McCarty Farms, Inc. v. Surface Transportation Board

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 3, 1998 Decided October 20, 1998

No. 97-1632

McCarty Farms, Inc., et al.,

Petitioners

v.

Surface Transportation Board and

United States of America,

Respondents

Burlington Northern and Santa Fe Railway Company,

Intervenor

Consolidated with

No. 98-1304

On Petitions for Review of an Order of the

Surface Transportation Board

Tim L. O'Neill argued the cause for petitioners, with whom
Timothy R. Engler was on the briefs.

 Thomas J. Stilling, Attorney, Surface Transportation
Board, argued the cause for respondents, with whom Joel I.
Klein, Assistant Attorney General, United States Department
of Justice, Robert B. Nicholson, and John P. Fonte, Attor-
neys, Henri F. Rush, General Counsel, Surface Transporta-
tion Board, and Ellen D. Hanson, Deputy General Counsel,
were on the brief.

Samuel M. Sipe, Jr. argued the cause for intervenor Bur-
lington Northern and Santa Fe Railway Company, with whom
Carolyn Doozan Clayton, Richard E. Weicher and Michael
E. Roper were on the brief.

Before: Sentelle, Henderson, and Garland, Circuit
Judges.

Opinion for the Court filed by Circuit Judge Sentelle.

Sentelle, Circuit Judge: Petitioners McCarty Farms, Inc.,
et al. (collectively "McCarty Farms") and the State of Mon-
tana Department of Commerce, et al. (collectively "State of
Montana") challenge a decision of the Surface Transportation
Board ("STB" or "Board") in which the STB ruled that
petitioners had failed to demonstrate that the rates charged
by Burlington Northern Railroad ("BN") to transport wheat
and barley from Montana to the Pacific Northwest were
unreasonable. The STB's decision covered three sets of
claims: (1) single-car wheat shipments moving before Sep-
tember 12, 1980 (Docket No. 37809), (2) multiple-car and
trainload shipments of wheat and barley (Docket No. 37815S),
and (3) single-car shipments of barley and single-car wheat
shipments moving after September 12, 1980 (Docket No.
37809 (Sub-No. 1)). We conclude that we have jurisdiction
over the second and third categories of claims, but not the
first. We further conclude that, in rendering its decision, the
Board did nothing that was arbitrary, capricious, or contrary
to law. As a result, we affirm the Board's ruling with respect
to those claims over which we have jurisdiction.

 I. Background

This case has a long and complex history. Indeed, these
proceedings have been winding their way through the courts
in one form or another for approximately 18 years. As Judge
Williams noted five years ago when this case was last before
this court: "McCarty Farms started this dispute's crawl
through the legal system in 1980 by filing a class action on
behalf of Montana farmers under 49 U.S.C. s 11705(c)(1) and
28 U.S.C. s 1337 in the U.S. district court for the District of
Montana." Burlington Northern R.R. v. ICC, 985 F.2d 589,
592 (D.C. Cir. 1993). In their Montana suit, McCarty Farms
and the other class representatives alleged that BN was
charging unreasonable rates for transporting single cars of
wheat for the two-year period ending September 12, 1980, in
violation of 49 U.S.C. s 10701(a) of the Interstate Commerce
Act. See McCarty Farms, Inc. v. Burlington Northern, Inc.,
787 F. Supp. 937 (D. Mont. 1992).

Under the doctrine of primary jurisdiction, the district
court referred the action to the Interstate Commerce Com-
mission ("ICC" or "Commission") to determine the rate rea-
sonableness issues. On March 27, 1981, McCarty Farms filed
the referred complaint with the ICC (Docket No. 37809), in
which it challenged not only BN's single-car wheat rates, but
also its single-car rates for barley. McCarty Farms sought a
prescription on future rates and did not limit its request for
reparations to the two-year period specified in its complaint
filed with the district court. McCarty Farms' Petition for
Declaratory Order and Complaint at 6 (March 27, 1981). In
an unpublished decision served on December 14, 1981, an
Administrative Law Judge found that (1) BN had market
dominance over wheat and barley traffic, (2) BN's present
and past rates were unreasonable insofar as they exceeded
200% of the variable cost of service, and (3) a revenue-to-
variable cost ratio of 200% was to be the maximum reason-
able rate for the transportation of wheat and barley.

McCarty Farms was not alone, however, in challenging the
reasonableness of BN's rates. In a separate proceeding filed
with the ICC (Docket No. 37815S), the State of Montana

challenged BN's rates for multiple-car and trainload ship-
ments of wheat and barley and sought prescription for rea-
sonable rates for the future. In an unpublished decision
served on July 30, 1982, the ICC reopened the case filed by
McCarty Farms (Docket No. 37809). The ICC instituted a
separate proceeding regarding the reasonableness of barley
rates (Docket No. 37809 (Sub-No. 1)) because it did not
believe they were part of the district court's referral. The
ICC consolidated the proceedings filed by McCarty Farms
and those filed by the State of Montana.

The three consolidated cases before the ICC were held in
abeyance indefinitely. In May 1984, McCarty Farms and the
other class representatives filed a complaint in the district
court, seeking a writ of mandamus. In response, the ICC
reopened the proceedings on September 11, 1984. In a
decision served on December 28, 1984, the ICC ruled that, to
the extent market dominance issues had not been developed,
additional evidence concerning market dominance would be
accepted. After extensive discovery, on May 22, 1987, the
ICC ruled that BN was market dominant over the subject
wheat and barley shipments moving from Montana to the
Pacific Northwest. McCarty Farms v. Burlington Northern,
Inc., 3 I.C.C.2d 822 (1987).

Having determined that BN was market dominant for the
movements at issue, the ICC turned to the rate reasonable-
ness analysis. On February 5, 1988, the ICC decided that the
Revenue-to-Variable Cost ("R/VC") standard was an appro-
priate means for testing the challenged rates and found that
the rates charged by BN were unreasonable. The ICC
directed BN to (1) compute the reparations due, (2) modify its
existing rate structure, and (3) present a proposal of compli-
ance to the ICC. On February 21, 1989, the ICC issued an
unpublished decision that corrected several costing problems
in the R/VC test and recomputed the ratios by which repara-
tions were to be calculated. The ICC directed BN to submit
a quantification of reparations due the class based on the
corrected procedure and a proposal for modifying its existing
rate structure so that BN would comply with the maximum
reasonableness standard in the future.

On March 20, 1991, the ICC affirmed its earlier decisions in
which it concluded that BN was market dominant over the
movement of wheat and barley and that BN's rates for this
traffic were unreasonable. The ICC calculated the amount of
reparations owed by BN through 1986 to be $9,685,918 plus
interest, and imposed on BN a future rate prescription proce-
dure. McCarty Farms v. Burlington Northern, Inc., 7
I.C.C.2d 1026 (1991). On July 5, 1991, BN filed a petition for
clarification of the March 20, 1991 decision, asking the ICC to
modify the calculations. In an unpublished decision served
on November 26, 1991, the ICC entered an order which
affirmed the amount of reparations and interest due through
July 1, 1991. However, the ICC sua sponte vacated the rate
prescription order contained in its March 20, 1991 decision.

McCarty Farms, the State of Montana, and BN then
sought review of the ICC decisions by this court. In an
opinion issued in 1993, we questioned the theoretical basis of
the R/VC test and remanded the proceedings to the ICC for
the purpose of reconsidering whether it was appropriate to
use the R/VC test instead of the Constrained Market Pricing
("CMP") test to evaluate the reasonableness of the challenged
rates. Burlington Northern R.R. v. ICC, 985 F.2d 589 (D.C.
Cir. 1993).

In an unpublished opinion served on March 26, 1993, the
ICC directed the class representatives and the State of
Montana to advise the Commission whether (1) they wanted
to proceed using the CMP test, (2) the proceedings should be
held in abeyance pending the development of a suitable
reasonableness methodology, or (3) there was some other
course of action that was appropriate. On April 23, 1993,
McCarty Farms notified the ICC of its election to proceed
using the CMP test. On May 10, 1993, BN notified the ICC
of its agreement to use the CMP test in the proceedings.
Effective January 1, 1996, the ICC Termination Act of 1995,
Pub. L. No. 104-88, 109 Stat. 803, abolished the ICC and
transferred certain functions, including the disposition of
these proceedings, to the STB. After the transfer, the STB
ruled that McCarty Farms had failed to show (under the
CMP test) that the challenged rates were unreasonably high,

and discontinued the proceedings. McCarty Farms, Inc. v.
Burlington Northern, Inc., Nos. 37815S, 37809 & 37809 (Sub-
No. 1) (Aug. 20, 1997) (the "1997 Decision").

Instead of petitioning the STB to correct alleged computa-
tional errors and to reconsider issues they contended were
incorrectly decided, McCarty Farms and the State of Mon-
tana filed their petition for review with this court on October
14, 1997. McCarty Farms also filed an appeal with the U.S.
District Court for the District of Montana, which was stayed
pending the outcome of this appeal. After examining McCar-
ty Farms' brief to this court, the STB agreed that there were
certain errors in its 1997 Decision and issued a supplemental
decision to correct those determinations it agreed were erro-
neous. McCarty Farms, Inc. v. Burlington Northern, Inc.,
Nos. 37815S, 37809 & 37809 (Sub-No. 1) (May 11, 1998) (the
"1998 Decision"). However, even after it made these correc-
tions, the STB still concluded that BN's rates were reason-
able.

II. Discussion

A. Jurisdiction

McCarty Farms challenges this court's jurisdiction to re-
view several claims raised in this suit. The claims at issue
relate to the following three categories of rates covered by
the STB's decision: (1) single-car wheat shipments moving
before September 12, 1980 (Docket No. 37809), (2) multiple-
car and trainload shipments of wheat and barley (Docket No.
37815S), and (3) single-car shipments of barley and single-car
shipments of wheat moving after September 12, 1980 (Docket
No. 37809 (Sub-No. 1)). We conclude that we have jurisdic-
tion over the second and third categories of claims, but not
the first.

1.Single-car shipments of wheat for the two-year period
ending September 12, 1980

Normally, this court has jurisdiction to review decisions of
the STB under the Hobbs Act, 28 U.S.C. ss 2321(a) and
2342(5). However, Congress has provided an exception to
our Hobbs Act jurisdiction. Under 28 U.S.C. s 1336(b),
review of orders of the STB that "arise" out of a referral from

a district court are within that court's exclusive jurisdiction.
Specifically, Section 1336(b) provides as follows:

When a district court ... refers a question or issue to
the Surface Transportation Board for determination, the
court which referred the question or issue shall have
exclusive jurisdiction of a civil action to enforce, enjoin,
set aside, annul, or suspend, in whole or in part, any
order of the Surface Transportation Board arising out of
such referral.

28 U.S.C. s 1336(b).

McCarty Farms asserts that claims relating to single-car
shipments of wheat moving before September 12, 1980 (Dock-
et No. 37809) fall within the exception to this court's jurisdic-
tion found in Section 1336(b). These claims initially were
raised in McCarty Farms' complaint filed with the U.S.
District Court for the District of Montana and were referred
by that court to the ICC. We agree that we do not have
jurisdiction over this first category of claims. Indeed, we
addressed this question the last time this case was before us.
In Burlington Northern, we concluded that "any appeal as to
the single-car wheat shipments moving before September 12,
1980 lies in the district court for the District of Montana."
985 F.2d at 592. Therefore, it is clear that we have no
jurisdiction over the first set of claims.

2.Multiple-car and trainload shipments of wheat and bar-
ley

We have previously ruled, and the parties agree, that we
have jurisdiction over claims relating to rates charged for
multiple-car shipments of wheat and barley (Docket No.
37815S) pursuant to the Hobbs Act, 28 U.S.C. ss 2321(a) and
2342(5). In Burlington Northern, we concluded that Section
1336(b) "has no application" to this second category of claims
because they "arise out of the Montana Department of Agri-
culture complaint, not the district court referral." 985 F.2d
at 592.

3.Single-car shipments of barley and single-car shipments
of wheat moving after September 12, 1980

The determination of our jurisdiction over the third set of
claims is more difficult. Characterizing this jurisdictional
question as "exceptionally difficult," we declined to decide this
issue in Burlington Northern on the grounds that it was not
necessary to resolve all jurisdictional questions where "the
merits of a case are clearly against a party seeking to invoke
the court's jurisdiction." Id. at 593. However, in light of the
Supreme Court's intervening decision in Steel Co. v. Citizens
for a Better Environment, 118 S.Ct. 1003 (1998), this position
is no longer tenable. As Justice Scalia noted in that case,
proceeding to the merits despite jurisdictional objections
"carries the courts beyond the bounds of authorized judicial
action and thus offends fundamental principles of separation
of powers." Id. at 1012. Therefore, we must resolve all
jurisdictional questions before proceeding to the merits.

McCarty Farms challenges this court's jurisdiction over the
third category of claims on the ground that these claims fall
within the statutory exception to our jurisdiction found in 28
U.S.C. s 1336(b). McCarty Farms argues that these claims
"arose" out of the referral from the Montana district court
and that the district court therefore has exclusive jurisdiction
to review the STB's decision regarding these claims on ap-
peal. In order to determine whether we have jurisdiction
over the third category of claims, we must start with the text
of Section 1336(b). The question of which court has jurisdic-
tion turns on the construction of the term "arising" in Section
1336(b). In general usage, the meaning of the term "arise" is
"to originate." Black's Law Dictionary 99 (5th ed. 1979).
Consistent with this usage, the third category of claims
cannot be said to have "arisen" out of the district court's
referral.

In no sense did the third category of claims originate in the
district court's referral. The referral did not mention rates
for shipments of barley or rates for shipments of wheat
moving after September 12, 1980. The complaint filed with
the district court did not even reference these rates. See

McCarty Farms, 787 F. Supp. at 942 & n.10 (reproducing
relevant sections of the amended complaint). Indeed, McCar-
ty Farms has petitioned the district court to "clarify" its
referral order so that it specifically references these claims,
but the district court has refused to do so. Id. at 947. We
find McCarty Farms' argument that the claims may "arise"
out of a referral that makes no mention of them unpersuasive.
McCarty Farms has supplied no workable definition of the
term "arise" supporting its contentions.

We acknowledge that other courts have noted that the
legislative history of Section 1336(b) evidences an intent on
the part of Congress to avoid "piecemeal appeals" by direct-
ing the district court to review all claims "arising" from its
referral. See Railway Labor Executives' Ass'n v. ICC, 894
F.2d 915, 917 (7th Cir. 1990) ("The insight behind section
1336(b) is that if a question within the purview of the ICC
arises in the course of a district court proceeding, submission
of the ICC's answer in the first instance to the district court
rather than to the court of appeals will avoid a cumbersome
and potentially protracted bifurcation of judicial review."
(citing S. Rep. No. 1394, 88th Cong., 2d Sess. (1964))). Some
courts have pointed to this legislative history in justifying a
broad construction of the term "arising" in order to further
this congressional goal. See, e.g., Union Pacific R.R. v.
Ametek, Inc., 104 F.3d 558, 561 (3rd Cir. 1997) (noting that a
narrow construction of the term "arising" would lead to
"problems arising out of parallel proceedings in different
courts arising out of a single controversy").

Nevertheless, we hold that we have jurisdiction over the
third category of claims on the present facts. McCarty
Farms could not have filed the third category of claims in the
district court, even if it had wanted to do so. In the com-
plaint it filed with the ICC, McCarty Farms sought a pre-
scription on future rates, a remedy not available in the
district court. See 49 U.S.C. s 11705(b)(1) (1988). The fact
that these claims as outlined in the administrative complaint
could not have been brought in the district court demon-
strates that they could not have "arisen" from the district
court's referral. Congress did not intend to authorize liti-

gants to expand the district court's jurisdiction beyond its
legitimate scope by filing complaints with the ICC and then
seeking review of those complaints by the district court
pursuant to Section 1336(b).

Moreover, the third category of claims could not have been
brought in the district court because, by the time McCarty
Farms filed its complaint with the ICC, the district court had
been divested of jurisdiction to hear those claims. On Octo-
ber 1, 1980, approximately six months before McCarty Farms
filed its complaint with the ICC on March 27, 1981, Congress
enacted the Staggers Rail Act. The Staggers Act provides in
relevant part that "[t]he jurisdiction of the Board over ...
transportation by rail carriers ... is exclusive." 49 U.S.C.
s 10501(b). After the parties petitioned the district court to
"clarify" its referral order, that court rightly held that the
Staggers Act had divested it of jurisdiction over the third
category of claims. As a result, the court concluded that it
could not allow McCarty Farms to amend its complaint to
include the third category of claims, and it could not itself
alter its referral order to specifically reference those claims.
The court reasoned as follows:

[The Staggers Act] did, contrary to the assertion of the
plaintiffs, divest this court of jurisdiction over challenges
to the reasonableness of rail rates in effect on or after
the effective date of the Staggers Rail Act, i.e., October
1, 1980. Because the court would not have had jurisdic-
tion to entertain the challenges advanced by the plaintiffs
to rail rates in effect as of October 1, 1980, the court
cannot acquire jurisdiction by retroactive amendment of
the order of referral.

McCarty Farms, 787 F. Supp. at 947. These claims, not
being within the jurisdiction of the district court, could not
have "arisen" out of any referral from that court.

Despite any lack of clarity in either the text of Section
1336(b) or its legislative history, we are satisfied that our
construction is consistent with congressional intent. Al-
though members of Congress may have expressed an intent
to further judicial economy, that laudable goal will not compel

a construction whereby claims that are only tangentially
related to those referred by the district court arise out of that
referral along with those specifically referenced by the dis-
trict court. Further, there is little danger of "piecemeal
appeals" where the disputed claims are not raised with the
district court, but rather are brought before the STB in the
first instance. Moreover, given the specific facts in this case,
there necessarily will be some duplication of judicial effort
since it is undisputed that we have jurisdiction over the
second category of claims, and it is clear that the district
court has jurisdiction over the first category.

We have stated before that the exception to our jurisdiction
under the Hobbs Act found in Section 1336(b) is a "narrow"
one. Overland Express, Inc. v. ICC, 996 F.2d 356, 358 n.1
(D.C. Cir. 1993), judgment vacated, 511 U.S. 1103 (1994)
(noting that "s 1336(b) is a narrow exception to our jurisdic-
tion over challenges to Commission proceedings under the
Hobbs Act"). Construing the statute narrowly gives the
parties a bright line rule they may follow in seeking review of
an STB decision. See Ametek, 104 F.3d at 566 (Roth, J.,
dissenting) ("The application of such a strict interpretation of
s 1336(b) would reduce the chance that appeals are made to
the wrong court. Counsel need only look to the language of
the district court's referral to determine whether the issue
was properly reviewable by a district court...."). Under a
strict construction of Section 1336(b), issues expressly set out
in the district court's referral order are reviewed by the
district court. The court of appeals reviews all other issues.

We note that the district court has come to the same
conclusion, ruling that "the scope of the court's jurisdiction to
review the Interstate Commerce Commission's decisions is
determined by the scope of the referral order itself." McCar-
ty Farms, 787 F. Supp. at 942. After reviewing its own
referral to the ICC, that court concluded that the third
category of claims at issue here did not "arise" from its
referral. Id. at 943 ("Contrary to the assertion of the plain-
tiffs, the express language of the court's order of referral
cannot be read to have encompassed single-car, multiple-car,
and trainload rates assessed by the Burlington Northern on

shipments of wheat which occurred from September 12, 1980,
forward and for the future, nor on single-car, multiple-car,
and trainload rates on barley from March 26, 1981, the date
plaintiffs filed their administrative complaint, forward, and for
the future.").

In sum, we are convinced that the disputed claims, not
having been within the jurisdiction of the district court,
cannot have arisen out of a referral from that court. We
further hold that this conclusion is consistent with the intent
of Congress as expressed in Section 1336(b).

B. The STB's Decision

Having established that we have jurisdiction over the sec-
ond and third categories of claims, we now turn to the merits.
We review final decisions of the STB under the deferential
arbitrary and capricious standard of the Administrative Pro-
cedure Act, 5 U.S.C. s 706(2)(A). Under that standard, we
must uphold a decision of the STB unless it is "arbitrary,
capricious, an abuse of discretion, or otherwise not in accor-
dance with law." Id. In reviewing the STB's determination
of rate reasonableness issues, we must also decide whether
the STB's decision is supported by "substantial evidence." 5
U.S.C. s 706(2)(E). We must "leave the Board's judgment
undisturbed" if its findings rest on "such relevant evidence as
a reasonable mind might accept as adequate to support a
conclusion" and it has articulated a "rational connection be-
tween the facts found and the [decision] made." Burlington
Northern R.R. v. STB, 114 F.3d 206, 210 (D.C. Cir. 1997)
(internal citations omitted).

In its petition for review, McCarty Farms contends that the
STB made a number of technical errors in implementing the
CMP test's stand-alone cost constraint. Under the stand-
alone cost constraint, the reasonableness of a railroad's rates
are judged against simulated competitive prices so that the
efficiencies of a contestable market serve as the guide for
establishing maximum rates. The stand-alone cost is the
hypothetical cost of an efficient producer to independently
provide service to a shipper or group of shippers. Thus, in

implementing the CMP test's stand-alone cost constraint, the
STB considers a hypothetical railroad in order to determine
the maximum rates that may be charged in providing service
to a shipper or group of shippers. McCarty Farms asserts
that the STB erred in determining several cost components of
the investment necessary to construct the hypothetical stand-
alone railroad. Specifically, McCarty Farms alleges that the
STB erred in (1) calculating a variety of investment costs, (2)
calculating revenues, (3) rejecting McCarty Farms' proposed
operating plan, (4) calculating the lease rates for locomotive
and rail cars, and (5) calculating depreciation expense.

Upon review of the STB's decision, we cannot conclude that
any of these alleged errors constitute the sort of "arbitrary"
and "capricious" decisionmaking that would warrant reversal.
See Ethyl Corp. v. EPA, 541 F.2d 1, 34 (D.C. Cir. 1975).
Rather, we conclude that the STB has rationally set forth the
grounds on which it acted, and its findings are based on
substantial evidence. See Burlington Northern, 114 F.3d at
210-11. Moreover, the STB has taken steps to correct those
technical errors in its 1997 Decision which it acknowledged by
issuing its supplemental 1998 Decision.1 Where an agency
has rationally set forth the grounds on which it acted, as the
STB has in this case, this court may not substitute its own
judgment for that of the agency. Bowman Transp., Inc. v.
Arkansas-Best Freight Sys., Inc., 419 U.S. 281, 285 (1974)
(citing Citizens to Preserve Overton Park, Inc. v. Volpe, 401
U.S. 402, 416 (1971)).

III. Conclusion

For the foregoing reasons, we conclude that we have
jurisdiction over claims relating to (1) multiple-car and train-
load shipments of wheat and barley (Docket No. 37815S) and

__________
1 McCarty Farms has moved to strike any reference in these
proceedings to the STB's 1998 Decision on the grounds that it was
issued after McCarty Farms had filed its appeal with this court.
Because we find the decision helpful to the court and not prejudicial
to the parties, we deny the motion.

(2) single-car shipments of barley and single-car wheat ship-
ments moving after September 12, 1980 (Docket No. 37809
(Sub-No. 1)). With respect to those claims over which we
have jurisdiction, we conclude that the STB's decision was
based on substantial evidence and was not arbitrary, capri-
cious, or contrary to law. We therefore affirm the decision of
the Board.