United States v. Interstate Commerce Commission – Oral Argument – October 21, 1969 (Part 1)

Media for United States v. Interstate Commerce Commission

Audio Transcription for Oral Argument – October 22, 1969 (Part 2) in United States v. Interstate Commerce Commission

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Warren E. Burger:

Number 28, 38, 43, 44, The Northern Mines merger cases, we will call them collectively.

Mr. McLaren, you may proceed whenever you’re ready.

Richard W. Mclaren:

Thank you Mr. Chief Justice.

May it please the Court, I will direct my argument to case number 28, the United States, the Interstate Commerce Commission.

This is a civil case which comes to the Court on direct appeal from the judgment of a three-judge District Court.

The District Court denied the Government’s request for an injunction and upheld the ICC’s approval of the merger of the Great Northern and the Northern Pacific Railroads which have been referred to in our briefs as the Northern Lines and their various railroads subsidiaries.

The merger has been stayed by this Court’s order.

The issue in this case is whether the ICC correctly applied the public interest test of Section 5 (2) (b) of the Interstate Commerce Act when it approved this merger, holding that the savings and service benefits of the merger outweigh the elimination of substantial rail competition between the Northern Lines in the Northern Tier of western states.

Case number 43, the City of Auburn case is related to our case and that it also raises competitive issues.

The other two cases, the case number 38, the Brundage case involving the fairness of the merger terms to Northern Pacific Stockholders and number 44, the Livingston case, questioning the Northern Pacific’s title to its properties raised on related issues.

Now, although the record in this case is a very long one, the basic facts are relatively simple.

First, I would like to identify the roads which proposed to merge in terms of the areas they serve.

The trunk lines of the merger parties are shown in various colors on the fold out map at the end of the Great Northern’s brief.

I’ve taken the liberty of requesting the clerk to distribute to each member of the Court an extra copy of this map and also of a copy of the map which is prepared from exhibit 85 and used by the Government in the District Court proceeding.

The latter shows the applicant roads as they will appear of — when it — if merged.

Looking first at the Great Northern’s map, the bigger one, you will see that the Great Northern trunk line toward the top in red.

With its affiliates, Great Northern carries on operations over some 80 – 200 miles of road in the Northern Tier States from Minneapolis and Duluth, Duluth from the east to Spokane, Seattle, Portland and other terminals in the Pacific Northwest.

Northern Pacific, in green on the map and its affiliates operate over some 6800 miles of road somewhat south of the Great Northern and they serve the same main terminals as the Great Northern in Minnesota and in the Pacific Northwest.

Potter Stewart:

I don’t see the green one, neither the green nor the red one is to come in to Duluth on my map.

Richard W. Mclaren:

The Great Northern map Your Honor shows that the trunk lines and in colors —

Potter Stewart:

Not this one?

Richard W. Mclaren:

Yes, Your Honor and the lighter black lines show more or less branch lines.

Potter Stewart:

Those — just a simple black lines are part of the same system, branch lines of the Great Northern and of the (Voice Overlap) —

Richard W. Mclaren:

They are on that particular case, yes Mr. Justice Stewart.

Some of the other black lines shown as I understand belong to a various other roads.

Potter Stewart:

Yes.

Richard W. Mclaren:

Shown on the Government’s map, the smaller one in red are all of the routes as they will appear of the merged roads both the trunk lines and branches.

The Chicago, Burlington and Quincy, a road that’s jointly owned by the Northern Lines is shown — its main road is shown in brown on the big fold out map.

Burlington conducts operations over some 8600 miles of road running Northwest from Chicago and Minneapolis and also west from Chicago to serve such points to St. Luis and Kansas City, Omaha, Denver, Billings, Montana and with the connection with Northern Pacific in Montana.

Subsidiaries of the Burlington goes out as far as the Texas Gulf Coast as is shown on the Government map and as the Great Northern map shows, I think the Burlington service tends to be complimentary to rather than competitive with the service of the Northern Lines.

Richard W. Mclaren:

Also involved in the merger is the Spokane, Portland and Seattle railroad about 600 miles of road shown in blue and its main route on the Great Northern map.

It is also jointly owned by the Northern Lines and its mean line and provides their shortest route from Spokane down to Portland.

The third line, third rail line providing service across the Northern Tier States is the Milwaukee railroad as shown in black on the Government’s map and also on the Great Northern’s.

Now, there’s no dispute that the Northern Lines are financially strong firms.

They owned vast acreage of valuable land and mineral rights as well as rail and motor carrier assets.

There are also regularly profitable although it’s fair to say that their profits have fluctuated over the years and do not reflect a large percentage return on their invested capital.

As merged, the Northern Lines and the Burlington would constitute one of the largest rail systems in the country.

The merged company would have some 27,000 miles of track in 16 states, total assets around $3 billion, annual rail revenues, $823 million and net income in the neighborhood of $131 million a year.

John M. Harlan II:

[Inaudible] the contract of merging exercised?

Richard W. Mclaren:

I believe Mr. Justice Harlan that in trackage it is bigger, in terms of revenue, it is not as big.

I’m not positive of those figures.

As the maps tend to indicate, the Northern Lines are head to head competitors for traffic across the Northern Tier States.

Each is the main competitor of the other and the Milwaukee is a very weak third.

The nature and the extent of this competition, rail competition, and the intermodal competition in this area is covered by the findings in the ICC reports as I’ll describe in just a moment.

To summarize the proceedings in the Interstate Commerce Commission, there are two main reports.

The first, disapproved the merger on grounds that it would have a drastically adverse effect on competition as well as the adverse effects on employees.

The second report on reconsideration reversed and it approved the merger.

I should say that the findings of fact in the first report are of significance since they are largely found again in the second report which is based on substantially the same record.

There are few exceptions, as I will point out.

I also think that the rational of the first report is important since it’s our contention that it applied the correct legal standard whereas the second report did not.

Warren E. Burger:

Mr. McLaren —

Richard W. Mclaren:

Now —

Warren E. Burger:

— in order to keep this set of figures in perspective, it will help me if you will pinpoint the figure if you have it in mind of the competition which will be eliminated in terms of traffic in the Northern Tier which these two roads operate if it —

Richard W. Mclaren:

Mr. Chief Justice Burger —

Warren E. Burger:

As I recall, there was a figure somewhere around a 6% of — in one aspect and another figure, could you pinpoint those for me?

Richard W. Mclaren:

I believe that the figures that Your Honor is recalling has to do with approximately 6% that points where the Northern Lines are the only rail service.

I believe that there is another figure of some on 37% or 38% where they compete for revenues and there all — is also some other competition.

And the broad figure that we use and that I will get into in some further detail a little bit later is that the Northern Lines directly compete for around 43% of their revenue.

They — and there’s an additional overhead portion of their revenue, a 12%.

So, we’re contending that they are competitors for about 55% of their revenue.

Richard W. Mclaren:

There are some other figures as to the percentage of the market they have which I will get to.

It runs to 60%, 70% and 80% in different areas.

To review just briefly, the proceedings in the Interstate Commerce Commission; they began in 1961 when the applicant’s petition for authority to merge.

Public hearings were held in 1961 and 1962 in which the Justice Department participated and in 1964, the Examiner issued a report recommending the merger with certain conditions be approved.

The matter was then briefed and argued before the ICC and in 1966, ICC issued its first report disapproving the merger even if conditioned as demanded by various interveners, including various other affected railroads.

Now, in the course to this first report, the Commission analyzed the evidence of the estimated savings to the applicants in merger which it estimated around twenty two and a half million dollars a year after 10 years.

The report detailed and analyzed the various efficiencies, principally the combining of yards and other facilities and the reduction of work forces and the report listed also the advantage to shippers, principally more direct routing and faster schedules all of which the merger promised.

On the other hand, the report noted that applicants could coordinate certain facilities and realize very substantial savings without merger.

It pointed out that the applicants are “large, strong and prosperous railroads and growing strong.”

It also found that their long-term train was favorable as against motor carriers.

It found that ton miles of freight had increase substantially during the 1960 through 1964 period and it found that the railroads had what it called a decided competitive advantage in many long haul of movements.

Now, in approaching the public interest test laid down by Section 5 (2) of the Commerce Act, the Commission saw its task as one of determining whether the adverse effects of the merger upon competition and on carry employees were outweighed by cost savings to applicants and the improved service to shippers.

It saw the public interest scale as being imbalanced, tipped neither for nor against the merger under the law.

Analyzing the competitive effects of the merger, the Commission focused on the Northern Tier States as being the area in which a low cost rail transportation was as it said of primary importance to long-haul, raw material shippers in the area where rail competition would be most adversely affected by the merger.

The report also found that whereas animal, mineral, agricultural and forest products account for around 60% of Northern Lines’ revenues, this kind of traffic was generally not attractive to motor carriers and was not highly susceptible to diversion to motor carriers.

In fact, it found that intermodal competition is not as strong in the Northern states here as in other parts of the country.

The report also found that the Northern Lines were in direct and substantial competition with one another and then when this was eliminated, the merged road would have a dominant position in the Northern Tier States.

For example, it found that together the Northern Lines would handle 61% of the carload traffic moving westbound in the Northern Tier and 83% eastbound.

As to West Coast traffic from Washington to California, it would have 73.5% moving north and south through the Seista and Beaver Gateways and that it would move 67% of ton 10 miles of rail freight in the Northern Tier States; 45% Minnesota, 81% North Dakota, 82% in Montana and 77% in Washington.

After the merger, the first report found that Northern Lines would as the report said, reign supreme.

They would overshadow all their rail competitors within this region and from this region to points beyond.

Measuring the competition that would be eliminated, ICC found that the Northern Lines were in direct competition as I mentioned at points accounting for 43% of their revenues and further that they competed for overhead traffic accounting for another 12%, thus the merger would eliminate the competition between them for 55% of their total revenues.

As to the Milwaukee road, the ICC found that for various reasons, it was a handicap and weak competitor.

It accounted for only 12% of east-west traffic in the Northern Tier.

The first report recognized that the Milwaukee could be strengthen by conditions attached to the merger and it considered these conditions principally, the granting of trackage rights into Portland, Oregon and into Billings, Montana and the opening of 11 gateways where it could exchange traffic with Northern Lines.

But the report found even with these conditions, the benefits would be as it said minimum and Milwaukee’s relative competitive position after the merger would be weaker than ever.

Potter Stewart:

Am I correct in remembering that at the time of the first report only three of the six conditions had been accorded to the Milwaukee road?

Richard W. Mclaren:

I believe that the Examiner’s report denied most of them, Mr. Justice Stewart, but then the — in the first report, the Commission took it assuming as I understand —

Potter Stewart:

And assuming all of them?

Richard W. Mclaren:

Assuming all of them, yes and saying that even though they had all these gateways and the new terminal on the coast at Portland, they still would be relatively weaker.

Richard W. Mclaren:

As a matter of fact the report went on to point out that the new company would have what it referred to as tremendous solicitation advantages.

The merged company would and it noted that the Milwaukee’s solicitation efforts would be puny by comparison.

And this is important because when you open gateways, this is a two-way street, the other fellow can get traffic as well and the Milwaukee could lose as well as to gain traffic.

Now, the first report concluded by holding that applicants had failed to establish that the — that the merger would result in transportation service superior to that which could be provided without merger and indeed “the disadvantages of an appropriately conditioned merger, and drastic lessening of competition and adverse effects on carrier employees outweigh the benefits that might be derived by applicants in the shipping public.”

Now, there is a dissent to this first report.

Five commissioners dissented and they did so not on the theory that the Northern Pacific and Great Northern are less dominant then the majority found, but on the theory that they are indolent giants who do not now bother to compete.

They said that the Northern Lines in their language are fat and happy.

They split the lion’s share of the Northern Transcontinental traffic and revenues between them and so preserve a facade of competition.

John M. Harlan II:

What was the —

Richard W. Mclaren:

The dissent —

John M. Harlan II:

What was the total commission at that time, you said there were five on the dissenting side (Voice Overlap)?

Richard W. Mclaren:

Yes Mr. Justice Harlan, and six on majority, it’s a 6 to 5 vote.

The dissent also found that the Northern Lines have what they called a common law marriage and they said that they hold shippers captive over great distances with a virtual lock on traffic routed through Spokane and the Twin cities.

That they have hamstrung and short-hauled the Milwaukee and that they’ve condemned it to a marginal and steadily deteriorating existence.

The dissent concluded that what was really needed here was to write off the present family competition as it called it by using the conditioning power of Section 5 to try to establish the Milwaukee as a genuine and authentic competitor.

Now, I emphasize this dissent because upon reconsideration as I’ll describe in a moment, the Commission reversed itself and it approved the merger and the minority became the majority in the second report and it used some of the same language in reasoning as in the dissent some of which I have just read.

John M. Harlan II:

How many shifted over to the majority?

Richard W. Mclaren:

Well, Mr. Justice Harlan there was a change in some people on the Commission.

The new lineup was eight to two and one abstaining.

Byron R. White:

Did any shift?

Richard W. Mclaren:

I think two must have shifted Mr. Justice White.

Byron R. White:

You mean it wasn’t all a question of new personnel?

Richard W. Mclaren:

No, it’s not a question entirely, the question is very sound.

There were two or three, two that shifted.

Well, after the first report was issued in December 1966, the applicants petitioned the ICC for reconsideration.

They formally stated that they were willing to accept various conditions including all those asked for by the Milwaukee and the Chicago Northwestern railroads.

At the same time, applicants said it into an agreement with those two roads, the Milwaukee and the Chicago Northwestern not to oppose their proposed merger in return for which the Milwaukee and Chicago Northwestern agreed to withdraw their opposition and support the Northern Lines’ merger.

The applicants also filed their agreement to enter into attrition agreements for the benefit of employees and they urged that ICC had erred in estimating merger savings in the first report and that these would be substantially greater and that it had found and that it asked for further evidence to be heard on this subject.

In January 1967, the Commission granted the petition.

They issued an order, reopening the proceedings and as the latter report stated, this was a limited reopening.

Richard W. Mclaren:

The further hearing was limited solely to determining and the basis of the most current information readily available, the amount of estimated savings resulting from the proposed merger in the light of one, agreements entered into between the applicants on the one hand and on the other, the Milwaukee and the Northwestern and second, the effect of relevant financial, operational and another changes related to savings which have occurred subsequently to the close of hearing recon —

Hugo L. Black:

May I ask you did the personnel of the Commission changed from the time this case began until it ended?

Richard W. Mclaren:

The personnel did change Mr. Justice Black.

I believe that in the second report, there were eight in the majority and this included five that had been in the majority before plus two that had changed and plus one new commissioner.

There were two that still were dissenting and then there was one new commissioner who did not participate.

I believe that was the lineup.

Hugo L. Black:

One new commissioner, but he did not participate?

Richard W. Mclaren:

Well, there was one new commissioner who did not, there were two who did.

Hugo L. Black:

The only change was that one during from the beginning to the end?

Richard W. Mclaren:

No, there were five in the original dissent.

Hugo L. Black:

I’m not talking about the way they divided up among themselves. You had a number of men on the commission, members of the commission.

What was the difference in the personnel of that commission from the time this case began until it ended?

Richard W. Mclaren:

I believe I’m right in thinking that there were three different commissioners.

Hugo L. Black:

Three different commissioners.

Richard W. Mclaren:

Yes, Mr. Justice.

Hugo L. Black:

When were they appointed?

Richard W. Mclaren:

I’m sorry sir, I don’t have that information, I could get it.

Hugo L. Black:

Alright.

Warren E. Burger:

But one of those three went each way and one abstained, is that what you told us.

Now, if you don’t have it, those figures.

Richard W. Mclaren:

I think that that’s right Mr. Chief Justice that that were two from the former majority that switched and then one new commissioner that added to the original five maybe eight and there was one new commissioner who didn’t participate.

Warren E. Burger:

So, it was not the new commissioner who altered the result?

Basically, it was the change in the position of some of the former commissioners sequent —

Richard W. Mclaren:

That would do it, yes, because they had five and they did get the —

Warren E. Burger:

Two more.

Richard W. Mclaren:

They did get the majority from — by one of the commissioners.

Hugo L. Black:

How did — they get them from — do you know whether the change in the personnel had anything to do with the judgment that was finally rendered?

Richard W. Mclaren:

I really can’t speak on that Mr. Justice Black. I think the basic fact here is that there was a change in the standard that they applied.

Hugo L. Black:

Well, that might be a change in the standard, but were there change in the number — by the men who applied for the standard?

Byron R. White:

Well, seven members of this majority were on the commission at the time of the first decision, I gather.

Richard W. Mclaren:

See, they’re seven or eight Mr. Justice White.

Byron R. White:

Well, it’s only an eight man majority, isn’t it?

That’s an eight to two?

Richard W. Mclaren:

That’s right.

Byron R. White:

Eight to two, the vote was?

Richard W. Mclaren:

Eight to two and one abstained.

Byron R. White:

One abstaining?

Richard W. Mclaren:

Yes.

Byron R. White:

And seven of those — if one only new commissioner was in the majority on the last report that that seven that were on the commission at the of the first two report.

Richard W. Mclaren:

Out if the majority?

Byron R. White:

Yes.

John M. Harlan II:

I’d understood in your brief, you will provide on somewhat [Inaudible]

Richard W. Mclaren:

Our basic contention Mr. Justice Harlan is that the commission failed on the second report to apply a public need standard which is the basic issue that was presented to the Court.

Hugo L. Black:

That’s not being close to a legal question, isn’t it?

Richard W. Mclaren:

Well, it’s a very difficult question Mr. Justice Black because the Court has laid out the requirement for an accommodation of the Transportation Act, the organization of roads into systems in and to serving the needs and requirements of efficient transportation.

On the other hand, the Court has held that we do have a national policy favoring competition and that the cases say that the commission in approaching this merger cases must accommodate the views and the policies of these two statutes in —

Hugo L. Black:

It is possible to preserve competition and to permit merger?

Richard W. Mclaren:

Well —

Hugo L. Black:

Preserve it to the extent it existed in the Court.

Richard W. Mclaren:

By — not among the same identical parties, but I think Mr. Justice Black and you have for example in your Penn Central merger, a situation where the roads merged and the commission had in mind the remaining competition from the Norfolk and Western Road and from the Chesapeake in Ohio system that was coming along.

It looked at the fact that you have a network of good roads and strong intermodal competition and then it found a public interest factor here in that the roads had the burden of providing public service through commutation in cities and if they had the very puzzling and difficult problem of what to do with the bankrupt New Haven railroad.

And the in-balance, all parties felt in the Penn Central litigation that that merger was a good thing and when it came —

Hugo L. Black:

It might be a good thing and might not wholly preserve competition.

Richard W. Mclaren:

That’s very true.

And the matter did not come to the Court although it came to the Court on other issues, it did not come up on the competitive question.

Hugo L. Black:

Because you are not as you are representing Department of Justice, finding it on the basis that’s its bad thing.

Richard W. Mclaren:

I didn’t understand Mr. Justice Black.

Hugo L. Black:

I don’t suppose you as representative of the Department of Justice opposing this on the basis that the whole merger, all those railroads and all that part of the United States was a bad thing or a good thing.

Richard W. Mclaren:

Well, we’re opposing it on the theory Mr. Justice Black that if you have healthy directly competing railroads, they do not need this merger in order to continue to give good service.

They are dominant in this area of the Northern Tier States.

Richard W. Mclaren:

And we think that under those conditions, the requirement of accommodation of the policy of the Transportation Act and of the anti-trust laws required the thing — that such an act a competitive merger not be permitted unless they’re — it serves a real public need and that that kind of elimination of competition should not be permitted merely to serve the private interest of the parties.

And if there are public interests that are being saved — served by the merger, but if they could be served by a less anti competitive alternative then the merger should not be permitted.

The lesser competitive alternatives should be put into effect by the Interstate Commerce Commission which after all under the law is given vast powers, and great discretion to regulate and to supervise the affairs of the railroad.

And in this case, it’s our contention that the Commerce Commission should have considered to what extent it could have opened up the gateways in order to strengthen the Milwaukee if that was the matter of public interest (Voice Overlap).

Byron R. White:

I take it then you do concede that better service might well justify an anti competitive merger?

Richard W. Mclaren:

Certainly, if an area has inadequate service and the way to —

Byron R. White:

Well, —

Richard W. Mclaren:

— get out of it is to have a merger.

Byron R. White:

That isn’t —

Richard W. Mclaren:

— that would be one, yes sir.

Byron R. White:

That isn’t — so you would say not always even — you have to first find that there’s an adequate service?

Richard W. Mclaren:

No.

Byron R. White:

Before you could ever justify a merger —

Richard W. Mclaren:

No, I don’t think that’s —

Byron R. White:

— on service grounds?

Richard W. Mclaren:

I don’t think that’s true.

We don’t —

Byron R. White:

But better service is enough.

Richard W. Mclaren:

Better service might be enough but if it’s terribly anticompetitive merger, if the better service can be achieved by a less anti competitive alternative then the merger should not be permitted unless there is some real public need for it.

Byron R. White:

Well, then — there — what’s wrong here then is that the — that in your views that the Commission although it found there would be better service, didn’t make an express finding they could not achieve these results by another route?

Richard W. Mclaren:

That’s one of the things, yes, Mr. Justice White.

Byron R. White:

What if it had —

Richard W. Mclaren:

They did that in the first report.

Byron R. White:

Well, what if they had found that?

That they couldn’t do this or to get this better service and if by another route in this case, let’s assume the Commission on the second report had made that finding, would you be here?

Richard W. Mclaren:

Well, I think if they found — made that finding and that the — there was a need of public service resulting from this, I think that they would have that power.

I’m not sure that we wouldn’t be here because I think that then the Court has a right to look at the situation and see if the — if that determination is supported by substantial evidence.

And I seriously question in this particular case that the Commission has done more than really give lip service to the question of the value of competition.

They have followed the dissent, the point I made a little earlier that after all these giants have not competed for years, they have thrown up their hands, given up hope and they have said, “Well, let’s let them merge and we’ll try and make something out of the Milwaukee and maybe it will provide the competition that we can’t get from the Northern Lines.”

Well, on the second report, the Commission came out and they said that this is a matter where we — where an error of the savings that will come from the merger, there will be some $39 million of savings after few years instead of the $22 million or $25 million earlier estimated and they dwelt at some length on the improved service which was estimated would result from the merger.

Richard W. Mclaren:

But, they did say no prospective service benefits that had not been considered in the first report.

And I think what’s fair to say that what they did do on the second report was to discard or reverse two principles of analysis which had been followed by a majority in the first report.

They took a new perspective as they say.

First, they determined to focus not so much on competitive effects in the Northern Tier States where competition would be eliminated, but rather they broadened out the focus.

And they took the broad view of the total area that was served by all of the merger parties, including that down in the central corridor which is served by the Burlington.

And of course the effect on competition looked somewhat less drastic taking that view.

Second, in considering the anticompetitive effects of the merger, the Commission determined the primary weigh not be given to the competition eliminated, that is the competition for 55% of their revenue because it held that the — there was substantial intermodal as well as intramodal competition that that would survive the merger.

On this basis, —

Potter Stewart:

Is it also — would it be correct to say that they took a different view of the meaning of Section 5 in their second report?

Richard W. Mclaren:

That was argued in the lower court Mr. Justice Stewart.

Potter Stewart:

I know.

Richard W. Mclaren:

I think that they are kind of on both sides of that question.

There was from —

Potter Stewart:

Both sides in both reports?

Richard W. Mclaren:

Yes sir.

There was an indication that in the first report that there is a presumption in favor of mergers.

On the other hand, there was a statement that the matter is in balance and then the same thing in effect was said in the second report.

It does appear to us that they in effect did accept the idea that there’s a presumption in favor of mergers that are brought up by the private parties in the second report whereas they gave competition, a certain value and weight in the first report that they didn’t in the second report.

But there, the difficulty as they pointed out in the first report, Mr. Justice Stewart is that you have the difficult task of weighing an intangible value of competition.

On the one hand against the savings from merger the tangible values that you can say, well, it’s $25 million a year and how do you say whether competition is worth $25 million a year?

I think that there is some indication in the recent holdings of the Court that starting with McLean where this test was laid out that there must be the accommodation.

The commission must consider on the one hand the anticompetitive consequences on the other, the savings, the improvements in service and so on.

That was spelled out first in McLean, it was followed in the Denver, it was followed in the St. Louis — Minneapolis St. Louis case and it has been referred to at various times since then.

I think that two or three of the Court’s more recent cases have cast some additional light on this in the sense that the Court has treated competition as the basic policy and it has treated the power of the administrative agency to grant immunity from that as carrying a rather important determination that is to be made by the administrative agency and —

Potter Stewart:

You’re referring to cases like that, Maritime Commission Case, Svenska or whatever it is.

Richard W. Mclaren:

Svenska is one them, the Denver Rio Grand case I think is one of them.

That’s the railroad express agency stock purchase and in the Denver Rio Grand opinion, there’s a passage that has to do and it points out that this five to power is the power to grant immunity from the policy which favors the competition.

And it implies that this is a matter of considerable importance for the Commission to determine.

And I think that when you then get to the Svenska case, and two, that was a Maritime case and two, it was not a merger case, but it did specifically mentioned two of the rail merger cases and it said that those cases follow the same pattern.

Warren E. Burger:

Mr. McLaren, as I read this record, there is some very, very substantial reductions in the time runs.

Warren E. Burger:

Now, on agricultural products which was one of the figures that I have been — carried in my mind from the apple growing country in Oregon and Washington, particularly Washington I guess, that’s a very important factor, isn’t it in this day of speed?

Richard W. Mclaren:

Yes, yes it certainly is Mr. Chief Justice, but our point on that is that the original figures came out and I don’t remember them precisely, but I think the rail time from the Northwest down into the Chicago area was something like 94 hours and they said, when we merge we can put together better, more direct runs and we can cut 12 hours off of that.

But before the record was closed because the Milwaukee had put through some faster trains, they’d cut more than 12 hours off already.

They took some lighter weight equipment and they were more careful in their scheduling and there is nothing to prevent them, if Your Honor please, to work out these better routings without merger.

They don’t have to merge these railroads in order to get direct routings and that’s what the minority, what the dissent in the first report was pointing to.

They have sat here fat and happy they’ve been entirely unwilling to take advantage of the possibilities that they were for more direct routings to try and meet the truck competition that the other side talks about.

They could’ve done that, they don’t have to merge to do it, and they could cut very, very substantial time of the run from the west down into the markets where they need to market these products from the raw materials country.

Referring once again to the Svenska case, I wanted to point out that the — the — this came up on the Maritime Commissions Power which is comparable to the Commission’s power to grant immunity to an anticompetitive arrangement and there I think it was an exclusive dealing arrangement and referring to the question of the National Economic Policy, the Court pointed out that another lies illegal arrangement and as the Court said, “alone, will normally constitute substantial evidence that the agreement is contrary to the public interest unless other evidence fairly detracts from the weight of this factor.”

Now, we contend that the Maritime Commission Rule that was discussed and upheld in Svenska precisely describes the standard which governs here.

FMC’s rule put the burden on the proponent of the anticompetitive agreement just as we would put the burden on the applicants to merge, to demonstrate that it was required by a serious transportation need, necessary to secure important public benefits for — in furtherance of a valid regulatory purpose.

And the Court not only upheld the Svenska — FMC rule, but it stated that the standard was “in full accord with the kind of accommodation between anti-trust and regulatory objectives approved by this Court in the Seaboard Airline in Minneapolis St. Paul rail merger decisions.”

William J. Brennan, Jr.:

Mr. McLaren, you state — stated that the outset that your submission was that there had been a change in standard between the two reports?

Richard W. Mclaren:

That the — yes Mr. Justice Brennan.

William J. Brennan, Jr.:

Would you mind stating what —

Richard W. Mclaren:

That in the —

William J. Brennan, Jr.:

— what the change was?

Richard W. Mclaren:

In the first report, I think that the Commission majority followed the standard that I have just described.

They gave some real weight not just lip service to the value of competition.

They considered the possibility that the advantages of the merger could be achieved by less competitive means.

And then they looked at what was left over that would just be accomplished by merger and they said, “That isn’t enough because on the other hand you’d eliminate all this competition and virtually create a rail monopoly in this Northern Tier States.”

William J. Brennan, Jr.:

And your view of the premise of the second report is what?

Richard W. Mclaren:

And our view is that it being — the second report being in effect took the savings claimed by the carriers and they looked at the better service that would be given and they threw up their hands as far as their actual powers to regulate and to force competition and to give the Milwaukee a viable position in this market.

And they said, “Okay, let them merge, we’ll try and work out conditions that will make the Milwaukee for the first time give shippers in the area, for the first time a realistic choice of carriers.”

I believe it was somewhat —

William J. Brennan, Jr.:

Well, as you have stated, that doesn’t seem to me to be much different when they struck the balance one way the first time and using the same consideration struck the balance the other way in the second report?

Richard W. Mclaren:

Well, Mr. Justice Brennan, I don’t think that in the second report, they really gave value to the question of competition nor did they bear on the question of the public need for the thing.

In other words, there is — there must first be a public benefit from it.

Secondly, there must be a need for it and there isn’t a need for it if it can be done by a less drastic means.

William J. Brennan, Jr.:

Well what —

Richard W. Mclaren:

That’s the —

Byron R. White:

Can you —

Richard W. Mclaren:

And that’s the test for —

Byron R. White:

Can you give us some record side on what’s the — where in the first or second report the Commission ever said what standard it was applying?

Richard W. Mclaren:

I don’t think I can Mr. Justice.

Byron R. White:

You just have to read it —

Richard W. Mclaren:

Fine.

Byron R. White:

— read it out of what they did?

Richard W. Mclaren:

I think that you can tell in the first report in the final paragraph where they had said that the proponents of the merger have failed to carry their burden of establishing this and they point to the fact that there are less drastic alternatives.

Hugo L. Black:

What page does that appear, do you have it — convenient?

Richard W. Mclaren:

165 and 166, I believe Your Honor.

On page 166, they point out that the — to find competition is not worth between 12 and 25 million a year less expenditures to achieve those savings would be tantamount to a conclusion that the value of intramodal rail competition is negligible.

And they mentioned this tangible savings factor but they have said that they were convinced that they are not as great as the value of competition and they conclude that the disadvantages of the appropriately conditioned merger, the drastic lessening of competition and adverse effect on carrier employees outweigh the benefits that might be derive by applicants and the shipping public.

And I think the standard follows there in the top of 167, applicants have failed to show that their proposed merger would result in transportation service to the public that is superior to that which can be provided without merger or that the benefits reasonably attributable to the proposed merger outweigh the adverse effects of the merger on carrier employees and the benefits that shippers derived from —

William J. Brennan, Jr.:

(Inaudible) page 343, is there a counterpart to which you have been (Inaudible) that require a report and the product (Inaudible), unless the proposition (Inaudible), adverse effect on (Inaudible), the benefits of the (Inaudible), that’s a reconsideration on this files based on the entire record, and now we can — isn’t that suggest that the same standing was applied (Inaudible) when the balance was struck on the face the first time and the other (Inaudible).

Richard W. Mclaren:

Well, I just don’t read it that way Mr. Justice Brennan.

It seems to me that they abandoned the possibility that the Commission has this broad power to bring about the better service that is anticipated here and then what you left, have left in this merger is really private benefits.

William J. Brennan, Jr.:

Are you saying then a specific rule, they enumerate it in three types that the second time they abandoned the (Inaudible)?

Richard W. Mclaren:

The second time, I think they really followed what the dissent had talked about that they were going to strengthen the Milwaukee and they said in the second report on reconsideration which comes a good bit later in another volume, they said that the Milwaukee conditions are a necessary predicate of their decision.

In other words, if — as I read that that really the Milwaukee conditions were the main purpose, the main public benefit, the main reason they found that it was consistent with the public interest and had it not been for that they would have found it was inconsistent with the public interest and I think that appears two or three times in the second report.

William J. Brennan, Jr.:

Well, at page 344, I take it, to receive this kind of action that they need for refusal, were appropriate condition, I gather that the reference to the Milwaukee overwrite (Inaudible) public to improve transportation?

What’s the difference (Inaudible)?

Richard W. Mclaren:

Well, they had given up as they said on the Northern Lines ever doing proper job here and they were going to substantially — sir?

Byron R. White:

(Inaudible)

Richard W. Mclaren:

Well, the five who became the majority in the second report —

Byron R. White:

Well, what is (Inaudible) — is this the final report?

Richard W. Mclaren:

I don’t think they did say it in the final report Mr. Justice White.

Byron R. White:

Oh, (Inaudible) didn’t they say we give up on the part of (Inaudible) —

Richard W. Mclaren:

Not in the second report, no.

But I think it’s a fair underlying fact that you can’t ignore on the second report.

I think — I don’t see how otherwise they —

Byron R. White:

You only represent to this Court — you couldn’t find it anywhere else?

Richard W. Mclaren:

Well, except in the finding that they say the conditions for the benefit of the Milwaukee and the improvements for the Milwaukee bringing it through to the Portland area are necessary predicate and I have the impression from the over all report that that’s really the main benefit that is — that the ICC found here.

Potter Stewart:

Well there were changes in the facts between the first and second report, aren’t there — weren’t there?

In other words although you disagree that with the suggestion in the question of Mr. Justice Brennan that the Commission in fact applied the same basic standard in each case but came out differently.

At least I would suppose if there were changes in the facts as I understand there were that it would been — would’ve been quite possible for the same Commission to apply the same standards and come out differently and the changes to which I refer are first of all the petition by these applicants which led to the second report accepting every single one of the conditions affecting the Milwaukee, every single one of the conditions affecting the Chicago and Northwestern agreeing fully to enter into a collective bargaining agreements with the representatives of their employee to take care attrition.

And finally, pointing out that the profits that would ensue upon this merger, the — I beg your pardon, the savings that would ensue upon this merger were substantially greater than at first been assumed.

Now, if I’m correct that these or any of these changes in facts were evident or present at the time of the second report, it would be quite conceivable that you could apply the same standards and come out with a different result.

Richard W. Mclaren:

I would like to answer that if I may.

As far as the conditions are concerned, Mr. Justice Stewart, I think in the first report, they assumed the conditions as to the Milwaukee at least which are I think preeminent.

Now, I’m not sure that they assumed the attrition agreements in favor of employees and it’s true that in the first report they pointed out that it was both the anti-competitive effect and the adverse effect on employees, it was bad.

But, the main conditions for the Milwaukee, I think had been considered.

As far as the savings are concerned, the new evidence that came in, there were just four days of the hearing on reconsideration, three of them with proponents and one for rebuttal and the savings there, the additional evidence had largely to do with simply an adjustment factor applying a percentage to previously estimated savings.

So, I don’t think that was a matter of new evidence particularly.

As a matter of fact, the anti-trust division petitioned that the matter be reopened both to find out who many more changes there had been already put into a fact like this faster train business and so on.

And also what savings had been achieved and could be achieved without merger and this was denied by the Examiner and upheld by the Commission.

Potter Stewart:

Certainly then as I understood your answer, there was at least one fundamental change in the facts between the first hearing, at the time of the first hearing and the time of the second hearing and that is the elimination of any problem with respect to attrition of the employees.

Richard W. Mclaren:

That’s true, that’s true and then there is also the fact that the Milwaukee and the Northwestern withdrew their opposition because they — each had agreed to the others mergering effect.

Warren E. Burger:

You’re in your rebuttal time now, if you were saving some.

Richard W. Mclaren:

Oh!

Alright, thank you.

Warren E. Burger:

(Voice Overlap) some time ago.

Mr. Dailey.

Louis B. Dailey:

Mr. Chief Justice and may it please the Court.

Our appeal is from the three-judge District Court in the District of Columbia unanimously affirming — unanimously dismissing our complaint in an action seeking to annul, set aside and restrain the enforcement of two Interstate Commerce Commission orders which had approved the merger terms and it also affirmed the Commission orders.

My remarks will be directed as to the justice and propriety of the Stock Exchange ratios and only that.

Now there are certain basic practices that I think the Court must keep in mind in connection with our appeal.

One is that isn’t just another railroad case coming down or up the legal tracks.

Northern Pacific has been mentioned here, has a great many, very vast and valuable land interests containing oil and gas, timber, coal, iron, ore and many other minerals yet un-found in an area that is about as large as Massachusetts and Connecticut combined.

Now the basic character of Northern Pacific changed after 1951 when substantial oil was found in the Williston Basin.

The state recognized this when they eliminated Northern Pacific stock from the Dow Jones rail average.

Louis B. Dailey:

The 1960, to give you an idea of what it did to the earnings.

In 1960, a few take their earnings of Northern Pacific and eliminate the Burlington dividend which was substantial of the remaining earnings, 50% of that came from natural resources and 50% from transportation properties.

So, that what we are talking about here is a very, very vital matter in determining stock exchange ratios.

Now, another thing that you must keep in mind on this appeal, raised a new problem for the Interstate Commerce Commission as to the valuation of such properties quite disparate from railroad properties.

The District Court is faced with this new problem and we suggest that the Schwabacher case, no other railroad case has this Court been faced with this particular problem.

Now, when I speak in this case of the parties, I will refer Northern Pacific as NP and the Great Northern as GN.

The one — I think first thing we should do is simply state what are the proposed merger terms to have it as background?

Under the terms in Northern Pacific stockholders will get one share of the new company’s common stock for each share that they have, same for Great Northern, but in addition, the Great Northern’s going to get a half of share of a $10 preferred stock which must be redeemed commencing five years after the consummation of the merger, over the next 25 years, 4% a year.

But it has a call provision in it that anytime after five years of consummation of the merger that it maybe redeemed.

But the thing to note is that surely Northern Pacific’s stockholders could not even achieve equality with this Great Northern until 30 years after consummation when right today the earnings of Northern Pacific are greater that Great Northern’s.

Potter Stewart:

Is the redemption to be at par, $10 a share?

Louis B. Dailey:

Yes, it might be $110, I’m not sure of that Your Honor.

Now, I come to the first point and that is this, that the Commission in the District Court have committed error in misinterpreting what the standards are as to the application Section 2, subdivision 2 of Section 5, Interstate Commerce Act that perhaps the best thing to do is quote, first, what the Commission said and then what the District Court said.

Let me quote from the Commission, this is in 297 of your appendix.

“The issue here is whether the exchange ratios are just and reasonable and limited thereto, we find the record both adequate and affirmative in that they either necessary, no in that they meet the necessary and required tests, one, that there are the result of arms length bargaining and two, that they fairly reflect the contributions of each group of stockholders of the combined system.”

That was the basis of the commission decision.

Now, what the District Courts say, “On the basis of the record upon which the Commission relied, we have no reason to rule other than that the ratio which was established with the approval of the companies and of a large majority of their stockholders is just and reasonable.”

Now, let’s take a look at Section 5.

There are really three steps involved in the achieving a railroad mergers.

The first is the parties have to agree on something.

Second is, that the Commission then takes action supposedly independent in which they either approve these terms or they modify them under Section 5 (2) to achieve what the test is of justice and reasonableness.

And the third thing that happens, after the Commission is all through of the case then you must have assent of the stockholders by an appropriate vote.

Now, the Court’s duty is one, that’s quite independent of any agreement of the parties or stockholder approval.

Parties got to agree before otherwise there is no case.

And the stockholder approval is only in there having to do with relevant as to the enforcement of whatever the Commission has found.

So that the error here is in relying for the decision on irrelevant things as to par — as to agreement of the parties in the first place and the subsequent approval by the stockholders.

This we claim is legal error.Now there’s no mention of Section 5 of arms length bargaining and et al.

The only reference in Section 5 et al is in subdivision 11 where it says that is a precondition consummation, you’ve got to get the assent of the stockholders.

In Re, North American Power and Light, the Circuit Court in the third district held in a public utility holding case that the presence of arm’s length bargaining is not a decisive criterion.

Now, although we claim that Section 5 doesn’t make arm’s length bargaining and stockholders’ vote and necessary required test under 5.

Louis B. Dailey:

I think it might be helpful to the Court for whatever weight or relevant you think these two factors have and to just examine what the record says about this.

First, let’s take the arm’s length bargaining business.

And why I say we impute no fraud or chicanery to the negotiator of these terms.

These are responsible people, we recognize that.

But, the common interest switch they have had in joint ownership of the Burlington running back to 91, a wholly owned ownership of the SP&S which the precedence alternated as precedence of the SP&S and the joint operations of the Montour Railway.

You just couldn’t have these kind of arm’s length bargaining which I think any court would consider to be arm’s length bargaining.

But more disturbing importance is the conflict of interests that shows up on the part of two members of the five members on the Northern Pacific consolidation committee which was the negotiating committee.

One of them, this is in exhibit 26 on page 21, one of them owned only 400 shares in Northern Pacific, but he was a vice-president, director of a Hill Foundation, what did that hold?

Not a single share of Northern Pacific and 18 — more than 18,000 shares of Great Northern.

Warren E. Burger:

Well, wasn’t that a beneficial interest of any kind?

Louis B. Dailey:

No, this was a representation by the man on the board.

He personally demand — personally owned 400 shares of the Northern Pacific stock and none in Great Northern, but —

Warren E. Burger:

I was wondering how much you would weigh this Great Northern —

Louis B. Dailey:

I think the Court will be able to judge that better than I, Mr. Chief Justice.

Another member of the Committee had — was the president of two mutual funds.

One of them had to be large amount of Northern Pacific stock only, but the second one had only 13,000 Northern Pacific stock and over 46000 of Great Northern stock.

Now, this — the general legal definition of what constitutes market value and this Court in Schwabacher posited the fact that the true criterion was the present intrinsic or market value of the contributions being made by the various groups.

Having that in mind, the general legal definition is what would knowledgeable of willing traders who wanted to make a deal in a trade acting under no compulsion at all, what would — what figure would they arrive?

Now, let’s take a look at that, what’s in this record?

The Great Northern had testified on its direct, this wasn’t crossed, that the achievement of railroad mergers, of the railroad properties was as he said, “Done under extreme compulsion.”

The President of the Northern Pacific confirmed this on his direct.

He characterized and used a very accurate adjective.

He said that this matter of achieving railroad consolidations was “the overriding consideration” in a mortgage act — in this merger application.

Now, how soft the bargaining was in this matter is shown by when they got to discussing the industrial properties both — which both railroads had.

Northern Pacific’s had been evaluated at $32,700,000, so they weren’t talking about peanuts.

The financial adviser for Northern Pacific was willing to take merely the assurance without any appraisals of the GN had that they had properties of very substantial character.

But the earnings from — their relative earnings from this particular category of assets in 1960 when this merger terms were agreed on, Northern Pacific’s were twice that of Great Northern’s.

So, I say this.

If I — this is arm’s length bargaining.

The record shows that the arms were exceedingly short.

Louis B. Dailey:

Now, about the stockholders’ vote; a lot has been said on the record about that.

I think the stockholders’ vote in this particular case should be a red flag to this Court to take a good look at the merit side.

It was passed by a vote of 73.2% of those entitled to vote.

It was the lowest vote, next to the lowest vote, the (Inaudible) was the lowest of any group of stockholders in all of the railroad mergers that have recently been engaged in.

It came only after they had to adjourn the meeting for four days to determine the outcome.

Newspapers called it a cliffhanger.

John M. Harlan II:

Wasn’t this exchange ratio part of the product of experts?

The (Inaudible)

Louis B. Dailey:

I — the report —

John M. Harlan II:

(Voice Overlap) on one side, first (Inaudible) on the other.

Louis B. Dailey:

They sought advice of those two, that is correct.

John M. Harlan II:

They agreed?

Louis B. Dailey:

I’m coming to that, did they agree?

They both approved the terms, Mr. Justice Harlan.

I see my time has expired.

Warren E. Burger:

We will take that up after lunch.

[Luncheon Break]

Mr. Dailey.

Louis B. Dailey:

Mr. Chief Justice and the Court.

Before I proceed with the argument, I would like to answer Mr. Justice Potter’s question about the provisions of the — someone asked about the call provisions of the preferred stock and I’m a little uncertain about — is that you Mr. Justice White?

Potter Stewart:

Yes.

Louis B. Dailey:

They are redeemable for the seeking fund purposes at par.

As to the —

Potter Stewart:

And that’s — so far as $10.

Louis B. Dailey:

$10 fund.

Potter Stewart:

So that would mean a — for each share of common stock would be $5 —

Louis B. Dailey:

Half of shares, see, Great Northern gets a half a share.

Potter Stewart:

Five dollars eventually.

Louis B. Dailey:

Five dollars.

As to the call of provisions, provides that five years after the consummation, the redemption price would be 105 for the first two years.

Louis B. Dailey:

The next two years, it would be on 104%, and then after that in the descending scale until that the —

Potter Stewart:

$105?

Louis B. Dailey:

No, no.

Potter Stewart:

105 percent —

Louis B. Dailey:

105% —

Potter Stewart:

— of $10.

Louis B. Dailey:

105% of the part.

Potter Stewart:

Of $10.

Louis B. Dailey:

That’s right.

Potter Stewart:

So, in other words —

Louis B. Dailey:

And —

Potter Stewart:

$10.50.

Louis B. Dailey:

Yes, and it keeps going down until it’s redeemable at par at the end of 15 years.

Now, I had about concluded the first point, as to the misinterpretation of Section 5 and laying stress on the arm’s length bargaining and the stockholder’s votes.

I now wish to come to point two and that is that there’s just no reliable probative substantial evidence in the whole record to support the finding of the Commission in the District Court that these terms are just and reasonable under Section 5.

Now the unique problem on this case is determining merger terms.

How do you value, weigh and relate the contributions of the two parties?

One has only railroad properties and the other has railroad properties plus these vast natural resources, some of which are not currently producing income, but are expected to in the future.

Now, there’s no issue in this question about the valuation of railroad properties.

Committee agrees that it’s proper to take a capitalization of earnings because they are not readily marketable and they are worth only what they can earn.

Committee was satisfied with the 60-40 GNNP relationship on the railroad properties.

Mr. Williams, the committee’s expert came up with the price earnings ratio of 15 times earnings in 1960 when the terms were agreed upon as an appropriate one and that hasn’t been questioned anywhere in the record.

The real issue is how are you going to value these natural resources?

The applicant’s position on that on the record was that it’s difficult, if not impossible, to value respective stocks except on the basis of capitalization of earnings.

That they made an attempt to value stocks by a separate valuation and they found it impractical.

Why?

Because they couldn’t agree on the stock ratio because of difficulty of valuing these properties on account of market conditions and the uncertainty of their future potential.

So they made what they called no definitive valuation of properties.

They say it in the last analysis, it just has to be a question of judgment.

Now, the committee’s position was and is that you arrive at a proper, the intrinsic stock market value of these two stocks which is what Schwabacher mandated that it’s more appropriate to take a market value of them rather than measure them on the basis of capitalization of earnings.

Louis B. Dailey:

But if you do take current earnings and capitalize it, that in the market place, knowledgeable traders wind up with a very high price earnings ratio.

Northern Pacific’s financial adviser agrees with the committee.

Let me read to you from Exhibit 32, page 3 which is Morgan Stanley’s report on the non-railroad properties.

Here’s what they say.

“In essence, however, a sale of interest in the properties would take place to create Northern stockholders and on this basis, Northern Pacific stockholders should realize sale value rather than value based on capitalization of earnings.”

And the committee chairman frankly testified on his direct testimony that you can’t make any exact appraisal in dollars of these properties.

We claim however though, although it’s not easy to value, some approximate valuation is not only possible, but is necessary if you’re going to sustain merger terms.

Now, what was the applicant’s evidence in the record to support this finding?

It’s based largely on past performances to earnings, dividends, stock market quotations and pro forma, dividend comparisons and on an erroneous and gloomy prediction that there was nothing reasonably foreseeable to indicate that Northern Pacific’s future earnings prospects were better than Great Northern’s.

And I’m sure the Court is aware, my former statement, in the last two years, our earnings have exceeded Great Northern’s.

Now, the GN’s financial adviser, first Boston’s witness testified, “the study of past performance is only important insofar as it measures or predicts future prospects.”

This was his direct testimony.

With that, the committee agreed.

Now, the applicant’s case as to the future prospects and value of these resources is based on evidence that we regard as of little prohibitive value and that’s the test of the Administrative Procedure Act.

They offered no market appraisals for these properties.

They put on the stand, no timber, oil or other geologist or expert on these matters that we could cross-examine, there’s none of that.

Both financial advisers on cross-examination were extremely vague as to past prices of timber and oil.

In other words, a direct case of the applicants was largely a long dreary account of their negotiation, how they couldn’t agree and all the arguments that they had and it was argument that largely not hard, positive reliable evidence.

Now, contrast the committee’s case.

We were very serious in this proceeding.

We were observing the injunction in the Erie case.

It said dissenting stockholders should put in positive evidence and should state precise inequities.

We had this constantly in mind.

So that when we put in our direct case, we had three experts on stock evaluation analysis and an oil geologist that were subjected to searching cross-examinations.

They testified as to various factors that must be considered when you get to valuing what the traders will — how they will trade these natural resources and properties in the public market?

Mr. Brundage, chairman of the committee testified as to the strong earning power of the natural resources, improved geological and geophysical discovery techniques, the freedom of these properties from obsolescence contrary to railroad properties, the low financial risk, the very high return on capital investment.

Our natural resources are yielding each year more than 100% of the return.

Whereas the testimony of the applicants on their direct case was that Northern Pacific in 1960 gets — getting a return of 1.4% on its transportation properties.

He spoke of the tax savings running into millions of dollars occasioned by the depletion allowances.

He spoke of the control elements that you didn’t have to develop properties in a hurry.

Louis B. Dailey:

You could take your time and you’re in control of it and most importantly, he spoke of the intrinsic and the survival values of these properties in an inflationary period.

Now Mr. Williams reported on his studies of comparative companies that had similar properties, then he wound up with a price earnings ratio in his judgment was 50 times earnings and this was never been questioned by any testimony on the part of the applicants.

He pointed to the TXL, Texaco deal which happen to be consummated about that time.

It was a merger like ours, in which the price earnings ratio were 75 times earnings.

Now, in the Morgan Stanley report which you can see in Exhibit 32, Morgan Stanley, in making their recommendations were terms favorable to Northern Pacific against GN came up with price earnings ratio of 12 on oil and gas, 15 on timber and 15 on other minerals.

Our oil geologist that was particularly familiar with the Williston Banking, based and he’d cut his eye teeth up in that area, testified as to the favorable prospects of the Williston Basin.

He predicted a billion tons of oil out of the basin in the next decade.

He spoke of a use of the exploration there.

The lack of the exploration of the deeper layers of the ground that pointed out that in the Williston Basin, they’d get a higher rate of discovery than the national rate.

And he also said that additional income from the oil would come from secondary recoveries.

Now, Mr. Story testified as to the economic matters and particularly as to trends of prices of natural resources and their value as a hedge against probable future monetary inflation.

Now, the important thing for this Court to realize is that this body of specific testimony on the part of the committee was never rebutted.

They had — the applicants had Morgan Stanley, they had all the oil experts and timber experts on the payroll.

Thousands of our stockholders’ money was paid to hire them, but they didn’t go on the stand and say that Mr. William’s price earnings ratio was wrong or that Mr. Brundage’s testimony as to the various factors that must be considered in the marketplace relating to our natural resources were improper or to how to weigh any factors that pertain to these natural resources, you just draw a blank from the applicants on that aspect.

So, we say that their testimony is not proven.

It isn’t reliable.

No experts, nobody to get at the truth.

Now, the committee doesn’t claim that exchange ratios can be based on exact dollar evaluations, but it does claim that there must be some rational basis in the record for any alleged just ratio.

If the Commission is to discharge its duty and this Court is to have any meaningful review of the record, and that just that you will search this record and you will not find how they arrived at these decisions except through these bargaining process.

Now, the committee also developed calculations to show they were precise in their criticisms of these terms.

They’re all set forth on three different theories and four different points of time, there were 12 different computations and as far as we’re concerned, they all with one exception, show that Great Northern should be preferred.

It’s all in the appendix to our brief and I’m sure and I hope you will study it.

Now, this record contains no discussion by either the Commission or the District Court of this expensive testimony of the committee.

Or was any rational explanation given, set forth anywhere as to how the particular ratios were developed or could be justified.

We urge that the wholly conclusionary finding of the Commission that these mergers fairly reflect the contributions of the group of stockholders involved is not supported by reliable, probative and substantial evidence as the administrator procedure requires.

Now, I received a five-minute warning here.

Our third claim which is that the Commission grossly erred in views of the discretion, denied us due process and outlying a lot of evidence of new evidence that’s available now that wasn’t then.

The Pierce case has been cited here as it — by the District Court as support, but the Pierce case was one in which they were dealing with the impact of war inflation.

And they said that as to that matter, the Commission was — that’s right within the scope of their particularized expertise and that therefore, there was no need to interrupt them.

We’ve — we concede that the general view is that you shouldn’t interfere with this, but the adjacent case was right on all fours with us.

Louis B. Dailey:

There they were dealing with the depression, now we’re dealing with inflation.

Even the President in his radio speech last Friday drew this comparison.

So, we say in conclusion that on no basis and on no theory does the record sustain the finding below and that they made a serious error when they took the wrong test and applied the bargaining process and the stockholder’s vote as determined.

The Commission simply didn’t do its homework on this case.

You’re going to find difficulty, I think, in finding in this record any rational basis to sustain what has been found.

So, in conclusion, I would like, respectfully ask this Court that the judgment of the District Court be reversed and that the course be remanded to it with instructions that the matter be remanded that the Commission for further proceedings not inconsistent with the opinion of this Court.

Now, as was set by this Court in the Penn-Central case, the short delay occasioned by a remand is not too high a price to pay to assure a disposition of this matter that is just to all parties.

I thank you for earnest consideration.

Warren E. Burger:

Thank you, Mr. Dailey.

Mr. Deale.

Valentine B. Deale:

Mr. Chief Justice, may it please the Court.

The Livingston Anti-Merger Committee raised these two thresholds issues in these consolidated cases.

The first issue is the issue of a jurisdiction of whether the Interstate Commerce Commission has jurisdiction over the proposed merger.

The second issue is the issue of whether or not the proposed merger is barred by a statutory law in contract.

The Commission’s position also embraces the contention that neither the Court below nor the Commission gave adequate consideration to these two primary issues.

The issue of jurisdiction is a twin issue.

It is an issue of jurisdiction and ownership.

In terms of the committee’s position, the Commission does not have jurisdiction over the proposed merger since one of the central properties in the merger namely the main line right-of-way used and operated by Northern Pacific Railway Company is neither owned by a merger applicant nor owned by a petitioner for inclusion in the merger.

Putting it another way, it’s the committee’s position that the ownership of the main line right-of-way continues to vest in the federally, in the federal chartered company, namely Northern Pacific Railroad, an existing federal company controlled to be sure by railway.

The merger authorization authority of the Commission has boundaries and it’s our position that these boundaries have not been heeded by the Commission.

Not just any merger maybe approved by the Commission.

The kind of a merger that maybe approved by the Commission is a merger where the properties to be merged are owned by the merger applicant.

And in the case of the rail merger, the properties may also be owned by a petitioner for inclusion in the merger.

The law makes no provision for the merger of properties owned by someone else.

Thus, involuntary mergers are outside the scope of the present law.

Now, complementing these boundaries upon the Commission’s authority is Section 5 (2) (b) of the Interstate Commerce Act which specifies that before the Commission may exercise its authority, it must find that the proposed transaction is within the scope of the Act.

In other words, in this case, that the rail merger is a merger, the properties of which are owned either by an applicant or by a petitioner for including, for inclusion in the merger.

Now, on the merits of the issue of who owns of the main line right-of-way used and operated by Northern Pacific Railway Company since 1896, the Commission’s — the committee’s position is this.

First, we want to draw the distinction between the main line right-of-way with its franchise in federal tax exemption between that properties or those properties and other properties of railways such as land grant lands.

The properties of a federally chartered main line right-of-way with its franchise and tax exemption privilege, that property has a quality of inalienability.

Valentine B. Deale:

The company which receives such property from Congress, from the United States Government may not, may not transfer it voluntarily except on the authority of Congress.

It is our position that Congress never enacted the necessary concept legislation to transfer title of the main line right-of-way with the franchise and tax exemption privilege from railroad to railway.

Now, contrary to the position of railway which has been uncritically accepted by the Commission, the resolution of May 31, 1870 was no consent to the purported transfer from railroad, the federally chartered company, to railway.

The joint resolution of 1870 authorized railroad to issue bonds in aid of construction and it also authorized railroad to place a mortgage to secure these bonds on railroad’s properties.

Shortly thereafter, within two months thereafter in fact, a mortgage — bonds were indeed issued and mortgages were placed — a mortgage was placed on railroads property.

Subsequently, there was default and the committee of bondholders had a foreclosure sale bought in the property.

Later on, the property was re-conveyed to the railroad company.

Subsequently, other mortgages, other bonds were issued and other mortgages were placed on the properties.

Three of these mortgages were involved in the so-called foreclosure sale of 1896.

And it is from this sale that railway claims good title to the property of the main line right-of-way.

Now, this foreclosure sale was analyzed in the Boyd case by this Court, the Court of Appeals and the Circuit Court.

In that case, an asinine of a remote creditor of railroad sought to enforce his rights against railway as a successor to railroad.

Railway defended on the basis that his rights, the creditor’s rights, had been wiped out by the foreclosure and the foreclosure sale.

All three courts agreed that railroad’s creditor should prevail and their basic reason was that the foreclosure proceeding, the foreclosure, the foreclosure sale was one of form and not of substance.

The facts of the transaction as provided in the cases and noted in the committee’s brief bear out this conclusion.

In effect, the stockholders and bondholders engaged in a private agreement to effectuate a transfer of title of railways — railroads property, a federal chartered company to railway which at that time was nothing, but a paper corporation.

By no standard of law could this be done in view of the inalienability of the kind of the property we’re talking about.

And certainly, the capacity for these private individuals to work out this sort of an arrangement was not enlarged by the mere fact of their use of a judicial forum which in this case was a consent foreclosure decree of the shadowy character for this foreclosure.

In this foreclosure sale is further indicated by the fact that the very court which issued the foreclosure — and which issued the foreclosure decree made a reservation in its foreclosure decree of the question of the validity of the mortgages being foreclosed and this question was raised by one of the intervening parties in the foreclosure, in the foreclosure proceeding.

And this reservation of the question of the validity of the mortgage being foreclosed was carried out not only in the decree, in the master sale and the Court order confirming the master sale and subsequently in the deeds of conveyance.

Hugo L. Black:

When was that decree rendered?

Valentine B. Deale:

In 1896.

Hugo L. Black:

Are you challenging it or standing on it?

Valentine B. Deale:

I’m sorry, Mr. Justice —

Hugo L. Black:

Are you challenging or standing on it?

Valentine B. Deale:

Our standing — we’re challenging the decree.

Hugo L. Black:

Of the 1896 decree?

Valentine B. Deale:

This is correct, Mr. Justice Black.

It is suggested here that if the courts in the Boyd case for the benefit of an asinine of a remote creditor can cut through the judicial tracking of a consent foreclosure decree for the benefit of such a creditor.

Surely, the same can be done when we talked about the rights of the public interest and welfare which the charters — which the charter provisions were designed to secure.

Valentine B. Deale:

Now, railway itself at the time of the foreclosure proceeding recognized that support of legislation was necessary in order to affect the transfer of the railroad’s properties to railway and this is without regard mind you, without regard to any question as to the validity of the foreclosure decree.

Congress, nevertheless, did not accede to railways’ wishes and did not give the necessary authorization.

Indeed, Congress has actually left open this question of who has title to the right-of-way used and operated by railway.

In the Act of June 25, 1929, this was an Act which authorized the United States to prosecute suits against the railway and railroad to quiet titles owned by the — to quiet titles to land owned by the United States against claims by a railroad and railway.

And in that Act, Congress provided as follows.

The provisions of this Act shall be — shall not be construed as affecting the present title of Northern Pacific Railroad Company or its successor the Northern Pacific Railway Company or any subsidiary of either or both in the right-of-way of said road or lands actually used in good faith by the Northern Pacific Railway Company in the operation of said road.

This language is certainly not language which recognizes any kind of title in railway.

Further, the issue that we’re raising here has never been adjudicated by any Court.

To be sure there has been some title language that has been used in cases, in the Boyd case particularly, in the land grant case and in the Landell case, but in none of those cases was the issue in controversy.

In the Boyd case, as we pointed out, was simply a case of creditor’s rights.

In the land grant case, the enabling statute specifically excluded the question of title to railways’ right-of-way.

And in the Landell case, minority stockholders attempted to raise this issue, but they were foreclosed from doing so by a summary judgment of the Court on the basis of latches.

Now, the circuit threshold issue which the Livingston Anti-Merger Committee is raising is independent of this jurisdictional ownership issue.

The committee’s position is that when railway — taking railway’s position that it succeeded to railroad and to the right-of-way of railroad, it succeeded to railroad with all the burden and the liabilities and obligations that were attached to the federal charter.

When Congress granted railroad a 400-foot wide, 21,000-mile long right-of-way, it did so together with 40 million acres of land.

It understandably included, in the federal charter, protective provisions to assure that in perpetuity, this National Highway would be maintained as a continuous line for the benefit of the public interest and welfare and also to serve certain Governmental services.

Now, two of these protective provisions are these.

One, there is a prohibition against merger of this road; secondly, there is a prohibition against placing on the road, any lien or mortgage.

These protective provisions, we submit run with the road.

They are more than merely personal limitations upon the original federal grantee.

Now, in opposing this view, railway has noted that it has placed, indeed has placed several mortgages on the properties without congressional consent.

The implication is that another mortgage which is called for by this merger would be alright.

Now, there is ample authority in case law from this Court to support the proposition that the continuance of an unauthorized act does not make it right or that the lack of an enforcement of a statutory provision does not affect any appeal.

Railway further suggests and the Commission seems to go along with the contention that the plenary authority of the Commission to approve mergers is enough to sweep away the protective provisions of the federal charter.

There are three reasons why this view was unsound.

First, it is too much to suppose that the general language describing the Commission’s plenary authority with respect to mergers overrides a particular right which Congress reserved onto itself in a railroad federal charter.

This is especially so, since both before and after Congress has granted the Commission of Authority to approve mergers, Congress reaffirmed its reservation of rights to alter, amend or repeal the federal charter.

Congress in effect, has preempted the provisions of the federal charter.

Now, there’s precedent for this conclusion.

This conclusion indeed had been confer — had been concordant by the Department of Justice, by the Interstate Commerce Commission and by the Congress.

Valentine B. Deale:

And I refer to the Texas and Pacific case which is outlined in the committee’s brief on pages 46 to 49.

In this case, a federally chartered company, Texas and Pacific Railway Company had burdens in its charter which it wanted to get rid off.

One of the burdens was a limitation upon consolidation.

Another burden was a limitation upon the financial structure of the company.

So, how did it go about getting rid of these burdens?

It went to the Congress and asked the Congress to amend its federal charter and in the course of the legislative process, again, the Department of Justice, the Interstate Commerce Commission and the Congress all agreed that the legislative route was the correct one.

Now, there is a further point.

However, the authority of the Commission to approve mergers may be interpreted.

It is not sufficient to abrogate a statutory contract made between the United States and the organizers, the Northern Pacific Railroad Company and their successors and assigns.

This contract which was consummated upon delivery of its acceptance to President Lincoln on December 29, 1864, provided for a method of amendment by the congressional action.

Accordingly, if the terms of the contract are not satisfactory to the parties, the approach is to amend the contract and amendment of the contract is provided for by the terms of the contract and the terms of the contracts spell out that Congress has reserved its rights to alter, amend, or repeal the contract.

And it is submitted therefore that under these terms, the Interstate Commerce Commission has no right to abrogate the terms of the contract and has no position to repudiate its terms by approving a proposed merger which contradicts the terms of the contract.

Now, in summary, railroad officials, or railway officials themselves have recognized that what we’re saying here that railway, if it did indeed take railroad’s main line right-of-way, it took it (Inaudible).

In the hearings before the joint congressional committee on the investigation of the Northern Pacific Railroad land grants, railway officials recognized that it was properly subject to all the limitations and liabilities and obligations imposed upon the original company by the Granting Act, and two of those congressional impositions, is one, a prohibition against merger; and two, a prohibition against placing a mortgage or a lien on the main line right-of-way without congressional consent.

There are some procedural inadequacies and this is the third position of the committee namely, that the court below nor the Commission gave adequate attention to the foregoing threshold issues.

The hearing examiner indeed recited the contentions of the committee and he dismissed them under — without merit.

But his evaluations of the contentions were mere surface evaluations.

The Commission had no independent thoughts of its own subject.

In other words, it accepted completely what the hearing examiners had to say about the subject.

The court below while recognizing that the issues that we’re raising are ones of great magnitude decided that the Commission really didn’t have to look into the issue.

Nevertheless, it acknowledged that should the court at some other day in the indefinite future have occasion to look into the issues which we’re raising now and comes to another conclusion than that court can measure the impact of its decision on the then status of the merger.

Furthermore, the court below was completely silent on the issue of the currency of the congressional impositions in the federal charter prohibiting merger and mortgage without congressional consent.

In summary, the Commission does not have jurisdiction over the proposed merger because ownership in the federally chartered right-of-way continues to vest in railroad which is neither a merger applicant nor a third party petitioning for inclusion in the merger.

Hugo L. Black:

May I ask you —

Valentine B. Deale:

Yes, Mr. Justice Black.

Hugo L. Black:

I can’t quite understand this question.

What you are raising is, isn’t it a question of ownership as between the old railway and the railroad?

Valentine B. Deale:

That’s correct, in the right-of-way.

Hugo L. Black:

Would you say that — what?

Valentine B. Deale:

In the right-of-way.

Hugo L. Black:

Yes, in the right-of-way.

Valentine B. Deale:

Yes.

Hugo L. Black:

But suppose you are right, and they merged, would you apply to loose if he did own it?

Valentine B. Deale:

The position is this.

If railroad does own the main line right-of-way then clearly the provisions of the federal charter, prohibiting merger and the provisions of the federal charter prohibiting a mortgage and a lien on the line without congressional consent, are applicable —

Hugo L. Black:

So what that would do is just really knock up the whole thing, wouldn’t it?

Valentine B. Deale:

That certainly would and that of course —

Hugo L. Black:

Nothing to merge, suppose you —

Valentine B. Deale:

There could be — in the courts, Mr. Justice Black, you must realized that the Livingston Anti-Merger Committee is against the merger.

Hugo L. Black:

Yes.

I judged it was.[Laughter]

Valentine B. Deale:

In brief —

Hugo L. Black:

But that’s a lawsuit outside of this one, isn’t it?

Valentine B. Deale:

Well, Mr. Justice Black, the Commission indeed has made this point and in judicial appeal.

Hugo L. Black:

The Commission has made the —

Valentine B. Deale:

And the Commission has made the point, it has suggested the point that you’re making and I would first like to suggest that we directed our attention to this issue in the first ten pages of our reply brief, but for the present in reply to your question, I would suggest this.

That the Commission and that the committee, the Livingston Anti-Merger Committee does have standing in the proceedings.

And having standing in the proceedings, it does have the right to raise a jurisdictional question and we’re suggesting that title is intimately involved with the question of the Commission’s jurisdiction.

Furthermore, by virtue of decisions of —

Hugo L. Black:

What (Voice Overlap) —

Valentine B. Deale:

— by virtue of —

Hugo L. Black:

What difference would it make?

Valentine B. Deale:

— decisions of — I’m sorry.

Hugo L. Black:

What difference would it make, who owns it, if it’s only a question of merging?

You are here as an intervener.

Valentine B. Deale:

Yes sir.

Hugo L. Black:

What difference would it make?

Why couldn’t they merge if it was owned by one group same as it was owned by another group?

Valentine B. Deale:

Well, were — we fall back Mr. Justice Black to the provisions of the federal charter and the applicability of the provisions of the federal charter.

Now, the federal charter would prohibit a merger.

Valentine B. Deale:

The federal charter provides the railroad may — that another road may be merged into railroad.

Hugo L. Black:

I see, you claim that’s an insuperable —

Valentine B. Deale:

It doesn’t —

Hugo L. Black:

— that any merger now or hereafter.

Valentine B. Deale:

This — and so long as the federal charter remains effective, I must — there’s one other and there’s a corollary point here and that is that the federal charter also prohibits the placement of a mortgage or lien on the road without congressional consent and there has been no congressional consent to the proposed mortgage on these (Voice Overlap).

Hugo L. Black:

I thought they have been mortgage all through the last century.

Valentine B. Deale:

There had been many mortgages on the road and again as we suggest, some of them have been authorized and we’re also suggesting that some of them have not been authorized.

It see my time up, Mr. Chief Justice.

Thank you.

Warren E. Burger:

Mr. Kahn, you may proceed whenever you’re ready.

Fritz R. Kahn:

Mr. Chief Justice, may it please the Court.

Counsels for the appellees on these consolidated cases have agreed upon a division of their argument.

I shall deal principally in — with the illegal standards observed by the Interstate Commerce Commission in approving the merger of the Northern Lines responding to the several contestants of the Department of Justice.

Mr. Cox, a counsel for the railroads, will deal with the several factual factors and that went into the decision to merge these roads, including the many benefits to the shipping public and that it enrolled offered.

He additionally will respond to the contentions of the Northern Pacific Committee.

He will be followed by Mr. Fred Tolan on behalf of 230 Pacific Northwest Shippers who will deal with the merger principally from the standpoint of the patrons of these roads.

And finally, Mr. Merrill and counsel for the Milwaukee will treat specifically with the conditions attached by the Commissions for the protection of that road.

The Public Utility Commissioner of Oregon who had initially opposed the merger before the Commission now supports it.

He, however, relies on his brief and will not separately argue.

Ten years ago, a committee of the Congress criticized the nation’s railroads.

In a report it said, the railroad industry has not been sufficiently interested in self-help in such matters as consolidations and mergers.

And last year, and this Court noted in the Penn-Central cases that the intervening years have marked a tremendous change and that the railroads now embarked upon a vast reorganization of rail transportation implementing the congressional policy of encouraging consolidation of the nation’s railroads into a limited number of systems.

Department of Justice has opposed that realignment.

At one stage or another, the department has opposed every major railroad consolidation of the past decade.

Its present attack — the challenges of the very premise upon which the Commission cater for has authorized and approved railroad mergers and the rationale upon which the Courts on review have sustained them.

Essentially, the question is this.

May a consolidation of railroads be held to be in the public interest upon the Commission’s finding of improved transportation, efficiencies and economies that the transport action itself will yield when weighed against the facts of evidence at the competitive consequences.

The Commission and the courts have said yes.

The department has unsuccessfully maintained in the past, says no.

Its position is that acknowledged savings, operational improvements and service benefits flowing from the affiliation of railroads without more cannot serve and to offset the loss of competition.

Fritz R. Kahn:

The Commission found and a unanimous lower court agreed, from that, the merger would produce savings of $40 million annually.

The Commission found and the lower court agreed that would result in better service.

Department does not now seriously challenge the findings of savings.

Hugo L. Black:

When was that finding made?

Before the first decision or –?

Fritz R. Kahn:

In the second report and Your Honor, the Commission found annual savings of $40 million.

Hugo L. Black:

What did it find on that subject in the first place?

Fritz R. Kahn:

In the first report, they estimated the savings to be between 12.7 and 25.5 million.

At the further hearing, evidence was introduced showing that the savings would be substantially greater.

Hugo L. Black:

So great a difference in the amount of savings.

Fritz R. Kahn:

Yes sir.

Department maintains that this merger cannot proceed.

It likens the railroad and to the players in the game as reply brief says, four is better than three, three better than two and two better than one, but such have not been the rules of the game for nearly half a century.

The Transportation Act of 1920 established altogether different standards, marking a fundamental change in the scheme of railroad regulation.

By that legislation, the Commission for the first time was empowered to authorize the improve — and to authorize and approve now the merger of railroads not withstanding their anti-competitive effects.

Indeed, and that legislation specifically conferred anti-trust immunity upon transactions approved by the Commission.

Potter Stewart:

Before that 1920 statute, the Commission, do I understand it, had no role to play in railroad mergers —

Fritz R. Kahn:

Now, that is correct sir.

Potter Stewart:

— throughout their history?

Fritz R. Kahn:

And that is correct sir and before that time, the mergers were governed solely by the Sherman and the Clayton Acts and it was during this period that this Court decided in Northern Security’s case and the Southern Pacific case consolidation.

Now, following the 1920 enactment, two acquisitions of control have reached this Court.

And I specifically invite this Court’s attention to its decisions in the New York Central Securities case and the Texas case.

Now, the most dramatic example under the Transportation Act of 1920 that the Commission could authorize from one railroad’s acquisition of control of another, even in the face of the most serious anti-competitive consequences was afforded by the Southern Pacific case.

In 1922, this Court had found that the control of the Central Pacific by the Southern Pacific violated the Sherman Act and it ordered the divestiture.

Southern Pacific, however, in an effort to maintain control applied to the Commission for authorization under the provisions of the Transportation Act of 1920 enacted subsequently to the beginning of the anti-trust prosecution.

The Commission in its report found that separation of the lines would result in more expensive and less efficient and satisfactory service that can be rendered under unified control.

It approved the control of relationship and thereby validated the very relationship that this Court had found to be unlawful the proceeding year.

Then none of the cases, and decided by the Commission —

Potter Stewart:

Did that case go beyond the Commission?

Was there a judicial review of that?

Fritz R. Kahn:

The District Court of the District of Utah have found and that the mandate of this Court in essence was satisfied in that no divestiture was required, the Commission having found the control relationship to be consistent with the public interest.

It was not reviewed on the merits, Your Honor.

Now, none of these cases decided by the Commission, some of which were sustained by the Courts and it was the Commission’s operate — authorization premised upon findings such as the department now would insist upon.

In the face of their evident anti-competitive effects and the proposals were approved by the Commission upon Commission’s findings of improved transportation, the economy’s inefficiencies that the trans-action itself would yield.

The department discusses none of these cases.

It ignores altogether and to the important cases of the 1920 to 1940 formative period.

By 1940, it had become apparent that the ambitious nationwide plan of consolidation which was a part of the 1920 Act was not bearing fruit.

The Transportation Act of 1940 relieved the Commission of having to formulate the plan as that it permits the Commission to approve carry their initiated voluntary plans if consistent with the public interest.

And so the 40 Act permitted the Commission to approve acquisitions — approve merges of railroads as it previously had acquisitions of control subject only to the standard of consistency with the public interest.

And this Court has repeatedly said that the congressional purpose in this 1940 Act was to facilitate merger and consolidation in the national transportation system.

The result of the Act and it was a change in the means while the end remained the same.

We do not view Svenska Amerika as changing that and we do not think Svenska Amerika — and America can be silent or in overruling decades of administrative and judicial construction.

Secondly, and most significant, in that proceeding and there were no benefits from the transaction from the agreements offered for Federal Maritime Commission approval and the Federal Maritime Commission specifically so found.

But finally, there is no suggestion in Svenska Amerika that the kinds of improvements, service benefits found to flow from the transaction here approved by the Commission would not satisfy the requirement of Svenska Amerika.

Beginning with the decision in the McLean case which incidentally involved a merger of seven motor carriers into the largest single motor carrier in the United States.

This Court has consistently held that under the 1940 Act as under the 1920 Act, the achieving of an adequate, efficient and economical system of transportation was a matter of paramount national concern.

And the preservation of competition among carriers, although still of value is significant chiefly as it aids in the attainment of the objective of the national transportation system.

Indeed, we show in our brief, that some of the very arguments in which the department now makes were considered and rejected by the Court in the McLean case.

This Court’s affirmance in 1967 of the Seaboard summary affirmance — in 1967 of the Seaboard Coastline Merger under the standards of the 1940 Act was one of several occurrences in following the Commission’s first report in the Northern Lines case and contributing to its change of mind in the approval of the Northern Lines’ merger in the second report.

In many of the characteristics in the Seaboard Coastline Merger were similar to that of the Northern Lines.

Though from the standpoint of the anti-competitive consequences flowing from the transaction and we submit and that the present merger poses even more, even fewer problems, less onerous and then the early one the early one, the Seaboard Coastline.

Therein here, the merger involved two relatively healthy, parallel rail competitors, dominant in expensing an economically significant section of the country.

Although the net earnings of Seaboard Coastline and were found by the Commission to be better than they are in the Northern Lines.

There is here, the merging railroads were each other’s principal competitors, though again, the volume of traffic for which they competed, was greater for the Seaboard and Coastline than it is for the Northern Lines.

They in here and the merger of the railroads and denied some communities of competitive rail service.

Although cities of the size of Tampa, and areas as extensive as Central and Western Florida served only by the merged Seaboard Coastline, are totally without counterpart in the Northern Lines merger.

John M. Harlan II:

May I ask you a question?

If I understood you correctly, you said that the Seaboard decision here, is that the second commission before it?

Fritz R. Kahn:

Only partially and Your Honor —

John M. Harlan II:

Oh, that’s why I was interested.

Fritz R. Kahn:

Yes.

John M. Harlan II:

What — could you elaborate that?

Fritz R. Kahn:

I shall.

The — Commissioner Webb had dissented in the Seaboard Coastline case and of course, he was the author of the Commission’s first report.

And some of his thinking as to the — of the – and the necessity for preserving railroad competition and certainly his view in the Transportation Act of 1920 of facilitating railroad mergers, but this doctrine was not carried forward into the 1940 Act and was evident in the one as in the other.

And there is certain amount of confusion as to what the 1940 Act did and was a factor in which contributed to the second report.

There’s only one of several.

I should like to point out that in the Seaboard Coastline case and the department as it does here opposed the transaction and as it does here, it said, and without overriding public benefits, the transaction could not be approved.

Indeed, in the lower court in its opinion, paraphrased the position of the department and said and the Government’s position really was that where two healthy competitors are involved, economies or dollar savings and other alleged benefits should never be enough and to overcome severe elimination of competition such as here involved.

Of course, the lower court rejected the department’s argument and this Court summarily affirmed.

Turning to other considerations which occurred between the first and the second report, the first of these is the accommodation of the employees of the railroads.

In the first report, the Commission had found some 5200 jobs on the applicant railroads that would be eliminated and that the adverse effect due to bumping would be even more severe.

There’s no question that the Commission cast this into the balance in favor the Northern.

Now following the first report, of course, the railroads reached agreements and with the couple of the unions providing for protection of their members against job losses except and by attrition.

In approving the merger in the second report the Commission imposed such protective conditions for all employees, including those not covered by the negotiated agreements.

Another change of course, was the protection afforded the competing railroads.

Excuse me.

Milwaukee and Northwestern had opposed in the merger unless certain conditions were attached.

In turn, Northern Lines opposed attachment of such conditions and this led to the Commission to conclude in its first report that attaching these conditions indeed might include, might preclude consummation.

Now, following the first report, agreements were reached with the railroads and all of the sought after conditions were attached.

I shall not discuss these conditions in detail and Mr. Merrill for Milwaukee shall.

I simply wish to point out that as a result of these conditions, the Milwaukee for the first time, and we’ll be able to reach Portland, for the first time, will be able to render service at Billing and incidentally, this was a new condition in the second report, it was not considered for attachment in the first report.

Potter Stewart:

That is what, the access to Billings?

Fritz R. Kahn:

Yes sir.

Thirdly, the Milwaukee, for the first time will be able to participate in West Coast traffic to and from Bridge Columbia and for the first time, the Milwaukee will be able to solicit Northern Tier transcontinental traffic originating at or destined to points not on its line by being able to interchange such traffic at competitive rates at 11 points certain in timing with the Northern Lines.

And as the Commission found, this afforded to the shipper a slower club to short haul in the merge system in the event that he is not satisfied with the treatment he’s getting.

In its third supplemental report, the Commission specifically opened these 11 gateways into the transportation of grain destined for the primary markets I Minneapolis, St. Paul and Sioux City.

At these conditions, will make up the Milwaukee a new railroad can scarcely be questioned.

As I pointed out at the outset, they were considered of sufficient consequence that the Public Utility Commission of Oregon would oppose the merger before the Commission following the imposition of the conditions supported the merger.

And more importantly, the Secretary of Agriculture, charged under the statute with representing the agricultural community considered them to be a benefit to the public in general and to the agricultural community in particular.

Fritz R. Kahn:

And accordingly before the Commission, he too changed his position and following imposition of the condition withdrew his opposition to the merger.

Lastly, among the conditions to obtain between the first and second report, was the receipt of additional evidence as to the savings.

In the first report, as I indicated before in response and to the question to Mr. Justice Harlan the Commission had found, I believe it was, the Commission had found that the savings might be $25.5 million.

However, without explanation and bringing this figure down to its conclusion, the Commission found that the savings might only reach $12.7 million.

And it was this figure, the range of $12.7 million to $25.5 million annually a guess at which the Commission measured the anti-competitive consequences.

Following the receipt of additional evidence, the analysis of additional studies and the Commission concluded that the annual savings would approach $40 million and the lower court agreed.

In reaching this conclusion, I might point out that the Commission did indeed consider the possibility and that certain savings, certain improvements might be achieved short of merger by the coordination of facilities.

At best, these would have yielded as the Commission found at 300 of the record, as the Commission mentioned that 300 of the record a $5.2 million, but the Commission went on to state specifically many of the coordinations though physically feasible will produce grossly unequal benefits to Great Northern, Northern Pacific a separate carriers.

Further, in a competition between the Northern Lines, it renders it difficult if not impossible as a practical matter to incur the expense involved in effecting such coordination.

It is against these benefits then that the lessening of competition the Commission said must be weighed.

And that there will be a very substantial lessening of competition has never been questioned.

The Commission referred to this as an undisputed fact.

And as — indeed as I believe Mr. Justice Black pointed out this morning, it’s scarcely possible to conceive of a significant merger of railroads in an area that would not be anti-competitive.

But that is not to say that these anti-competitive consequences can be ignored by the Commission.

And the Commission very carefully referring to this Court’s decision in McClain, in Minneapolis, in Seaboard Coastline said that it has a duty to estimate the scope and appraise the effects of the curtailment of competition which will result from the proposed consolidation and consider them along with the advantages of improved service, safer operations, lower cost, etcetera to determine whether the consolidation will assist in effectuating overall transportation policy.

This we submit, the Commission has done.

The Commission noted that Great Northern and Northern Pacific are competitive and that their lines extend generally through the same Northern Tier States and from Seattle and Portland on the west, to Duluth Superior, Minneapolis, Saint Paul on the east, but they are also complementary and that the Great Northern’s principle mileage is in the east and Northern Pacific’s in the west.

And while their lines are parallel and Great Northern primarily serves northern communities in the Northern Tier States, and while the Northern Pacific serves those towards the south.

And at many points as the Commission pointed out as between Helena and Shelby, Montana the main lines of these railroads are several — are better than a hundred miles apart.

And the Commission pointed out that obviously a shipper located on or near in the line on one road, and but 50 or 100 miles from the line of another is not influenced by the competition in the selection of the carriers.

In our brief, we offer many examples.

We quote for example a Montana grain dealer who has elevators near the Northern Pacific tracks, and he said, “For the most part, the grain has to move on the railroad pretty close to where it’s grown.

For instance I can’t ship on the Milwaukee if it even if their rate is zero.

”The Commission in the second report indeed recognized and that the Northern Tier States are rich in animal, mineral, agricultural and forest resources.

It recognized full well that this cost, this traffic constitutes as Mr. McLaren pointed out, approximately 60% of the traffic originated by these roads in this area.

As — it is for this very traffic that rail transportation offers the most and distinct competitive advantage to use as phrase, were the greatest inherent advantages.

But we point out in our brief that with respect to this very traffic, 80% comes from points that are none competitive between the merging railroads.

The Department at no time has challenged these figures, neither has the Department ever challenged the fact and the truck competition has become very pervasive at least as to one category of products, manufacture and miscellaneous products.

It was with respect to this category of traffic and that the Commission specifically found in the second report that these railroads are most vulnerable to motor carrier competition.

It found moreover that it is this traffic that the rail carriers must retain to balance their operations in handling the products of the agricultural and extracted industries.

Fritz R. Kahn:

The record establishes and the Commission so found that this category of traffic manufactured in miscellaneous products constitutes more than 30% of the Great Northern’s carload revenue and nearly 40% of the Northern Pacific, and for both road its the single most important category of traffic.

Now with respect to the much quoted in exhibit 16 referred to in the Commission’s report, second report in the vicinity of page 316 of the record.

The Commission acknowledged full well and its second report as it had in its first that rail competition will be eliminated entirely at 47 communities in the northern tier.

However, the Commission went on and to point that the number of stations is small, being less than 5% of the stations in those very states, and it went on to point out that these stations produced an insubstantial volume of applicant’s business, approximately 6% whether measured by cars or revenue.

Additionally, the Commission found with these so called class — with respect to these so called class one points that some of them are located on the main line of one applicant and on the branch line of another and with the result that the loss of competition is more theoretical than real.

Helena, Montana is a perfectly good example, it being on the main line of the Northern Pacific, but on the branch line of the Great Northern.

With respect to the class two stations, those served by two or more of the applicant railroads and at least one other railroad, the Commission acknowledged in its second report as it had in the first that rail competition will be diminished, but not eliminate it at these 160 stations.

It recognized in the second report as it had in the first that these stations contribute about 33% of the cars and 38% of the revenue of the northern lines in this area.

Mr. McLaren would add all these figures including overhead traffic and tell you that the railroad’s merger would result in a loss of competition of 55%.

Mr. McLaren forgets however, that the addition of the bridge traffic it increases its universe and as the Examiner found at page 770 of the record, 771, if bridge traffic were included that percentage of the total traffic handled in 1960 at the stations where there will be a reduction in the number of rail carriers would be smaller than the figures subsequently shown.

We point out that at nearly two thirds of these class two stations served by two of the applicants and one other road, with respect to these, we point out that 97 and out of the 160 stations, nearly two thirds all occur at four places; Seattle, Spokane, Minneapolis, Saint Paul, Duluth, Superior.

And it is with respect to these points that the Commission in its second report specifically found that following the merger, none would be served by fewer than three railroads nor fewer than 15 truck lines.

The Commission in its second report pointed out that even though some of the points show up as class two stations reflecting service by two or more of the applicant railroads and at least one other, they do not have competition between the applicants today.

For example, the largest community in the northern tier which would be left without competitive rail service as a result of the merger is Pasco, Washington.

At Pasco, Washington the Northern Pacific comes in from one direction, and the SP&S goes out in another direction and the competition between them is really nonexistent.

As to all of the points, all of the class two points, the Commission found first apportionment of traffic between Great Northern and Northern Pacific and the other road serving these points is not wholly the result of interplay of competitive forces, but often results from other factors entirely.

Second, the shippers at these class two locations in addition to the northern lines and one other rail carrier, are generally served by other modes of transportation vigorously competing for traffic.

And third, by virtue of the conditions imposed in this case, the Milwaukee which is the other railroad serving many of the class two points will be substantially strengthened as a meaningful transcontinental competitor.

Potter Stewart:

What’s the current status of the proposed merger between the Milwaukee and the Chicago Northwestern?

Fritz R. Kahn:

I believe the argument has been held before the Commission and the report of the Commission is being awaited.

Beginning at page 48 of our brief, we offer examples drawn from the record which fully support he Commission’s findings.

We show how some shippers and this is particularly true of the large national accounts, simply allocate traffic as between available rail carriers.

We show the number, the growth and the activity of truck lines at the class two points.

At Fargo for example, 20 motor carriers compete for traffic with the railroad and the record establishes in that 50% of the less than car load merchandise traffic received there arrives by truck.

And we point out that the Commission found that the Milwaukee has shorter routes and superior rate and will offer competitive service right through the heart of the northern tier serving most of the class two stations.

Moreover, the Commission in its second report accorded much weight to the many shippers, trade associations and other groups which supported the merger.

Even in the face of express recognition that competition might be eliminated or reduced.

John M. Harlan II:

Mr. Kahn, I don’t understand the anti-trust division of the Government, take issue with you on the question that a fewer there as better service resulting from this merger.

I understand this position to be that’s not the right standard in a case of two large railroads who’re in competition in something more than mere betterment is necessary.

Perhaps that something has [Inaudible].

John M. Harlan II:

It seems to me there’s no real issue between you so far and what the Government — what the anti-trust division wants?

Fritz R. Kahn:

As I can see it sir, the difference between us is this.

The Commission believes that the improvements in transportation and the economies and efficiencies that the transaction will yield alone can justify on balance the offsetting consideration of the loss of competition.

As we concede, because I understand the department’s position, it is in that something else must be cast into the balance. Some overwriting public end, and we submit —

John M. Harlan II:

How unique are the language of other kinds of cases?

Fritz R. Kahn:

Right.

We submit that — and there’s as the rewriting of the standard as consistently applied by this Court.

Warren E. Burger:

I think Mr. McLaren emphasized also, certainly he did in his plea that the condition of the carrier, one or both of the merging carriers was a very large factor.

You haven’t touched on that at all.

Fritz R. Kahn:

And that is correct.

And they — the department transfers the sick company doctrine to — in the railroad merger situations where we submit it doesn’t obtain.

If — and benefits will flow from a merger and of sound railroads and we believe the Commission is empowered under the statute to approve such a merger.

In short we say that and the department has relied essentially in this case upon a recitation of figures drawn from one or two exhibits.

The figures which the first report of the Commission itself recognized contained certain deficiencies and as the lower court agreed, tend to exaggerate the competition which exists between the Northern Lines.

The Commission viewed these figures in the context of the entire record.

And we submit that the Commission indeed made the requisite judgment as to the anti-competitive consequences that the merger would bring about.

We do believe that consistently with this Court’s holding last year in the Penn-Central merger cases, the Commission has furthered the policy of the Congress.

It is that policy which produces a variation from the traditional anti-trust laws of insisting upon the privacy of competition as the touchstone of economic regulation.

Competition is merely one consideration here and we think the Commission has adequately considered it.

Warren E. Burger:

Mr. Cox.

Hugh B. Cox:

May it please the Court, Mr. Chief Justice.

I appear in this case for the applicant railroads.

I propose to discuss in the first instance the arguments of the Department of Justice and reserve I hope a brief period of time in my argument to talk about the arguments of the stockholder’s committee representing stockholders of the Northern Pacific.

I think I shall unless there are questions from the Court, submit the appeal of the Livingston Anti-Merger Committee on our brief where it is discussed in considerable detail.

Turning —

Warren E. Burger:

Mr. Cox would it be a fair or a safe generalization of the stock in this problem that almost all mergers have an anti-competitive effect in some degree and probably in some degree not necessarily the same, some savings and benefits, isn’t that — doesn’t that underlie the whole problem?

Hugh B. Cox:

That underlies the problem and I suppose that you could find an economist who would say the more competition you suppress, the more savings and benefits you get.

But it’s a question of fact in each case, I suppose and it is our view of the statute that what Congress has done here is to direct and authorize the committee to consider the elimination of competition on the one hand, and the benefits to transportation services and facilities on the other.

And having made that consideration to decide on the facts of a particular case, and not by the application of some rule of law, general application, but decide on the facts of that particular case whether the merger or preservation of the competition will do more to provide — improve adequate and economical transportation service, which is the standard that we find in the statute.

Now that as we see it was the issue here.

Hugh B. Cox:

It’s our view of the Commission in the second report did exactly, went to exactly that process which is the process that the Court described in the McLean case in language which is frequently reiterated.

That it weighed the adverse effects on competition against the benefits, improvements in transportation services and facilities on the other, and it decided on balance that the merger would do more to provide adequate, economical and efficient transportation service in this area of the country with the conditions attached than would preservation of the competition between the Northern Lines.

They made findings on this and in our view those findings are supported by substantial evidence and they provide a reason, a basis for what the Commission did.

Now if the Court adheres, I submit to what it is said in the past, that should be the end of this case, but the Government’s argument is a little protean.

I have trouble sometimes getting my hands on it.

I’m never quite sure whether the Department of Justice is arguing for a new rule of law which in effect says that service improvements are not enough, improvements in transportation services are not enough, there must be something over and beyond those services before you can authorize a merger that suppresses competition, substantial competition.

Now whether that is really their argument or whether they are in effect inviting this Court to review the record de novo and make an independent determination on whether the court believes this merger is in the public interest.

But the argument seems to me to be suspended rather uneasily between those two extremes.

Now, in view of that it was my intention this afternoon to talk a little bit about the facts because I think any way you look at this case, the facts deserve some consideration and perhaps more consideration than they get from – in the argument of the Department of Justice.

While it is quite true they deal with these facts in the sense, but they deal with them in a rather curious technique by admitting them they discount them.

So that when they say, “Well, of course we admit there’d be some system, service improvements here,” I don’t think the Court gets from that the full force and flavor of what this record shows about what this merger means.

And with the Court’s permission I would like to talk a little bit about that, even though I suppose some sort of respects the Assistant Attorney General will not dispute these facts.

Now, these is a mass of evidence in this record.

There are 14,000 pages of transcript, 240 exhibits on Examiner’s report, it takes up most of two volumes of the appendix here.

And a great deal of it is related to the benefits of this merger, the service benefits, the improvement in the service and facilities and it’s not general abstract evidence.

It’s particularized evidence about particular commodities, particular markets, particular routes and particular shipment.

And I can’t possibly do justice to it but there are three sort of categories to this evidence I’d like to say something about.

First, evidence that has to do with the faster and more reliable service, now that’s been mentioned here this morning, the expedited schedules.

There are a number of examples of those I could give to the Court, makes a difference in points in the Yakima Valley of 12 hours to Chicago and 24 hours to Kansas City.

Some points west of Spokane, it means 24 hours difference to Chicago in immediate point, the same thing.

Some points in North Dakota and Montana, it means 24 hours to — faster than Minneapolis.

Now the real point, the way the Department of Justice apparently tries to deal with that is to say, “Well, the carriers could do this anyway without merger.”

This anticipates the point that I intended to deal with a little later, but I will say this about that.

There is evidence in this record, not in the record, but there’s evidence which everybody has taken and no question about it that while this proceeding was pending the Milwaukee put on a fast train between Chicago and Seattle and I might pause here and add that arguably enough, there was also evidence that the reason they did that was because of fear of truck competition.

The Northern Lines responded by putting on fast trains and the — we are told that that shows that all these improved schedules could be achieved without merger.

Well now, the fact is and the Commissions referred to this in its second report, not the — it’s really the third report, it’s the second report on reconsideration.

These trains that the Milwaukee and that two Northern Lines put on between Chicago and Seattle are lightweight, light tonnage trains which they put extra power, which means of course they’re carrying — they’re paying more for every ton of freight they carry on those trains.

There’s one of those trains each way, each day, except by one of the Northern Lines which I believe skips Monday.

Now, in contrast, what this merger will do will be is provide faster schedules for the fast trains, but it’s going to provide faster schedules for all the trains, the regular freight trains and not only the transcontinental trains, but these intermediate trains.

So that the suggestion that these lightweight, light tonnage trains which the Commission took into account, prove that the carriers can do these improved schedules without merger, I submit is not really supported by the rational consideration of the evidence.

Hugh B. Cox:

Now, the other kind of improvement, the two other things I should like to mention, one is the improvement in car supply, which this merger will bring which is a very serious matter in this part of the country.

That improvement will come in two ways.

In the first place, the improvement in schedules, the elimination of interchanges and the elimination of switching time, turnaround time in the yards is going to make more cars available and there’s a reasoned conservative estimate in the record for the Commission that this will mean about 1700 additional cars daily, which will be available for loading.

Now that’s one way the car supply will be improved.

Another way it will be improved which is of great significance is that under — when the lines are merged, of course cars will be centralized.

There’ll be a centralized control for the dispatch and distribution of the cars.

Today there is evidence to this kind in the record.

Those lines will sometimes stand idle on one of the lines, while the point not too far away, the shipper is waiting for a car.

Well, when you have one agency distributing those cars over the system that kind of things certainly be reduced and maybe eliminated.

Now the third thing that I should like to mention about these service benefits because — so that the Court will get some sense of what’s in this record is a mass of evidence that has to do with the effect of improved through routes and single line service which is often in many cases, some commodities are cheaper than even through rates by two railroad and the transit and loading and unloading privileges which this merger will make available to shippers.

Now, this evidence proves and it rather surprised me that that these shippers attached great importance to these transit and loading and unloading privileges.

What they mean briefly is this.

That if a shipper ships over the line of the single railroad and he wants to stop the car and have the product processed in some way and then move on, or if he wants to send — start out a car half loaded and then load it completely, or if he wants to unload it, if that takes place on the line of a single railroad, it — shipper can do it with the transfer privilege on the single line or through rate which is an advantageous rate.

But if, when he stops it from processing or loading or unloading, he wants to have it move on over another railroad, he pays what is in effect a higher rate, something like a combination rate.

Now, what this merger does is to make those privileges available to system wide.

They are not now because the Northern Lines don’t extend this kind of privilege to one another, but available over the entire system as well as over in many parts of the Milwaukee as a result of the conditions.

And anyone who flavors the testimony, even in the Examiner’s report might ask, you don’t have to go on the record to see what importance the shippers attached, economic importance, to these particular privileges.

They open up markets for example.

They will enable a man in Nebraska who hasn’t been able to — a shipper, a lumber shipper in the first instance to the northwest who wants to have lumber processed in Nebraska and sold in Missouri to do it for the first time at a rate which will enable him to compete with lumber moving from another part of the country.

Now, I should like now to turn although I have to some extent anticipated myself to this question of whether these things can be done without merger.

I have talked about the freight, the expedited schedule.

I think Mr. Kahn has made the point which was not I think left entirely clear in the argument this morning that the Commission did make some findings on this.

The — they made the findings that Mr. Kahn referred to and the Examiner made a finding that there was no reasonable expectation that these railroads could achieve these improvements in service, or these coordinations if they remained independent competitors.

I think that the findings that the Commission made on that represent one area of agreement between the first and the second reports, because in the first report the majority of the Commission there said, “We agree that these carriers as competitors will not and cannot as a practical matter make the coordinations from which they derive grossly unequal benefits.”

And the Commission in the second report found that most of these instances, these coordinations would or facilities would produce grossly unequal benefits, and therefore that as a practical matter, it was not reasonable to expect the railroads to make them.

Now this can be illustrated and again to give you some flavor of the record, I should like to descend into details, it maybe a little bit variorum, and I think they may be necessary.

One of the things that’s going to be done on this merger is to coordinate routes so that the trains of the combined system move over the best and most expeditious route.

For example, on the main line west, the main route will be composed of a segment of the line, the present line of the Northern Pacific from the Twin Cities to a point in North Dakota.

At that point, the traffic will move on to what is now the main line of the Great Northern, which is a much better line, in many respects and will move on the line of the Great Northern all the way across the top of the country to Sandpoint in Idaho.

At that point, the traffic will be moved over to a line of the Northern Pacific to go to Spokane, and then from Spokane it will move on to the coast over a line of the Great Northern.

Hugh B. Cox:

Now, if you stop to think about it that is the kind of thing, they’re running, they’re going to be running common trains that cannot be done by two, as a practical matter, by two independent competing companies.

Despite some suggestions this morning to the contrary, the Commission has no authority to compel one railroad to give another railroad trackage rights over its line.

So that if any railroads try to do this, there would have to be arrangements for compensation worked out.

And since this is going to be done system wide on all the routes, what you would have to think about would be the two railroads sitting down to decide.

They were going to run trains over one another’s routes, perhaps mixed trains, how they were going to pay one another for the — on a fair basis for the advantages that each got out of it.

Now, I submit if you stop to think about that quite apart from the practical difficulties which would I think would make the exchange ratio look easy, apart from those, you couldn’t do that without ending what would practically a de facto pooling of revenues and sharing of profits.

And that relationship could hardly be consistent with really effective and vigorous competition between the two lines.

So this coordination of routes — as a Commission and I should add here that the Commission in the first report, in the report which disapproved the merger, the Commission there found that coordination of routes between competing railroads was ordinarily not practical.

So here again, there’s really no dispute about this.

Now, the coordination of the routes is an essential part of all these improvements of service.

It’s obvious that it has a direct relationship with the schedules of the car supply, but it’s also essential to the coordination of these terminal facilities.

And the reason for that is that in order to construct these new terminal facilities, you have to rearrange the traffic.

You have difficulty getting ground and cities usually of the appropriate kind and in most of these cities the two railroads come into the city from different directions as they do for example in St. Paul.

So that what as an essential part of building a common yard, a common switching and assembly yard, the trunk line traffic has to be moved.

As I explained a moment ago, all of that trunk line traffic in St. Paul is going to come in to St. Paul, the main traffic, east and west over a line of the Northern Pacific.

Now, that is also true in these other terminals in Spokane and in Portland.

Where they — to do the terminal arrangements, they have to coordinate the routes, really they have to run mixed trains.

Now, that again is not the kind of saying that can be done, these yards effectively and efficiently between two competing companies.

Of course to have a yard in which there are two companies operating, they’re both — each other is going to be want to be sure it gets its trains out just as quick as the other fellow does.

You’ll have duplicate yards, duplicate shipping crews, it’s a switching crews.

You can’t do these things.

Indeed, there is here I think a strange internal inconsistency in the argument of the anti-trust division which I think is worse comment.

If you did, could do all these things, these by voluntary coordinations between the carriers, what you would have would be the two carriers running mixed or combined trains with common crews, over each other’s routes using common terminals and common repair facilities, in some degree, presumably using a managerial staff in common.

They’d still have to have a common agency distributing the freight cars.

You would have a relationship, a cooperative relationship that would be inconsistent with the existence of the kind of competition that the anti-trust division says it should be preserved.

And indeed, it somewhat surprises me to hear them taking this line in this case because in other context, they have frequently pointed out the dangers and indeed the illegality that will arise from these cooperative and joint undertakings, which is exactly what they seem to be arguing for here.

I think that I should now like to speak briefly to the — to one matter and leave it without much comment and that’s the matter of the savings to the railroad.

I should merely like to point out to the Court that there is a direct relationship between the improvements in service and of the savings because the savings come in large part, not entirely, but in large part from the coordination of facilities and from the quicker routes and the other steps that will produce the better service to the shippers.

So that it is a mistake to think of these savings as being of only in direct benefit to the shippers, because they do have a direct relationship to the service improvements.

But apart from that the Commission made findings which all relate to matters that’s entitled to give weight to under Section 5 (2), which pointed out that the savings would increase the pressure — decrease the pressure for rate increases which comes from increasing costs that they would — by improving the rate of return of the carriers put them in a better position to buy a modern and improved equipment, and that they would increase their capacity and power to compete with the trucks, which is — and other modes of transportation.

Hugh B. Cox:

Now the Department of Justice as I said in the beginning seems to admit these are — these benefits exist in a way, but it says that they really are not important as against the loss of competition will be caused by the merger of the two Northern lines.

And as I said earlier, their view seems to be that almost as a matter of law you need something beside improvements in transportation services and facilities, you need something over and above and beyond that of a more extraordinary character.

Byron R. White:

What could that be?

Hugh B. Cox:

Well, Mr. Justice White, I am not exactly the man to develop that.

Byron R. White:

I know, but I just try to imagine — I’m just trying to imagine with you —

Hugh B. Cox:

Well, they give two examples although —

Byron R. White:

Suppose one of them might be a failing carrier?

Hugh B. Cox:

A failing carrier, the other one is where you have two prosperous carriers, but there you need to put them together so they can service — save a third failing carrier like the New Haven now in the Penn-Central case.

Do you follow me on that?

Byron R. White:

Yes.

Hugh B. Cox:

Those are the only two examples that they have given us and there’s a footnote in their reply brief which to some degree casts doubt on what — whether they — what they really mean about the failing carrier, but that’s as far as I can go, I regret to say it in.

Byron R. White:

I take it that they would say that transportation — if it’s improved transportation services you want, the law prefers the competitive way —

Hugh B. Cox:

That’s right.

Byron R. White:

— of securing those.

Hugh B. Cox:

That is their position.

Now we’ve developed this legal argument in our brief and I don’t want to retread what Mr. Kahn has said, but we point out in our brief a number of things about that argument.

One is that the act itself almost by term shows that Congress was not prepared to rely upon competition producing its benefits.

And we all — we point out specifically that in the adequacy of transportation service is one of the four things in Section 5 (2) (c) that the Commission is required to give weight to when it is asked to consider a merger, and we also point out that the national transportation policy, which of course pervades in the degree the interpretation of the provisions of the acts, speaks in terms of efficient, economical, adequate and safe transportation service.

Now, it is our view that you look at the statute and you look at the provisions of the statute, the very kinds of benefits that this case produces to shippers are the kinds of benefits that the Congress authorized the Commission to consider, and if it had a reasoned judgment on the matter and evidence to support it, could decide, justify the merger that suppressed substantial competition.

And of course we argue too from the McLean case and the Sea Board case particularly that they were precisely cases of that kind.

That’s what the Commission did and this Court sustained it.

Byron R. White:

I suppose the Government’s view might be that you just don’t — the section just shouldn’t ever be held to apply or to permit a merger between competing carriers?

Hugh B. Cox:

I don’t think they would go that far, but —

Byron R. White:

At least when they’re strong?

Hugh B. Cox:

When they’re — well, I couldn’t honestly say that I could read their briefs that way.

I — as I have said before, I have some difficulty in getting it and analyzing it precisely, but I would say they do say that you can’t ever have a merger in that situation unless you have some very extraordinary and special benefit that goes far beyond improvements of service.

And the only two I know anything about are the New Haven situation or the bankrupt carrier that’s a — now, Mr. Kahn has discussed the competitive effect of this merger was particularly with the view to suggesting that the department has exaggerated the quantitative extent to which competition is affected, and I don’t want to cover any of that ground again.

There are some things about the competitive situation that I think it might be useful for me to speak very briefly.

One of them asked the — they really relate not so much to the quantity of competition that is eliminated, but to the economic significance of that elimination and particularly economic significance in relation to the adequacy, efficiency and economy of transportation services because I think it’s important to remember here that we, at least in our view, are not operating under a statute which gives the competition as such or in the abstract some overriding and controlling importance.

It is an important consideration and the Commission treated it as being important, but it’s important as it relates to the contribution it makes to good and improved transportation services.

Hugh B. Cox:

Now, so that economic consequences in that sense to which I wish to speak very briefly, the Committee — the argument for the Department of Justice I think rolls together a number of things, specifically two of them particularly which are quite different.

I think this has been clear, but I should like to be sure it’s clear.

They take the traffic at points where there are only the two Northern lines and they combine that with the points at which there are the two Northern lines and one or more, sometimes three or four other railroads.

Now of course the effect of this merger at those points is quite different, there’s a significant difference.

At the points where you have only the Northern lines, the two Northern lines, you remove all way of competition by this merger, but those points are not significant enough, either in terms of value of — on the volume of traffic produced, or in the markets they serve to support the argument on the other side, so they have to combine the 6% of the revenues that come from points of that kind, that is where there are only the two Northern lines, with the revenues from the points where there are other railroads in addition to the Northern lines.

And it’s that way they derive their percentage of 43 or 44% which is said to be the effect of the extent to which it eliminates competition at least on a station basis.

Now, I have said that there is a difference between the two situations and it’s obvious, it is the question I suppose really is, if you eliminate one of three or four railroads, how economically significant is that in this industry in relation to the service and the rate the shipper will get?

It — true, it is an elimination or a reduction of competition, but there’s nothing in this record that suggests in any way that the elimination of one of several competing railroads in this industry has effects that are quite as devastating on railroad service and railroad rates, as the argument on the other side suggests.

And there’s some pretty hard empirical evidence that points in the contrary direction, that is the evidence of the shippers.

Now, there are large number of shippers who testified here, and a great many of these shippers came from these points where there will be a reduction by one in a number of railroads serving the points.

Yet all of these shippers, practically unanimous, all of these shippers while saying, “Competition is a good thing, and we like competition,” all of them supported this merger particularly as it was conditioned to protect the Milwaukee and the Northwestern.

Now that evidence seems to me to indicate pretty clearly that the shippers at least, so long as they have two or more railroads, believe that the benefits of this merger to them in their pragmatic judgment, the benefits of this merger to them are economically more consequence than the elimination of one railroad out of several at these points.

Now I — that is not of course is not a question to be decided essentially by a pool of shippers, but certainly the unanimity of the support from the shippers is pretty persuasive evidence that looking at economic consequences, there was nothing unreasonable in the judgment that the Commission made here.

I think, since I have mentioned the shipper testimony, I should say one thing more about it because it — this shipper testimony on several aspects of the case is rather embarrassing to the anti-trust division and in their reply brief they suggest that the court really shouldn’t pay any attention to it because — well they say that perhaps the shippers were brainwashed by the railroads and they also suggest that they are frightened of the railroad.

Well, as to the first question, the first suggestion, I merely observe that there were 200 and — more than 200 of these shippers and about 39 associations representing shippers who testified, they were cross-examined.

The Examiner accepted their evidence as credible and persuasive and there’s plenty of evidence in this record that they don’t hesitate to litigate and to oppose the railroads when they want to.

In fact they bitterly opposed the railroads in the first hearing in this case on the question of Milwaukee conditions.

But there really isn’t any basis for the suggestion that the railroads brainwashed them.

The suggestion we frightened them rests on, apparently on a footnote citation of an article by a professor in the trade journal.

Rather a remarkable attempt to discredit at a large number of witnesses by a rather feeble weapon, I think, but I suggest that the — that these witnesses deserve consideration and weight as was given to them both by the Examiner and by the Commission.

Now there are two other things about the economic consequences of the elimination of competition that will be eliminated here that I think are significant.

One has been referred to which is the conditions for the Milwaukee.

And I merely say about that, that while the department attempts to dismiss the Milwaukee as a weak and ineffective competitor, again there is ample testimony in this record from the shippers that the Milwaukee has been, even without the conditions, an effective competitor.

And there’s also evidence that they expect with the conditions as — that it will be an even more effective competitor, and there’s no doubt about the effective — what those conditions will do to its competitive power.

It’s true it doesn’t have as much money as the Northern Lines.

It doesn’t have as big a volume of traffic, isn’t as large, but those facts do not mean that the company is an ineffective competitor.

Indeed if I may take somewhat the same line I took a moment ago, I have often heard the anti-trust division attached great importance to the activities of small competitors on the ground that they make up in hunger, ambition and enterprise for their lack of resources.

Well, the Milwaukee here is certainly has been and will be, I think on the basis of the facts, an effective competitor.

The other thing that I should like to mention before the Court rises is the question of intermodal competition which again as I think has been dismissed by the Department of Justice without a recognition of what the record shows.

Here again, the evidence is there’s a great deal of particularized evidence on what trucks are dong in this part of the United States.

Hugh B. Cox:

There may not be as much truck competition in the northwest as there is in the northern tier as there is elsewhere, but there’s enough of it to exert a very direct and heavy pressure on these railroads competitively.

We have cited in our brief testimony from some of these shippers, and along this the citations in one place of shippers who said, “The real competition today is not the rate competition is not between the railroads and the other railroads, it’s between the trucks and the railroads.”

And as far as these agricultural commodities are concerned, the bulk commodities, there’s particularized evidence that trucks are moving in increasing quantities grain, agricultural commodities, lumber, paper products, lime, salt, a whole range of bulk products which one time were thought to be immune to truck competition, and of course no one disputes that they are moving — have been moving large quantities of the merchandise traffic, which is the traffic that the move to the large part into this territory instead of out of it.

The trucks have improved their time schedules as I made the reference to the Milwaukee situation a moment ago, and they’re building highways so that their time between the Twin Cities and the West Coast in some instances will be less than that of the railroads today.

So that this — the trucks which also serve these points, not only they serve the points, not only where there are railroads left, but they serve the points where there will be one railroad left and they provide effective and direct competition today which in its strength and vigor is sufficiently compensates for the loss of one railroad at the points where there are several railroads.

Now, I’ve taken these things together.

I should like to suggest to this point in the argument, I believe it was that, that the — when the Commission made this balancing — went through the balancing process in its second report, which is what it did.

It did not depreciate the value of competition, but as compared with what it did in the first report it engaged in a more thoughtful and detailed analysis of what kind of competition would be left, very important, and what the economic significance to the competition that was eliminated really was.

Warren E. Burger:

Well, were there not also some substantial changes in that interim too?

Hugh B. Cox:

I’m sorry, I didn’t —

Warren E. Burger:

Were there not changes made to accommodate objectors (Voice Overlap) —

Hugh B. Cox:

Oh, certainly, the Milwaukee conditions of course were in a direct bearing on the competitive situation as did the Northwestern conditions, and those were — that was an important factor as was the labor conditions were also important, but I was speaking largely of the consideration of the competitive balance between competition and the loss of competition and the benefits, Mr. Chief Justice.

Warren E. Burger:

Well, on a 6 to 5 split in the first go around, it would appear to be a case in which it would take very slight adding to one scale to tip that balance?

Hugh B. Cox:

That is quite so, and of course there were three members of the Commission who did change their minds, three who didn’t, who had voted for the merger in the first case and two new appointees who came to it fresh and voted for the merger and that was how the majority of eight was composed on the second court.

Warren E. Burger:

Thank you Mr. Cox.