *3 (D.D.C. April 16, 2008) (“Unlike in Twombly, the plaintiffs here do not rely on only bare allegations of parallel behavior, or assume that there is a conspiracy because there is an ‘absence of any meaningful competition.’”) (citing Twombly, 127 S. Ct. at 1970); Fair Isaac Corp. v. Equifax Inc., 2008 WL 623120, at *5 (D. Minn. March 4, 2008) (“The Twombly plaintiffs’ allegations of an illegal § 1 agreement rested exclusively on the parallel conduct of the defendant regional telecommunications providers.”). 12 This “sitting tight” in furtherance of the phone companies’ long-established practice of not invading each other’s territories is in marked contrast to the many dramatic changes in the Defendants’ conduct in connection with the conspiracy alleged here, including (among other things) the alleged ways in which the railroads ceased competing with each other. Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 26 of 71 20 Twombly is thus readily distinguishable from the case here, where the plaintiffs make direct and specific allegations of an unlawful agreement independent of parallel behavior. At the same time, nothing in Twombly precludes circumstantial allegations from also being considered in an antitrust complaint. Rather, Twombly held that a complaint must contain merely “enough factual matter (taken as true) to suggest that an agreement was made.” Id. at 1965 (emphasis added). Twombly confirms that a § 1 claim can be made on the basis of circumstantial allegations alone, including allegations of parallel conduct alone under certain circumstances.13 Indeed, the Court noted that “[a]n allegation of parallel conduct is thus much like a naked assertion of conspiracy in a § 1 complaint: it gets the complaint close to stating a claim.” Id. at 1966 (emphasis added). The allegations of parallel conduct must be placed in a factual context that “nudge[s]” the conspiracy claim “across the line from conceivable to plausible.” Id. at 1974. 13 Many post-Twombly courts have held that circumstantial evidence, including parallel conduct, is still relevant in assessing the viability of antitrust claims. See, e.g., Hyland v. Homeservices of America, Inc., No. 05-612, 2007 WL 2407233, at *3 (W.D. Ky. Aug. 17, 2007) (“Plaintiffs . . . have properly put the Defendants on notice of its alleged antitrust claims by setting out facts of an alleged a conspiracy [sic] to price-fix between the Defendants, supported by actions of parallel conduct. Accordingly, the Court finds that the Plaintiffs have ‘nudged’ their claims across the line from conceivable to plausible.”); In re Southeastern Milk Antitrust Litig., 2008 WL 2117159 at *6 (“These complaints, while not answering all specific questions about ‘who, what, when, and where,’ do put defendants on notice concerning the basic nature of their complaints . . . and the grounds on which their claims exist.”); Behrend v. Comcast Corp., 532 F. Supp.2d 735, 741 (E.D. Pa. 2007) (“‘[A] complaint warrant[s] dismissal only where it fail[s] ‘in toto to render plaintiffs’ entitlement to relief plausible’ . . . [A]n antitrust complaint would certainly meet the Twombly criteria if the complaint constitutes notice to the defendant of the legal claims asserted and includes a statement of the elements of those claims, along with allegations of the defendant’s underlying conduct that, if proven, would plausibly demonstrate such elements.”) (citations omitted); City of Moundridge, 2008 WL 1735856 at *4, *6 (“All inferences are construed in favor of the plaintiffs and, while the claim may rest ultimately on a thin factual reed, the plaintiffs have alleged supporting circumstantial facts and placed their claims ‘in a context that raises a suggestion of a preceding agreement,’ ‘nudg[ing] their claims across the line from conceivable to plausible[.] . . . Because the complaint alleged some circumstantial facts that support an inference of an agreement, the plaintiffs’ claim is plausible.”) (citations omitted). Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 27 of 71 21 See also Aktieselskabet, 525 F.3d at 17 (“Twombly was concerned with the plausibility of an inference of conspiracy, not with the plausibility of a claim”). In short, Twombly reaffirmed that a Section 1 Sherman Act case can be properly pleaded by either (a) sufficient allegations of an actual agreement, or (b) allegations of parallel action placed in a context plausibly suggesting such an agreement. As developed below (see pp. 21 - 28, infra), the Complaint here does both. The Complaint alleges with detail the existence of an unlawful agreement, including the who, what, when, why, and where of the conspiracy. The Complaint also contains multiple additional facts that more than “nudge” the claim across the plausibility line. The Complaint thus satisfies the governing standard of Rule 8(a)(2) and far exceeds the pleading requirements of Twombly. II. THE COMPLAINT ADEQUATELY ALLEGES AN UNLAWFUL PRICE-FIXING CONSPIRACY The Complaint directly alleges Defendants’ unlawful concerted conduct, providing Defendants ample notice of the particular unlawful acts with which they are charged. At the same time, the Complaint provides abundant details of the conspiracy and its factual context that firmly support the conspiracy’s plausibility. Defendants’ repeated assertion that the Complaint’s conspiracy allegations are merely “conclusory” or somehow incoherent are wide of the mark. The Complaint sets forth numerous concrete and specific facts as to the why, who, what, where, when, and how of the conspiracy. The Complaint alleges: (1) why the conspiracy took place, (2) who engaged in what concerted conduct (including the specific companies’ concerted actions at particular times and the name of a specific executive who led the charge on crucial conspiratorial conduct), (3) what illegal steps Defendants took in furtherance of the conspiracy, (4) where conspiratorial meetings occurred (e.g., at AAR board meetings), (5) when (including specific dates), and (6) how, in detail, the unlawful concerted conduct was carried out. Thus, Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 28 of 71 22 Plaintiffs have alleged - specifically and concretely - the elements of a price-fixing agreement and not merely parallel behavior. The Complaint alleges unlawful collusive conduct and identifies the specific steps taken by Defendants to implement their price-fixing conspiracy. The Complaint alleges that BNSF and UP agreed in July 2003 to bring their fuel surcharge programs into lockstep. (Compl. ¶¶ 7, 59- 62.) It also explains that, at this time, the Defendants still faced a significant barrier to widespread use of stand-alone fuel surcharges - namely, the then-prevailing cost adjustment indexes that already included fuel as a factor. (Id. ¶¶ 55-56.) To overcome this hurdle, the Defendants in the Fall of 2003, at meetings and discussions within the AAR board (including on dates specified in the Complaint), agreed to take, and took, collective action to create a new cost- adjustment index without fuel and then to use that index and other collective action to impose broadly stand-alone fuel surcharges that were in virtual lockstep in the Eastern and Western regions, respectively, through at least mid-2007. (Id. ¶¶ 65, 68, 73, 76-78, 89-95.) See also pp. 2 - 4, supra. The Complaint specifies that an officer of BNSF admitted in early 2004 that it was Matthew K. Rose, BNSF’s chairman, president and CEO, who “led the charge” behind the AAR’s creation of the new fuel cost index. (Id. ¶¶ 9, 68.) And it alleges that, following on the heels of the Defendants’ collective action through the AAR to create the new index without fuel, Defendants CSX and NS, the two major Eastern railroads, agreed to coordinate their rail fuel surcharge program so that it would run in lockstep, using the fuel index that would yield the highest rail fuel surcharges at the time. (Id. ¶¶ 69-72.) The Complaint explains in detail that while the Eastern and Western railroads moved in lockstep with different indexes, the key aspects of the fuel surcharges in both regions - including applying the surcharge as a percentage Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 29 of 71 23 of the total cost of the freight transport - were identical. (Id. ¶¶ 59-63; 69-72.) The Complaint also explains why Defendants engaged in this unlawful concerted conduct, and the role their newly-created cost-adjustment index played in facilitating the conspiracy’s objective. (Id. ¶¶ 67- 72.) Both pre- and post-Twombly, these allegations are more than sufficient to plead a price- fixing claim. See City of Moundridge, 2008 WL 1735856, at *3 (“Unlike in Twombly, the plaintiffs here do not rely on only bare allegations of parallel behavior … [The complaint] identifies the years and locations where the agreement was reached and the defendants who participated.”); Behrend, 532 F. Supp. 2d at 741 (distinguishing Twombly because “we have clear allegations of actual agreements between Comcast and its competitors”); In re Hypodermic Prods. Antitrust Litig., 2007 WL 1959224, at *14 (finding the complaint’s allegations “to be in sharp contrast with the allegations found insufficient in” Twombly, since “the instant [c]omplaint sets forth allegations of specific anti-competitive agreements”).14 14 See also In re Southeastern Milk Antitrust Litig., 2008 WL 2117159, at *6 (“[Plaintiffs] argue, and it appears rightfully so to this Court, that rather than simply alleging facts from which an inference of an agreement can be drawn, they allege … that actual agreements exist.”); see also id. (“These complaints, while not answering all specific questions about ‘who, what, when and where,’ do put defendants on notice concerning the basic nature of their complaints against the defendants and the grounds upon which their claims exist.”); In re Western States Wholesale Natural Gas Antitrust Litig., MDL No. 1566, slip op. at 6 (D. Nev. Feb. 19, 2008) (attached as Exhibit A hereto) (“Plaintiffs’ allegations go beyond allegations of parallel conduct paired with a bare allegation of conspiracy. … Plaintiffs allege Defendants engaged in wash trades, which, by their nature, involve collusive agreement between two parties.”); In re Motor Fuel Temperature Sales Practices Litig., 534 F. Supp. 2d 1214, 1237 (D. Kan. 2008) (“Unlike Twombly, plaintiffs here do not allege parallel behavior with no actual agreement among defendants.”). Compare Twombly, 127 S. Ct. at 1970 n.10 (“doubt[ing]” that the bare reference to an agreement in the complaint provided the notice “required by Rule 8” since “the pleadings mentioned no specific time, place, or person involved in the alleged conspiracies,” giving the defendants “no clue” as to which of the defendants “supposedly agreed or when and where the illicit agreement took place”) (emphasis added). Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 30 of 71 24 Defendants do not - and could not - credibly claim that they lack notice of the unlawful concerted conduct with which they are charged. Instead, they caricature the Complaint as consisting only of “conclusory allegations of conspiracy.”15 (Defendants’ Brief at 1.) The Complaint’s allegations of conspiracy, however, are supported by a detailed account of Defendants’ motivation for conspiring, why they conspired in the manner that they did, what steps they took in furtherance of the conspiracy, and when they took them. In Twombly, the conspiracy allegations were considered “conclusory” because they merely parroted the language of the Sherman Act. By contrast, the Complaint here alleges specific facts concerning the unlawful concerted conduct in which Defendants engaged. Indeed, here, one key element of the conspiracy is Defendants’ concerted conduct at the AAR - the collective agreement to publish the AIILF and then use that new index to impose percentage-based, stand-alone fuel surcharges on customers as widely as possible - all of which is alleged in detail and with specificity. Defendants also make the baffling claim that Plaintiffs do not allege a conspiracy at all. For example, they assert: “Plaintiffs … do not present an ‘independent allegation of actual agreement’ between the Western Railroads or between the Eastern Railroads that suggests a meeting of the minds among any of them.” (Defendants’ Brief at 26.) Of course, Plaintiffs allege this (in detail) many times over, as explained above. Paragraphs 65 and 67 of the Complaint, for example, very clearly allege such an agreement: 65. In the fall of 2003, BNSF and UP initiated an effort in the AAR to get all Defendants to agree on a fuel surcharge program that would enable the Defendants to take fuel costs out of the weighted RCAF and AII (which already permitted the Defendants 15 Defendants call the Complaint’s allegations of conspiracy “conclusory.” However, “conclusory” means “consisting of or relating to a conclusion or assertion for which no supporting evidence is offered.” (Merriam Webster’s Dictionary of Law.) As Plaintiffs demonstrate herein, any suggestion that the Complaint has not alleged any facts supporting the allegation of an unlawful conspiracy is patently false. Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 31 of 71 25 to recover all of their fuel costs), and instead apply artificially high Rail Fuel Surcharges as a revenue enhancement mechanism: that is, use the “surcharge” to charge a percentage increase on the total cost of the freight transport, regardless of the actual cost of fuel for that transport job. Through meetings and discussions within the AAR board on October 2-3, December 11-12 and otherwise in 2003, Defendants BNSF, UP, CSX and NS agreed to create and implement coordinated fuel surcharge programs, and to enforce their program through a variety of means discussed herein. 67. Defendants BNSF, UP, CSX and NS conspired to cause the AAR to inaugurate the AIILF so that they could begin assessing separate, stand-alone Rail Fuel Surcharges, applied against the total cost of rail freight transportation, and coordinate that practice. The creation of this new index was an important, carefully-planned step taken collectively by the Defendants to allow implementation and continuation of their price fixing conspiracy. (Compl. ¶¶ 65, 67; see also Compl. at ¶¶ 56-77 (describing the details of the agreement).) Defendants also claim that the Complaint’s allegations are “lacking in specifics regarding the who, what and when of agreement.” (Defendants’ Brief at 23.) However, as detailed herein, the Complaint not only identifies the unlawful acts that each company did; it names a specific executive who admittedly played a lead role in crucial conspiratorial conduct on behalf of BNSF. It identifies the time periods in which all the allegedly unlawful conduct took place, and the specific dates of meetings at which crucial steps of the conspiracy occurred. This level of detail is rare and more than sufficient to state a price-fixing claim. See, e.g., City of Moundridge, 2008 WL 1735856, at *3 (applying Twombly and finding that identification of “years and locations where the agreement was reached and the defendants who participated” was sufficient to support conspiracy allegations); In re OSB Antitrust Litigation, 2007 WL 2253419, at *1 (applying Twombly and considering it sufficient that complaint identified “the approximate time and manner of their agreement.”). Defendants’ argument reduces to the assertion that a complaint cannot proceed to discovery unless the complaint pinpoints every executive involved and specifies the dates of Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 32 of 71 26 every unlawful meeting. But there is no basis in law or common sense for such a requirement.16 Conspiratorial activity is nearly always secret.17 The Complaint here reflects more knowledge of the details of this conspiracy than most.18 Defendants cite four cases in which courts dismissed complaints that Defendants claim are “similar” to the Complaint in this case. (Defendants’ Brief at 18-21.) These cases are distinguishable for multiple reasons - but Defendants’ assertion that the complaints in those cases are “similar” to the detailed and comprehensive Complaint in this case is spurious. In In re Elevator Antitrust Litig., the allegations of conspiracy were entirely conclusory. As the Second Circuit noted, quoting the district court: “[T]he complaint enumerates ‘basically every type of conspiratorial activity that one could imagine. . . . The list is in entirely general terms without any specification of any particular activities by any particular defendant[; it] is nothing more than a list of theoretical possibilities, which one could postulate without knowing any facts whatever.” In re Elevator Antitrust Litig., 502 F.3d 47, 50-51 (2d Cir. 2007) (emphasis added). The allegations here are not remotely similar. 16 As noted above, Twombly did not institute any heightened pleading standard that would require, for example, that a plaintiff identify the specific date and attendee of every allegedly collusive meeting before discovery begins. Nor could Twombly have instituted any such pleading standard, as this would have required amending the Federal Rules. 17 See, e.g., In re Mercedes Benz Antitrust Litig., 157 F. Supp. 2d 355, 372-73 (D.N.J. 2001) (“[r]egardless of whether concealment is an essential element of price-fixing, secrecy is its natural lair”). For precisely this reason, dismissal prior to discovery in antitrust cases should occur sparingly. See, e.g., Hosp. Bldg. Co., 425 U.S. at 746 (“[I]n antitrust cases where ‘the proof is largely in the hands of the alleged conspirators,’ ... dismissals prior to giving the plaintiff ample opportunity for discovery should be granted very sparingly.”) (quoting Poller v. Columbia Broadcasting, 368 U.S. 464, 473 (1962)). 18 Moreover, requiring Plaintiffs to identify every executive at the AAR board meetings identified would be a pointless exercise - Defendants themselves certainly know who attended the meetings identified. Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 33 of 71 27 Likewise, in Kendall v. U.S.A., Inc., 518 F.3d 1042 (9th Cir. 2008), even after discovery, plaintiffs “simply allege[d]” that the defendants were “coconspirators, without providing any facts to support such an allegation, despite having deposed executives from both MasterCard and Visa.” Id. at 1050 (emphasis in original).19 And in In re Late Fee and Over-limit Fee Litig., 528 F. Supp. 2d 953 (N.D. Cal. 2007), the plaintiffs’ “principal claim in the case” was that “the defendants’ late and over-limit fees are excessive ‘punitive damages’ subject to limitation under the Due Process Clause.” Id. at 957, 58. The plaintiffs’ alternate price-fixing claim was pled in a conclusory manner, providing “no details as to when, where, or by whom th[e] alleged agreement was reached.” Id. at 962 (emphasis added). The plaintiffs did “not identify any actual agreement among the defendants,” id. at 961, and could not even point to parallel behavior. The “heart of the plaintiffs’ antitrust allegations” was a chart demonstrating that the defendants’ behavior was “not even roughly in parallel.” Id. at 962. Similarly, in In re Travel Agent Comm’n Litig., MDL No. 1561, 2007 WL 3171675, at *4 (N.D. Ohio Oct. 29, 2007), the court found that, on a number of occasions, some defendants “entirely” failed to follow other defendants’ pricing moves - which is hardly reflective of the lockstep pricing alleged in the Complaint. These decisions show only that some courts have dismissed some price-fixing complaints after Twombly - a point Plaintiffs do not dispute. But these cases have not included the types of allegations here. And many courts have recognized that Twombly is no bar to a properly pled 19 The Kendall court also premised its decision on the belief that the Twombly Court had “specifically abrogated the usual ‘notice pleading’ rule, found in Federal Rule of Civil Procedure 8(a)(2)….” Id. at 1047 n.5. The D.C. Circuit has expressly rejected this reading of Twombly, holding that “Twombly leaves the long-standing fundamentals of notice pleading intact.” Aktieselskabet, 525 F.3d 8 at 15. See also id. at 16 (“If, despite this clear language, Twombly itself left any doubt, the [Supreme] Court subsequently emphasized the continuation of the prior Rule 8(a) standard: ‘[S]pecific facts are not necessary,’ and a complaint need only give the defendant fair notice of the claims.” (quoting Erickson, 127 S.Ct. at 2200). Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 34 of 71 28 and supported antitrust complaint.20 As one court has observed - in a case where plaintiffs alleged a conspiracy in less detail than the Complaint at issue here: Plaintiffs have made specific factual allegations of Defendants’ wrongdoing - including actions in furtherance of the conspiracy, Defendants’ purported motive, the approximate time and manner of their agreement, and the mechanism by which Defendants fixed prices. Twombly requires no more. In re OSB Antitrust Litig., 2007 WL 2253419, at *1 (emphasis added). Similarly, the Complaint in this case contains at least as much detail, if not more detail, than the complaint recently found to satisfy Twombly in this District in City of Moundridge, 2008 WL 1735856. Defendants virtually ignore City of Moundridge,21 OSB, and the other cases that are far more similar to this case than the cases on which Defendants rely.22 20 Indeed, courts have recognized that defendants seek to stretch Twombly far beyond its limits. In In re Southeastern Milk Antitrust Litig., for example, the court noted: Defendants cannot be faulted for attacking plaintiffs’ complaints on the basis of Twombly. The level of factual pleading they seek, however, could rarely, if ever, be met by a plaintiff in an antitrust case before discovery. While Twombly certainly requires of plaintiffs a degree of pleading that may not be required in other cases, it was not intended as a shield to be used by antitrust defendants to defeat even a meritorious claim. Arguing that plaintiffs have not pleaded sufficient facts appears to have become the mantra of defendants in antitrust cases. 2008 WL 2117159, at *12, n.7. 21 Defendants state only that the complaint in City of Moundridge made allegations “that are not analogous to those in the present Complaint,” but do not identify anything specifically about the City of Moundridge complaint that is not present in the instant Complaint. (Defendants’ Brief at 21.) 22 See, e.g., Babyage.com, Inc. v. Toys “R” Us, Inc., Civ. Action No. 05-6792, 2008 WL 2120493 (E.D. Pa. May 20, 2008); In re Southeastern Milk Antitrust Litig., 2008 WL 2117159; Fair Isaac Corp., 2008 WL 623120; Beach v. Atlas Van Lines, Civ. Action No. 2:07-764-CWH (D.S.C. Mar. 31, 2008) (order denying motion to dismiss) (attached as Exhibit B); In re Western States, MDL No. 1566, slip op., (D. Nev. Feb. 19, 2008) (attached as Exhibit A); In re Graphics Processing Units Antitrust Litigation, 540 F. Supp. 2d 1085 (N.D. Cal. 2007); Hyland, 2007 WL 2407233; Behrend, 532 F. Supp. 2d 735; In re Hypodermic Prods. Antitrust Litig., 2007 WL 1959224. Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 35 of 71 29 III. THE COMPLAINT’S CONSPIRACY ALLEGATIONS ARE COHERENT AND PLAUSIBLE Plaintiffs’ allegations provide a coherent and plausible account of why Defendants desired to begin imposing rail fuel surcharges widely on their customers and how they developed and implemented a plan to do so through unlawful concerted conduct. Defendants attempt to make this account appear incoherent and “implausible,” but in each such instance Defendants misapprehend or mischaracterize the Complaint’s factual allegations. A. The Creation and Adoption of the AIILF is Probative of the Conspiracy 1. Defendants’ Creation and Adoption of the AIILF was Key to their Price-fixing Conspiracy The Complaint alleges that central to Defendants’ efforts broadly to impose rail fuel surcharges, set as a percentage of a freight shipment’s base rate, was the Defendants’ agreement to publish, adopt, and use a rate-escalation index with their customers that had the fuel cost component taken out. Defendants mischaracterize the Complaint by suggesting that their collective creation and publication of the AIILF is not probative of a conspiracy, because the publication of an index without a fuel component was not actually necessary to impose stand-alone fuel surcharges. (Defendants’ Brief at 37.) To begin with, Defendants do not explain why, if this were so, BNSF admitted in a call with analysts that its president and CEO “led the charge” on the AAR’s publication of the AIILF in order to facilitate BNSF’s move toward imposing stand-alone rail fuel surcharges on its customers. (Compl. ¶ 68.) Defendants assert that the Complaint purportedly shows the AIILF was not necessary, because it alleges that certain Defendants imposed fuel surcharges prior to December of 2003, when the AIILF was created. (Defendants’ Brief at 37.) Defendants also assert that their surcharge tables on their websites show that rail fuel surcharges existed before the creation of the Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 36 of 71 30 AIILF. (Id.)23 Defendants further assert that the STB has noted that rate-based surcharges dated back to the 1970s. (Id. at 38.) The Complaint explains, however, why none of this is contradictory. Simply put, although some Defendants intermittently imposed rate-based fuel surcharges in isolated instances before 2003, they were not in significant use in Defendants’ unregulated private contracts by 2003, because those contracts overwhelmingly used rate-escalation indexes (the AII/RCAF) that already had a component that tracked actual fuel cost increases. (Compl. ¶ 57.) Nothing in the STB’s decision contradicts this allegation. The STB referred to the use of fuel surcharges in the mid-1970s; it did not suggest that the fuel surcharges were in active use in Defendants’ unregulated contracts by 2003. Indeed, it is surprising Defendants would even attempt to suggest that the fuel surcharge program was not a new development in late 2003 or early 2004, given that UP executive James 23 Defendants attach and cite to various printouts from their websites listing historical fuel surcharges that predate the alleged conspiracy. (See Defendants’ Brief at 28-29, & ns.6, 7, 9 (citing, inter alia, Ex. C & D).) Defendants argue that those websites have been incorporated by reference and that all documents and data contained in them, including fuel surcharge data that predate the putative class period, must be accepted as true for purposes of their motion to dismiss because the Complaint accuses Defendants of publishing their surcharges on their websites during the relevant period. (Id. at n.6.) As a preliminary matter, the existence of fuel surcharges that predate the conspiracy does not contradict the allegations in the complaint. As discussed above, the Complaint explicitly pleads the existence of those earlier surcharges and explains how the conspiracy allowed Defendants to impose fuel surcharges more broadly and to coordinate their imposition to avoid competition. However, Plaintiffs further reject the argument that they have broadly incorporated Defendants’ websites and all information presently available thereon. As the Court is aware, Defendants have steadfastly refused to produce any discovery to date and Plaintiffs therefore cannot independently verify any data on those extensive websites. Under these circumstances, a limited reference to websites in a complaint does not incorporate those websites by reference. See generally In re Newbridge Networks Sec. Lit., 767 F. Supp. 275, 279 n.4 (D.D.C. 1991) (“Extraneous material may be considered but only if it is attached to the complaint or incorporated by reference, and limited quotation does not constitute incorporation by reference.”). None of Defendants’ cited cases support such a broad application of the doctrine of incorporation by reference. Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 37 of 71 31 Young acknowledged in a 2007 interview that the new rail freight surcharges were “really unique to the railroad industry. Three, four years ago they were really non-existent.” (Compl. ¶ 10.) In order to begin imposing fuel surcharges widely, therefore, Defendants needed to replace the prevailing indexes with a new index that did not have a fuel component. In order to ensure their goal of across-the-board rate increases, Defendants agreed to disseminate this new index (the AIILF) collectively and impose it on their customers widely, along with the rail fuel surcharges. This concerted conduct is not only probative of a conspiracy - it is the central means by which the price-fixing conspiracy was effectuated. 2. Defendants’ Agreement to Publish and Use the AIILF is Actionable Under the Sherman Act. As detailed in the Complaint and discussed above, at the time the conspiracy began, most of Defendants’ customers’ contracts included rate-escalation provisions tied to long-standing cost-adjustment indexes (the AII and RCAF) that adjusted rates over the term of the contract based on actual increases in the railroads’ costs. These indexes tracked multiple industry cost components, including fuel. In order to impose stand-alone fuel surcharges widely, Defendants needed to begin using a cost escalation index that did not include fuel costs. They used the cover of the AAR to create and publish such an index (the AIILF) collectively, and agreed to impose it, along with stand-alone fuel surcharges, on their customers. The Complaint alleges that immediately following the publication of the AIILF under the auspices of the AAR, all Defendants began immediately imposing that index on their customers along with the inflated Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 38 of 71 32 fuel surcharges, which moved in lockstep.24 These allegations are directly probative of a price- fixing conspiracy. Defendants claim that their concerted action at the AAR amounted only to the publication of a voluntary index by a trade association, intended to “provid[e] tools for optional use by members.” (Defendants’ Brief at 36.) According to Defendants, without some “separate allegations indicating that association members were bound to use the index or otherwise were restricted by it; a trade association agreement to create and publish a cost index will not suffice” to confer antitrust liability. (Defendants’ Brief at 34-35.) But this assertion is based on a fundamental mischaracterization of the Complaint. In fact, Plaintiffs do allege - repeatedly - that Defendants agreed both to publish the AIILF and to use it collectively to impose coordinated fuel surcharge programs on their customers. This is in certain respects the core of the alleged price-fixing conspiracy: that Defendants agreed to publish and use the AIILF so they could apply stand-alone fuel surcharges on their customers. Defendants’ assertion that Plaintiffs have alleged “only” that the new index “allowed” Defendants to apply stand-alone fuel surcharges (Defendants’ Brief at 35) (emphasis added) is thus particularly brazen. The Complaint alleges that the publication of the AIILF “allowed” Defendants to apply stand-alone fuel surcharges, and that Defendants agreed that they would apply those fuel surcharges, and that they actually did so in a coordinated fashion. Numerous paragraphs, including 5, 13, 65, 67, and 75 - which Defendants’ essentially ignore - clearly allege that Defendants agreed to implement coordinated fuel surcharge programs involving stand-alone rail fuel surcharges using the AIILF and to impose these programs on their customers in a coordinated manner: 24 See, e.g., Compl. ¶¶ 5, 13, 65, 67, 75. Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 39 of 71 33 5. To overcome this obstacle [i.e., the widespread use of the AII/RCAF], Defendants BNSF, UP, CSX and NS devised and embarked on a scheme to remove fuel from the AII, so that a separate “fuel surcharge” could then be applied as a percentage against the total cost of freight transportation. This permitted these major railroads to achieve their desired, and mutually agreed, result: an effective percentage rate increase that could be broadly applied to rail freight customers. 13. With the AIILF they had put in place, and in furtherance of the conspiracy, Defendants BNSF, UP, CSX and NS now each applied the fuel surcharge in the same way: as a percentage multiplier of the total base rate for the rail freight transportation. … This agreed approach yielded the Defendants billions of dollars of additional profits. 65. In the fall of 2003, BNSF and UP initiated an effort in the AAR to get all Defendants to agree on a fuel surcharge program that would enable the Defendants to take fuel costs out of the weighted RCAF and AII (which already permitted the Defendants to recover all of their fuel costs), and instead apply artificially high Rail Fuel Surcharges as a revenue enhancement mechanism: that is, use the “surcharge” to charge a percentage increase on the total cost of the freight transport, regardless of the actual cost of fuel for that transport job. Through meetings and discussions within the AAR board on October 2-3, December 11- 12 and otherwise in 2003, Defendants BNSF, UP, CSX and NS agreed to create and implement coordinated fuel surcharge programs, and to enforce their program through a variety of means discussed herein. 67. Defendants BNSF, UP, CSX and NS conspired to cause the AAR to inaugurate the AIILF so that they could begin assessing separate, stand-alone Rail Fuel Surcharges, applied against the total cost of rail freight transportation, and coordinate that practice. The creation of this new index was an important, carefully-planned step taken collectively by the Defendants to allow implementation and continuation of their price fixing conspiracy - a conspiracy that would enable the Defendants to widely impose price increases on the entire cost of rail freight transport and thereby obtain additional revenues far beyond any actual increases in fuel costs. This step was a notable departure from past practice, and marked the first time that the AAR created a cost escalation index without a fuel cost component. Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 40 of 71 34 75. The actions by Defendants thus were not independent responses to a common problem of increasing fuel costs. Rather, the only purpose in taking these collective actions was to begin assessing a stand-alone fuel surcharge applied to revenue (i.e., the entire base rate for the freight shipment), not costs; to act in concert with one another in setting fuel surcharge prices and demanding them from shippers and customers; and to ensure collective enforcement of the program. That is, pursuant to the conspiracy, Defendants would now be able to apply the supposed fuel cost increase percentage to the entire cost of freight shipment (notwithstanding that fuel only accounts for a portion of the costs of the shipment). Through this collective action, Defendants BNSF, UP, CSX and NS planned to use the stand-alone fuel surcharge as an easy way to dramatically increase profits without having to wait for new rail capacity to come on line to meet growing demand - so long as these railroads participated by not competing on fuel surcharge prices to undercut one another. (Emphases added.) (See also Compl. ¶¶ 6, 8, 11, 12, 69, 74, 76, 77.) As the foregoing exemplary paragraphs reflect, the Complaint alleges that the conspiracy was not limited to the publication of the AIILF, but extended to agreement by the Defendants to act in concert in imposing stand-alone rail fuel surcharges on their customers by using the AIILF.25 Such agreement is clearly illegal. Defendants do not appear to contest - nor could they - that their agreement to impose coordinated fuel surcharge programs by using the AIILF would violate the Sherman Act, regardless of whether there was any independent restraint requiring them to use the index. As this Court has previously recognized, “it is well established that the parties to an agreement which per se violates the antitrust laws may not defend on the basis that they have applied no coercion to bring about adherence to the combination or to compel obedience to its terms.” National Ass’n of Broadcasters, 536 F. Supp. at 163; see also Fed. 25 Plaintiffs are, of course, entitled to reasonable inferences concerning their allegations. See Aktieselskabet, 525 F.3d at 21 n.8 (“We continue to construe complaints liberally by interpreting ambiguous text in the complaint in the light most favorable to the plaintiff.”). Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 41 of 71 35 Trade Comm’n v. Pac. States Paper Trade Ass’n, 273 U.S. 52, 62 (1927) (“An understanding, express or tacit, that the agreed prices will be followed is enough to constitute a transgression of the law. No provision to compel adherence is necessary.”); Am. Column & Lumber Co. v. U.S., 257 U.S. 377, 391, 399 (1921) (noting that the associational plan found to violate Section 1 of the Sherman Act “was optional” for association’s members and that the “sanctions” were merely “financial interest, intimate personal contact, and business honor, all operating under the restraint of exposure of what would be deemed bad faith and of trade punishment by powerful rivals”).26 26 Notably, in all of the cases Defendants cite in support of their assertion that non- mandatory associational conduct is somehow immune from antitrust scrutiny, courts were assessing associational conduct following either discovery or trial - that is, weighing the evidence and finding it insufficient to support liability. None found that non-mandatory associational conduct “cannot form the basis for antitrust liability,” Defendants’ Brief at 34, but rather that there was no evidence (after trial or discovery) that the conduct in question did so. See, e.g., Schachar v. Am. Acad. of Ophthalmology, Inc., 870 F.2d 397, 398 (7th Cir. 1989) (noting that “[a]fter a month of trial, the jury disagreed” with plaintiff on liability); Maple Flooring Mfrs.’ Ass’n v. U.S., 268 U.S. 563, 566, 585 (1925) (noting that “[t]he oral testimony and documentary evidence have covered a wide range and have reached a great volume which it will be impossible, within the limits of an opinion, to review in detail,” and that the court must look to the “peculiar circumstances of each case”); Cement Mfrs.’ Protective Ass’n v. U.S., 268 U.S.588, 606 (1925) (“[H]ere the government does not rely upon agreement or understanding, and this record wholly fails to establish, either directly or by inference, any concerted action other than that involved in the gathering and dissemination of pertinent information with respect to the sale and distribution of cement to which we have referred; and it fails to show any effect on price and production except such as would naturally flow from the dissemination of that information in the trade and its natural influence on individual action.”) (emphasis added); Moore v. Boating Indus. Ass’ns, 819 F.2d 693, 712-13 (7th Cir. 1987) (“Since there was no evidence which would on any theory support a verdict for plaintiffs on the antitrust claim, had proper instructions been given to the jury, there is no necessity nor reason to remand for a new trial . . . [The plaintiff] presented no evidence of any agreement, combination, or conspiracy to boycott and refuse to deal.”) (emphasis added). The remaining cases cited by Defendants likewise center on highly specific factual and antitrust issues with no bearing on this case at all. See Schachar, 870 F.2d at 399 (analyzing disaggregated “market with thousands of providers”); NCAA v. Board of Regents of Univ. of Oklahoma, 468 U.S. 85, 98-120 (1984) (assessing whether a college athletic association’s plan for televising games was a per se violation of Section 1 of the Sherman Act); National Soc’y of Prof’l Eng’rs v. U.S., 435 U.S. 679, 684-99 (1978) (analyzing professional associations’ code of ethics). Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 42 of 71 36 In addition, although the point is largely academic in light of the Complaint’s allegations that the Defendants agreed to impose stand-alone fuel surcharges in a coordinated fashion using the AIILF, it merits mention that this Court has recognized that antitrust liability can arise even from non-mandatory associational practices. As this Court has explained, if a trade association lawfully publishes pricing information that is used “as the means to effectuate an antitrust conspiracy, the conspiracy itself is still unlawful.” Jung, 339 F. Supp. 2d at 37 (quoting Cont’l Ore Co., 370 U.S. at 707 (“acts which are in and of themselves legal lose that character when they become constituent elements of an unlawful scheme.”)); see also Am. Tobacco Co. v. U.S., 328 U.S. 781, 809 (1946) (“It is not of importance whether the means used to accomplish the unlawful objective are in themselves lawful or unlawful. Acts done to give effect to the conspiracy may be in themselves wholly innocent acts. Yet, if they are part of the sum of the acts which are relied upon to effectuate the conspiracy which the statute forbids, they come within its prohibition.”). In Jung, this Court assessed motions to dismiss an antitrust suit in which one “prong” of the conspiracy was the publication of a survey by the American Association of Medical Colleges (“AAMC”) aggregating its members’ compensation levels, which allegedly “facilitat[ed] . . . the anticompetitive agreement” by providing “a mechanism by which compensation levels remain stabilized and depressed.” 300 F. Supp. 2d at 126, 166. There was no allegation that members were bound to provide information that formed the basis of the survey. This Court noted that “[a]lthough institutional defendants provide their individual information to the AAMC and the results of the Survey are distributed by the AAMC to its members, the institutional defendants are not required to provide information in order to receive the Survey. In fact, the Survey is available to the public at large.” Id. at 140 (emphasis added). Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 43 of 71 37 Notwithstanding the non-mandatory nature of the request for information from the AAMC members, this Court viewed the allegations “through the lens of” the “larger price-fixing charge” and concluded that: while plaintiffs have not alleged expressly that the AAMC agreed to join the conspiracy, it is reasonable to infer from the facts and circumstances detailed in the complaint that the AAMC, an organization whose membership includes the institutional defendants, annually collects and disseminates compensation information to its members in order to facilitate the alleged compensation-fixing agreement and to allow for internal policing of member co-conspirators. Id. at 166-167 (emphasis added).27 Likewise, when the detailed allegations here concerning the AIILF are “viewed through the lens of” the “larger price-fixing charge,” id. at 166, the role of the AIILF in the fulfillment of Defendants’ conspiratorial objectives becomes clear. Far from being innocent, the Defendants’ use of the AAR, which Defendants dominate and control, provided the means by which and through Defendants could collectively act to implement their conspiracy. 3. Defendants’ Post Hoc, Piecemeal Justifications for the AIILF are Unpersuasive Defendants advance several arguments in an effort to defend creation and publication of the AIILF. In so doing, Defendants not only mischaracterize what the Complaint alleges, but also improperly seek to disaggregate their conduct in the AAR in the Fall of 2003 from all of the other conduct alleged in the Complaint. Defendants also face a formidable burden in attempting to give post hoc justifications for their conduct. It is well established that “allegations in antitrust cases cannot be compartmentalized and considered in isolation ‘as if they were separate lawsuits, thereby overlooking the conspiracy 27 This Court later had to enter judgment for the defendants in Jung due to the subsequent passage of federal legislation amending the antitrust laws to prevent the consideration of the very evidence related to medical residency programs on which plaintiffs’ allegations depended. Jung, 339 F. Supp. 2d at 26. The passage of that legislation, however, in no way impacts this Court’s cited reasoning. Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 44 of 71 38 claim itself.’” Jung, 300 F. Supp. 2d at 156 (quoting Fine Paper, 685 F.2d at 822); see also Cont’l Ore Co., 370 U.S. at 699 (“The character and effect of a conspiracy are not to be judged by dismembering it and viewing its separate parts, but only by looking at it as a whole.”). This principle is reflected in post-Twombly rulings, where price-fixing defendants failed in trying similar strategies. See, e.g., In re Southeastern Milk Antitrust Litig., 2008 WL 2117159, at *7 (rejecting defendants’ “attempt to parse and dismember the complaints”). Defendants must do more than give a plausible account of why their alleged conduct was not part of a conspiracy; they must give such a compelling explanation that it renders Plaintiffs’ conspiracy allegations implausible. See, e.g., In re Linerboard Antitrust Litig., 504 F. Supp. 2d 38, 59 (E.D. Pa. 2007) (noting that defendants’ giving of “one plausible explanation” of their parallel conduct was insufficient to obtain summary judgment); City of Moundridge, 2008 WL 1735856, at *4 (holding that “a complaint need not be dismissed where it does not ‘exclude the possibility of independent business action,’” as the defendants had argued, because such a requirement “would be counter to Rule 8’s requirement of a short, plain statement with ‘enough heft to show that the pleader is entitled to relief.’” (quoting Twombly, 127 S. Ct. at 1966)); In re Southeastern Milk Antitrust Litig., 2008 WL 2117159, at * 7 (admonishing defendants for impermissibly parsing the complaint and concluding that defendants’ piecemeal justifications were insufficient because “the fact that multiple instances of parallel conduct are alleged makes it far less likely that a business justification exists for all of the acts taken in total”).28 28 See also Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 468 (1992) (“The Court did not hold [in Matsushita] that if the moving party enunciates any economic theory supporting its behavior, regardless of its accuracy in reflecting the actual market, it is entitled to summary judgment.”). Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 45 of 71 39 Defendants here argue that publication of the AIILF “could have” been motivated by a “time lag concern” arising from use of the AII/RCAF. (Defendants’ Brief at 39.) However, this justification is counter to the allegations in the Complaint (which must be fully credited at this stage of the proceedings). The Complaint alleges that the AII and RCAF could capture all actual fuel cost increases, and quotes the president of Defendant UP, who contemporaneously acknowledged that the RCAF “looks at actual costs through the industry.” (Compl. ¶ 4.) Furthermore, notwithstanding Defendants’ suggestion to the contrary, the STB in fact made no finding that there was any valid “time lag concern.” All the STB noted with respect to the purported “time lag concern” was that some carriers (i.e., the Defendants) had raised this issue as part of their arguments before the STB. See STB Ruling at 4. The STB certainly did not credit such arguments in concluding that the Defendants’ fuel surcharges were misleading precisely because they did not reflect actual fuel costs. Id. at 7. More basically, even if (contrary to the Complaint’s allegations) there was anything to a “time lag concern,” this would not explain why Defendants had to address it collectively. If any individual Defendant had such a concern, it could have calculated its own AIILF and tried to impose it along with stand-alone fuel surcharges unilaterally. There was no legitimate reason why Defendants had to address this supposed concern in a concerted fashion.29 Defendants do not give a persuasive explanation for why the AAR would need to be involved in offering the AIILF “tool” to its members at all. The Complaint alleges that there was 29 Defendants’ claim that their adoption of the AIILF was justified by the STB’s concern with double-dipping is even more far-fetched. (Defendants’ Brief at 39.) The STB found that Defendants’ (coordinated) fuel surcharge programs were the cause of double-dipping. STB Ruling at 10. The most obvious way for Defendants to avoid “double dipping,” of course, would have been to continue using the AII/RCAF indexes, which “already permitted full recovery by the railroads of actual fuel cost increases,” without stand-alone fuel surcharges. (Compl. ¶ 4.) Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 46 of 71 40 no legitimate reason for the AAR to be involved in publishing the AIILF, even if any individual Defendant had thought such an index was desirable. (Id. ¶¶ 74-76.) Indeed, Defendants themselves stress that the AIILF is calculated by using “simple arithmetic” based on an index (the AII) which is “already public.” (Defendants’ Brief at 36.) If that is the case - and it undoubtedly is - then it is difficult to see why the AAR (i.e., the Defendants) would need to be involved in providing that “tool” at all.30 If BNSF, for example, wanted such a tool, and was operating in a legitimately competitive fashion, then it could have easily made the arithmetical adjustment to the AII itself, giving itself a tool that it could use unilaterally. BSNF did not do this, however - because, as the Complaint alleges, it realized that it would be more successful in implementing the revenue-based surcharges widely, and not sporadically as they had been used in the past, if all Defendants agreed to use the same approach. (Id. ¶¶ 56, 64.) Defendants also cannot reconcile their post hoc explanation for the AIILF with the contemporaneous statement by BNSF that its CEO “led the charge on” the AAR’s publication of the AIILF. (Compl. ¶ 68.) This statement is more consistent with the alleged fact that the AIILF was published through the AAR as a means of cover for an unlawful agreement than it is with Defendants’ post hoc explanation that the AAR innocently decided to create a new “tool” for voluntary use by its members. Nor can Defendants explain why their concerted actions regarding the AIILF occurred at the same time Defendants took steps to begin the broad imposition of stand-alone fuel surcharges and to bring their respective Eastern and Western fuel surcharge prices into lockstep. The timing 30 The RCAF was established in response to the Staggers Act requirement that a cost- adjustment factor be created and published by the STB. See 49 U.S.C. § 10708. The AAR publishes and submits the RCAF, and the AII which underlies it, to the STB for approval. There is no statutory or regulatory reason why the AAR would need also to publish the AIILF. (Compl. ¶ 76.) Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 47 of 71 41 of these interrelated events alone supports the plausibility of the alleged conspiracy. Defendants’ post hoc justifications, based on disaggregating the various contemporaneous actions alleged in the Complaint, cannot explain away the curious convergence of these events - and certainly do not render the alleged conspiracy implausible. B. The Lockstep Fuel Surcharges of the Western and Eastern Railroads are Probative of the Conspiracy The Complaint alleges that, in implementing the alleged price-fixing conspiracy, each Defendant agreed to impose upon its customers the same rail fuel surcharges used by its principal regional competitor. Thus, Plaintiffs allege that during the conspiracy the Western railroads charged their customers the exact same rail fuel surcharges, and the Eastern railroads charged their customers the exact same fuel surcharges. The Western railroads began to charge the same fuel surcharges in July of 2003, shortly before BNSF “led the charge” to the AAR,31 and the Eastern railroads began to charge the same fuel surcharges right after the AIILF was announced.32 Defendants’ websites bear these allegations out - BNSF and UP charged the exact same fuel surcharges, and NS and CSX charged the exact same fuel surcharges, through at least mid-2007. (See Compl. ¶¶ 80-82.) Defendants argue that they compete with each other only regionally, and not across the entire nation. (See Defendants’ Brief at 4-5.) But this only further explains why the conspiracy could be effectively implemented with the Eastern and Western railroads, respectively, in lockstep on fuel surcharges. As discussed herein, the fuel surcharge programs of the four 31 The Western railroads began to charge identical fuel surcharges shortly after the Spring 2003 meeting of the National Freight Transportation Association, attended by Defendants’ executives. (Compl. ¶ 58.) 32 The Eastern railroads promptly began to implement the AIILF after they jointly effectuated its publication in December 2003. (Compl. ¶¶ 69, 73.) Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 48 of 71 42 Defendants were identical in critical respects. The Eastern Defendants and Western Defendants each implemented the agreed conspiracy in their respective regions. 1. The Complaint Explains How the Mechanisms and Timing of the Defendants’ Lockstep Pricing Fit Within the Allegations of Conspiracy Defendants claim that the alleged conspiracy is not “typical” because it “involves the use of two completely different surcharge formulas adopted at widely different times by the Eastern and Western Railroads.” (Defendants’ Brief at 24.) They also assert that this “undermine[s] any plausible inference of an integrated overall conspiracy.” (Id.) These claims are untrue. The alleged (and uncontrovertible) facts of Defendants’ lockstep pricing fits neatly within the Complaint’s detailed account of Defendants’ price-fixing conspiracy. First, the fact that the Western railroads and the Eastern railroads used different fuel indexes for setting their fuel surcharge prices was essentially a historical quirk: when the two Eastern railroads moved into lockstep following publication of the AIILF, they chose to use the fuel index that, at that particular time, would generate higher rail fuel surcharges. (Compl. ¶ 12.) Defendants claim that the surcharges between the Western and Eastern railroads differed in “almost every possible respect,” (Defendants’ Brief at 24), but this is significantly overstated. The Western and Eastern railroads took the same approach to setting rate-based fuel surcharges, moving in lockstep and keyed to a fuel index. Indeed, the fuel surcharge programs of the Western and Eastern railroads were largely identical in virtually all of their complex and unprecedented features. (Compl. at ¶¶ 59-62; 69-72.) These features included: • Setting fuel surcharges as “a percentage increase on the total cost of the freight transport, regardless of the actual cost of fuel for that transport job.” (Id. ¶ 65.) • Establishing the exact same two-month time period between an increase in the applicable index and the implementation of the adjustment to the surcharge. (Id. ¶¶ 61, 71.) Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 49 of 71 43 • Adopting other similar mechanisms for calculating when and how surcharges would be administered, including the selection of a trigger point above which a fuel surcharge would be assessed, and the amount of the surcharge (as a percentage) to be applied for each incremental increase in the cost of fuel above the trigger point. (Id. ¶¶ 59-62; 69-72.) • Publicly reporting both historical and future monthly surcharges on Defendants’ websites (to monitor adherence to agreed-upon rates). (Id. ¶¶ 61, 71.) Given Defendants’ success in imposing supracompetitive rail fuel surcharges widely on their customers - allowing them to price significantly above cost and reap enormous profits (id. ¶ 99) - the minor differences in the surcharge rates between the Western and Eastern railroads was of no practical consequence to the conspiracy’s operation and success.33 As the tables of Defendants’ fuel surcharges show, the Western railroads’ surcharges were similar to the Eastern railroads’ surcharges during the entire Class Period. (Id. ¶¶ 80, 82.) Second, Defendants’ suggestion that “the timing of the events” in Defendants’ adoption of lockstep surcharge mechanisms “is impossible to square with any suggestion of conspiracy” is, again, simply untrue. (Defendants’ Brief at 25.) It is true that the Western railroads brought their surcharges into lockstep before the Eastern railroads did. But all this indicates - and what the Complaint alleges - is that the Western railroads may well have been the initiators of the conspiracy.34 (Id. ¶ 65.) A conspiracy is not implausible merely because all of its members do not join at the exact same time. Despite what Defendants may think the “typical” conspiracy 33 See, e.g., In re Graphics Processing Units Antitrust Litig., 540 F. Supp. 2d at 1095 (“absolute lockstep behavior in all situations” is not necessary to show conspiracy). 34 It is possible, of course, that evidence obtained through discovery will shed further light on the timing of the early conspiratorial meetings and may even reveal that one or both of the Eastern railroads were involved in conspiratorial meetings from the outset. Because a cartel operates in secret, plaintiffs are not required to identify when every conspiratorial meeting took place or whether agreement was arranged at the outset through multilateral or bilateral meetings. See, e.g., Callahan v. A.E.V., Inc., 947 F. Supp. 175, 179 (W.D. Pa. 1996) (observing that in an antitrust action, conspiratorial conduct “is generally covert and must be gleaned from records, conduct, and business relationships”). Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 50 of 71 44 looks like (Defendants’ Brief at 24), conspiracies are rarely cast in stone from the outset, with all participants involved equally and all effects felt simultaneously from the first days of the enterprise. See, e.g., In re Copper Antitrust Litig., 98 F. Supp. 2d 1039, 1056 (W.D. Wis. 2000) (“[T]here is, of course, no requirement that each coconspirator participate in every phase of an evolving conspiracy, as long as each was aware that the conspiracy did not begin and end with his own activities.” (quoting United States v. Yonkers Contracting Co., Inc., 706 F. Supp. 296 (S.D.N.Y. 1989)).35 The timing of the adoption of Defendants’ lockstep pricing mechanisms supports the plausibility of the alleged conspiracy. The Western railroads moved their surcharge programs into lockstep but saw that imposing stand-alone rail fuel surcharges widely would be impracticable in light of the prevailing use of the AII/RCAF. They decided to use the cover of the AAR to create a new index and bring all Defendants on board with adopting it and using it with their customers. The Eastern railroads agreed to do so. 35 Plaintiffs’ allegations about the timing of Defendants’ actions in furtherance of the conspiracy exceed applicable pleading requirements. Plaintiffs are not required to specify which Defendants led or participated in the various overt actions in furtherance of the conspiracy as long as they have sufficiently pled each Defendant’s involvement. See, e.g.,In re OSB Antitrust Litig., 2007 WL 2253419, at *5 (“Antitrust conspiracy allegations need not be detailed defendant by defendant.”) (citing cases); Ice Cream Liquidation, Inc. v. Land O’Lakes, Inc., 253 F. Supp. 2d 262, 278 (D. Conn. 2003) (plaintiffs not required to “specify individual acts of each defendant” where the complaint identified the co- conspirators and described nature and effect of conspiracy); In re Mercedes-Benz Anti- Trust Litig., 157 F. Supp. 2d at 375 (“The short answer is that plaintiffs have alleged that all of the named defendants were participants in the conspiracy” and whether “a particular defendant may or may not have joined in a specific overt act in furtherance of the conspiracy, such as attending a meeting, does not affect its status as a conspirator”); In re Vitamins Antitrust Litig., No. 99-197 (TFH), 2000 WL 1475705, at * 11 (D.D.C. May 9, 2000) (“An overt act need not be pleaded against each defendant, because a single overt act by just one of the conspirators is enough to sustain a conspiracy claim even on the merits.”) (quoting In re Nasdaq Mkt. Makers Antitrust Litig., 894 F. Supp. 703, 712 (S.D.N.Y. 1995)). Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 51 of 71 45 Following publication of the AIILF, all Defendants began using the new index with their customers, and the Eastern railroads immediately brought their surcharges into lockstep. Thus, the Complaint lays out the time period of the conspiracy and alleges in detail the precise timing of each railroad’s imposition of surcharges in relation to the publication of the AIILF. The interrelated timing of these events firmly supports the plausibility of the price-fixing conspiracy alleged. 2. Defendants’ Years of Lockstep Pricing Cannot Be Explained Away As Unilateral Conduct Defendants also assert that their years of lockstep pricing in the Eastern and Western regions merely showed that Defendants were engaged in “price matching and follow-the-leader pricing.” (Defendants’ Brief at 13; see also id. at 30 (suggesting that Defendants purposefully “follow[ed] each other in charging the same prices”).) Defendants’ apparent acknowledgement that they were purposefully following each other’s prices, though, actually underscores the plausibility of Plaintiffs’ conspiracy allegations.36 First, lockstep pricing should not be considered in isolation. It should be considered in light of all of the Complaint’s allegations - such as the identification of Defendants’ conspiratorial meetings, the publication and collective use of the AIILF, the stabilization of market shares, and the reaping of windfall profits. While “parallelism, taken alone, [does not] raise the necessary implication of conspiracy” Twombly, 127 S. Ct. at 1968 n.7 (emphasis added), “[a]n allegation of parallel conduct . . . gets the complaint close to stating a claim,” and with just “some further factual enhancement,” such an allegation will suffice to render the claim 36 Moreover, Defendants’ argument contradicts what is alleged in the Complaint. The Complaint alleges that Defendants met and agreed to fix prices, not that they engaged in unilateral business decisions that led them to follow each other’s pricing practices. Indeed, the Complaint alleges that Defendants would not have rationally charged the same prices absent agreement. (See Compl. ¶¶ 84, 87, 88.) Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 52 of 71 46 plausible. Id. at 1966. Such “further factual enhancement” is clearly present here, as discussed at length above. When viewed in the context of Defendants’ other conduct alleged in the Complaint, such as the Defendants differing fuel efficiencies and operating costs, (Compl. ¶¶ 83, 86), as well as all of the contemporaneous conduct within the AAR, the Defendants’ lockstep pricing clearly supports the plausibility of the conspiracy.37 Defendants’ suggestion that they engaged in purposeful “price matching and follow-the- leader pricing” contradicts the reasons Defendants gave for their fuel surcharge prices during the Class Period. As the Complaint alleges, and as must be taken as true, Defendants falsely and deceitfully presented their fuel surcharges during the Class Period as a means to “compensate for increases in the cost of fuel.” (See, e.g., id. ¶¶ 2, 16, 96-98.) As noted above, the STB itself found this “misleading.” Thus, Defendants’ new explanation shows that the explanation they all gave to their customers for their fuel surcharges was pretextual. Plaintiffs reiterate that on a motion to dismiss, where the Defendants have moved to stay discovery, it is inappropriate for Defendants to invoke evidence outside the scope of the Complaint. To the extent, however, that Defendants seek to rely on what occurred at the STB (e.g., Defendants’ Brief at 9-10 & n.1), it is noteworthy that Defendants explicitly defended their fuel surcharges as a means of cost recovery, not as a matter of follow-the-leader price matching. See, e.g., Comments of BNSF Railway Co., STB Ex Parte No. 661, Filing No. 217709, at 5 (Oct. 2, 2006) (“BNSF is committed to recovering its increased costs of fuel through fuel surcharges 37 As the Complaint notes, an industry analyst at the time expressed puzzlement at the fact that the Defendants had ceased competing to gain market share in favor of charging the same prices. (Compl. ¶ 84.) It is a reasonable inference that this analyst - fairly expected to be knowledgeable about the industry - was puzzled by the railroads’ conduct because it was not in any individual railroad’s independent self interest, absent a conspiracy. (See id. at ¶¶ 87, 88.) See also Section III.D.7, infra. Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 53 of 71 47 and not to over-collect.”); Comments of Union Pacific Railroad Co., STB Ex Parte No. 661, Filing No. 217707, at 4 (Oct. 2, 2006) (“UP’s [fuel surcharge] is NOT a profit center. It never has been a profit center. It was never intended to be a profit center. It was and is intended to be an efficient way of recouping rapidly changing fuel costs.”); Summary of BNSF Railway Company’s May 11, 2006 Presentation, STB Ex Parte No. 661, Filing No. 216402, at 1 (Apr. 27, 2006) (bullet point summary of STB hearing presentation, stating “Fuel Surcharge is a cost recovery mechanism”); Written Statement of CSX Transportation, Inc., STB Ex Parte No. 661, Filing No. 216397, at 6-7 (Apr. 27, 2006) (discussing increase in fuel expenses paid by CSX and stating that CSX’s “fuel surcharge program is designed to recover this astounding increase in its costs for fuel”) (All available at http://www.stb.dot.gov/filings/all.nsf/ByDocketNumber). Post-Twombly courts have considered pretextual justifications for coordinated behavior to be highly probative of conspiracy. In City of Moundridge, for example, the defendant producers of natural gas had given justifications during the alleged conspiracy period that were alleged to be pretextual. The Court found that these pretextual reasons for their pricing behavior supported the plaintiffs’ conspiracy allegations. See 2008 WL 1735856, at *3 (“Hurricanes Katrina and Rita should not have affected the market in as the defendants claimed and they were only a pretextual reason to justify withholding market supply to create an artificial shortage.”).38 38 The City of Moundridge court also considered “the allegations that the defendants had reported high profits.” Id. See also In re OSB Antitrust Litig., 2007 WL 2253419, at *3 (considering relevant the allegation that conspirators achieved “‘staggering’ profit increases”) (internal reference omitted); In re Graphics Processing Units Antitrust Litig., 540 F. Supp. 2d at 1095 (noting allegation that conspirators’ “profit margins grew considerably . . . lend[s] more support to plaintiffs’ complaint.”). Similarly, here, the Complaint alleges that by collectively adopting the AIILF, and by coordinating their fuel surcharge practices “under the guise of rising fuel prices,” Defendants were able to reap substantial additional profits, far in excess of any increases in their fuel costs. (Compl. ¶¶ 2, 54.) Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 54 of 71 48 Similarly, in In re Linerboard Antitrust Litigation, the defendants gave one reason for their parallel conduct during the period of the alleged conspiracy, but attempted to defend their conduct on summary judgment as conscious parallelism. The court held that this evidence of pretext strongly supported the conspiracy claim: The Court notes that the simultaneous downtime announcements in this case constitute particularly strong circumstantial evidence because Inland’s official position has been that its downtime decision was based on internal inventory levels rather than conscious parallelism. 504 F. Supp. 2d at 60 (emphasis added); see also Beach v. Atlas Van Lines, Inc., Civil Action No. 2:07-764-CWH, Order, at 3, 6 n.4 (Docket No. 128) (attached as Exhibit B hereto) (denying motion to dismiss where plaintiffs alleged, inter alia, that “defendants computed a fuel surcharge as a percentage of the entire linehaul charge, which has no relationship to the actual increased cost of fuel associated with the movement of goods,” and thus that their fuel surcharge practice “was simply a secret revenue enhancer.”); compare Compl. ¶ 74 (Defendants’ “‘revenue-based’ fuel surcharge bore no direct relationship to Defendants’ actual increase in fuel costs,” and “was not a cost recovery mechanism, but a revenue enhancement measure.”). In addition, although “follow the leader” pricing is not illegal on its own, it is also not competitive and it walks right up to the line of illegality. If consciously parallel pricing is accompanied by improper discussions among competitors or other improper signaling or signs of assent, then it is illegal. See, e.g., Brown v. Pro Football, Inc., 518 U.S. 231, 241 (1996) (“Antitrust law … sometimes permits judges or juries to premise antitrust liability upon little more than uniform behavior among competitors, preceded by conversations implying that later uniformity might prove desirable, or accompanied by other conduct that in context suggests that each competitor failed to make an independent decision.”) (citing cases) (internal citations omitted); U.S. v. Socony-Vacuum Oil Co., 310 U.S. 150, 179 (1940) (liability for conspiracy may result from “informal gentlemen’s agreement or understanding”); Esco Corp. v. U.S., 340 F.2d Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 55 of 71 49 1000, 1006 (9th Cir. 1965) (a price-fixing agreement is not usually accomplished through a “formal signed-and-sealed contract or written resolution”); id. at 1007 (“A knowing wink can mean more than words.”). The Complaint alleges that Defendants met and discussed railroad fuel surcharges in the industry at approximately the same time that they were announcing the details of their new fuel surcharge programs. Defendants now indicate that, during this period, they were not pricing independently, but instead purposefully following each other’s pricing practices. In light of this, it is (at a minimum) plausible that Defendants’ discussions at the AAR and otherwise were accompanied by improper communications, signaling, or signs of assent regarding their intentions about rail fuel surcharges. Thus, Defendants’ own suggestion that their lockstep pricing was the result of “follow the leader” pricing practices only underscores the plausibility of the price-fixing conspiracy alleged in the Complaint. The cases Defendants cite do not support dismissal. All but one involved appeals from grants of summary judgment, and thus reflected assessments of evidence and expert opinions. See, e.g., Reserve Supply Corp. v. Owens-Corning Fiberglas Corp., 971 F.2d 37, 55 (7th Cir. 1992) (concluding that the plaintiffs “evidence” could not overcome defendants’ evidence tending to exclude the possibility they were acting independently).39 At the pleading stage, 39 See also In re Baby Food Antitrust Litig., 166 F.3d 112, 134 (3d. Cir. 1999) (considering testimony and expert evidence in evaluation of ‘plus factors’); In re Citric Acid Litig., 191 F.3d 1090, 1106 (9th Cir. 1999) (“All in all, there is no more than a scintilla of evidence that [defendant] was a participant in the citric acid conspiracy” which is insufficient to overcome summary judgment); Clamp-All Corp. v. Cast Iron Soil Pipe Institute, 851 F.2d 478, 489 (1st Cir. 1988) (“We can find no concrete evidence in the record that [defendant] acted improperly.”). The Defendants reliance on In re Travel Agent Commission Litigation, the only non-summary judgment case on which they rely, is also puzzling. As noted above, there the court found that, on a number of occasions, some defendants “entirely” failed to follow other defendants’ pricing moves - which is not follow-the-leader pricing by definition. 2007 WL 3171675, at *4. Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 56 of 71 50 however, “a court constru[es] the complaint liberally in the plaintiff’s favor, accept[ing] as true all of the factual allegations contained in the complaint, with the benefit of all reasonable inferences derived from the facts alleged.” Aktieselskabet, 525 F.3d at 15 (citations omitted). Moreover, the courts in Citric Acid, Clamp-All, and Baby Food (see footnote 39, supra), cited by Defendants, found merely that the adoption of similar list prices, alone, could not be a basis for sustaining a Section 1 claim. One factor underpinning these decisions was the fact that the defendants competed over the actual prices charged. See, e.g., Citric Acid, 191 F.3d at 1102 (“[a]lthough there appears to have been little competition in citric acid list prices, [defendant] did price aggressively in actual contracts”) (emphasis in original).40 Defendants here did not compete over how rail fuel surcharges were set or charged, and agreed not to negotiate discounts on their fuel surcharges and overall contract rates. (See Compl. ¶¶ 84, 88, 92, 95.) As Defendants’ own websites show (and showed to each other), the Western and Eastern railroads charged the exact same rail fuel surcharges during the conspiracy. The absence of any deviation is, indeed, striking. Finally, Defendants contend that it is unremarkable that they engaged in lockstep pricing “for nearly 38 months” because, after their fuel surcharge formulas were set, monthly surcharge prices did “not reflect separate monthly pricing decisions by Defendants, but, instead, an automated application of the fuel surcharge mechanisms previously put in place.” (Defendants’ Brief at 32.) Again, it is difficult to see how this undercuts Plaintiffs’ conspiracy allegations. Agreeing to use a common formula is an obvious means to implement a price-fixing scheme, and 40 See also Clamp-All Corp., 851 F.2d at 484 (Defendants “often set prices that deviated from their price lists.”); In re Baby Food Antitrust Litig., 166 F.3d at 130 (“the evidence shows that the defendants’ actual transaction prices moved in different directions more often than not.”). Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 57 of 71 51 it is illegal. See, e.g., Socony-Vacuum Oil, 310 U.S. at 222 (“price-fixing includes more than the mere establishment of uniform prices . . . prices are fixed . . . if the range within which purchases or sales will be made is agreed upon, if the prices paid or charged are to be at a certain level or on ascending or descending scales, if they are to be uniform, if by various formulae they are related to the market prices. They are fixed because they are agreed upon.”) (emphasis added). Absent a price-fixing agreement, there is no reason why Defendants were locked into using any particular fuel surcharge mechanism for 38 months or for any other period. Absent a price-fixing agreement, each Defendant was free to adjust its surcharges any time it pleased. Defendants’ apparent admission that they ceased making “monthly pricing decisions” during the Class Period thus comports with Plaintiffs’ conspiracy allegations; it does not undermine them. (Defendants’ Brief at 32.) C. Defendants’ Numerous Breaks from Industry Practice Over a Short Period of Time Are Probative of Conspiracy The plausibility of the alleged conspiracy can also be seen through the numerous breaks with past industry practice that occurred over a short period of time, and which align with Plaintiffs’ account of Defendants’ conspiratorial conduct. During the alleged conspiracy period, Defendants took numerous affirmative steps that represented a break with past practice. In particular: • Defendants created and began using a brand-new rate-escalation index in their contracts (the AIILF), notwithstanding that the indexes in use (the AII/RCAF) were long-standing, widely accepted in the industry, and captured all actual increases in fuel costs; • The Western and Eastern railroads coordinated their fuel surcharge programs, including not only the index used, but the trigger points, timing of adjustments, and other minute details; • The Western and Eastern railroads’ fuel surcharges moved into lockstep for the first time, and stayed there throughout the Class Period; • Defendants stopped negotiating rail fuel surcharge rates with any of their customers; Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 58 of 71 52 • Defendants collectively moved away from using long-term contracts with their customers; • Defendants collectively moved away from using “through rates” in interline shipments, facilitating their ability to police compliance with the conspiracy; • Defendants stabilized their market shares. As the Supreme Court observed in Twombly, “complex and historically unprecedented changes in pricing structure made at the very same time by multiple competitors, and made for no other discernible reason would support a plausible inference of conspiracy.” Twombly, 127 S. Ct. at 1966 n.4 (internal quotations omitted). A “marked change in [D]efendants’ behavior around the time the conspiracy allegedly started” renders Plaintiffs’ conspiracy allegations plausible. In re Graphics Processing Units Antitrust Litig., 540 F. Supp. 2d at 1096 (“Taken as true, plaintiffs’ allegations show that there was a marked change in defendants’ behavior in the market around the time the conspiracy allegedly started. … Accordingly, direct-purchaser plaintiffs have pleaded allegations that if true would make an antitrust conspiracy plausible.”); Fair Isaac Corp., 2008 WL 623120, at *6 (“In the instant case, the Second Amended Complaint alleges a close temporal proximity between the Credit Bureaus’ agreement to jointly create, own, and control VantageScore, and the beginning of the alleged parallel price manipulation and denial of access to the Credit Bureau’s data.”); In re Western States Wholesale Natural Gas Antitrust Litig., MDL No. 1566 (2:03-cv-01431-PMP- PAL), Order (Docket No. 843) at p. 6 (D. Nev. Feb. 19, 2008) (“Plaintiffs allege a historically unprecedented change in natural gas prices as the result of widespread false reporting of trade information made by multiple competitors during the same time period in the natural gas industry for no discernible reason other than conspiracy. This factual pattern is precisely the type of context Twombly recognized as supporting a plausible suggestion of agreement.”). Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 59 of 71 53 The Complaint alleges that none of these measures were necessary to achieve Defendants’ proffered justification of managing rising fuel costs. Because cost-adjustment indexes (the AII and RCAF) that accounted fully for rising fuel costs were already in use, the adoption of the AIILF and the use of separately-assessed fuel surcharges were not needed. (Id. ¶¶ 4, 74.) As the STB determined, it was “misleading” for Defendants to suggest that the fuel surcharges they imposed reflected actual fuel costs. To the contrary, as the STB held, Defendants’ fuel surcharge programs which “increase[] all rates by a set percentage stand[] virtually no prospect of reflecting the actual increase in fuel costs for handling the particular traffic to which the surcharge is applied.” (Id. ¶ 16) (quoting STB Ruling at 6) (emphasis added).41 Defendants do not even attempt to explain why the fact that all of this affirmative conduct occurred over a short period of time is not itself suggestive of a conspiracy. They disaggregate certain actions and try to explain them as innocent. This attempt to explain each element in isolation is itself improper. See Jung, 300 F. Supp. 2d at 156; see also In re Southeastern Milk Antitrust Litig., 2008 WL 2117159 at *7. Defendants note that the railroads moved into lockstep in the West when UP adopted the fuel surcharge mechanism that BNSF was using, and that the railroads moved into lockstep in the East when NS adopted the fuel surcharge mechanism that CSX was using. (See Defendants’ Brief at 26-29.) This is true, as the Complaint makes clear. But it is difficult to see why Defendants think this should remove their conduct from suspicion. These changes occurred over 41 Defendants argue that publication of the AIILF “could have” been motivated by Defendants’ concern that use of the AII/RCAF indexes only permitted fuel cost recovery after a significant “lag.” (Defendants’ Brief at 39.) As discussed above, this justification is counter to the allegations in the Complaint (which must be fully credited at this stage of the proceedings) and counter to the findings of the STB. See, supra, at p.39. Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 60 of 71 54 a short period of time, grouped around the concerted action by Defendants to publish and adopt a brand-new index, which allowed them to impose that new index and the stand-alone surcharges on all their customers at the same time. These changes also occurred along with Defendants’ refusal to negotiate fuel surcharge rates, their move from long-term contracts and through rates, and their stabilization of market shares. Defendants never explain why all this conduct was occurring around the same time. The nearest Defendants come to addressing the close temporal proximity of their numerous breaks with past practice at the outset of and during the conspiracy period is to argue at length that the move into lockstep pricing by the Western and Eastern railroads was not “simultaneous.” (Defendants’ Brief at 25-30.) Notwithstanding pages of argument on the point, however, it is simply a “red herring.” As alleged, when the Western railroads began actively to impose their largely-dormant fuel surcharge programs in July of 2003, they simultaneously brought their fuel surcharge rates into lockstep and kept them there through at least mid-2007, despite changing market conditions, individual factors affecting fuel prices, and customer objections. Similarly, when the Eastern railroads began to impose the AIILF and stand-alone fuel surcharges on their customers, right after Defendants’ collectively published the AIILF, they too simultaneously brought their fuel surcharge programs into lockstep and kept them there through at least mid-2007. Finally, some of Defendants’ attempts to suggest that their surcharge programs changed at different times only make their pricing behavior more suspect. Defendants argue, for example, that, “Although the Complaint alleges that Defendants had the ‘exact same fuel surcharges … through at least mid-2007,’ the website data shows that, effective July 1, 2006, NS modified its WTI Index-based fuel surcharge by significantly increasing the trigger point … and Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 61 of 71 55 reduced the increments by which the fuel surcharge is increased.” (Defendants’ Brief at 29, n.9 (internal complaint citations omitted) (citing Exhibit E to Reinhart Declaration (Doc. No. 106)).) Defendants’ historical fuel surcharges, as reported on the websites they submitted with their motion, however, show that NS and CSX continued to charge the exact same fuel surcharges from July 1, 2006 on. Compare Exhibit E to Reinhart Declaration (NS surcharges in, for example, August and September of 2006 were 19.2% and 20.8%) with Exhibit F to Reinhart Declaration (CSX surcharges in August and September of 2006 were 19.2% and 20.8%). Evidently, this purported change by NS made absolutely no difference to its prices at all: they remained in complete lockstep with CSX right up until the last dates reported on the websites. Compare Exhibit E (NS surcharge in October of 2007 was 20.0%) with Exhibit F (CSX surcharge in October of 2007 was 20.0%). How is this supposed to undercut the conspiracy’s plausibility? D. The Complaint’s Allegations of Defendants’ Other Conspiratorial Conduct Further Support the Plausbility of the Alleged Conspiracy The Complaint details various additional steps taken by Defendants to perpetuate, and ensure the effectiveness of, their conspiracy. (See Compl. ¶¶ 89-95.) As many of these steps would not have been in any Defendant’s independent self-interest in the absence of a conspiracy, they further support the plausibility of the alleged conspiracy. See, e.g., Babyage.com, Inc., 2008 WL 2120493, at *4 (“Plaintiffs have alleged that implementing RMP agreements was against each manufacturer’s independent self interest. This tends to suggest … the absence of unilateral action.”). Defendants try to divorce Plaintiffs’ allegations about these matters from their context, in order to present them as a merely “random assortment” of allegedly unpersuasive allegations. (Defendants’ Brief at 40.) But when such allegations are evaluated “by looking at [the Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 62 of 71 56 conspiracy] as a whole,” Cont’l Ore Co., 370 U.S. at 699, each adds to the plausibility of the inference of conspiracy. 1. Industry Communications As discussed above, the Complaint alleges that Defendants, and their top executives, engaged in numerous meetings throughout the Class Period, including meetings that are alleged to have directly involved conspiratorial conduct. Defendants’ assertions that the Complaint is “[b]ereft of any specific allegations” and “does not identify the people who reached the agreement, nor how, when, or where it was reached” (Defendants’ Brief at 41) are utterly baseless. Defendants ignore, for example, paragraph 65: 65. In the fall of 2003, BNSF and UP initiated an effort in the AAR to get all Defendants to agree on a fuel surcharge program that would enable the Defendants to take fuel costs out of weighted RCAF and AII (which had already permitted the Defendants to recover all of their fuel costs), and instead apply artificially high Rail Fuel Surcharges as a revenue enhancement mechanism: that is, use the “surcharge” to charge a percentage increase on the total cost of the freight transport, regardless of the actual cost of fuel for that transport job. Through meetings and discussions within the AAR board on October 2-3, December 11-12 and otherwise in 2003, Defendants BNSF, UP, CSX and NS agreed to create and implement coordinated fuel surcharge programs, and to enforce their programs through a variety of means discussed herein. (See also id. ¶ 9.) Elsewhere, Plaintiffs identify Matthew Rose, chairman, president, and CEO of Defendant BNSF, as an executive directly involved in this unlawful concerted conduct. (Id. ¶ 68.) To the extent the Defendants want more names of executives, this is not because of any genuine need for notice. Defendants themselves undoubtedly know the names of their executives who attended the AAR board meetings in October and December of 2003 identified in paragraph 65. Plaintiffs also allege the existence of other locations where Defendants’ top executives met Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 63 of 71 57 during the Class Period, including the Spring 2003 NFTA meeting, which occurred shortly before the Western railroads began to coordinate their fuel surcharges. (Id. ¶¶ 58-59.) While the identification of such opportunities to discuss, reach, and maintain the unlawful agreement may not be sufficient standing alone to plead a claim, these allegations do not stand alone. They are tiles in a larger evidentiary mosaic, and they further bolster the plausibility of the alleged unlawful conduct. Before Twombly and after, numerous courts have recognized that allegations concerning interfirm communications, including those occurring at trade associations, may be considered in assessing whether a conspiracy can be plausibly inferred. See, e.g., In re OSB Antitrust Litig., 2007 WL 2253419, at *5 (considering allegations of “price-fixing discussions during industry events” in denying motion to dismiss); In re Static Random Access Memory (SRAM) Antitrust Litig., MDL No. 1819, 2008 WL 426522 at *6 (N.D. Cal. Feb. 14, 2008) (rejecting defendants’ arguments for dismissal under Twombly where plaintiffs’ complaint included, inter alia, allegations of trade association meetings that provided opportunities to conspire and instances of intercompetitor exchanges of price information).42 Finally, Defendants’ argument that nothing can be inferred from their interline communications is misplaced. (Defendants’ Brief at 41.) While the Complaint alleges that Defendants took collective action to end “through rates” on interline freight transportations as a 42 See also In re Flat Glass Antitrust Litig., 385 F.3d 350, 361 (3d. Cir. 2004) (proof of conspiracy can consist of the fact that “defendants got together and exchanged assurances of common action or otherwise adopted a common plan even though no meetings, conversations or exchanged documents are shown”) (citation omitted); In re Automotive Refinishing Paint Antitrust Litig., 229 F.R.D. 482, 492 (E.D. Pa. 2005) (“Evidence of communication and cooperation among Defendants through the aegis of a trade association may also be relevant to establish the existence of a conspiracy or combination, which is a required element of a Section 1 Sherman Act claim.”); In re Carbon Black Antitrust Litig., MDL No. 1543, 2005 WL 102966, *8 (D. Mass. Jan. 18, 2005) (considering allegations that “price increases were coordinated through unlawful communication via a third-party conduit and at trade association meetings” and denying motion to dismiss). Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 64 of 71 58 means to help effectuate the fuel surcharge conspiracy (see Section III.D.3, infra), the Complaint does not allege that such interline communications were used in any way with respect to adoption of the AIILF, the establishment of the fuel surcharge programs, or the steps to bring fuel surcharges rates into lockstep in each of the eastern and western regions. (See, e.g., Compl. ¶¶ 8, 9, 58.) 2. Short-Term Contracts The Complaint also alleges that, as one aspect of the conspiracy, Defendants decided collectively to move away from long-term contracts and toward more prevalent use of shorter- term contracts or contracts with 30-day cancellation provisions. (Compl. ¶¶ 15, 89.) This is yet another break with industry practice during the Class Period, and it would not have been in any Defendant’s independent self-interest absent a conspiracy. Long-term contracts allow railroads to lock in business, and it is unlikely that all Defendants would have moved away from this practice simultaneously if they had concerns that their competitors would try to take their business. Defendants rationalize this conduct by asserting that, in a period of high demand and tight capacity, moving to shorter-term contracts is “economically rational behavior.” (Defendants’ Brief at 43.) The fact that Defendants may have had some economic incentive to move to short-term contracts, however, does not explain why all Defendants did this in tandem at the same time as they took the other alleged steps in the Complaint. A plausible explanation is that the move toward short-term contracts was one means by which Defendants could collectively maximize their profits from the conspiracy, by allowing their rate-based fuel surcharges to be broadly imposed in an era of rising base rates. Defendants also suggest that the move to shorter-term contracts is at odds with the Complaint’s allegations concerning the centrality of the AIILF to the conspiracy. (Id.) In fact, Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 65 of 71 59 Defendants’ use of the AIILF for longer term contracts, and a move to increasing use of shorter- term contracts, were complementary elements of the conspiracy, which was focused on maximizing application of the stand-alone fuel surcharges as a revenue enhancement mechanism. At the time the AIILF was adopted, most freight was transported pursuant to private contracts that included cost-adjustment provisions based on the AII or RCAF indexes that already accounted for actual fuel cost increases. The AIILF was the necessary means to address cost escalation in long-term contracts, which many customers continue to have to this day. The AIILF was thus integral to the conspiracy, while at the same time Defendants increasingly sought to have shorter term contracts. Thus, in the context of the Complaint’s allegations, this collective move toward short- term contracts by Defendants during the Class Period supports the plausibility of the conspiracy. 3. Through Rates The Complaint also alleges that, during the Class Period, Defendants made another break from past industry practice, and one that required joint conduct: moving away from using a single “through rate” for interline shipments, and instead having each railroad bill the customer separately. (Comp. ¶ 94.) The Complaint explains that this change was made to increase pricing transparency in order to monitor compliance with the conspiracy and so that each Defendant could bill separately for its surcharge. This change would not have been consistent with any individual Defendant’s independent self interest, absent a conspiracy. In response, Defendants neither deny that the practice marked a new departure from historic rate billing practices, nor offer any reason as to why the new practice was adopted by all Defendants at the same time. Instead, Defendants claim that the move away from through rates would not lead to greater transparency. (Defendants’ Brief at 43-44.) Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 66 of 71 60 Contrary to Defendants’ assertion, their collective movement away from through rates does serve to “provide transparency as to what each railroad was charging on multiple line shipments.” (Compl. ¶ 94.)43 The elimination of single-factor through rates allowed each Defendant in multi-railroad shipments to transmit its own invoice and collect its own fuel surcharge (typically a separate line item on the invoice), and thus allowed each Defendant to demonstrate to its competitor that it was assessing and collecting the agreed upon surcharge. Policing the fuel surcharge agreement thus became far easier. This shift away from through rates could not have been accomplished without the collective action of the Defendants, and it supports the plausibility of the alleged conspiracy. 4. Advance Publication of Fuel Surcharges The advance announcement of Defendants’ fuel surcharges, and publication of those surcharges on their respective websites, provided each Defendant with a means to detect deviations from the price fixing scheme. (Compl. ¶¶ 14, 61, 71.) Defendants attempt to justify this practice as “customer service” and suggest that they publicly announced their surcharges in order to fulfill their obligation to “provide to any person, on request, the carrier’s rates and other service terms.” (Defendants’ Brief at 45 (emphasis added).) These reasons are unpersuasive. Essentially every business is willing to provide to any customer its rates on request, but not every business publicly announces its rates - to its customers and competitors - and explains 43 When one railroad enters into a single-factor through rate with another railroad, the division of revenues for each railroad and the fuel surcharge actually being assessed and collected by each railroad cannot be discerned by those railroads’ nearest regional competitors. So, for example, if BNSF is shipping freight from the West to East coast, and enters into interchange service with CSX, the through-rate customer’s bill will not delineate the division of revenues between BNSF and CSX. If the customer shows that bill to BNSF’s and CSX’s competitors (NS or UP) during the context of contract negotiations, NS or UP cannot determine if a fuel surcharge is even being charged, let alone the amount of the surcharge. Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 67 of 71 61 exactly how they will be computed in the future. Defendants have given no persuasive justification for why they needed to do this, in light of the serious anticompetitive concerns with disclosing one’s prices and pricing intentions to one’s competitors.44 Defendants’ justifications aside, publication of prices can be a relevant factor supporting an inference of conspiracy. For example, the OSB court, in a post-Twombly ruling, found probative of conspiracy an allegation that the defendants published their prices in an “industry periodical,” thereby allowing defendants to “monitor their competitors and ensure that no member of the conspiracy ‘cheated’ by offering significantly different prices.” In re OSB Antitrust Litig., 2007 WL 2253419, at *3; see also In re Coordinated Pretrial Proceedings in Petroleum Products Antitrust Litig., 906 F.2d 432, 449 (9th Cir. 1990) (concluding that the defendants’ public posting of prices and discounts “supports a reasonable and permissible inference of an agreement or understanding concerning prices”). 5. Failure to Negotiate Fuel Surcharges During the Class Period, Defendants refused to negotiate the rail fuel surcharges they implemented, or even to reconsider their rail fuel surcharge practices, although it had been customary for them to do so previously, when stand-alone fuel surcharges had been used sporadically and only in isolated instances. (Compl. ¶¶ 92-93.) “Shippers from many different 44 As the Supreme Court observed in U.S. v. Container Corp. of America: Here all that was present was a request by each defendant of its competitor for information as to the most recent price charged or quoted, whenever it needed such information and whenever it was not available from another source. Each defendant on receiving that request usually furnished the data with the expectation that it would be furnished reciprocal information when it wanted it. That concerted action is of course sufficient to establish the combination or conspiracy, the initial ingredient of a violation of § 1 of the Sherman Act. 393 U.S. 333, 335 (1969) (footnote omitted). Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 68 of 71 62 industries, some with significant economic power, tried to negotiate the fuel surcharge percentages, but were told by the Defendants (who had previously been willing to negotiate discounts on rail freight rates) that the Rail Fuel Surcharges were ‘not negotiable.’” (Id. ¶ 92.) Defendants’ new practice of refusing to negotiate surcharges, which must be accepted as true at this stage, goes to the heart of the conspiracy alleged. This change would clearly not have been consistent with any individual Defendant’s independent self-interest, absent a conspiracy. It supports an inference that a conspiracy was plausible. In response, Defendants assert that because the railroad industry was going through a period of high demand and tight capacity, it is natural that they would all cease negotiating surcharges. (Defendants’ Brief at 45.) But this is far from a necessary inference. Even under such conditions, companies can still use negotiation or discounting to increase market share and, therefore, profits. Particularly combined with Plaintiffs’ allegations that Defendants’ had different fuel efficiencies and operating costs (Compl.¶¶ 83, 86), and that Defendants’ market shares remained stable during the Class Period, this allegation further supports the plausibility of the conspiracy. 6. Government Investigation As set forth in the Complaint, Defendants have publicly disclosed that they are the subject of at least one government investigation of their fuel surcharge practices. Every Defendant has received at least one state grand jury subpoena or state grand jury inquiry concerning rail fuel surcharges. (Compl. ¶ 18.) Contrary to Defendants’ suggestion, this ongoing governmental investigation also supports the plausibility of the alleged conspiracy. See, e.g., In re Tableware Antitrust Litig., 363 F. Supp. 2d 1203, 1205 (N.D. Cal. 2005) (“A plaintiff may surely rely on governmental investigations, but must also, under FRCP 11, undertake his own reasonable inquiry and frame his complaint with allegations of his own design.”) The fact Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 69 of 71 63 that an Attorney General’s office with limited resources to protect the public welfare exercised its discretion to convene a grand jury to investigate these surcharges supports the plausibility of the Complaint’s allegations. 7. Market Share Stabilization Plaintiffs also allege that, during the course of their conspiracy, Defendants agreed not to compete for market share and that Defendants’ market shares remained stable following the 2003 agreements. (Compl. ¶ 95.) Defendants do not directly address this allegation, which obviously supports the plausibility of a conspiracy. See, e.g., In re High Fructose Corn Syrup Antitrust Litig., 295 F.3d 651, 660 (7th Cir. 2002) (“that market shares did not fluctuate significantly during the period of the alleged [ ] conspiracy may indicate that the sellers had agreed tacitly or otherwise to share the sales opportunities created by the growth in demand”). As noted above, an industry analyst at the time expressed puzzlement at the fact that the Defendants had ceased competing to gain market share in favor of charging the same prices. (Compl. ¶ 84.) It is a reasonable inference that this analyst was puzzled by the railroads’ conduct because it was not in any individual railroad’s independent self interest, absent a conspiracy. (See id. at ¶¶ 87, 88.) * * * Thus, in sum, Plaintiffs have not only directly alleged unlawful concerted conduct by the Defendants in detail, and placed this conduct in a factual setting firmly suggesting the likelihood of conspiracy, but have also alleged additional features of the conspiracy that further bolster its plausibility. The Complaint here does far more than “nudge” this case into the realm of plausible conspiracy. Defendants’ characterization of the Complaint’s allegations as “conclusory” is baseless and their post hoc, piecemeal justifications fall far short of overcoming Plaintiffs’ allegations. Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 70 of 71 64 CONCLUSION For all of the foregoing reasons, Defendants’ joint motion to dismiss the direct purchasers’ Complaint should be denied. Dated: July 8, 2008 Respectfully submitted: /s/ Stephen R. Neuwirth Stephen R. Neuwirth Daniel Brockett Sami H. Rashid QUINN EMANUEL URQUHART OLIVER & HEDGES, LLP 51 Madison Avenue, 22nd Floor New York, New York 10010 Telephone: (212) 849-7000 Facsimile: (212) 849-7100 Email: stephenneuwirth@quinnemanuel.com /s/ Michael D. Hausfeld Michael D. Hausfeld (D.C. Bar #153742) Benjamin D. Brown (D.C. Bar #495836) COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C. 1100 New York Avenue NW Suite 500, West Tower Washington, DC 20005 Telephone: (202) 408-4600 Facsimile: (202) 408-4699 Email: mhausfeld@cmht.com Steig D. Olson COHEN, MILSTEIN, HAUSFELD & TOLL, P.L.L.C. 150 East 52nd Street, 30th Floor New York, NY 10022 Telephone: (212) 838-7797 Facsimile: (212) 838-7745 Direct Purchaser Plaintiffs’ Interim Co-Lead Class Counsel Case 1:07-mc-00489-PLF Document 118 Filed 07/08/2008 Page 71 of 71 Case 1:07-mc-00489-PLF Document 118-2 Filed 07/08/2008 Page 1 of 8 Case 1:07-mc-00489-PLF Document 118-2 Filed 07/08/2008 Page 2 of 8 Case 1:07-mc-00489-PLF Document 118-2 Filed 07/08/2008 Page 3 of 8 Case 1:07-mc-00489-PLF Document 118-2 Filed 07/08/2008 Page 4 of 8 Case 1:07-mc-00489-PLF Document 118-2 Filed 07/08/2008 Page 5 of 8 Case 1:07-mc-00489-PLF Document 118-2 Filed 07/08/2008 Page 6 of 8 Case 1:07-mc-00489-PLF Document 118-2 Filed 07/08/2008 Page 7 of 8 Case 1:07-mc-00489-PLF Document 118-2 Filed 07/08/2008 Page 8 of 8 Case 1:07-mc-00489-PLF Document 118-3 Filed 07/08/2008 Page 1 of 16 Case 1:07-mc-00489-PLF Document 118-3 Filed 07/08/2008 Page 2 of 16 Case 1:07-mc-00489-PLF Document 118-3 Filed 07/08/2008 Page 3 of 16 Case 1:07-mc-00489-PLF Document 118-3 Filed 07/08/2008 Page 4 of 16 Case 1:07-mc-00489-PLF Document 118-3 Filed 07/08/2008 Page 5 of 16 Case 1:07-mc-00489-PLF Document 118-3 Filed 07/08/2008 Page 6 of 16 Case 1:07-mc-00489-PLF Document 118-3 Filed 07/08/2008 Page 7 of 16 Case 1:07-mc-00489-PLF Document 118-3 Filed 07/08/2008 Page 8 of 16 Case 1:07-mc-00489-PLF Document 118-3 Filed 07/08/2008 Page 9 of 16 Case 1:07-mc-00489-PLF Document 118-3 Filed 07/08/2008 Page 10 of 16 Case 1:07-mc-00489-PLF Document 118-3 Filed 07/08/2008 Page 11 of 16 Case 1:07-mc-00489-PLF Document 118-3 Filed 07/08/2008 Page 12 of 16 Case 1:07-mc-00489-PLF Document 118-3 Filed 07/08/2008 Page 13 of 16 Case 1:07-mc-00489-PLF Document 118-3 Filed 07/08/2008 Page 14 of 16 Case 1:07-mc-00489-PLF Document 118-3 Filed 07/08/2008 Page 15 of 16 Case 1:07-mc-00489-PLF Document 118-3 Filed 07/08/2008 Page 16 of 16 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA In re RAIL FREIGHT FUEL SURCHARGE ANTITRUST LITIGATION ______________________________________ This document relates to: ALL CASES MDL Docket No. 1869 Misc. No. 07-489 (PLF) [PROPOSED] ORDER DENYING DEFENDANTS’ MOTION TO DISMISS Upon consideration of the Joint Motion to Dismiss filed on May 30, 2008 by Defendants BNSF Railway Company (“BNSF”), Union Pacific Railroad Company (“UP”), CSX Transportation, Inc. (“CSX”) and Norfolk Southern Railway Company (“NS”) (together, “Defendants”), and the briefs and exhibits submitted in support thereof and in opposition thereto, it is HEREBY ORDERED that Defendants’ Motion to Dismiss is DENIED. So ORDERED. Dated: ________________ _____________________________ Paul L. Friedman United States District Judge Case 1:07-mc-00489-PLF Document 118-4 Filed 07/08/2008 Page 1 of 1