CSX Transportation, Inc. v. Surface Transportation Board

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 7, 2009 Decided October 23, 2009

No. 07-1369

CSX TRANSPORTATION, INC.,

PETITIONER

v.

SURFACE TRANSPORTATION BOARD AND UNITED STATES OF

AMERICA,

RESPONDENTS

AMERICAN CHEMISTRY COUNCIL, ET AL.,

INTERVENORS

Consolidated with 07-1370, 07-1371, 07-1372, 07-1410,

08-1194

On Petition for Rehearing

Before: ROGERS, TATEL, and GRIFFITH, Circuit Judges.

Opinion for the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge: This petition for rehearing asks

that we reconsider one aspect of our earlier opinion denying

petitions for review of a Surface Transportation Board

regulation that provides two simplified methods for resolving

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rail rate disputes too small to bring under ordinary procedures.

As part of its challenge to the regulation, Petitioner Norfolk

Southern argued that in violation of the Administrative

Procedure Act the Board’s Notice of Proposed Rulemaking

had failed to give notice of a significant change that surfaced

only in the final rule. Given that no party had presented that

argument to the Board in a petition for reconsideration, we

declined to consider it. Because we now agree with Norfolk

Southern that we should have addressed the issue, and

because we conclude that the Board failed to provide

adequate notice, we vacate the relevant portions of the

regulation, as well as of our earlier opinion.

I.

Our earlier opinion describes the background of this case

and the two simplified methods for resolving rail rate

disputes. CSX Transp., Inc. v. Surface Transp. Bd., 568 F.3d

236, 238–40 (D.C. Cir. 2009). The three benchmark method,

the one at issue here, compares the challenged rate to three

benchmark figures, one of which—the R/VCCOMP—is derived

by comparing the rail movement at issue with a group of

similar movements. The Board selects this comparison group

from groups of movements the parties propose, and the parties

in turn choose the comparison movements from a survey of

movements across the nation, the so-called waybill sample.

Under the proposed rule, parties could suggest comparison

groups drawn from the most recent year of waybill sample

data. Simplified Standards for Rail Rate Cases (“NPRM”),

STB Ex Parte No. 646 (Sub-No.1), at 33 (served July 28,

2006) (notice of proposed rulemaking). Under the final rule,

however, parties may draw from the four most recent years of

data. Simplified Standards for Rail Rate Cases (“Decision” or

“final rule”), STB Ex Parte No. 646 (Sub-No. 1), at 80, 83

(served Sept. 5, 2007).

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In their petition for review, Norfolk Southern and several

other railroads argued that the proposed rule violated the

Administrative Procedure Act because it failed to provide

notice that the Board was considering switching from one

year to four years’ worth of data. See 5 U.S.C. § 553(b)(3)

(requiring agencies to give notice of “the terms or substance

of the proposed rule or a description of the subjects and issues

involved”). As petitioners pointed out, nothing in the NPRM

expressly indicated that the Board was considering expanding

the data from which parties can draw comparison groups.

The Board did not argue otherwise. Yet because the railroads

had failed to present this argument to the Board, we declined

to address it. CSX, 568 F.3d at 246–47. Although the

railroads argued that they had no way of knowing of any lack

of notice until the Board promulgated its final rule, we

pointed out that they could have presented the argument to the

Board in a petition for reconsideration. See 49 C.F.R.

§ 1110.10. In so ruling, we acknowledged the holding of

Darby v. Cisneros, 509 U.S. 137 (1993), that absent a

statutory or regulatory requirement, courts have no authority

to require parties to exhaust administrative procedures before

seeking judicial review. We distinguished Darby, however,

finding that nothing in that case extinguished the general

requirement that parties give the agency a chance to rule on

all objections in the first instance. CSX, 568 F.3d at 247.

In its petition for rehearing, Norfolk Southern challenges

our characterization of Darby. According to Norfolk

Southern, Darby bars courts from imposing an exhaustion

requirement where agency action has become final under the

APA. See Darby, 509 U.S. at 143–53. Although a party’s

failure to raise an issue during agency proceedings prior to a

final appealable rule or order may result in waiver of that

issue, Norfolk Southern argues that a court may not require a

party to return to the agency to raise an issue that arises only

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at the final rulemaking. In response, the Board insists that our

earlier opinion correctly interpreted Darby: Darby addresses

only exhaustion of remedies, leaving in place the requirement

that a petitioner present its argument to the agency at least

once before seeking judicial review.

Having reconsidered this issue, we now agree with

Norfolk Southern. “Wisdom,” Justice Frankfurter once said,

“too often never comes, and so one ought not to reject it

merely because it comes late.” Henslee v. Union Planters

Nat’l Bank & Trust Co., 335 U.S. 595, 600 (1949)

(Frankfurter, J., dissenting).

Darby stands for the proposition that absent a statutory or

regulatory requirement to the contrary, courts have no

authority to require petitioners seeking judicial review of a

final agency action to further exhaust administrative

procedures. Here, although Board regulations do permit a

petition for rehearing, neither the ICC Termination Act of

1995 nor the Board’s regulations requires one. See 49 U.S.C.

§ 722; 49 C.F.R. §§ 1110.10, 1115.3(f). Under Darby,

therefore, we had no authority to require Norfolk Southern to

file a petition for rehearing once the agency issued its final

rule.

Our earlier opinion relied on ExxonMobil Oil Corp. v.

FERC, 487 F.3d 945 (D.C. Cir. 2007), in which we rejected

petitioners’ argument that the absence of a rehearing

requirement in the Interstate Commerce Act (which was

implicated because the case involved oil pipelines) meant that

they had no obligation to present their arguments to FERC.

But neither we nor any party noticed that the ExxonMobil

petitioners had never alleged an inability to raise their

arguments before issuance of the final rule. Because they

could have presented their arguments to the agency in the first

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instance, ExxonMobil applied the well-established doctrine of

issue waiver, which permits courts to decline to hear

arguments not raised before the agency where the party had

notice of the issue. See, e.g., United States v. L.A. Tucker

Truck Lines, 344 U.S. 33, 35–37 (1953); Appalachian Power

Co. v. EPA, 251 F.3d 1026, 1036 (D.C. Cir. 2001). As

ExxonMobil explains, petitioners’ “error was not failing to

seek rehearing, but rather failing to raise the issue at all.”

ExxonMobil, 487 F.3d at 962.

Unlike the ExxonMobil petitioners, Norfolk Southern

insists that it had no way to raise the notice argument until the

Board issued its final rule. This is clearly correct. The

NPRM mentions providing only one year’s worth of data

from which parties could draw comparison groups and

nowhere indicates that the Board might consider expanding

that to four years’ worth of data. Given that, and given that

Norfolk Southern had no obligation to file a petition for

reconsideration, it had a right under Darby to seek judicial

review of its argument that the Board failed to give adequate

notice of the change from one-year to four-year data samples.

II.

To satisfy the APA’s notice requirement, the NPRM and

the final rule need not be identical: “[a]n agency’s final rule

need only be a ‘logical outgrowth’ of its notice.” Covad

Commc'ns Co. v. FCC, 450 F.3d 528, 548 (D.C. Cir. 2006).

A final rule qualifies as a logical outgrowth “if interested

parties ‘should have anticipated’ that the change was possible,

and thus reasonably should have filed their comments on the

subject during the notice-and-comment period.” Ne. Md.

Waste Disposal Auth. v. EPA, 358 F.3d 936, 952 (D.C. Cir.

2004) (citations omitted). By contrast, a final rule fails the

logical outgrowth test and thus violates the APA’s notice

requirement where “interested parties would have had to

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‘divine [the agency’s] unspoken thoughts,’ because the final

rule was surprisingly distant from the proposed rule.” Int’l

Union, United Mine Workers of Am. v. Mine Safety & Health

Admin., 407 F.3d 1250, 1259–60 (D.C. Cir. 2005) (internal

citations omitted).

In this case, the Board offers a two-part argument that its

final rule represents a logical outgrowth of the NPRM. It first

claims that the release of four-year data—albeit for another

purpose—was “a foreseeable and reasonable result of other

changes advocated by the railroads.” Resp’t Br. 33. Under

the previous three benchmark approach, two benchmarks—

the RSAM and R/VC>180—were calculated using four years’

worth of private data. See Rate Guidelines—Non-Coal

Proceedings, S.T.B. Ex Parte No. 347 (Sub-No. 2) at 16, 20

(served Dec. 31, 1996). By contrast, the NPRM proposed to

calculate those two benchmarks based on the railroads’ public

filings. NPRM at 23. Although no release of private data

would be necessary under the proposed rule, the NPRM

indicated that if the method for calculating the two

benchmarks remained the same, parties would be unable to

verify the benchmarks unless the Board released the data. Id.

at 23 & n.41. According to the Board, given that the railroads

themselves persuaded the Board not to adopt the public filings

proposal, see Decision at 80–82, railroad petitioners should

have foreseen that the Board would release the four-year data

to enable parties to verify the benchmarks.

Second, the Board argues that the railroads had notice

that parties would draw comparison groups from whatever

data the Board released. In support, the Board notes that the

NPRM and the final rule contain identical language regarding

the comparison groups. Compare NPRM at 20 (“The

[comparison] movements would be drawn from the Waybill

Sample provided to the parties by the Board.”), with Decision

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at 18 (“The [comparison] movements must be drawn from the

Waybill Sample provided to the parties by the Board at the

outset of the case.”), and Decision at 83 (“As explained in the

NPRM, we will select the comparison group based on

information contained in the Waybill Sample released to the

parties at the outset of the case . . . .”) (internal citations

omitted). As a result, the Board argues, the railroads should

have foreseen that the same data released for the other two

benchmarks would be used for comparison groups.

The railroads respond that the Board’s “convoluted

‘explanation’ of its heretofore undisclosed, ‘complex’ path” to

the final rule’s use of four-year data stands as “cogent proof

that this change was anything but a logical outgrowth of the

Board’s proposal.” Railroad Petr’s’ Reply Br. 15. The

railroads point out that the NPRM proposed drawing

comparison groups from the most recent year’s worth of data

and never mentioned the possibility that the Board might

consider using data for a longer period of time. See NPRM at

33. Indeed, the railroads tell us, and the Board nowhere

disagrees, that not one commenter indicated that it understood

the proposal to mean that the Board might consider using

more than one year’s worth of private data. Railroad Pet’rs’

Br. 8.

Responding to the Board’s second argument, the

railroads contend that the proposal to calculate two

benchmarks from public data “had nothing to do with the

number of years from which comparable movements would

be drawn.” Railroad Pet’rs’ Reply Br. 15–16. Noting that the

final rule expanded the data available for comparison

movements “in a very oblique and indirect manner,” the

railroads protest that “two separate sections of the final rule,

which decide wholly unrelated issues, must be cobbled

together” to conclude that the rule authorizes the use of four

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years’ worth of data for comparison movements. Railroad

Pet’rs’ Br. 12. According to the railroads, because the NPRM

nowhere suggested that the two sections were linked, it failed

to give adequate notice that the Board was considering using

anything other than the most recent year’s data to derive

comparison groups.

As mentioned above, a final rule qualifies as a logical

outgrowth of the proposed rule if interested parties “‘should

have anticipated’ that the change was possible.” Ne. Md.

Waste Disposal Auth., 358 F.3d at 952. We have found that a

final rule represents a logical outgrowth where the NPRM

expressly asked for comments on a particular issue or

otherwise made clear that the agency was contemplating a

particular change. For example, in Owner-Operator

Independent Drivers Ass’n v. Federal Motor Carrier Safety

Administration, 494 F.3d 188 (D.C. Cir. 2007), we considered

a rule that allowed long-haul truck drivers to satisfy their ten-

hour off-duty requirement in two separate resting periods as

long as one period was at least eight hours long. We

concluded that the final rule was a logical outgrowth of the

NPRM, which stated that “FMCSA will consider a variety of

possible changes . . . including . . . establishing a minimum

time for one of the two ‘splits,’ such as 5 hours, 8 hours, or

some other appropriate level.” Id. at 209–10. Similarly, in

City of Portland v. Environmental Protection Agency, 507

F.3d 706 (D.C. Cir. 2007), we concluded that a final rule

requiring uncovered reservoirs to be treated for a particular

parasite was a logical outgrowth of the proposed rule because

the NPRM expressly requested comments on whether the

agency should consider requiring cities to inactivate the

parasite. Id. at 715.

By contrast, our cases finding that a rule was not a logical

outgrowth have often involved situations where the proposed

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rule gave no indication that the agency was considering a

different approach, and the final rule revealed that the agency

had completely changed its position. For example, in

International Union, we concluded that a final rule setting a

maximum mine belt air velocity of 500 feet per minute was

not a logical outgrowth of a proposed rule providing that “[a]

minimum air velocity of 300 feet per minute must be

maintained.” 407 F.3d at 1259. We explained that “the

Secretary could not have expected interested parties to realize

that she would consider abandoning her proposed regulatory

approach . . . simply because she invited commentary on a

proposed rule that included a minimum air velocity.” Id. at

1260. We reached a similar result in Environmental Integrity

Project v. Environmental Protection Agency, 425 F.3d 992

(D.C. Cir. 2005), in which EPA published a proposed rule

clarifying that a set of regulations operate independently of

one another. In its final rule, however, EPA adopted just the

opposite position, declaring that those regulations are in fact

not separate regulatory standards. Id. at 994–95. We rejected

EPA’s argument that it had satisfied its notice-and-comment

obligations by “repudiat[ing] its proposed interpretation and

adopt[ing] its inverse” in the final rule. Id. at 998.

This case presents a closer question. Although the

NPRM neither asked for comments on a particular issue nor

otherwise indicated that the Board was contemplating a

particular change, the final rule did not amount to a complete

turnaround from the NPRM. That said, we think this case far

more like those in which we found that agencies had failed to

give adequate notice. In essence, the Board contends that the

mere mention of the release of one-year data for comparison

groups gave notice that the amount of data available for that

purpose might change. We rejected just that argument in both

International Union and Environmental Integrity Project, and

we do so here as well. Although the NPRM proposed several

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revisions to the existing system, it nowhere even hinted that

the Board might consider expanding the number of years from

which comparison groups could be derived. Unlike the

notices in Owner-Operator and City of Portland, in which we

found that the final rules qualified as logical outgrowths, the

Board’s NPRM requested comments on no particular issue at

all. To be sure, expanding from one to four years’ worth of

data is less dramatic than adopting a maximum velocity cap

where a minimum was proposed (International Union) or a

completely different reading of a set of regulatory standards

(Environmental Integrity Project). Even so, we see no way

that commenters here could have anticipated which

“particular aspects of [the Board’s] proposal [were] open for

consideration.” Envtl. Integrity Project, 425 F.3d at 998

(emphasis omitted); see also Fertilizer Inst. v. EPA, 935 F.2d

1303, 1312 (D.C. Cir. 1991). Indeed, were we to conclude

that commenters had notice merely because the NPRM

mentioned one year’s worth of data, the Board could issue

broad NPRMs “only to justify any final rule it might be able

to devise by whimsically picking and choosing within the four

corners of a lengthy ‘notice.’” Envtl. Integrity Project, 425

F.3d at 998. Such a rule would hardly promote the purposes

of the APA’s notice requirement.

We are similarly unpersuaded by the Board’s argument

that making private data available to verify the other two

benchmarks gave commenters notice that the same data would

be used to derive comparison groups. Although both the

NPRM and the final rule note that comparison groups will be

drawn from data released to the parties, neither makes clear

that the Board was referring to all data released to the parties

for any purpose. Indeed, the language regarding the release of

data appears in portions of the NPRM discussing comparison

groups, suggesting that it refers only to data released for that

purpose. Moreover, even under the Board’s broader reading,

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commenters could hardly be expected to pick this single

sentence out of a sixty-four page NPRM absent any indication

that the comparison group data might change.

To be sure, in retrospect we might be able to discern the

Board’s reasoning, i.e., that the railroads’ other unrelated

comments suggested keeping the four-year averages for two

benchmarks, that as a result the Board might release four-year

data, and that the four-year data might then be used to

calculate comparison groups. Under the APA, however,

notice must come from the NPRM. See 5 U.S.C. § 553(b).

Here, because nothing in the NPRM (1) indicated that the

Board might consider expanding the comparison group data

from one to four years, or (2) linked data released for other

purposes to the comparison groups, we are unable to conclude

that the final rule qualifies as a logical outgrowth of the

NPRM.

The Board next argues that even if we conclude that it

failed to give adequate notice, there is no reason to vacate the

rule because the change was neither prejudicial to the

railroads nor important. See 5 U.S.C. § 706 (requiring courts

to take “due account” of “the rule of prejudicial error”); First

Am. Discount Corp. v. Commodity Futures Trading Comm’n,

222 F.3d 1008, 1015 (D.C. Cir. 2000) (declining to decide

whether final rule represented a logical outgrowth where

petitioner suffered no prejudice); Transmission Access Policy

Study Group v. FERC, 225 F.3d 667, 729 (D.C. Cir. 2000)

(declining to apply logical outgrowth analysis to minor

change), aff’d New York v. FERC, 535 U.S. 1 (2002). In

support, the Board points out that the final rule allows parties

to demonstrate in individual cases that comparison

movements drawn from older data are “unreasonable.”

Although this is certainly true, the railroads’ point, with

which we agree, is that they were prejudiced by their inability

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to persuade the Board not to adopt the four-year rule in the

first place, thus requiring them to litigate the issue in

individual proceedings. “Had the Board given notice that it

proposed to include four years’ historical Waybill Samples,”

the railroads tell us, they “would have made additional

objections and presented significantly more (and different)

evidence (concerning, for example, changes in market

conditions over four-to-six year periods) to support those

objections.” Railroad Pet’rs’ Br. 10. The railroads also point

out that because the Board needs one to two years to gather

and release the data, see Decision at 84, expansion to four

years’ worth of data means that comparison groups could be

drawn from movements that are up to six years old, and older

data increases the “likelihood of distorted comparisons and

results.” Railroad Pet’rs’ Br. 12. We thus agree with the

railroads that the change from one year to four years’ worth of

data was important and potentially prejudicial.

III.

For the foregoing reasons, we conclude that the Board

failed to comply with the APA’s notice and comment

requirements. We therefore vacate (1) the portion of our

earlier opinion rejecting the railroads’ notice argument, see

CSX, 568 F.3d at 246–47, and (2) the portion of the final rule

that makes four years of data available for comparison groups,

see STB Ex Parte No. 646 (Sub-No. 1), at 83 (served Sept. 5,

2007); see also Allied-Signal, Inc. v. U.S. Nuclear Regulatory

Comm'n, 988 F.2d 146, 150–51 (D.C. Cir. 1993). We also

vacate the portion of our opinion rejecting the railroads’

argument regarding regulatory lag, see CSX, 568 F.3d at 247–

48, an issue we had no need to reach given our conclusion

here that the Board failed to provide the required notice.

So ordered.