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SOUTHERN RY. CO. v. UNITED STATES

April 6, 1976

SOUTHERN RAILWAY COMPANY, ET AL., Plaintiffs, and THE DENVER & RIO GRANDE WESTERN RAILROAD COMPANY, ET AL., Intervening Plaintiffs,
v.
UNITED STATES OF AMERICA AND INTERSTATE COMMERCE COMMISSION, Defendants, and PACIFIC FRUIT EXPRESS COMPANY, Intervening Defendant.



The opinion of the court was delivered by: HAROLD LEVENTHAL

LEVENTHAL, Circuit Judge: This is an action under 28 U.S.C. §§ 1336(a), 2321-2325 *fn1" to suspend, annul, or set aside the report and order of the Interstate Commerce Commission (ICC or Commission) in Ex Parte No. 137, Contracts for Protective Services, 318 I.C.C. 111, decided August 27, 1962 (1962 Order).

I. INTRODUCTION

 A. Parties and Contentions

 Plaintiffs are several common carriers by rail road. *fn2" Defendants are the Commission and the United States of America, as statutory defendant under 28 U.S.C. § 2322. Intervening defendant is the Pacific Fruit Express Company (PFE), a company engaged in the furnishing of cars containing mechanical heating and refrigeration units for the protection of perishable commodities against heat and cold. PFE is wholly owned by the Union Pacific Company and the Southern Pacific Transportation Company.

 This action was filed on September 17, 1973. Various motions to dismiss of defendants and intervening defendant were denied on July 17, 1974, although the issue of the applicability of the doctrine of laches was reserved for this decision. Argument on the motions to dismiss was heard on May 27, 1975.

 In the 1962 order, the Commission conditionally approved for a limited time only certain contracts for the provision of "protective services" *fn3" pursuant to § 1(14)(b) of the Interstate Commerce Act, 49 U.S.C. § 1(14)(b), *fn4" and set forth certain standards governing the filing and content of new contracts to replace these and other existing contracts and arrangements. This challenge was precipitated by a subsequent action of the Commission, not specifically under review here, *fn5" in No. 35515, Contracts -- Protective Service Between Pacific Fruit Express Company and the Akron, Canton and Youngstown Railroad Company, et al., 340 I.C.C. 754 (1972) (1972 declaratory order). There the Commission declared that under the 1962 Order connecting or terminating carriers (non-originating carriers) are being furnished "protective services" when they receive cars with mechanical refrigeration units originating elsewhere, even though the car line companies *fn6" providing the units are "foreign car lines" in that they perform no additional services over connecting railroads' lines, and must submit their agreements or arrangements with the car lines for approval by the Commission.

 Plaintiff railroads argue: (1) This interpretation is not supported by findings and substantial evidence in the 1962 Order. (2) If the 1962 Order is so interpreted, there is no statutory authorization for it under § 1(14)(b). (3) The 1962 Order, so interpreted, is procedurally defective because of vagueness and failure to comply with the notice and comment requirements for rulemaking under the Administrative Procedure Act (APA). (4) Under this reading, the 1962 Order mandates pooling agreements illegal under § 5(1) of the Act, 49 U.S.C. § 5(1), without prior specific Commission approval. (5) The Commission's actions subsequent to 1962 in unconditionally approving contracts not containing agreements between non-originating railroads and foreign car lines for the provision of mechanical protective service (MPS) and consistently failing to clarify the scope of its 1962 Order attached an impermissible retroactive effect to the Commission's present interpretation. Defendants and intervening defendant, in addition to disputing the foregoing contentions on the merits, maintain that plaintiffs' action is barred by the doctrines of exhaustion of administrative remedies and laches.

 B. Outline of Ruling

 This case has a protracted history, due in significant measure to the imprecision of the 1962 Order, and prolonged not only by Commission indecisiveness and inaction but by affirmative conduct creating the distinct impression that the 1962 Order did not reach the issues in dispute here. These are considerations that would render inequitable any ruling rejecting the lawsuit for laches. As for the defense of exhaustion of administrative remedies, while we have been sorely tempted to remand to the I.C.C. for clarification before undertaking any decision on the merits, we are reluctant to prolong the anxiety and confusion in this regulatory no-mans land. The lack of clarity in the 1962 Order, compounded by the Commission's subsequent actions, has hampered our consideration of the merits. After reflection, we conclude that there is authorization in the 1962 Order and § 1(14)(b) for the Commission's present interpretation, and we also decline to set aside the 1962 Order because of the procedural objections of plaintiffs. Thus, we are clear as to the legality of prospective application of the order as interpreted in 1972. However, we recognize, in light of the tortuous history of this case, that there is a problem of unfairness as well as a possible statutory barrier in § 15(6) of the Act, 49 U.S.C. § 15(6), *fn7" if plaintiff carriers are exposed to liability, whether through administrative or private enforcement actions, for their previous non-compliance with the 1962 Order as interpreted in 1972. *fn8" Since the ICC has yet to make clear that it understands the 1962 Order to impose substantive liability on plaintiff carriers in the absence of either superseding contracts approved by the Commission under § 1(14)(b) or administrative enforcement proceedings, and indeed has suggested otherwise in the 1972 interpretive ruling, we remand to the Commission to determine whether, and as of what point, plaintiffs can be held liable for their previous mon-compliance. If the ICC determines that there is no such liability under the terms of the 1962 Order, we also urge it to investigate the possibility of conducting a settlement conference among all the interested parties (which would not be limited to the formal parties in this action). Such an approach might better accommodate the interests within this troubled transportation sector than continued litigation, and would aid judicial administration as well as uniformity of regulatory policy by terminating pending lawsuits in different courts. *fn9" Finally, we decline to enjoin enforcement of the 1962 Order, as to retrospective application, pending the outcome of administrative proceedings on remand. *fn10"

 II. BACKGROUND AND PRIOR PROCEEDINGS

 In order to understand the various contentions of the parties, a somewhat detailed background is necessary.

 A. Statutory Scheme in General

 Section 1(4) of the Act makes it the duty of every common carrier by rail to furnish transportation upon reasonable request and to establish just and reasonable rates. Section 3(4) requires every common carrier to provide facilities for the the interchange of traffic. Compensation for inter-line traffic is provided by through rates with other railroads, as established by the railroads under § 1(4) or the Commission under § 15(3). 49 U.S.C. §§ 1(4), 3(4), 15(3).

 As part of the railroad's duty to provide transportation service, section 1(11) requires the carrier to provide reasonably adequate and suitable "car service" for all the traffic it holds itself out to transport. And in the case of perishable commodities, the obligation extends to the provision of rail cars with protection against heat or cold. *fn11" The shipper or receiver of perishables pays two charges, one for transportation and one for protective service, both of which are covered by railroad tariffs filed with the Commission. In a shipment involving more than one carrier, these charges are in the form of joint tariffs.

 The duty to furnish cars and protective service in the first instance is placed on the originating carrier, and the arrangements are usually made with wholly-owned subsidiaries acting as car line companies. With respect to inter-line shipments, the statutory duty to accept cars in interchange gives rise to inter-line arrangements, with transportation charges divided among participating railroads in agreed-upon shares or "divisions." Protective service charges are allocated as between the roads and the car line companies by "division sheets," in the absence of bilateral contracts between particular roads and car line companies. Rental for the use of the cars is paid by non owning railroads to car-line companies.

 The Commission regulates compensation to the car line for the use of the car or "car service" under § 1(14)(a), *fn12" and for "protective service" rendered under § 1(14)(b). Section 1(14)(a) was enacted in 1907, and amended in 1940, to make clear that it covered compensation for the use of the car "whether or not owned by another carrier." The Commission sought enactment of § 1(14)(b) in 1940 because doubts as to its jurisdiction over car line companies prevented close scrutiny of their relationship with their parent roads in determining the actual cost of providing protective service so that the Commission would have a proper basis for approving cost-related protective service tariff charges to be paid by shippers. *fn13"

 The dispute before us turns in part on the distinction between "car service" and "protective service." When protective services involved only the use of ice or salt in refrigeration cars, the distinction enjoyed clarity. The furnishing of the car itself was the responsibility of the car line company operating in the area of the originating railroad, and this capital investment was recognized not only by the originating carrier but also by the connecting carriers in the form of rental assessments paid to the car owner, subject to the Commission's approval. But while the car line company loaded the car with ice or salt, it was necessary for successive providers of protective service to repack the car with ice as it melted in transit. Each railroad along the route provided the service in its own area. Accordingly, the Commission ruled that the car line's provision of portable coolers or heaters did not constitute protective service; the agreements going to the Commission for approval were for services rendered by car line operating personnel. *fn14"

 With the advent of mechanical protective service units in 1953, however, the distinction blurred. The car now included a MPS unit, designed to operated without significant servicing or repairs for the entire transcontinental journey. The car line company supplies, maintains, and repairs the MPS unit and its incidental appurtenances, adds fuel and refrigerant, and generally attempts to put the unit in satisfactory condition for an entire trip, although minor repairs and resupplying of fuel or refrigerant are sometimes performed by the connecting roads for which the car line company is billed.

 Since MPS did not call for such extensive services in intermediate and destination areas as had previously been performed, the railroads comprising the National Perishable Freight Committee (NPFC), a ratemaking organization of plaintiffs and other carriers responsible for promulgating a "perishable protective tariff," adopted Division Sheet 7 in 1953. The railroads agreed that in the absence of a bilateral agreement with the car line company 80% of protective service revenues would be allocated to the originating road, for payment to the car line company to cover cost of ownership and other expenses, with the remaining 20% allocated to the connecting roads in the same proportion as division of the transportation charges. Hills for fuel, refrigerant, and repairs by connecting roads would be reimbursed by the car owner.

 B. Prior Proceedings

 (1). 1940 Order. With the enactment of § 1(14)(b), in 1940, the Commission immediately opened the Ex Parte No. 137 Docket, ordering, on October 18, 1940, the railroads to file copies "of all their currently operative contracts, agreements, or written arrangements" for protective service and transform unwritten understandings into written contracts. Contracts for Protective Services (First Report), 246 I.C.C. 145-46 (1941). The First Report, which issued on July 31, 1941, set the general approach of declaring the principles and guidelines the Commission would apply in passing on the contracts and arrangements that the carriers were required by § 1(14)(b) to file for ICC approval. *fn15"

 (2). 1962 Order.16 The advent of MPS prompted the Commission, on October 28, 1959, to institute a new investigation to determine whether the charges set forth in certain MPS contracts were consistent with the public interest under § 1(14)(b) (R. 7986). *fn17" All railroads parties to these contracts were made respondents, and notice in the Federal Register was given. The investigation was subsequently broadened, on May 20, 1959, to include charges for use of mechanical refrigeration in additional contracts; and, on December 9, 1959, to bring in as respondents "all rail carriers having contracts for protective service on file with the Commission requiring approval pursuant to Section 1(14)(b)," and to include all charges for protective service in order to determine whether prior decisions in Ex Parte No. 137 should be modified (R. 8008). Because of the resultant scope of the proceeding, all of the plaintiff railroads were respondents, *fn18" and all the significant car line companies participated. *fn19"

 Following hearings held in 1959 and 1960, the hearing examiner, on March 23, 1961, issued his recommended report and order. His pertinent conclusion was that intervening defendant PFE, although compensated for MPS by Division Sheet 7, was "operating under an arrangement with the railroads to render mechanical refrigeration services without the approval of the Commission" (R. 8022-83). And as to the contracts before him, the examiner denied approval because on the basis of the record evidence they did not cover the costs of the car line companies (R. 8032, 8037-38).

 After the filing of exceptions to the examiner's report and replies thereto, and after oral argument, Division 3 of the Commission, on August 27, 1962, issued the 1962 Order challenged in this case. While leaving for later discussion the matters in dispute here, we note that Commission approved all the contracts before it on the condition that "all rail carriers and express companies receiving protective service under any contracts, agreements, or arrangements requiring approval under § 1(14)(b) . . . shall submit for approval within 120 days after the effective date of the order herein, new and superseding Contracts covering protective services which shall replace all prior contracts, including division sheet 7"; and (2) required these new or superseding contracts to contain specific requirements, most notably a guarantee of cost plus reasonable profit to the car line companies. 318 I.C.C. at 125-27.

 (3). 1962-65 Hiatus. Considerable confusion attended issuance of the 1962 Order. On October 12, 1962, New York Central requested an extension of time in order to seek reconsideration (R. 10073-74), and on October 17, 1962, the Commission granted an extension to November 19, 1962 and postponed the effective date of the order to January 10, 1963 and the date of compliance to May 10, 1963 (R. 10075). The deadline for filing new contracts was again extended to June 10, 1963 on the request of Southern Pacific and Union Pacific, who noted that the railroads could not agree "on method of payment of car line cost by intermediate and destination carriers" (R. 10088).

 On March 12, 1963, after the date had expired for seeking reconsideration, the Missouri Pacific and the Wabash, owning lines of American Refrigeration Transit Company (ART), filed a "petition for leave to file a petition for clarification and/or modification," specifically raising the questions whether the 1962 Order required contracts between non-originating carriers and foreign car lines, and whether Division Sheet 7 had to be superseded, and identifying the extent of confusion among the affected parties (R. 10288, 10080-85). *fn20" The Commission denied the petition for failure to present "sufficient grounds" (R. 10293-94). *fn21"

 Thereafter, in light of the June 10, 1963 deadline, contracts between railroads and six railroad-controlled car lines were filed and "unconditionally approved" by the Commission, on September 9, 1963, as in compliance with the 1962 Order. *fn22" 321 I.C.C. 758, 761-62. The Commission made no mention of the fact that these contracts did not provide for compensation from non-originating lines for the furnishing of MPS. The Commission did not refer in any way to the failure of the railroads to seek approval of their continued use of Division Sheet 7. *fn23"

 Between 1963 and 1972, the Commission continued to approve contracts and amendments. None of these agreements applied carriers outside of the car lines' area of operations. *fn24" There was no sign of ICC disapproval.

 (4). 1965-72, California Litigation and the 1972 Order. In 1965, PFE, intervening defendant here, brought an action in the Northern District of California for damages and injunctive relief against ninety eastern and southern railroads to recover compensation for furnishing MPS units in PFE cars traversing their lines. Shortly afterwards, on February 8, 1966, Union Pacific and Southern Pacific, PFE's parent lines, petitioned the Commission for a cease and desist order directing defendants to pay their share of PFE's costs as directed by the 1962 Order, rather than allocate tariff revenue on the basis of Division Sheet 7 (R. 10552, 10557). That petition was opposed by those defendants who later became plaintiffs in the present action, and who asserted they were in full compliance with the 1962 Order. The Commission, on May 17, 1966, rejected the petition as raising the same questions as the California action (R. 10581).

 Questions were certified by the District Judge in the California suit, on November 16, 1971. In response, Division 2 of the Commission issued a declaratory order, dated February 28, 1972, which by its terms applied only to the California action. In the 1972 Order, the Commission declared, in pertinent part, that (1) PFE's furnishing of a MPS unit constituted "protective service" within § 1(14)(b), as distinguished from "car service" under § 1(14)(a); (2) the 1962 Order required the filing of contracts between PFE and non-originating carriers; and (3) Division Sheet 7, although not officially on file with the Commission, was "specifically embraced" by the 1962 Order, and the failure to file contracts superseding it violated § 1(14)(b) but did not render the division sheet void. 340 I.C.C. 754, 7667-71. *fn25"

 As a result of the Commission's answers, the District Judge ruled, on March 2, 1973, that the failure of the railroads to enter into new contracts superseding Division Sheet 7 violated the 1962 Order and § 1(14)(b), giving PFE a right of action for damages and injunctive relief. *fn26" The Court of Appeals for the Ninth Circuit affirmed on August 28, 1975, after oral argument in the case at bar on the motions to dismiss.

 (5). Post-1972 Order Developments.

 The Commission's 1972 declaratory order not only influenced the outcome of the California action, but encouraged a number of other district court enforcement actions involving claims similar to those raised by PFE. *fn27"

 On December 1, 1972, before the California district court decision issued, the owning roads of Fruit Growers Express and Western Fruit Express, including many of the plaintiff carriers here, filed a "petition for further and supplemental hearings" in Ex Parte No. 137, complaining of a turnabout in the Commission's position and lack of notice and opportunity to participate in the formulation of the claimed novel interpretation (R. 10622-49). *fn28" On January 26, 1973, the Commission denied the petitions on the ground that the petitioners were merely concerned about the effect of the 1972 Order which explicitly disclaimed application to any situation except the California suit (R. 10602). Also, for a time, the Commission continued to approve contracts and amendments which did not deal with the foreign car line question (R. 10593, 10599). However, on February 1, 1974, the Commission approved several ART contracts which covered the use of ART equipment by non-originating carriers outside ART's service area (R. 10655, 10682), expressly noting

 
that the superseding contracts contain the same provisions as the contracts previously in force except that the superseding contracts apply to all usages of the contractor's protective service equipment in contrast to the superseded ...

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