Laurel Sand & Gravel, Inc. Maryland Midland Railway, Inc. v. Csx Transportation, Inc.

Citations: 924 F.2d 539; 1991 WL 7731Docket: 89-1076

Court: Court of Appeals for the Fourth Circuit; February 26, 1991; Federal Appellate Court

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Laurel Sand and Gravel, Inc. (LSG) and Maryland Midland Railway, Inc. (MMR) appealed a summary judgment favoring CSX Transportation, Inc. on allegations of Sherman Act violations. The Fourth Circuit Court was tasked with determining whether the district court made errors in three key areas: (1) the absence of evidence suggesting CSX's refusal to grant trackage rights to MMR was motivated by conspiracy; (2) LSG's lack of standing under Section 4 of the Clayton Act; and (3) the dismissal of MMR's claim that CSX monopolized rail transportation by denying access to its tracks, deemed an "essential facility." The court affirmed the district court's ruling, which had granted summary judgment to CSX on both counts of the complaint. 

LSG and MMR's lawsuit alleged that CSX conspired with Millville Quarry, LSG's competitor, to exclude LSG from the Washington, D.C.-Baltimore aggregate market (Count I), and that CSX monopolized rail transportation of aggregates by denying MMR access to its tracks (Count II). The facts revealed that LSG, incorporated in 1982, acquired a distribution site near Annapolis Junction and needed to use CSX's rail lines for shipping materials. LSG's operations required connecting tracks to CSX's main line, which were critical for accessing its distribution center. The district court found that even without CSX's tracks, LSG could have constructed alternative access.

In July 1986, discussions between LSG and MMR led to CSX being contacted for transportation services for LSG's aggregates. CSX offered a rate of $2.95 per ton, which MMR and LSG interpreted as an "exit offer," indicating it was not intended for acceptance. On November 7, 1986, MMR and LSG requested trackage rights from CSX, anticipating a lower rate of $0.25 per ton, but CSX refused and opted to adjust rates instead. After litigation commenced, CSX offered a revised rate of $2.12, which, combined with MMR's charge of $1.55, exceeded the transportation costs of competitor Millville, whose quarry was closer to the destination.

LSG and MMR allege that CSX's refusal of trackage rights and the high exit rate were motivated by a conspiracy with Millville Quarry, Inc. to suppress competition in the Washington/Baltimore market. They claim this conspiracy was based on prior dealings between CSX and Millville. Before LSG acquired a distribution center in 1982, Millville had shown interest in a distribution center at Annapolis Junction and had leased part of a spur line from CSX. In 1984, CSX leased the remaining spur line to Millville and subsequently entered two unit train agreements with them, increasing its market share in aggregate transportation.

One unit train agreement included a rebate that lowered Millville's effective rate, while another had varying rates based on volume. CSX granted Millville a "most favored nations clause," allowing Millville to terminate its contract if a competitor received a lower rate. LSG and MMR assert that Donald Sanchez from CSX and Larry Campbell from Millville conspired before July 1982, citing incidents such as a 1984 lease agreement that allegedly blocked LSG's access to a key rail-served site, and a rate increase for Rockville Crushed Stone, Inc. after an initial agreement, which is unclear in intent—whether to protect Millville or negotiate a better rate.

CSX transferred the Fulton Distribution Facilities to Millville instead of its competitor, Baltimore Asphalt and Paving Co. (BAPCO), despite the fact that Millville only pursued the facility after learning of BAPCO's interest. Millville already owned a nearby distribution facility and did not use the newly acquired one, although it submitted the highest bid for it. CSX provided LSG with a noncompetitive transportation rate for aggregate materials to benefit Millville. The district court found that this rate, only one cent above CSX's variable cost, was still higher than Millville’s transportation costs, indicating that LSG could not compete without trackage rights, which were deemed the only feasible option. LSG’s executive vice president testified that even an initial joint line rate proposed by MMR was uncompetitive. The analysis of pricing revealed that LSG could only compete with Millville under specific conditions that would not be financially viable. 

For a Sherman Act violation, it is necessary for two or more parties to act in concert, but businesses have the right to determine their own dealings independently. An agreement to restrain trade can be inferred from conduct, but it must be shown that such conduct excludes the possibility of independent action. The Supreme Court has held that to establish an antitrust violation through ambiguous conduct, evidence must demonstrate that the alleged conspirators had a common scheme aimed at achieving an unlawful objective. Specifically, in the context of summary judgment, antitrust plaintiffs must present evidence that negates the possibility of independent conduct among alleged conspirators.

LSG and MMR must meet a two-part evidentiary burden to establish a conspiracy involving CSX and Millville, demonstrating a shared unlawful objective and excluding the possibility of independent actions based on legitimate business reasons. The district court found that LSG and MMR failed to provide direct evidence of a common scheme, relying instead on prior transactions between CSX and Millville that predated the denied trackage rights. This evidence did not negate the possibility that CSX's refusal was a unilateral, legitimate business decision, aimed at preserving its relationships with subsidiary railroads and maintaining its business model. Consequently, the court determined there was no violation of Section 1 of the Sherman Act.

Regarding Section 4 of the Clayton Act, the court referenced the principles established in Hanover Shoe and Illinois Brick, which dictate that only direct purchasers have standing to sue for antitrust injuries. Since LSG is classified as an indirect purchaser, it lacks standing to pursue a claim. LSG’s argument, citing Blue Shield of Virginia v. McCready, that Section 4 should allow for broader recovery based on common law proximate cause analysis, was not persuasive. In Blue Shield, the Court granted standing based on the specific injury to a patient, which was not analogous to LSG's situation.

LSG appears to be affected by an alleged conspiracy to suppress competition in the Baltimore/Washington aggregate market, similar to the situation with the subscriber in Blue Shield; however, key differences exist. Unlike the subscriber, LSG is purportedly the target of this conspiracy, and the harm it experiences from the refusal of trackage rights is indirect, in contrast to the direct financial losses incurred by subscribers seeking psychological care reimbursement. Following the Hanover Shoe/Illinois Brick precedent, LSG, as an indirect purchaser, lacks standing to claim damages.

MMR, the sole plaintiff in Count II, alleges that CSX's refusal to grant trackage rights constitutes an improper monopolistic act under Section 2 of the Sherman Act. The court found this claim invalid, noting that MMR must demonstrate two criteria: CSX's possession of monopoly power in aggregate transportation and exclusionary conduct to maintain that power. Although MMR invokes the essential facilities doctrine, it fails to establish key elements. MMR argues that trackage rights are necessary for aggregate transportation between Emory Grove and Annapolis Junction and claims CSX is a monopolist controlling the relevant market. However, MMR does not satisfy the requirements to show it could not reasonably duplicate the facility or obtain alternatives, such as constructing additional tracks, purchasing train service from CSX, or acquiring trackage rights. Despite CSX's rate offer being reasonable, it does not preclude MMR from exploring other options. Thus, the court concludes MMR has not proven its case against CSX.

MMR did not successfully demonstrate that access to the essential facility was denied, as the rail rate offer and trackage rights denial did not constitute a refusal of access. The evidence indicates that any rate above $1.00 would be unprofitable for both MMR and LSG, and the access standard does not guarantee profitability for LSG or MMR. Furthermore, MMR's argument on feasibility is flawed; access to the tracks must be assessed based on CSX's standard business operations, not hypothetical scenarios. CSX has provided valid business reasons for denying trackage rights, including the potential negative impact on its relationships with feeder lines critical for its profitability. Consequently, the district court's summary judgment favoring CSX is upheld.