Chicago & North Western Railway Co. v. Atchison, Topeka & Santa Fe Railway Co.

There were originally three groups of railroads involved in the proceedings before the Commission: the Eastern, Midwestern, and Mountain-Pacific carriers. The Eastern railroads operate in the northeastern area of the United States extending south to the Ohio River and parts of Virginia and west to central Illinois. Midwestern Territory lies between Eastern Territory and the Rocky Mountains, and the rest of the United States to the west constitutes Mountain-Pacific Territory. The latter is subdivided into Transcontinental Territory — comprising the States bordering the Pacific, Nevada, Arizona, and parts of Idaho, Utah, and New Mexico — and Inter-mountain Territory. The railroads operating in Southern Territory, which includes the southeastern United.

Railroads customarily establish joint through rates for interterritorial freight service, and the divisions of these rates, fixed by the Commission or by agreement, determine what share of the joint tariffs each of the several participating carriers receives. See St. Louis S. W. R. Co. v. United States, 245 U. S. 136 , 139-140, n. 2. In 1954 the Eastern carriers filed a complaint with the Commission seeking a greater share of the joint tariff on freight traffic east and west between Eastern Territory and Transcontinental Territory. Shortly thereafter, the Midwestern carriers also filed a complaint, requesting higher divisions on (1) their intermediate service on Eastern-Transcontinental traffic, (2) their service on freight traffic east and west between Midwestern Territory and Transcontinental Territory. Some of the Midwestern lines had long believed that the Mountain-Pacific carriers enjoyed an unduly high share of the joint tariffs for these categories of traffic. When joint rates for traffic to the western United States were first established in the 1870’s, rates were divided on the basis of the miles of carriage rendered by the participating railroads, but the Mountain-Pacific carriers enjoyed a 50% inflation in their mileage factor.^[5] In 1925, after

In the proceedings before the Commission, which consolidated the Eastern and the Midwestern complaints, the Mountain-Pacific railroads not only defended the existing divisions, but sought a 10% increase in their share. Regulatory commissions of States in Mountain-Pacific Territory also intervened. The consolidated proceedings involved rate divisions affecting about 300 railroads, which voluntarily aligned themselves into three groups— Eastern, Midwestern, and Mountain-Pacific — and submitted evidence and tried the case on this group basis. A great deal of time was consumed in compiling and introducing massive amounts of evidence — more than 800 exhibits and over 11,200 pages of testimony. The Hearing Examiners made a recommended report in 1960. After considering written briefs and oral arguments from the various groups of parties, the Commission issued its original report in March of 1963. The Commission found the existing divisions to be unlawful, and prescribed

When exercising its statutory authority to establish “just and reasonable” divisions under § 15 (6) of the Interstate Commerce Act, the Commission is required to:

“[G]ive due consideration, among other things, to the efficiency with which the carriers concerned are operated, the amount of revenue required to pay their respective operating expenses, taxes, and a fair return on their railway property held for and used in the service of transportation, and the importance to the public of the transportation services of such carriers; and also whether any particular participating carrier is an originating, intermediate, or delivering line, and any other fact or circumstance which would ordinarily, without regard to the mileage haul, entitle one carrier to a greater or less proportion than another carrier of the joint rate, fare or charge.”^[7]

After reviewing the nature of the traffic involved and considering the special claims of the various groups, the Commission found that “none of the contending groups is more or less efficiently operated than another,” and that “there are no differences in the importance to the public attributable to the three contending groups of carriers.” Its decision thus turned on more direct financial considerations, to which the Commission devoted a substantial part of its lengthy report. Under Commission practice, these financial considerations are divided into “cost of service” and “revenue needs.” The former consists of the out-of-pocket expenses directly associated with a particular service, including operating costs, taxes, and a four percent return on the property involved.

In determining cost of service, the Commission relied upon a cost study prepared by the Mountain-Pacific railroads, but introduced certain modifications that produced different results. The Commission found that existing divisions on Eastern-Transcontinental traffic gave the Mountain-Pacific carriers revenues that exceeded their costs by 57%, while the Midwestern and Eastern railroads received only 43% and 22% more, respectively, than their costs for the service they contributed. On Midwestern-Transcontinental traffic, the Commission found that the divisions gave the Mountain-Pacific carriers revenues 71% above cost, while the Midwestern lines received only 39% above cost; on this traffic the Midwestern railroads bore 31.5% of the total cost but received only 27.1% of the total revenue.

In assessing comparative revenue needs, the Commission found, that the average rate of return for 1946-1958, based on net railway operating income from all services as a percentage of the value of invested property,^[8] was 3.40% for the Eastern roads, 3.49% for the Midwestern group, and 4.64% for the Mountain-Pacific carriers. The Commission also found that the Mountain-Pacific railroads had the most favorable record and trend in both freight volume and freight revenues, and the Eastern railroads the least favorable, with the Midwestern roads occupying an intermediate position. In response to the Mountain-Pacific carriers’ complaint that their net operating income from all services had not increased as fast as net investment in recent years, the Commission

From all this evidence, the Commission concluded “that there should be increases in [the Eastern carriers’] divisions reflecting revenue need as well as cost.” While the very poor financial position and high revenue needs of the Eastern carriers were thus important elements in prescribing increases in their divisions, the Commission went on to find cost considerations the controlling factor with regard to the Midwestern divisions: “As between the [Mountain-Pacific railroads] and the [Midwestern] railroads the differences in earning power are less marked, but our consideration of the evidence bearing on cost of service previously discussed convinces us that the primary midwestern divisions as a whole are too low.”

In establishing higher divisions for the Eastern carriers, the Commission relied upon the existing percentages governing divisions of the various rates between well-defined subareas in Eastern Territory and points in Transcontinental Territory. The Commission simply increased the percentages that the Eastern carriers formerly received on this traffic.^[9] However, the Commission concluded that it could not follow this procedure

After entertaining petitions for reconsideration, the Commission adopted a supplemental report in late 1963. For the first time, a few carriers abandoned the three-group basis on which all the prior proceedings had been conducted. Requests for special treatment were made on behalf of one Mountain-Pacific road, the Denver & Rio Grande, and two Midwestern carriers, the Missouri-Kansas-Texas (Katy) and the St. Louis-San Francisco (Frisco), on the ground that the divisions prescribed by the Commission had an unduly harsh effect on them.^[14] The Commission considered and largely rejected these and other criticisms of its original decision, and issued a supplemental order substantially reaffirming its original order after making minor technical modifications.

Eleven of the Mountain-Pacific carriers brought an action in the District Court to enjoin and set aside

"[T]hat to comply with . . . the Interstate Commerce and the Administrative Procedure Acts . . . the Commission is required to make affirmative findings which disclose that the requirements of Section 15 (6) have been met and the factors therein required have been determined and considered, not only as to the groups of roads involved but with respect to each carrier affected in said groups; that findings must be made as to the amount of revenue, in terms of dollars, required by the respective carriers affected in any new divisions prescribed, the financial effect of the Commission’s orders in terms of dollars as to

the carriers and the extent to which the new divisions prescribed will produce the revenue found to be required . . . ."

The Eastern carriers, the Midwestern defendants, and the Government and the Commission all appealed the decision of the District Court. Thereafter, all of the Eastern and some of the Midwestern carriers^[15] reached settlement agreements with the Mountain-Pacific carriers covering the rate divisions affecting them. We accordingly vacated the judgment of the District Court with respect to the divisions of the Eastern and the settling Midwestern railroads, and remanded the relevant portions of the appeals to the District Court with instructions to dismiss as moot. 383 U. S. 832 , 384 U. S. 888 . Thus, the principal dispute remaining concerns the divisions between the Mountain-Pacific carriers and the eight principal Midwestern roads that are appellants in No. 8.^[16]

II.

None of the appellees now defends the position, espoused by the District Court, that the Commission was required to make separate individual findings for each of the 300 railroads involved in the proceedings before it.

In its first decision involving rate divisions under § 15 (6), the New England Divisions Case, 261 U. S. 184 , the Court upheld the authority of the Commission to take evidence and make findings on a group basis. Speaking for a unanimous Court, Mr. Justice Brandéis noted that the “actual necessities of procedure and administration” required procedures on a group basis in ratemaking cases, and that a similar practice was appropriate in divisions cases. The complexity of the subject matter and the multiplicity of carriers typically involved in divisions cases were such that a wooden requirement of individual findings would make effective regulation all but impossible. The Court held that the Interstate Commerce Act permits the Commission to proceed on a group basis and to rely on “evidence which the Commission assumed was typical in character, and ample in quantity” to justify its findings, reasoning that:

“Obviously, Congress intended that a method should be pursued by which the task, which it imposed upon the Commission, could be performed. ... To require specific evidence, and separate adjudication, in respect to each division of each rate of each carrier, would be tantamount to denying the possibility of granting relief. We must assume that Congress knew this . . . .” 261 U. S., at 196-197 .

Both the Court^[18] and the Commission^[19] have consistently adhered to this construction of the Act’s require

The pragmatic justifications for the Commission’s group procedures are obvious. Even on a group basis, the Commission proceedings in this case required a voluminous record and were not completed until nearly 10 years after the complaints were filed. To demand individual evidence and findings for each of the 300 carriers in the Commission proceedings would so inflate the record and prolong administrative adjudication that the Commission’s regulatory authority would be paralyzed.

Nor do considerations of fairness require disregard of administrative necessities. The premise of group proceedings, as the New England Divisions Case explicitly recognized, is that evidence pertaining to a group is typical of its individual members. 261 U. S., at 196-199 . See also Beaumont, S. L. & W. R. Co. v. United States, 282 U. S. 74 , 82-83. It has always been accepted that an individual carrier may challenge this premise and, on proper showing, receive independent consideration if its individual situation is so atypical that its inclusion in group consideration would be inappropriate. It is the Commission’s practice to accord independent treatment to an individual carrier when a proper request for special consideration is made.^[21] But no such requests were made

In increasing the shares of the Eastern railroads the Commission did rely on revenue needs as well as costs, but it found costs alone the controlling factor in raising the divisions of the Midwestern carriers. In the conclusions in its original report, the Commission stated that there should be increases in the Eastern divisions “reflecting revenue need as well as cost,” but in the very next sentence it went on to say that as between the Midwestern and Mountain-Pacific roads, “differences in earning power are less marked, but our consideration of the evidence bearing on cost of service previously discussed convinces us that the primary midwestern divisions as a whole are too low.” Its reliance on costs alone in increasing the Midwestern shares is confirmed by the Commission’s supplemental report, in which it again rejected a request of the Midwestern carriers for even higher divisions based on their claim of pressing revenue needs: “It was our stated view that [increases in the Midwestern divisions] were supported by the evidence concerning cost of service, but that the proposal of the midwestern lines gave undue weight to their claimed revenue need.”^[22] Since revenue needs were important factors only with regard to the Eastern divisions, and those divisions are no longer in issue because the Eastern roads have settled with the Mountain-Pacific carriers, any errors committed by the Commission in its treat

The Commission placed considerable emphasis on rates of return in its discussion of comparative revenue needs. Following its established practice, it found that a value basis, rather than book cost, as urged by the Mountain-Pacific roads, was the proper method for calculating the investment base.^[24] The evidence disclosed that the Mountain-Pacific fines had enjoyed a 4.64% return, as opposed to 3.40% for the Eastern fines, and 3.49% for the Midwestern fines. The suggestion that these findings in terms of rate of return were insufficient because they did not express revenue needs in terms of absolute dollar amount is totally novel and unreasonable. This suggestion seems to stem from a misconception of the Commission’s function in divisions cases. Its task is not to transfer lump sums of cash from one carrier to another, but to “make divisions that colloquially may be said to be fair.” B. & O. R. Co. v. United States, 298

The claim of unfair surprise is strained in light of the fact that the Commission has frequently differentiated passenger and freight revenues in freight rate division cases.^[28] While passenger deficits did not become an important issue in this case until the report of the Hearing Examiners was handed down, the Commission relied upon statistics which were matters of public record, and the Mountain-Pacific carriers had ample opportunity to debate the issue in their exceptions to the Hearing Examiners’ report and their petitions for reconsideration of the Commission’s original decision. And while the Commission has sometimes acted to offset passenger deficits in freight rate cases,^[29] the issues are quite different when, in a divisions case, it is argued that carriers in one part of the country should subsidize the passenger operations of carriers elsewhere.

If the Commission were to give controlling weight to passenger deficits in a divisions case, it might be appropriate to take more evidence on the issue and discuss it in greater depth than the Commission did here. But in light of the fact that, in this case, passenger deficits were of negligible relevance to the Commission’s decision to

lines are used by bridge traffic, and it is, therefore, quite correct to charge this bridge traffic with its proportionate share of maintaining the lines over which it moves.”

The Commission made certain adjustment in the basis for determining locomotive costs; the Mountain-Pacific carriers’ objections to this adjustment were directed at the Commission’s reliance on differences it found between engine districts in Eastern Territory and those elsewhere. Any error in this adjustment is thus relevant only to the Eastern divisions, which are no longer in issue. The Commission also substituted Rail Form A treatment of car service costs, after finding that the Mountain-Pacific study ignored actual territorial differences in this item. Again, this issue related only to the Eastern divisions. In ascertaining the cost attributable to equipment used in the service at issue, the Commission chose a 4% rate of return on investment, a figure traditionally employed by it for this purpose, rather than the 6% figure urged by the Mountain-Pacific carriers. And, in harmony with its treatment of revenue needs, the Commission chose its standard value basis to measure the investment involved, rather than the book cost used by the Mountain-Pacific study.^[30]

From the Mountain-Pacific cost study, as adjusted in these particulars, the Commission found that the Mountain-Pacific carriers enjoyed a much higher margin of revenue over costs than did the Midwestern carriers, and for this reason prescribed increases in the Midwestern divisions.

“In the prehearing conference in the instant cases the advisability of instituting an overall general investigation was discussed but the [Mountain-Pacific carriers] opposed the suggestion, and the matter was dropped. . . . Nor do we see in the record any basis for assuming that the eastern and midwestern complainants withheld vital evidence merely because they had different conceptions of the nature and extent of facts to be developed.”

The Mountain-Pacific carriers also contended that certain factual premises on which the Commission based its allocation of road maintenance costs were erroneous, and that there was no foundation for the Commission’s choice of a value basis for investment rather than book cost.

The District Court did not directly deal with these contentions, stating rather cryptically that in light of its conclusions on the revenue needs issues, “it is unnecessary to discuss [the cost issues]. However, no inference is to be drawn that the court is of the opinion that the [cost issues], or any other numbered issues not discussed in this opinion, are of the nature it would be required to decide should they be raised at some future time.”^[31]

The District Court held that the Commission was required to find the exact effect, in precise dollar amount, of the new divisions on the revenues of each of the 300 carriers involved in the Commission proceedings. The appellees also contend that the Commission was obliged

Finally, the Mountain-Pacific carriers quarrel with the Commission’s prescription of a minimum division of 15%. They contend that the evidence pertaining to terminal costs and standby costs that a participating railroad must incur regardless of the length of its carriage does not justify so high a minimum division. But the Commission found that: “Both in many divisional bases voluntarily established in the past and as well in our decisions it has been common practice to accord minimum divisions for carriers having relatively short hauls, sometimes as high as 20 or 25 percent but more usually 15 percent.

YI.

The appellees finally contend that the Commission erred in its treatment of a single Mountain-Pacific carrier, the Denver & Rio Grande, and two Midwestern carriers, the Katy and the Frisco. It is argued that the situation of these three carriers was dissimilar to that of the groups with whom they were considered, that the typical evidence rule of the New England Divisions Case was inapplicable, and that the Commission was therefore required to make separate findings concerning these carriers. The appellants point out that these carriers voluntarily aligned themselves with their respective groups, presented evidence and argued the case on that basis, and never suggested that they should receive separate treatment until after the Commission’s original decision. They argue that the Commission should not be required, on its own motion, to guess which of 300 carriers may require individual treatment when none of them even requests it. Cf. United States v. Tucker Truck Lines, 344 U. S. 33 , 37. The District Court resolved these contentions by stating that “there has been no intentional relinquishment of a known right on the part of any of these roads.”^[36] This language is more appropriate to a criminal trial than an administrative proceeding.

Midwestern line, in the interest of equalizing competing routes. ... In dealing with this contention, two considerations must be sharply differentiated. The first is the general desirability of equalizing divisions; the Mountain-Pacific lines agree that the parties should be free to equalize divisions over competitive routes .... But a very different question is raised when the Midwestern lines ask the Commission to prescribe divisions over gateways 500 miles inside Mountain-Pacific territory and served only by Mountain-Pacific lines. Such a prescription is beyond the issues of the complaints before the Commission in this proceeding.”

In rejecting the belated claims made by the Mountain-Pacific carriers on behalf of the Rio Grande, the Commission was justified in concluding that: “The midwest-ern complainants are correct in stating that the ‘problem is left precisely where the transcontinental defendants insisted that it be left.’ We therefore see no reason for the modification of our findings sought by the defendants.”

Of course, the Commission could not simply rest on such notions of estoppel to justify infliction of substantial injury upon an important railroad serving the public. But it was not at all clear at the time of the Commission’s decision, and it is still not clear, that the new divisions will have the disastrous or unfair effects alleged by the Rio Grande. The revenue effect on the Rio Grande hinges, in important part, on the subdivisions it is able to negotiate with the other Mountain-Pacific carriers. The Mountain-Pacific carriers, including the Rio Grande, urged the Commission to permit such voluntary negotiation in the first instance before taking action itself.^[37] The Commission acceded to this request by spe

We conclude as did the Court in the New England Divisions Case:

“To consider the weight of the evidence, or the wisdom of the order entered, is beyond our province. . . . But the way is still open to any carrier to apply to the Commission for modification of the order, if it is believed to operate unjustly in any respect.” 261 U. S., at 204 .

We hold that the Commission’s original and supplemental orders are valid, and that the District Court erred in setting them aside. When it entered interlocutory injunctions against these orders, the District Court imposed certain protective conditions. They provided that if the Commission’s orders were eventually upheld, they would be deemed effective as of July 1, 1963, and March 30, 1964, respectively, and the various carriers would be required to resettle the interim revenues they received in accordance with the divisions established in the orders. Pending appeal of its final decision to this