U.S. District Judge grants class certification to shipper lawsuit against U.S. Class I rails

Late last week, a U.S. District judge in the District of Columbia granted class action certification to shipper plaintiffs in a lawsuit which maintains that four United States-based Class I railroads—Burlington Northern Santa Fe, Union Pacific, Norfolk Southern Corp., and CSX—worked together , or colluded, on fuel surcharges assessed to shippers.

Various reports indicate that the plaintiffs, who are comprised of eight shippers, maintain that the railroads, which control roughly 90 percent of U.S.-based freight rail volume, collaborated to maintain prices through fuel surcharges that were part of shippers’ bills and they also contend that this fuel surcharges had no direct correlation to actual fuel cost increases.

This case centers on what a Reuters report described as “an endless string of rate increases” between 2003-2008 which generated billions of dollars in extra revenues for the four railroads. What’s more, it added that the eight shipper plaintiffs say that the railroads took advantage of a concentrated market, tight capacity, and coordinated pricing.

Reuters also noted that overcharge claims are being presented as evidence and are under a seal, adding that a study by the American Chemistry Council indicated that fuel surcharges imposed by all major freight railroads topped fuel cost increases by $6.4 billion between 2003-2007.

Stephen Neuwirth, an attorney at Quinn Emmanuel Urquhart & Sullivan, representing the plaintiffs, said that Judge Paul Friedman’s decision serves as a strong validation for this case.

“This harmed both the shippers and American consumers who had to foot the bill for these surcharges,” he said in a statement. “[W]e are pleased that lawmakers and regulators in the federal government are now considering taking concrete steps to curb the monopoly that was created in the railroad freight industry after deregulation more than 30 years ago.”

Issues between railroads and shippers regarding how fuel surcharges are applied are far from new. In January 2007, the Surface Transportation Board issued a final rule focused on how railroads calculate and apply fuel surcharges.

In that ruling, the STB declared that computing fuel surcharges in a manner that does not correlate with actual fuel costs for specific rail shipments was an “unreasonable practice.” Toward that end, the agency said, it said it would prohibit railroads from assessing fuel surcharges that are based on a percentage of the base rate charged to customers. Instead, carriers were required to develop a fuel-surcharge computation that is more closely linked to the portion of their fuel costs that is attributable to a specific shipment.

Morgan Stanley analyst William Greene commented in a research note that Judge Friedman’s decision to grant class certification to the shipper plaintiffs makes “the economics of winning much more compelling for the plaintiff attorneys,” but noted “the most probable outcome appears to be a negotiated settlement between rails and the shipper plaintiffs.”

And since the STB’s 2007 decision Greene said that most rails have moved towards a mileage-based fuel surcharge mechanism following STB guidelines, explaining that the STB indicated it was unreasonable to link fuel surcharges to a base rate. Subsequently, the rails, said Greene, were instructed to relate fuel surcharges more closely to actual fuel costs and not to use fuel surcharges as a profit center.

This case could have merit and significantly benefit shippers, according to Jay Roman, president of Escalation Consultants, an energy and railroad consultancy.

“The attorneys in this case appear to have already completed discovery and presented to the judge what their proposed method would be for calculating damages,” he said. “This is not a normal class action suit, in that it should be much more on the fast track than a normal one would be, because of what has already been completed. The railroads are kind of in a different arena than they are used to being in…because this is different than previous cases in front of the STB and they have a formidable opponent, too.”

Roman said he has advised his rail shipper clients to make sure their legal departments are aware of this case and stay close to what is going on, due to the fact that the dollar amounts in this case are “enormous” and should the railroads lose this case if a settlement is not reached, it will likely have a significant impact on rates.  

Railroads appear ready to dig in and are prepared for any challenges this case may bring, it seems.

“While the court decided that the case may continue as a class action, the court did not find that the plaintiffs’ allegations are true,” said Tom Lange, director of corporate communications for Union Pacific. “The ruling addresses only the preliminary procedural question of whether the case can proceed as a class action on behalf of a group of plaintiffs.  This ruling did not determine that Union Pacific in any way violated the law or did anything wrong.” 

And based upon its initial review, Lange said Union Pacific expects to petition the US Court of Appeals for the District of Columbia to review the District Court’s decision.

“As we have said since these lawsuits were first filed in 2007, Union Pacific denies the plaintiffs’ allegations and intends to continue to defend vigorously against the plaintiffs’ unfounded claims and looks forward to presenting facts showing that our independent fuel surcharge programs did not violate any antitrust laws,” said Lange.