Railroad Operator Loses on Appeal Because It Failed to Properly Present Arguments

Lubin_FB_1-large-300x115A railroad switch carrier sued a railroad operator alleging that the operator took advantage of its position as a majority shareholder in a joint venture to force the joint venture company to agree to a contract with atrocious and unfair terms. The switch carrier alleged that the contract forced the joint venture company to pay 3.5x the fair market value of rent for use of railroad tracks, as well as turn over its assets to the railroad operator. The plaintiff sued, but the district court found that the company’s claims were preempted by federal statutes. On appeal, the 7th Circuit found that the plaintiff had failed to develop several of the arguments that it advanced in the district court. The appellate panel found that there was no excuse for this error because the plaintiff and defendant were both sophisticated litigants. The panel determined that the plaintiff had waived its arguments as a result.

Canadian Pacific Railway owns 49% of Indiana Harbor Belt Railroad Company while Consolidated Rail Corporation owns 51%. Two other defendants, Norfolk Southern Corporation and CSX Corporation, indirectly own Consolidated Rail. Norfolk Southern and CSX each control two directors on Indiana Harbor’s seven-person board. Indiana Harbor operates as a switch carrier on tracks owned by Consolidated Rail and its parent companies near Chicago.

The railroads managed their arrangement with a 99-year contract executed in 1906 between Indiana Harbor and the previous owners of the tracks. Though the agreement expired in 2006, for seven years between 1999 and 2006, Consolidated Rail stopped paying expenses and invoicing Indiana Harbor for rent. This quid pro quo cessation lasted through the expiration of the agreement and into the extended negotiations over a new trackage rights contract.

Canadian Pacific alleged in its complaint that during the negotiations, Consolidated Rail and its parent companies used their power as majority shareholders to force Indiana Harbor into an atrocious deal. Allegedly, Consolidated Rail forced Indiana Harbor to agree to pay an annual rent of $5 million, approximately 3.5 times the fair value, while also inserting clauses into the agreement that transferred ownership of Indiana Harbor’s assets to the track owners.

Canadian Pacific filed suit in federal court alleging that Consolidated Rail, Norfolk Southern, and CSX had breached fiduciary duties they owed to it and Indiana Harbor under Indiana law. As remedies, Canadian Pacific sought compensatory and punitive damages based on the alleged overpayment for the trackage rights, voiding of the new agreement, and an injunction requiring Indiana Harbor’s board to approve only the $1.3 million price. Canadian Pacific also sought an order requiring Consolidated Rail to pay alleged operating and maintenance expenses incurred from 1999 to 2006.

Consolidated Rail moved to dismiss the complaint for failure to state a claim. Consolidated argued that 49 U.S.C. § 10501(b) and 49 U.S.C. § 11321(a) independently preempted Canadian Pacific’s claims. Section 10501(b) gives the Surface Transportation Board (STB) exclusive jurisdiction over transportation by rail carriers, and the remedies provided in the section with respect to rates. Section 11321(a) provides that a rail carrier, corporation, or person participating in an exempted transaction is exempt from the antitrust laws and all other law, including State and municipal law, as necessary to let that rail carrier, corporation, or person carry out the transaction. A magistrate judge, presiding by consent, agreed with both of Consolidated’s preemption arguments and dismissed the case. Canadian Pacific then appealed.

The appellate panel began by stating that Canadian Pacific challenged the breadth of the district court’s preemption analysis. Citing Cty. of McHenry v. Ins. Co. of the West, the panel stated that Canadian Pacific had failed to develop many of the arguments it raised in its appeal in the district court. The panel noted that litigants are obligated to present to the district court both factual and legal arguments in support of their positions. The panel then stated that Canadian Pacific is a sophisticated party, represented by able counsel, and should have known that it needed to raise all arguments it had against the motion to dismiss, yet failed to do so without explanation. The panel determined therefore that Canadian Pacific waived many of its arguments. The panel therefore affirmed the decision of the district court.

You can view the opinion here.

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