Court Sides With Rails Against STB Rate Ruling
The shipper-supported final rule became effective March 6, 2022, and was challenged before the court by the Association of American Railroads and Union Pacific.
FORR essentially is a form of binding arbitration, more descriptively known as last, best and final offer. It is the STB’s latest attempt at a simplified, less costly process for establishing a reasonable freight rate where the potential recovery does not justify a more detailed analysis whose price tag can be in the millions of dollars.
For the now-derailed FORR to be invoked, the STB would have first had to find the railroad “market dominant,” and the rate charged as “unreasonable.” The STB would then impose a rate by choosing, without modification, from the last, best and final offers submitted by the carrier and shipper.
A carrier might make a last, best and final offer of a freight rate of $100, while the shipper’s last, best and final offer might be to pay a freight rate of $10. In choosing the $100 rate or $10 rate, the STB would have had to ignore, for example, its own or other outside analysis and reasoning suggesting, perhaps, a $70 rate as the most equitable. This is where the rulemaking ran afoul of its statute, ruled the court.
In theory, last, best and final offer binding arbitration forces disputants to compete to make the most reasonable and most realistic final offer—one that has the best chance to be chosen.
FORR was to apply only to relatively low-volume shipments with diverse origins where a shipper’s potential recovery is too low to justify use of court-approved rate challenge procedures applicable to high-volume, repetitive movements. Such challenges, owing to their complexity, can be prohibitively expensive and prevent many shippers from challenging the reasonableness of rail freight rates.
Beginning in 1987, STB predecessor Interstate Commerce Commission began a search for a less complex, less costly substitute. The 2015 Surface Transportation Board Reauthorization Act, recognizing previous failures and inertia on the Board’s part, instructed the STB to maintain one or more “simplified and expedited” methods for determining rate reasonableness. FORR emerged seven years later.
The search has become the STB’s Gordian knot, with FORR now the third failed attempt at a simplified, less costly rate methodology. Among previous failures—primarily because of shipper rejection and congressional grumbling—were Simplified Stand-Alone Cost and Three Benchmark. The search must now begin anew.
FORR was adopted by the STB in 2022 by a 3-2 vote along party lines, with Republicans Patrick J. Fuchs and Michelle A. Schultz dissenting. The proponent Democrats were then-Chairperson Martin J. Oberman (now retired, with his seat vacant), current Chairperson Robert M. Primus and Karen J. Hedlund. With the STB now deadlocked 2-2 on the issue, it is doubtful the agency will ask for a further review by a larger panel of the 8th Circuit.
For those keeping political scorecards, all three of the judges who ruled against the STB are Republican appointees—two nominated by President George W. Bush and one by President Trump. The 8th Circuit’s other judges are primarily Republican appointees.
AAR and UP complained to the court that the STB lacked the statutory authority to publish the rule as written, that the methodology was vague, and that the rule was “arbitrary and capricious,” as ratemaking by the STB must be the result of independent analysis and reasoned decision making and not simply a delegation of the task to the parties, with the STB choosing one.
The court agreed with the railroads that the STB lacks statutory authority to promulgate the FORR rule, finding it unnecessary to decide the vagueness issue or whether the rule is arbitrary and capricious.
The court cited in its decision (download below) the dissents of Fuchs and Schultz.
“FORR reduces the agency to mere passive, all-or-nothing selections,” Fuchs is quoted. “FORR is an evasion of the Board’s fundamental responsibility because it makes the Board entirely dependent on litigants’ self-determined rate review methodologies, gives little meaningful guidance for those methodologies, and prohibits the Board from devising its own remedy where necessary.”
Schultz was quoted that “FORR would require the Board to choose between two rates even if the Board finds the correct outcome falls above, below or somewhere in between the two submissions.” She termed this a “limitation on the Board’s ability to exercise its own judgment by weighing each side’s arguments, evaluating the evidence and considering both the public interest and rail transportation policy.”
Notably, last, best and final offer binding arbitration is required under the Railway Labor Act for resolving certain commuter rail (not freight rail and not Amtrak) labor disputes. In 1992, Amtrak and two of its unions voluntarily agreed to settle a labor dispute through last, best and final offer binding arbitration. Separate private-sector arbitrators chose the offer of the Brotherhood of Locomotive Engineers over that of Amtrak, and the offer of Amtrak over that of the International Association of Machinists.
Frank N. Wilner is a former chief of staff at the STB and author of “Railroads & Economic Regulation, An Insider’s Account,” available from Simmons-Boardman Books at https://www.railwayeducationalbureau.com, 800-228-9670.
