Petition for Writ of Certiorari — South Dakota v. Kansas City Southern Railway Co.

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IN THE i a ~ |

Supreme Court of the Unite Snir

OCTOBER TERM, 1989

STATE OF SOUTH DAKOTA, et al.,

. Petitioners,

KANSAS CITY SOUTHERN RAILWAY COMPANY, et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

ROGER A. TELLINGHUISEN E. BARRETT PRETTYMAN, JR.*

Attorney General HOGAN & HARTSON

JEFFREY P. HALLEM~ 555 Thirteenth St., N.W.

M. BRIDGET RYAN Washington, D.C. 20004

Assistant Attorneys General (202) 687-5685

State Capitol Counsel for Petitioners

Pierre, SD 57501

(605) 773-3215

THOMAS J. WELK

JAMES E. MCMAHON

Boyce, MURPHY, MCDOWELL

& GREENFIELD

Post Office Box 5015

Sioux Falls, SD 57117

(605) 336-2424

GLEN H. JOHNSON

BANKS, JOHNSON, JOHNSON,

COLBATH & HUFFMAN

3202 West Main Street

Rapid City, SD 57702

(605) 348-7300

Of Counsel:

DANIEL J. DOYLE

740 Pine Road

Carlisle, PA 17013

(717) 486-4106 * Counsel of Record

A SATO I ET TET IT ED BIE

WILSON - EPES PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

2 oer

QUESTIONS PRESENTED

1. (a) Should a State be treated like any other com-

mercial entity for antitrust standing purposes when the

State’s role, and the injury to the State found by the

jury to have been caused by the defendants’ anticompeti-

tive conduct, directly implicated not simply commercial

but also sovereign interests of the State?

(b) Should an antitrust plaintiff be denied standing

because it was not a direct participant in the market re-

strained, as the court below held, contrary to this Court’s

rejection of such a “black-letter rule” in Associated Gen-

eral Contractors of California, Inc. v. California State

Council of Carpenters, 459 U.S. 519 (1983)?

2. Is a pattern of litigation activity protected by the

Noerr-Pennington doctrine as a matter of law so long as

it was motivated in part by a genuine desire to obtain

judicial relief, as the court below held, contrary to this

Court’s recent express rejection of that absolutist posi-

tion in Allied Tube & Conduit Corp. v. Indian Head, Inc.,

108 S. Ct. 1931, 1938 (1988) ?

_ 8. Under the Seventh Amendment to the United States

Constitution, may a Court of Appeals overturn a jury’s

determination that a pattern of litigation activity is a

sham and that such activity harmed the plaintiff, when

the record is replete with evidence supporting the jury

verdict?

(i)

PARTIES TO THE PROCEEDINGS

Petitioners before this Court and plaintiffs-appellees

below are the State of South Dakota and the South Dakota

Conservancy District, an agency of the State of South

Dakota. Respondents and defendants-appellants below are

Kansas City Southern Railway Company and its parent,

Kansas City Southern Industries, Ince.

TABLE OF CONTENTS

Es = yy 6). By) | 4, yy |

PARTIES TO THE PROCEEDINGS o.0000000.0000n...

ET PUNT OMIED cccscesceictsnersccnsssesecccensssseenss

TE corerergeivceivnenncisnitneencanatinhennennntncanmunaantennn

IIE iar cicseaesniaaisserteneahacn shasnanameenensnsimesenchascaneene

PERTINENT STATUTORY AND

CONSTITUTIONAL PROVISIONS ......0.0..000...........

STATEMENT OF THE CASE .........0...2......2...............

REASONS FOR GRANTING THE WRIT ...................

I. THE DECISION BELOW CONFLICTS WITH

Il.

A RECENT DECISION OF THIS COURT

AND AGGRAVATES CLEAR CONFLICTS

AMONG THE CIRCUITS ON THE TESTS

FOR ANTITRUST STANDING ..0000000000..........

A. The Lower Court Failed To Consider The

Special Status Of A Sovereign State —...........

B. The Lower Court Treated A Single Issue—

Participation In The Market—As Decisive,

And Ignored Other Significant Factors........

THE DECISION BELOW CONFLICTS WITH

A RECENT DECISION OF THIS COURT

AND AGGRAVATES CLEAR CONFLICTS

AMONG THE CIRCUITS ON THE SHAM

EXCEPTION TO THE NOERR-PENNINGTON

IE Silence htnnecninnaseinaneneipnrnainnnanatin

A. The Lower Court’s Absolutist Treatment Of

TABLE OF CONTENTS—Continued

B. The Lower Court’s Absolutist Treatment Of

Partial Success ......... sicicccsijaiienieiaibeielantantiiaibaieslbtdit

C. The Conflict And Confusion Surrounding

The Sham Exception Is Persistent And

I i iniicnctntactnnctiicanialitinntninmeniaaninnanniaitinns

Ill. THE COURT BELOW VIOLATED THE SEV-

ENTH AMENDMENT IN OVERTURNING

THE JURY’S FACTUAL FINDINGS THAT

SHAM PETITIONING CAUSED THE IN-

FU TD SOE EE hhcentitnmnenen

CONCLUSION

APPENDICES

Appendix A:

Appendix B:

Appendix C:

Appendix D:

Appendix E:

Appendix F:

Appendix G:

Appendix H:

ee ee

Opinion of the Court of Appeals for

BI III cic ciettescnincticentetinneetinn

Judgment of the Court of Appeals

for the Eighth Circuit —.......00.00.0000.....

Order of the Court of Appeals for

the Eighth Circuit denying rehear-

ing and amending opinion _..............

Order and Opinion of the District

Court for the District of South

Dakota (July 26, 1984) 2.000000...

Order and Opinion of the District

Court for the District of South

Dakota (March 6, 1986) ...............00....

Special Verdict Form ........................

Judgment of the District Court for

the District of South Dakota _.............

Examples of Jury Instructions on

the Noerr-Pennington Doctrine ........

Page

33a

35a

38a

ry Vv Vyeue

TABLE OF AUTHORITIES

Cases Page

Adams V. Pan American World Airways, Inc., 828

F.2d 24 (D.C. Cir. 1987), cert. denied, 108 S. Ct.

Be I tenihhncscaceddek de nciicsaetdeiieteinhecacanatciiece thin 16

Affiliated Capital Corp. v. City of Houston, 735

ef B&O: | ee reeenareen 28

Alexander v. National Farmers Organization, 687

A B. fC S.C erceeeere 21

Allied Tube & Conduit Corp. v. Indian Head, Inc.,

Re Se Es EE I cebsiicckcecinataereeotrtmenerceae passim

Amey, Inc. V. Gulf Abstract & Title, Inc., 758 F.2d

1486 (llth Cir. 1985), cert. denied, 475 U.S.

Be WIE bleiiiecemea etic , 16

Associated General Contractors of California, Inc.

v. California State Cowncil of Carpenters, 459

See EE | Lccsactcbistsdanecnemiconiavelinncecieenaniel 13, 15, 16

Bell v. Dow Chemical Co., 847 F.2d 1179 (5th Cir.

IIE seonstdhecinnstcrssctiaiSsssantndinnnineasisnitonsndesasaiticacticanaatibseasadelinadaas 15

Bill Johnson’s Restaurants, Inc. v. NLRB, 461

tle EE SUIIIIIIIED 2. cin scetusctacntnoeanansennuuneaiaienandadlaianeiia 26

Blue Shield of Virginia v. McCready, 457 U.S. 465

fips eae AE Ma aaa eh 13, 14

California Motor Transport Co. v. Trucking Un-

limited, 404 U.S. 508 (1972) .......022. ee. 17, 22, 28

Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S.

BR. GH Srveseceseesrdintcdinecsaendeteny soktnestarenetiene 13

Clipper Exxpress V. Rocky Mountain Motor Tariff

Bureau, Inc., 690 F.2d 1240 (9th Cir. 1982),

cert. denied, 459 U.S. 1227 (1983) —.....0000 2... 23, 28

Coastal States Marketing, Inc. v. Hunt, 694 F.2d

I a. = a 18, 24

Columbia Pictures Industries v. Redd Horne, Inc.,

PY B Fgh | Ren eee 21

Eagle v. Star-Kist Foods, Inc., 812 F.2d 588 (9th

IE CUED > cnnbiscsesnheveecthcs Codbeaceditealiptaadaenimtansabssenciaats 15

Eastern Railroad Presidents Conference Vv. Noerr

Motor Freight, Inc., 365 U.S. 127 (1961) —........ 16, 17

Eneray Conservation, Inc. Vv. Heliodyne, Inc., 698

of § f £: & Sean we 19

ein

TABLE OF AUTHORITIES—Continued

Page

ETSI Pipeline Project v. Burlington Northern,

Inc., (E.D. Tex. May 8, 1989), appeal pending

(5th Cir.) (No. 89-2561) ...... Et ee 10

Federal Prescription Service, Inc. Vv. American

Pharmaceutical Association, 668 F.2d 258 (D.C.

Cir. 1981), cert. denied, 455 U.S. 928 (1982)... 21

Gallick v. Baltimore & Ohio Railroad, 372 U.S. 108

AES BS EAE oe" ARR 26

Gorman Towers, Inc. V. Bogoslavsky, 626 F.2d 607

RE EE AE Sn Oe 25

Gregory Marketing Corp. v. Wakefern Food

Corp., 787 F.2d 92 (3d Cir.), cert. denied, 479

ares ee re ee ee 15

Grip-Pak, Ine. Vv. Illinois Tool Works, Inc., 694

F.2d 466 (7th Cir. 1982), cert. denied, 461 U.S.

RE EEC NNN TE eT Moe oe. aoe 21, 22

Hawaii v. Standard Oil Co. of California, 405 U.S.

gk es ee ee SE 11, 12

In re Burlington Northern, 822 F.2d 518 (5th Cir.

1987), cert. denied, 484 U.S. 1007 (1988)......21, 22, 24

In re South Dakota Water Management Board,

PA BO! 0 5

Kobe, Inc. v. Dempsey Pump Co., 198 F.2d 416

(10th Cir.), cert. denied, 344 U.S. 887 (1952).. 24

Lavender Vv. Kurn, 8327 U.S. 645 (1946) 0000... 26

Litton Systems, Inc. v. AT&T, 700 F.2d 785 (2d

~ Cir. 1983), cert. denied, 464 U.S. 1078 (1984)... 24

Mandeville Island Farms, Inc. v. American Crystal

Sugar Co., 384 U.S. 219 (1948)... 13

MCI Communications Corp. v. AT&T, 708 F.2d

1081 (7th Cir.), cert. denied, 464 U.S. 891

CIEE . ccininnreniintiiaeiibiiaieaiieeeaiiie eae diial 24

Missouri V. Andrews, 586. F. Supp. 1268 (D. Neb.

1984), aff'd, 787 F.2d 270 (8th Cir. 1986), aff'd

sub nom. ETSI Pineline Project v. Missouri,

484 U.S. 495 (1988) .... Se Me An eS passim

Otter Tail Power Co. v. United States, 410 U.S.

8366 (1973), on remand, 360 F. Supp. 451 (D.

Minn. 1973), aff'd, 417 U.S. 901 (1974) q.......... 17

vii

TABLE OF AUTHORITIES—Continued

Page

Razorback Ready Mix Concrete Co. Vv. Weaver,

761 F.2d 484 (8th Cir. 1985) .............................. 21

Rex Chainbelt, Inc. v. Harco Products, Inc., 512

F.2d 993 (9th Cir.), cert. denied, 423 U.S. 831

COT eoceeeerrttneernssstitieneennsenentnenns 24

Southaven Land Co. v. Malone & Hyde, Inc., 715

8). a he | 16

Tennant v. Peoria & Pekin Union Railway, 321

5S 7 _ a een 26

Trucking Unlimited v. California Motor Transport

Co., 1967 Trade Cas. (CCH) { 72,298 (N.D.

Cal. 1967), rev'd, 482 F.2d 755 (9th Cir. 1970),

2 ee 8 Ge OF Rn 17

United Mine Workers v. Pennington, 381 U.S.

SI nites nenbsoinetnhieneiiinndiantasensintnanntnbanmsciiannem 16

Video International Production, Inc. Vv. Warner-

Amex Cable Communications, Inc., 858 F.2d

1075 (5th Cir. 1988), cert. denied, 109 S. Ct.

I Ha ccescniacasntteiiddhdiinsiepnniniaiensnaianietieiinanbtinebapeate 24

Webb v. Fury, 282 S.E.2d 28 (W. Va. 1981)... 26

Weiss v. Willow Tree Civic Association, 467 F.

OG ee 25

Westmac, Inc. Vv. Smith, T97 F.2d 313 (6th Cir.

1986), cert. denied, 479 U.S. 1035 (1987) ..18, 21, 22, 24

Constitutional Provisions and Statutes

or arr

a iccenrrininseincidatenciinmniananseenmemnenninn

Clayton Act, 15 U.S.C. § 15(a) (1982) iia

Sherman Act, 15 U.S.C. §1 (1982) ~.....................

bo bo fe te

Commentary

Areeda & Hovenkamp, Antitrust Law ‘ 203.1

SI ND Seiscttiecniewanecinstennncieenennnenihinninianmniannnaen 22

Calkins, Developments in Antitrust and the First

Amendment: The Disaggregation of Noerr, 57

a oe e 2 een 25

viii

TABLE OF AUTHORITIES—Continued

Fischel, Antitrust Liability for Attempts to In-

fluence Government Action: The Basis and

Limits of the Noerr-Pennington Doctrine, 45

££: SSR FO nee

Handler & De Sevo, The Noerr Doctrine and Its

Sham Exception, 6 Cardozo L. Rev. 1 (1984)...

Note, The Misapplication of the Noerr-Pennington

Doctrine in Non-Antitrust Right to Petition

Cases, 36 Stan. L. Rev. 1243 (1984) ....................

Sullivan, Developments in the Noerr Doctrine, 56

pA OU,

Page

IN THE

Supreme Court of the United States

OCTOBER TERM, 1989

No.

STATE OF SouTH DAKOTA, et al.,

7 Petitioners,

KANSAS CITY SOUTHERN RAILWAY COMPANY, et el.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

Petitioners the State of South Dakota and the South

Dakota Conservancy District (collectively “the State” or

“South Dakota”) respectfully pray that a writ of cer-

tiorari issue to review the judgment and opinion of the

United States Court of Appeals for the Eighth Circuit

entered in the above-entitled proceeding on June 29, 1989.

OPINIONS BELOW

The opinion of the Court of Appeals is reported at 880

F.2d 40 and is reprinted in the appendix hereto (“App.”)

at la. An Order was issued by the Court of Appeals

amending its opinion on August 8, 1989; that Order is

reprinted at App. 35a. The pertinent opinion of the Dis-

trict Court are unreported and are reprinted at App. 38a,

56a.

JURISDICTION

The judgment of the Court of Appeals was entered on

June 29, 1989. App. 33a. A petition for rehearing with

suggestion for rehearing en banc was timely filed on July

11, 1989, and denied on August 8, 1989. App. 35a. The

jurisdiction of this Court is invoked under 28 U.S.C.

§ 1254(1).

PERTINENT STATUTORY AND

CONSTITUTIONAL PROVISIONS

Section 1 of the Sherman Act, 15 U.S.C. §1 (1982),

provides in pertinent part that “[e]very contract, com-

bination in the form of trust or otherwise, or conspiracy,

in restraint of trade or commerce among the several

States, or with foreign nations, is hereby declared to be

illegal.”

Section 4 of the Clayton Act, 15 U.S.C. §15(a) (1982),

provides in pertinent part that “any person who shall be

injured in his business or property by reason of anything

forbidden in the antitrust laws may sue therefor in any

district court of the United States * * *.”

The Seventh Amendment to the United States Constitu-

tion provides that “[i]n suits at common law, where the

value in controversy shall exceed twenty dollars, the right

of trial by jury shall be preserved, and no fact tried by

a jury, shall be otherwise reexamined in any Court of

the United States, than according to the rules of the

common law.”

STATEMENT OF THE CASE

In the early 1970’s, Energy Transportation Systems,

Inc. (“ETSI”), a joint venture, sought to design, finance

and construct a 1200-mile pipeline from the Powder River

Basin coal fields in Wyoming to electric utilities in the

south central United States. The pipeline would ship coal

slurry, which is a mixture of 50 percent crushed coal and

50 percent water. The ETSI project would have intro-

duced the first non-railroad mode of coal transportation

into the region and saved electric consumers over $900

million.

The guarantee of a sufficient long-term, uninterruptible

water supply was an essential prerequisite to the project,

and South Dakota had a direct interest in that prerequisi-

site. At the time, the State had two serious water prob-

lems. One was a shortage of quality drinking and live-

stock water in the western half of the State. The other

concerned whether the ETSI project would divert much-

needed ground water from the State. This second prob-

lem caused South Dakota to oppose the initial ETSI pro-

posal. A modified proposal to run a water pipeline from

South Dakota’s Oahe Reservoir across the State to join

with the ETSI pipeline in eastern Wyoming, where the

water would be mixed with coal, resolved both problems.

The proposed Oahe Reservoir pipeline would provide water

to ranchers, farmers, communities, and energy industry

users, as well as to ETSI. Money realized from the in-

dustrial sales of water would finance the delivery systems

to western South Dakota communities and to other state

water projects.

In 1981 South Dakota secured passage of legislation

authorizing a permit which could be assigned to ETSI for

Oahe Reservoir water. After this permit was granted,

South Dakota and ETSI entered into a long-term contract

under which the Oahe Reservoir permit was transferred

to ETSI, and ETSI agreed to provide, at no cost, excess

capacity in the water pipeline for domestic and livestock

needs in western South Dakota, and to pay the State a

minimum of $450 million over a term of 50 years.

For 10 years, until the whole project was killed as a

result of the anticompetitive and illegal acts that formed

the basis for this lawsuit, the State of South Dakota

played a vital role in the development of the project.

Among other things, the State:

* saw legislation introduced, passed, and vetoed, and

then new legislation passed in a special session of the

————

Legislature which changed the law to allow the project

to go forward;

* extended powers of eminent domain for transporta-

tion of water utilized by out-of-state coal slurry pipeline

projects;

* through its Governor discussed the project with

neighboring States, affected cities, and Indian Tribes;

* negotiated with ETSI to ensure water development,

quality drinking water, and to provide sales taxes, South

Dakota’s principal source of revenue, from the pipeline

construction ; ~—

* provided a water permit pursuant to contract, and

passed legislation to allow ETSI’s use of tax-free bonds;

* filed an original lawsuit in this Court in order to

establish that Oahe Reservoir water could be marketed;

* sought the assistance of Attorneys General in west-

tern States in support of South Dakota’s position in the

Andrews litigation, discussed below;

* through its Conservancy subdistricts, which were es-

tablished to facilitate water development within the

State, supported the ETSI project as part of the develop-

ment of an 11-county area, performed a cost study of the

water pipeline from the Oahe Reservoir, and passed ap-

propriate resolutions relating thereto;

* through its Water Management Board and its De-

partment of Water and Natural Resources held hearings

on affected water rights;

* provided comments to a federal agency on the en-

vironmental impact of the project, conducted feasibility

studies, reviewed United States geological survey reports,

and supported a federal water service contract to ETSI;

* formed a Task Force to deal with water marketing

issues;

* created a Water Facilities Construction Fund in

which ETSI payments were deposited and the money from

which was used to finance water development projects and

resource studies;

* made application for one federal water contract that

only a public body could apply for;

* met with ETSI to design and assign the location of

taps for West River communities from the water pipe-

line;

* requested and achieved an amendment to the ETSI

contract to allow South Dakota’s western communities ad-

ditional time to determine where distribution taps would

be located; and

* defended the state water permit that was assigned

to ETSI. In re South Dakota Water Management Board,

351 N.W. 2d 119 (S.D. 1984).

According to evidence later introduced at trial, respond-

ents Kansas City Southern Industries and The Kansas

City Southern Railway Company (jointly “KCS’’) con-

spired with other railroads to defeat the ETSI pipeline.

KCS considered this project to be a serious threat as a

nonrail competitor.

The railroads’ opposition consisted of a group boycott

to deny ETSI crossing rights and a pattern of sham liti-

gation that abused the administrative and judicial proc-

esses in local, state, and federal forums. Delay was a

critical objective of the conspiracy. Construction on this

$3 billion capital-intensive construction project could not

begin until all major permits were secured. Delay in-

creased escalating multimillion capital expenditures and

created risks of uncertainty as to delivery by ETSI to

utility customers, who were intending to expend millions

of dollars on modifications to their plants to allow coal

slurry to be burned. Delay also helped maintain the rail-

roads’ monopoly profits from hauling coal to the utility

customers.

For over 10 years KCS carried out many acts in fur-

therance of the conspiracy, some aimed directly at South

Dakota, even though KCS had no tracks and no presence

in the State. Eventually, KCS succeeded in having South

Dakota’s contract with ETSI cancelled and the pipeline

project killed.

The State cannot even begin to summarize here the

many acts taken by the railroads to thwart the ETSI

pipeline project. A few examples will have to suffice.

KCS first conspired with other railroads to deny per-

mits needed by ETSI to cross railroad right of ways.

Faced with this group boycott, ETSI found “windows,”

which were areas where the railroads had only easement

interests. When ETSI purchased rights from abutting

fee owners and began to obtain the crossing rights in

quiet-title actions, the railroads resisted and intentionally

prolonged those suits for as long as 5% years. The in-

tentional delay occurred despite the railroads’ recognition

that there was no legal ground for opposition. Delay, not

success, was the object.! In all, ETSI was forced to file

69 “window” suits, including one in South Dakota; ETSI

was successful in all of them.

Another part of the railroads’ strategy was to oppose

on every possible front the required environmental im-

pact statement (“EIS”). The railroads’ object was to

make the environmental evaluation as difficult as possible

and hopefully to bog down the process. SA 1001. KCS

even contrived not to disclose fully its objections to the

1 As one KCS attorney wrote, KCS should settle its window litiga-

tion unless its “policy is going to remain the same, i.e., delay every

way we can their obtaining permits or grants for construction of

[ETSI’s] lines * * *.” KCS App. 645. One railroad employee wrote

that “if we take a chapter from the environmentalists, there are

many situations where litigation can hold up new projects.” Ex.

693. A railroad attorney noted that “our original idea * * * was to

create another roadblock in the Commission to afford the railroad

industry an opportunity to further delay pipeline construction.”

SA 1052.

“KCS App.” refers to KCS’s Appendix in the Eighth Circuit.

“SA” refers to South Dakota’s Separate Supplemental Appendix in

the same court.

EIS before the Bureau of Land Management solely to

preserve judicial remedies and thereby ensure further

delay. KCS App. 609.

In addition to the EIS challenge, virtually every sig-

nificant permit needed by ETSI was targeted and chal-

lenged, dozens of baseless claims were asserted, and

with one exception (discussed below), not one was

successful. One local commission member was told that

if the commissioners did not delay the permitting process,

they could be held personally liable. SA 219-221.2 KCS

led notices of intent to sue on some permits even before

the EPA had acted on them, SA 1197, 1199, and it sent

letters to authorities in South Dakota alleging that the

Oahe pipeline in South Dakota would transport hazardous

wastes, when in fact it would transport only water.

Challenges were made at every administrative*® and

judicial level, and the resultant delays were bragged about

internally. SA 1106; see also KCS App. 725. Since they

lacked standing to assert many of the claims they were

making, others were solicited to participate, and their

participation underwritten.

Concurrently, the railroads devised a strategy to pre-

vent ETSI from obtaining a secure water source. For ex-

ample, they spread falsehoods to downstream States about

an alleged violation of (nonexistent) interstate compacts.

SA 985-988. With KCS as the spearhead, the railroads

stirred up opposition and guided parties through state

and federal water permit hearings and litigation in South

Dakota so as to ensure lengthy appeals in the courts.

KCS filed a complaint against the Federal Government

in 1982 containing more than 20 separate causes of ac-

2 This intimidation obviously was not protected by the Noerr-

Pennington doctrine discussed infra. Yet such conduct was not

even discussed by the Eighth Circuit.

3One such agency termed their written comments not only

“puzzling” but “frivolous.” SA 253-236; see also KCS App. 239.

tion in the so-called Andrews litigation...As KCS planned

this litigation, its executives recognized that it “may

achieve delay and nothing more” and that “no one asserts

a high level of confidence that we would ultimately pre-

vail in the legal arena, once the delays have been ex-

hausted.” KCS App. 755. Despite this recognition, one

chief executive ordered, “continue to fight.” Jd.

KCS obtained only a partial measure of success.‘ Of

the more than 20 claims raised, the District Court ruled

on only one, the authority of the Bureau of Reclamation

to contract for water service, in a manner unfavorable to

ETSIL.® Missouri v. Andrews, 586 F. Supp. 1268 (D. Neb.

1984), aff'd, 787 F.2d 270 (8th Cir. 1986), aff'd sub nom.

ETSI Pipeline Project v. Missouri, 484 U.S. 495 (1988).

Even on this issue, however, the District Court ruled

that KCS had no standing, and the relief was granted in

favor of other parties.

The railroads were wholly successful, however, in de-

stroying the ETSI project. After spending $140 million,

ETSI terminated the project and cancelled the South

Dakota contract, citing the prolonged railroad opposition.

SA 1248-49. The continued railroad harassment simply

made the $3 bijlion project too risky for investors and

backers. The cancellation vitiated all of the sovereign acts

taken by the State and deprived the State of tax revenues

and $200 million of ETSI payments in present value dol-

lars. Also lost was the opportunity for the State to pro-

vide high quality drinking water at a reasonable cost to

many of the State’s citizens and funding for much needed

other state water projects.

In 1988, South Dakota brought this suit against KCS,

alleging (1) that KCS and others had conspired in viola-

4 A second lawsuit was filed by Missouri, Iowa and Nebraska, and

the suits were consolidated.

5 ETSI thereafter worked with South Dakota to obtain a water

service contract from the Corps of Engineers consistent with the

District Court decision. SA 187, 315-316, 325-327,

tion of Section 1 of the Sherman Act to prevent the de-

velopment and operation of the ETSI project and to pro-

hibit the use and shipment of Oahe Reservoir water

necessary for the pipeline’s operation,® and (2) that KCS

had violated South Dakota law by intentionally inter-

fering with contractual relations between South Dakota

and ETSI.

The trial lasted 10 weeks. The jury was instructed on

all elements of Section 1 and intentional interference with

contractual relations. It was also instructed on the dif-

ference between sham activities and those legitimately

protected under the Noerr-Pennington doctrine.’

The jury unanimously returned a special verdict find-

ing that KCS violated Section 1 and intentionally inter-

fered with South Dakota’s contract. It awarded $200

million in lost contract payments, $10.9 million in lost

tax revenues, $8.3 million in prejudgment interest, and

$25 million in punitive damages. The District Court over-

ruled all of KCS’s post-trial motions. It previously had

held that South Dakota had standing because it suffered

the direct, foreseeable type of injury the antitrust laws

were intended to redress. App. 5la-53a, 61a.

The Court of Appeals disagreed, reversed, and ordered

the cause dismissed. It held that because the State was

not itself a competitor in the coal transportation market,

it could not seek redress under the antitrust laws for the

harm it suffered at the hands of KCS. App. 15a-16a, 19a-

20a. The court also dismissed the tort claim because KCS

was “successful’ in the Andrews litigation, it was deemed

to have genuinely sought judicial relief, and therefore

the sham exception to Noerr-Pennington did not apply as

a matter of law. The court held that “whether [KCS|

® The other railroads involved in the conspiracy were named as

co-conspirators. One of them subsequently settled with the State

rather than be faced with a separate suit.

7 For examples of these jury instructions, see App. 7la,

Ne |

also possessed anticompetitive motives is irrelevant.”

App. 29a.° oe

REASONS FOR GRANTING THE WRIT

I. THE DECISION BELOW CONFLICTS WITH A

RECENT DECISION OF THIS COURT AND

AGGRAVATES CLEAR CONFLICTS AMONG THE

CIRCUITS ON THE TESTS FOR ANTITRUST

STANDING

A. The Lower Court Failed To Consider The Special

Status Of A Sovereign State

The court below held that “the State of South Dakota

has no standing to sue KCS for alleged antitrust viola-

tions.” App. 20a. The court treated the State as if it

were just another supplier to the victim of an antitrust

conspiracy. In so doing, the court disregarded the fact

that KCS targeted significant overt acts against the State.

It also ignored the fact that the State played a far larger

role in the ETSI venture than the ordinary private ven-

dor would. South Dakota took major steps in its sover-

eign capacity to make the ETSI venture possible, and the

State sought to obtain not only commercial but broad

social benefits for the welfare of its people. The steps

taken by South Dakota were those only a State could

take, and the interests it asserted and protected were

those for which no private party could possibly be respon-

8In a consolidated companion case in Texas, KCS settled with

ETSI and utility plaintiffs for $82 million. ETSI then obtained a

directed verdict in its favor on the issue of Conspiracy in a Sherman

Act Section 1 lawsuit against one of KCS’s alleged co-conspirators.

Thereafter, a jury returned a verdict in ETSI’s favor in the amount

of $345 million, before trebling. ETSI Pipeline Project v. Burling-

ton Northern, Inc. (E.D. Tex., May 8, 1989), appeal pending (5th

Cir., No, 89-2561).

sible. Under the circumstances, to treat South Dakota as

just another litigant ignores the special status that the

States occupy under the Constitution.

This Court decided seventeen years ago that the anti-

trust laws do not provide a remedy for injuries solely to

the sovereign interests of a State. Hawaii v. Standard

Oil Co. of California, 405 U.S. 251, 265 (1972). South

Dakota, however, does have commercial as well as sover-

eign interests to vindicate in this case. It would be per-

verse, however, to read the Standard Oil case as author-

ity for the proposition that the sovereign involvement of a

State is entirely irrelevant in determining whether it has

standing to complain. If that were true, a court would

have to ignore matters that bear directly on the magni-

tude and scope of the harm.

South Dakota hardly played a passive role throughout

the years when ETSI was attempting to construct the

pipeline. To the contrary, its participation was required,

and that participation necessitated an entire series of

sovereign decisions and acts. See supra at 3-5. These

sovereign actions were thwarted by the illegal conduct of

KCS and other railroads, and some of that conduct was

specifically directed at the State of South Dakota.

KCS’s campaign to destroy competition from the ETSI

coal slurry pipeline not only deprived South Dakota of

the benefits from the ETSI contract, but also deprived the

State of the opportunity to participate in ether similar

ventures and to develop its resources for its citizens.

South Dakota’s former Governor summarized these grave

effects:

We lost the ability to develop South Dakota in water

resources. We lost water for western South Dakota,

good water, free water, from the Missouri River.

Those are the two things that we lost. [KCS App.

219.]

He testified that the State was never again able to

sell water, nor did it receive further coal slurry propo-

sals.° In other words, KCS did not just kill a single mar-

ket opportunity for the State but instead destroyed an

entire market and thereby frustrated the ability of a

sovereign State to develop its resources for the benefit of

its citizens.

Vindication of South Dakota’s interests would not re-

quire the kinds of speculative calculation that deterred

recognition of a remedy in Standard Oil; the damages

are easy to compute—as the jury did—and they do not

duplicate the damages of ETSI or anyone else. Because

of the significant and readily identifiable damage done

to a sovereign State by violations of the antitrust laws,

this Court should review the judgment below which de-

nies that State a remedy.

As explained above, Standard Oil does not preclude

consideration of the special status of a sovereign State in

assessing the standing of that State to vindicate its com-

mercial interests. The point is that the status of a State

broadens the scope of its commercial interests deserving

of protection under the antitrust laws. However, to the

extent that language in Standard Oil could be read to

prohibit standing by a State in circumstances like those

obtaining here, we respectfully request the Court to re-

consider that language.

Such reconsideration would be both warranted and

timely. For a variety of reasons, the Federal Government

has not enforced the antitrust laws as actively as it once

did. It therefore is imperative that the States be allowed

a more significant role in guarding against the detrimen-

tal effects of antitrust violations on all their interests—

including proprietary activities, processes, commercial in-

terests, sovereignty, and interests beyond those of any

single citizen or group of citizens. And in this case, as

well as throughout the western United States, there could

be no interests more vitally in need of protection than

® Janklow Trial Tr., Vol. I, p. 113.

)

those of water rights, the very life-blood of the State’s

citizens.

B. The Lower Court Treated A Single Issue—Partici-

pation In The Market—As Pecisive, And Ignored

Other Significant Factors

Whether or not South Dakota is to be treated like any

other litigant, the court below committed clear error in

giving decisive effect to its finding that South Dakota

did not participate in the coal transportation market.

This emphasis on a single factor is contrary to the most

recent mandate of this Court in Associated General Con-

tractors of California, Inc. v. California State Council of

Carpenters, 459 U.S. 519 (1983), and is also contrary

to the tests applied in other Circuits.

In Associated General Contractors, this Court empha-

sized that antitrust standing is a fact-intensive inquiry

and that it is “virtually impossible to announce a black-

letter rule that will dictate the result in every case.” Jd.

at 536. Direct participation by the plaintiff in the re-

strained market may be an important factor, to be sure,

but it is not decisive.” This factor is important primar-

ily because it will shed light on the underlying issue that

is really important: namely, whether the plaintiff’s in-

terests would be served or disserved by enhanced compe-

tition in the market.” Jd. at 539. Obviously, antitrust

litigation may produce perverse results if potential plain-

tiffs do not have a genuine interest in preserving com-

petition. Cf. Cargill, Inc. v. Monfort of Colorado, Inc.,

479 U.S. 104 (1986). No such risk is present here.

The court below gave no consideration to the fact that

South Dakota had a vital interest in the preservation of

10 See Blue Shield of Virginia v. McCready, 457 U.S. 465, 472

(1982) (the statute “‘does not confine its protection to consumers,

or to purchasers, or to competitors, or to sellers’”) (quoting

Mandeville Island Farms, Inc. Vv. American Crystal Sugar Co., 334

U.S. 219, 236 (1948)).

competition in the market for the transportation of coal

—an interest identical to that of ETSI itself. Only if the

coal transportation market were opened to competition

from coal slurry pipelines could ETSI and South Dakota

benefit. When the potential competition of a coal slurry

pipeline was destroyed by the actions of KCS and others,

South Dakota was deprived of significant revenues and

“an important opportunity to develop its water resources

for the benefit of its citizens.

Contrary to the characterization in the opinion below,

South Dakota was not simply one more supplier of mate-

rial to the ETSI pipeline. South Dakota’s role was so

critical that even KCS’s counsel concluded that as a re-

sult of the State’s contract with ETSI, “ETSI has thus

initially resolved the worst problem coal slurry pipelines

face: the availability of water.” SA 1116. Cancellation

of the contract was therefore not only “inextricably in-

tertwined with the injury” to the relevant market,"' but

ultimately became a principal objective of KCS’s cam-

paign against competition. In these circumstances, it was

clear error for the Court of Appeals to find that the in-

juries suffered by the State “were ‘purely an incidental

result of anti-competitive activity in another segment of

the economy * * *’.” App. 18a-19a (citation omitted).

It was similarly absurd for the lower court to con-

clude:

The loss of [South Dakota’s] future revenues clearly

flowed from the cancellation of the contract rather

than from injury to competition in the market in

which it was involved. * * * It is evident that South

Dakota would have suffered an identical loss in the

event that the railroads had done nothing and ETSI

had simply decided to terminate the SDCD/ETSI

contract for some other reason. [App. 19a.]

Of course the cancellation of the contract was the im-

minent cause of South Dakota’s injury, but the destruc-

11 McCready, 457 U.S. at 484.

tion of competition for coal transportation is what caused

the cancellation. A simple hypothetical will demonstrate

the fallacy of the lower court’s approach. If a dealer were

wrongfully terminated because of an illegal conspiracy

between his supplier and a rival dealer, it clearly would

be wrong to deny standing on the theory that a valid

termination could cause the same injury to the dealer.

The theory makes no more sense in this case.

The court below acknowledged, but failed to weigh,

most of the significant factors fer a determination of

standing that this Court identified in Associated General

Contractors: that KCS was wrongly motivated to elimi-

nate totally all competition from a coal slurry pipeline,

that elimination of an entire segment of competition was

the very type of injury the antitrust laws were designed

to prevent, that the injury to South Dakota directly

flowed from that elimination of competition, that the

damages were in effect fixed by contract and easy to

calculate, and that no complex apportionment of damages

would be necessary. Contrary to the mandate of Asso-

ciated General Contractors, the lower court focused ex-

clusively on one factor, the causal connection between the

antitrust violations and South Dakota’s harm. The court

then compounded the error by finding that there was no

direct causal connection simply because South Dakota did

not directly compete in the restrained market.

The decision of the Eighth Circuit on this issue is not

an isolated misapplication of the principles laid down by

this Court in Associated General Contractors. The Ninth

Circuit has similarly insisted that an antitrust plaintiff

be either “a consumer of the alleged violator’s goods or

services or a competitor of the alleged violator in the re-

strained market.” Eagle v. Star-Kist Foods, Inc., 812

F.2d 538, 540 (9th Cir. 1987). The Third and Fifth

Circuits have applied a similarly restrictive test. Gregory

Mktg. Corp. v. Wakefern Food Corp., 787 F.2d 92 (3d

Cir. 1986), cert. denied, 479 U.S. 821 (1986); Bell v.

Dow Chem, Co., 847 F.2d 1179 (5th Cir. 1988).

~ However, other Circuits have recognized, as Associated

General Contractors did, that direct participation by the

plaintiff in the restrained market is not a necessary

predicate for standing. The decision in Amey, Ine. V.

Gulf Abstract & Title, Inc., 758 F.2d 1486 (11th Cir.

1985), cert. denied, 475 U.S. 1107 (1986), granted stand-

ing to plaintiffs who were the “targets” of anti-competi-

tive activity (as South Dakota was), even though they

were not direct participants in the restrained market. In

Adams v. Pan American World Airways, Inc., 828 F.2d

24 (D.C. Cir. 1987), cert. denied, 108 S. Ct. 1225 (1988),

and Southaven Land Co. v. Malone & Hyde, Inc., 715

F.2d 1079 (6th Cir. 1983), the courts ultimately denied

standing, but they applied the Associated General Con-

tractors factors and did not simply rest on the fact that

plaintiffs were not in the market.

It is evident that confusion and conflict still exist in

the Courts of Appeals over the appropriate tests for anti-

trust standing. The Court should take the opportunity,

in this important case, to clarify the tests once and for all.

Il. THE DECISION BELOW CONFLICTS WITH A

RECENT DECISION OF THIS COURT AND

EXACERBATES CLEAR CONFLICTS AMONG THE

CIRCUITS ON THE SHAM EXCEPTION TO THE

NOERR-PENNINGTON DOCTRINE

The “Noerr-Pennington doctrine” is the shorthand label

used to describe this Court’s rulings that certain petition-

ing activity before the government is immune from scru-

tiny under the antitrust laws and other laws regulating

commercial behavior. Both Noerr™ and Pennington *

involved lobbying efforts seeking governmental action that

12 Wastern R.R. Presidents Conference V. Noerr Motor Freight,

Inc., 365 U.S. 127 (1961).

13 United Mine Workers v. Pennington, 381 U.S. 657 (1965).

‘i

would injure the lobbyists’ competitors..* This Court

ruled that such efforts could not subject the lobbyists to

antitrust liability.

The Court also recognized that petitioning activity may

be “a mere sham to cover what is actually nothing more

than an attempt to interfere directly with the business

relationships of a competitor,” in which case application

of the antitrust laws “would be justified.” Noerr, 365

U.S. at 144. This sham exception was first applied in

California Motor Transport Co. v. Trucking Unlimited,

404 U.S. 508 (1972). That case concerned the filing of

some 40 administrative actions by motor carriers to block

a competitor’s efforts to obtain operating rights. This

Court held that the litigation activity was a sham in-

tended to burden the competitor and therefore was not

entitled to Noerr-Pennington immunity, id. at 515, even

though the carriers actually prevailed in 21 of the 40 ad-

ministrative actions.’*° Two years later, the Court sum-

marily affirmed a lower court finding that an electric

company’s use of litigation to block the establishment of

competing municipal power systems also fell within the

sham exception to Noerr-Pennington."

A. The Lower Court’s Absolutist Treatment Of Motive

The court below did not dispute that KCS had anti-

competitive motives in pursuing its course of litigation,

but nonetheless ruled that KCS’s activities were wholly

14Jn this case, tried before Allied Tube and Conduit Corp. Vv.

Indian Head, Inc., 108 S. Ct. 1931 (1988), the jury was instructed

that the lobbying activities were absolutely protected. KCS App.

515.

15 See Trucking Unlimited v. California Motor Transp. Co., 1967

Trade Cas. (CCH) § 72,298 at 84,744 (N.D. Cal. 1967), rev’d, 432

F.2d 755 (9th Cir. 1970), aff’d, 404 U.S. 508 (1972).

18 Otter Tail Power Co. v. United States, 410 U.S. 366 (1973),

on remand, 360 F. Supp. 451 (D. Minn. 1973), aff’d, 417 U.S. 901

(1974).

eet

protected because KCS genuinely sought judicial relief in

the Andrews litigation. App. 27a. Even accepting the

court’s premise—contrary to the jury findings—that KCS

genuinely sought relief, the Eighth Circuit’s legal analysis

was fundamentally flawed and directly contrary to this

Court’s guidance.’’

The question presented was succinctly posed by the

Fifth Circuit in Coastal States Mktg., Inc. v. Hunt, 694

F.2d 1358, 1371 (5th Cir. 1983) :

The usual litigant will base its decision to sue on a

number of factors. Some of these considerations may

be anticompetitive. Others may involve a genuine

desire for judicial relief * * *. The “sham” standard

must account for the existence of multiple motiva-

tions.

In recent years, some Circuits have concluded that

litigation activity is protected under Noerr-Pennington

unless it is solely motivated by an intent to injure com-

petitors, with no genuine desire to obtain judicial relief.

These Circuits regard the presence of a genuine desire

for judicial relief, even if combined with or overshadowed

by anticompetitive motives, as sufficient to invoke the

Noerr-Pennington shield. See, e.g., Coastal States Mktzg.,

Inc., 694 F.2d at 1872 (“anticompetitive motives do not

taint a suit filed, at least in part, in hope of judicial

relief”); Westmac, Inc. v. Smith, 797 F.2d 313, 317

(6th Cir. 1986), cert. denied, 479 U.S. 1035 (1987) (“the

17 The Eighth Circuit’s extended analysis of the Noerr-Pennington

isstie was necessary to its holding. Although the court stated

(again contrary to the jury’s findings) that KCS’s efforts to assert

standing in the Andrews litigation were not a proximate cause of

ETSI’s decision to terminate its contract with the State, the court

recognized that KCS’s efforts went beyond assertion of its own

standing, and therefore it had to rule on the Noerr-Pennington

issue. App. 26a-3la. The court below also engaged in footnoted

dicta concerning the jury’s findings on damages, but the discussion

was expressly prefaced by the statement that “we do not pass on

this issue.” App. 26a, n.28.

sham exception does not apply merely because a party

files a suit with the principle [sic] purpose of harming

his competitor’) ; Energy Conservation, Inc. v. Heliodyne,

Inc., 698 F.2d 386, 388 (9th Cir. 1983) (sham exception

applies “when the bringing of a suit is solely an effort to

interfere directly with a competitor”) (emphasis added).

The court below embraced this approach to the problem

of mixed motives in applying the sham exception. It

stated that the exception only applied if the litigation was

“in fact solely intended to cause injury to competitors

rather than to obtain governmental action,’ and that

“Tslo long as [an actual desire for relief] existed, the

issue of whether the petitioners also possessed anticom-

petitive motives is irrelevant.” App. 23a, 29a (emphasis

added). Although this approach had support in the other

Circuits, it was definitively rejected by this Court last

year, after the cited cases from the other Circuits but

before the decision below.

In Allied Tube & Conduit Corp., this Court considered

a claim that Noerr-Pennington protected the efforts of a

manufacturer to secure passage of product standards and

codes that would iniure a competitor. The Court expressly

addressed the problem of mixed motives in assessing

whether the manufacturer’s conduct was protected, and

ruled that the presence of a genuine desire to obtain gov-

ernmental relief—in the case before it, to secure legisla-

tive enactment of the standards and codes—did not im-

munize the manufacturer’s conduct. As the Court stated,

“Twle cannot agree with [the manufacturer’s] absolutist

position that the Noerr doctrine immunizes every con-

certed effort that is genuinely intended to influence gov-

ernmental action.” 108 S. Ct. at 1938. There was little

dispute that the manufacturer genuinely sought govern-

mental action, but this Court held that such an “ultimate

aim is not dispositive.” Jd. at 1939.

The court below, in contrast, embraced this precise

“absolutist” position, ruling that KCS’s pattern of litiga-

tion activity was necessarily protected simply because

KCS genuinely sought judicial relief in the Andrews case.

According to the court below, the presence of anticompeti-

tive purpose is wholly “irrelevant” so long as the defend-

ant also actually sought to influence governmental action—

in the litigation context, to obtain judicial relief. App.

29a. This Court in Allied Tube rejected both this ex-

treme and the polar opposite extreme which would make

an anticompetitive purpose decisive. On the one hand,

the Court made clear that “we do not suggest that the

absence of anticompetitive purpose is necessary for Noerr

immunity.” 108 S. Ct. at 1941 n.11 (emphasis added).

On the other hand, the Court stated that “the mere fact

that an anticompetitive activity is also intended to in-

fluence governmental action is not alone sufficient to ren-

der that activity immune from antitrust liability.” Jd.

(emphasis in original). The conduct in Allied Tube was

not necessarily protected because it “was at least partially

motivated by the desire to lessen competition.” Jd. at

1941 (emphasis added). This is in sharp contrast to the

approach of the court below that litigation activity is

absolutely protected as a matter of law unless it was “in

fact solely intended te cause injury to competitors.” App.

23a (emphasis added). The court below has erected a

burden of proof virtually impossible to sustain.

There is no easy answer to the problem of mixed mo-

tives in applying Noerr-Pennington and the sham excep-

tion. As this Court concluded, the answer depends on

“the context and nature of the activity,” 108 S. Ct. at

1939—i.e., the entire range of evidence surrounding the

defendant’s conduct. Such evidence was put before the

jury in this case in the course of a ten-week trial, and

that jury concluded that KCS’s pattern of litigation ac-

tivity was a sham. The Eighth Circuit overturned that

finding on the basis of its “absolutist’” view of Noerr-

Pennington. This Court should grant the writ to ensure

that its approach to this recurring problem is applied by

the lower courts.

B. The Lower Court’s Absolutist Treatment Of Partial

Success

Application of the Allied Tube approach would also put

to rest an existing conflict among the Circuits over whether

the objective reasonableness and/or success of a party’s

position in litigation preclude a finding that the litigation

is a sham. Prior to Allied Tube, several Circuits had

ruled that reasonable or successful litigation cannot be a

sham.'* In contrast, the Fifth Circuit had held that “suc-

cess on the merits does not necessarily preclude an anti-

trust plaintiff from proving that the defendants’ earlier

litigation activities were sham,” ’*® and the Seventh Cir-

cuit had ruled that litigation can constitute a sham un-

protected by Noerr-Pennington “regardless of its out-

come.” °

In ruling that KCS’s activities were protected “as a

matter of law,” the court below invoked Eighth Circuit

precedent involving “litigation [which] was successful

and consequently deemed to preclude a finding of sham or

unlawful intent.” *! The court relied upon its conclusion

18 See Columbia Pictures Indus. v. Redd Horne, Inc., 749 F.2d

154, 161 (3d Cir. 1984); Westmac, Inc. v. Smith, 797 F.2d at 318;

Razorback Ready Mix Concrete Co. Vv. Weaver, 761 F.2d 484 (8th

Cir. 1985); Federal Prescription Serv., Inc. v. American Pharma-

ceutical Ass’n, 663 F.2d 253, 266 (D.C. Cir. 1981), cert. denied, 455

U.S. 928 (1982).

19 Jy re Burlington Northern, 822 F.2d 518, 528 (5th Cir. 1987),

cert. denied, 484 U.S. 1007 (1988). The dissent argued that a suc-

cessful lawsuit cannot under any circumstances constitute a sham.

822 F.2d at 534.

20 Grip-Pak, Inc. v. Illinois Tool Works, Inc., 694 F.2d 466, 472

(7th Cir. 1982), cert. denied, 461 U.S. 958 (1983).

21 App. 29a-30a (emphasis added), citing Razorback Ready Miz

Concrete Co. v. Weaver, 761 F.2d at 487. The Seventh Circuit has

expressly noted that the Eighth Circuit view “appears to be * * *

contrary” to its own on this point. Grip-Pak, 694 F.2d at 473, citing

Alexander v. National Farmers Org., 687 F.2d 1178, 1200 (8th

that “there was a reasonable basis for the action” in

Andrews in immunizing all of KCS’s activities from in-

quiry. App. 3la. The Fifth Circuit, on the other hand,

considered the same claim on the same facts in In re

Burlington Northern, another case arising out of the

efforts of the various railroads, including KCS, to block

the ETSI pipeline project. Since the Fifth Circuit does

not accord the same weight to success on the merits or

objective reasonableness in applying the sham exception

as does the Eighth Circuit, it held—contrary to the court

below—that the railroads’ Andrews activity was not im-

mune as a matter of law under Noerr-Pennington, but

could be examined to see if it fell within the sham excep-

taion. 822 F.2d at 528. The conflict is thus not merely

of academic interest; it affects real-world litigation to the

extent that identical conduct leads to different results in

different Circuits.

This conflict should have been resolved by Allied Tube.

Since an actual desire for relief alone can no longer be

viewed as sufficient for immunity, actual success can like-

wise no longer confer talismanic protection from applica-

tion of the sham exception. Such success or the objective

reasonableness of the claim may or may not reflect the

presence of a genuine desire for relief, but such a genuine

desire no longer suffices to immunize the litigation ac-

tivity. By failing to follow Allied Tube, the court below

kept alive and exacerbated a persistent conflict among the

Circuits.

The Eighth Circuit’s approach was particularly objec-

tionable in this case, however, because it immunized

KCS’s entire course of conduct on the basis of one “suc-

cessful’ piece of litigation. The court itself stated that

“one-third of [KCS’s] administrative actions * * * were

Cir. 1982). See also Areeda & Hovenkamp, Antitrust Law % 203.1

at 19 (1988 Supp.) (noting conflict between Sixth Circuit Westmac

and Seventh Circuit Grip-Pak opinions).

li lle et A ae Sg etn el ce al

SS ee ee eee ee =<

Oe ee

directly related to the Andrews litigation,” App. 25a,

meaning that fully two-thirds were not. The court none-

theless devoted its analysis to the one-third, ignored the

other two-thirds, further ignored the 19 unsuccessful

claims in Andrews, found that the Andrews litigation was

not a sham, and then overturned a jury verdict which

was based on all the evidence. The Eighth Circuit’s ap-

proach is thus not only flawed as a matter of logic, but

also is in sharp conflict with this Court’s decisions and

those of other Circuits.

The clearest conflict is with California Motor, the first

decision holding that sham litigation was not protected

by Noerr-Pennington. In California Motor, the Court

held that the sham exception applied to a course of repeti-

tive suits brought “with or without probable cause.” 404

U.S. at 512 (emphasis added). This Court ruled that

Noerr-Pennington did not immunize the defendants’ con-

duct even though the defendants had prevailed in 21 of

the 40 suits alleged to be sham.” The Court did not rule

that only the unsuccessful litigation was actionable, and

certainly not that the successful litigation somehow “im-

munized” that which was not.

The Eighth Circuit’s approach also conflicts with the

holdings of other Circuits that otherwise-protected litiga-

tion which is part of an overall anticompetitive scheme

is not entitled to Noerr-Pennington immunity. As the

Ninth Circuit held in a leading case:

When * * * the petitioning activity is but a part of

a larger overall scheme to restrain trade, there is no

overall immunity. * * * The defendants’ actions do

not enjoy immunity, even though a part of the ac-

tions may have involved protected first amendment

petitioning. The reach of the Noerr-Pennington doc-

trine is not that extensive, and the antitrust laws

are not that impotent. [Clipper Exxpress v. Rocky

Mountain Motor Tariff Bureau, Inc., 690 F.2d 1240,

22 See n.15 supra.

1263, 1265 (9th Cir. 1982), cert. denied, 459 USS.

1227 (1983) .]

See also Kobe, Inc. v. Dempsey Pump Co., 198 F.2d 416

(10th Cir.), cert. denied, 344 U.S. 837 (1952); Rex

Chainbelt, Inc. v. Harco Prods., Inc., 512 F.2d 993 (9th

Cir.), cert. denied, 423 U.S. 831 (1975). But see In re

Burlington Northern, 822 F.2d at 526. The court below,

in contrast, concluded that because “a part of [KCS’s]

actions” were protected (i.e., the one-third involving

Andrews), KCS was entitled to “overall immunity.”

C. The Conflict And Confusion Surrounding The Sham

Exception Is Persistent And Recurring

Not surprisingly, the Circuits are in disarray over the

scope of the sham exception to the Noerr-Pennington doc-

trine. As the Seventh Circuit has noted, “[t]he Noerr

and Pennington cases themselves provide little definition

of what a ‘sham’ may be other than to indicate immunity

for ‘genuine efforts’ and ‘good faith’ attempts to influence

governmental bodies.” MCI Communications Corp. V.

AT&T, 708 F.2d 1081, 1155 (7th Cir.), cert. denied, 464

U.S. 891 (1983). Indeed, there is a persistent chorus

from the various Courts of Appeals themselves seeking

guidance on what constitutes sham activity. See, e.g.,

Coasial States Mktg., Inc. v. Hunt, 694 F.2d at 1371

(“The Supreme Court has never defined with precision

the standard for determining when litigation is a

sham”); Video Int’l Production, Inc. Vv. Warner-Amex

Cable Communications, Inc., 858 F.2d 1075, 1082 (5th

Cir. 1988), cert. denied, 109 S. Ct. 3189 (1989) (a “sub-

stantial amount of confusion” exists over exceptions to

Noerr-Pennington) ; Litton Systems, Inc. v. AT&T, 700

F.2d 785, 813 (2d Cir. 1983), cert. denied, 464 U.S. 1073

(1984) (“the contours of the sham exception are far

from clear; the courts have themselves had difficulty de-

fining the doctrine”); Westmac, Inc. v. Smith, 797 F.2d

at 320 (“the federal courts have struggled to give spe-

cific meaning to the Noerr-Pennington doctrine’s sham

exception. We need a definition of the sham exception

ovate

that is clear and analytically sound as well as functional”)

(Merritt, J., dissenting).

Commentators agree that application of the exception

“has been plagued by considerable confusion.” ** As two

authors noted recently, “[w]hat is and what is not a

sham is the Hamlet-like question that has perplexed the

lower courts in the two decades since the Supreme Court

* * * enunciated the Noerr doctrine.” ** Another con-

cluded that there is “fundamental disagreement over the

test by which to identify sham petitioning.” *

This confusion is particularly troubling because issues

surrounding the sham exception to the Noerr-Pennington

doctrine arise with considerable frequency,** and often,

as here, in the context of major, large-scale litigation.

The Noerr-Pennington doctrine and the corollary sham

exception are applicable in a wide variety of contexts,

including tortious interference,” antitrust,** civil rights,”

23 Fischel, Antitrust Liability for Attempts to Influence Govern-

ment Action: The Basis and Limits of the Noerr-Pennington Doc-

trine, 45 U. Chi. L. Rev. 80, 104 (1977).

24 Handler & De Sevo, The Noerr Doctrine and Its Sham Excep-

tion, 6 Cardozo L. Rev. 1, 1 (1984).

25 Calkins, Developments in Antitrust and the First Amendment:

The Disaggregation of Noerr, 57 Antitrust L. J. 327, 332 (1988).

See also Sullivan, Developments in the Noerr Doctrine, 56 Anti-

trust L. J. 361, 361 (1987) (Supreme Court cases in area “leave

open some broad, general questions”) ; Note, The Misapplication of

the Noerr-Pennington Doctrine in Non-Antitrust Right to Petition

Cases, 36 Stan. L. Rev. 1243, 1253 (1984) (“judicial construction

of the sham exception has been inconsistent’).

26 See Handler & De Sevo, supra at 14, 26 (“In recent years,

there has been an explosion of case law involving claims brought

under the Noerr doctrine’ with a “dramatic increase ir reliance

upon the sham exception’’).

27 See App. 22a-23a & n.24.

28 See, e.g., Allied Tube & Conduit Corp. v. Indian Head, Inc.,

108 S. Ct. at 1936-42.

20 See, e.g., Gorman Towers, Inc. Vv. Bogoslavsky, 626 F.2d 607

(8th Cir. 1980); Weiss v. Willow Tree Civic Ass’n, 467 F. Supp.

803, 807 (S.D.N.Y. 1979).

26 .

libel,*° and unfair labor claims.*' Both the Noerr-

Pennington doctrine itself and the sham exception to it

are judicially created doctrines, so only this Court can

provide the uniform interpretation which is so clearly

lacking.

Ill. THE COURT BELOW VIOLATED THE SEVENTH

AMENDMENT IN OVERTURNING THE JURY’S

FACTUAL FINDINGS THAT SHAM PETITIONING

CAUSED THE INJURY TO THE STATE

The Seventh Amendment restricts appellate review of a

jury’s determination of factual questions. This Court

has repeatedly asserted that “it would be an undue in-

vasion of the jury’s historic function for an appellate

court to weigh the conflicting evidence, judge the credibil-

ity of witnesses and arrive at a conclusion opposite from

the one reached by the jury.” ** Only when there is a

“complete absence of probative facts to support the con-

clusion” ** may an appellate court overturn a jury’s

findings.

The Eighth Circuit below contravened these basic prin-

ciples and invaded the province of the jury in at least two

significant respects. First, it focused exclusively on

KCS’s role in the Andrews litigation in considering KCS’s

liability. The jury, however, heard evidence on a broad

range of petitioning activity by KCS apart from the

Andrews litigation, including the so-called “window liti-

gation”, proceedings in connection with the EIS and

hearings relating to federal, state and local permits.

3° See, e.g., Webb v. Fury, 282 S.E.2d 28, 36-37 (W. Va. 1981).

3! See, e.g., Bill Johnson's Restaurants, Inc. v. NLRB, 461 U.S.

731, 741 (1983).

382 Lavender v. Kurn, 827 U.S. 645, 652-653 (1946). Accord

Gallick v. Baltimore & Ohio R.R., 8372 U.S. 108, 116 (1968); Tennant

Vv. Peoria & Pekin Union Ry. Co., 321 U.S. 29, 35 (1944).

33 Lavender, 327 U.S. at 653 (emphasis added).

Originally, the Court of Appeals sought to justify over-

turning the jury’s findings as to the tort claim on the

ground that “|(tjhe trial court’s blanket instruction to

the jury * * * submitted the question of improper inter-

ference without attempting to distinguish between the

alleged interference occurring before and after the date

of the contract.” App. 25a, n.27. The jury, however, was

expressly instructed that it “may only consider evidence

as to the defendant’s conduct that occurred after defend-

ants had knowledge of the contract between plaintiffs and

ETSI” (Jury Instruction 32), and unanimously answered

“Yes” to the question whether “the defendant’s actions

taken after the defendant knew of the existence of the

contract * * * were a proximate cause of the termination

of that contract.” App. 66a-67a (Special Verdict 11).

In denying rehearing, the court amended its opinion to

acknowledge that “the trial court instructed the jury

* * * to consider only evidence in the tortious interfer-

ence claim that occurred after KCS’s knowledge of the

contract.” App. 36a. The court nonetheless persisted in

restricting its analysis of sham petitioning to the An-

drews litigation, stating ipse dixit that “the post-contract

activity predominantly involved Andrews litigation and

the opposition by the other states * * *.” App. 37a (em-

phasis added).

Second, even if KCS’s post-contract activity “predomi-

nantly” involved the Andrews case, the lower court erred

because the properly-instructed jury had sufficient evi-

dence before it to conclude that KCS’s other activities

contributed to the harm to South Dakota. The court below

acknowledged that the legitimacy of those other activities

was “subject to debate.” App. 24a. With respect to “the

period in which the contract was in effect,” the court

noted that “roughly one-third of the administrative pro-

ceedings mentioned above were directly related to the

Andrews litigation.” App. 25a. As stated earlier, this

means that two-thirds were not, and yet the court simply

dismissed that two-thirds as “de minimus.” (sic) App.

37a. The question of the weight to accord such ex-

tensive proceedings was for the jury, and the court vio-

lated the Seventh Amendment in overturning the jury’s

verdict.

The same is true with respect to the question whether

KCS’s activities in connection with Andrews were sham.

Other Circuits recognize that whether litigation activity

is a “sham” under Noerr-Pennington is a question of fact

for the jury.** Indeed, the first case applying the sham

exception, California Motor, ruled that the “factfinder”

might conclude that the activities at issue in that case

constituted a sham. 404 U.S. at 513.

The jury here was expressly instructed at length on the

Noerr-Pennington doctrine and the sham exception.” It

was specifically told that KCS’s litigation activities were

protected and could not form the basis for antitrust or

tort liability if they were “brought for the true purpose

of seeking the relief sought therein.” App. 7la (July In-

struction 33). Pursuant to these instructions, the jury

returned special verdicts finding that KCS’s actions after

it knew of the contract between ETSI and the State were

a proximate cause oi the termination of that contract.

The court below, however, overturned the jury’s conclu-

sions and held that KCS’s Andrews-related litigation ac-

tivities, “as a matter of law,” were not sham and were

protected by Noerr-Pennington. App. 3la. It did so with-

out any discussion of the proper weight to accord the

jury’s findings under the Seventh Amendment, without

any recognition that the evidence must be viewed in the

light most favorable to the State and that the State was

entitled to all favorable inferences that might reasonably

3* See, e.g., Clipper Exxpress v. Rocky Mountain Motor Tariff

Bureau, Inc., 690 F.2d at 12583 (“[w)hether something is a genuine

effort to influence governmental action, or a mere sham, is a ques-

tion of fact”) ; Affiliated Capital Corp. v. City of Houston, 735 F.2d

1555, 1567 (5th Cir. 1984) (“[w]hether or not such conduct is

within the sham exception is a fact issue for the jury’’).

35 See App. 7la-72a,

be drawn from the evidence, and, indeed, without any

recognition that the sham question was for the jury at

all. The appellate court simply reviewed the massive rec-

ord concerning KCS’s activities and motive and reached

a conclusion contrary to that of the jury. Certainly where

a jury has been properly instructed, as it was in this case,

and its determination necessarily takes into account de-

tailed evidence about a party’s motives and intent, a

Court of Appeals should not be allowed to overturn the

jury’s verdict as a matter of law because some small part

of the underlying pattern of litigation turned out to be

successful.

CONCLUSION

For the foregoing reasons, this Court should grant the

writ and reverse the decision below.

Respectfully submitted,

E. BARRETT PRETTYMAN, JR.*

ROGER A. TELLINGHUISEN

Attorney General HOGAN & HARTSON

JEFFREY P. HALLEM 555 Thirteenth St., N.W.

M. BRIDGET RYAN Washington, D.C. 20004

Assistant Attorneys General (202) 637-5685

State Capitol Counsel for Petitioners

Pierre, SD 57501

(605) 773-8215

THOMAS J. WELK

JAMES E. MCMAHON

BoYcE, MURPHY, MCDOWELL

& GREENFIELD

Post Office Box 5015

Sioux Fal!s, SD 57117

(605) 336-2424

GLEN H. JOHNSON

BANKS, JOHNSON, JOHNSON,

COLBATH & HUFFMAN

3202 West Main Street

Rapid City, SD 57702

(605) 348-7300

Of Counsel:

DANIEL J. DOYLE

740 Pine Road

Carlisle, PA 17013

(717) 486-4106 * Counsel of Record

APPENDICES

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

No. 88-2158

STATE OF SOUTH DAKOTA; SOUTH DAKOTA CONSERVANCY

DISTRICT, an Agency of the State of South Dakota,

y, Appellee,

KANSAS CITY SOUTHERN INDUSTRIES, INC., a Foreign Cor-

poration; KANSAS CITY SOUTHERN RAILWAY COMPANY,

a Foreign Corporation,

Appellants.

No. 88-5375

STATE OF SOUTH DAKOTA; SOUTH DAKOTA CONSERVANCY

DISTRICT, an Agency of the State of South Dakota,

v. Appellants,

KANSAS CITY SOUTHERN INDUSTRIES, INC., a Foreign Cor-

poration; KANSAS CITY SOUTHERN RAILWAY COMPANY,

a Foreign Corporation,

Appellees.

No. 88-5422

STATE OF SOUTH DAKOTA; SOUTH DAKOTA CONSERVANCY

DISTRICT, an Agency of the State of South Dakota,

y, Appellant,

KANSAS CITY SOUTHERN INDUSTRIES, INC., a Foreign Cor-

poration; the KANSAS CiTy SOUTHERN RAJLWAY, INC.,

a Foreign Corporation,

Appellees.

Appeals from the United States District Court

for the District of South Dakota

Submitted: December 13, 1988

Filed: June 29, 1989

Before LAY, Chief Judge, HEANEY* and FAGG, Cir-

cuit Judges.

LAY, Chief Judge.

Kansas City Southern Industries and The Kansas City

Southern Railway Company ' appeal a judgment in favor

of the State of South Dakota and the South Dakota Con-

servancy District,” of $600,000,000 which represents a treb-

led jury verdict of $200,000.000 based on a federal anti-

trust claim. KCS also appeals a verdict of $244,200,000

awarded to SD on a state law claim of tortious interfer-

ence with a contractual relationship. KCS claims SD has

no standing to assert a federal antitrust action and that

any anti-competitive activity KCS may have committed is

protected by the Noerr-Pennington doctrine. See infra

note 23. KCS also asserts that the contract between SD

and Energy Transportation Systems, Inc. (ETSI), cannot

be the basis for recovery under either a antitrust or a

tort theory because the contract was invalid. KC further

*The HONORABLE GERALD W. HEANEY assumed senior

status on December 31, 1988.

1 These parties will be jointly referred to hereafter as “KCS.”

2 The plaintiffs who brought this action were the State of South

Dakota and its Conservancy District, and will be jointly referred

to hereafter as “SD”, “the State”, or “the State of South Dakota.”

appeals other issues relating to the jury instructions, the

statute of limitations, personal jurisdiction, venue, and

the entry of judgment. The State of South Dakota cross-

appeals the trial court’s exclusion of its claim for lost tax

revenues, failure to properly secure the judgment, and

refusal to instruct the jury on certain theories. We re-

verse and dismiss the judgment on the antitrust claim for

lack of standing. We further reverse and dismiss the

judgment on the tortious interference claim for reasons

set forth in our opinion.

I. Background

Energy Transportation Systems, Inc., was created dur-

ing the early 1970’s for the purpose of constructing a

pipeline through which coal could be transported from

mining sites in north central states to utility companies

in south central states. This project occurred in response

to the energy crisis arising in the oil industry. ETSI,

which was a joint venture composed of a number of large

corporations,* intended to transport coal in “slurry” form.

Coal slurry is a mixture of roughly half coal and half

water. Consequently, large quantities of water were re-

quired to operate the pipeline.

ETSI initially proposed the Madison Formation Aquifer

(Madison) as the source of water for the pipeline. The

Madison is an enormous, mostly subterranean body of

water which exists under several states including South

Dakota and Wyoming. The State of South Dakota op-

posed this proposal on the grounds that the pipeline’s use

of Madison water would be detrimental to its environ-

ment and would deplete the water supply of residents in

the western part of the state. ETSI nonetheless sought

3The ETSI Pipeline Project was a joint venture created as a

partnership under the laws of Delaware by and among Arcoal

Transportation, Inc., Bechtel Petroleum, Inc., Lehman Realty Cor-

poration, Slurco Corporation, and Texas Eastern Slurry Transport

Company. KCS app. at 707.

and received Madison water permits from Wyoming au-

thorities.

The ETSI pipeline project also faced opposition from

the railroad industry which opposed the construction of

coal slurry pipelines generally. During the mid-1970’s

to the end of 1981, this opposition manifested itself in the

railroads’ refusal to grant ETSI permission to cross un-

der existing railroad tracks. Crossing rights were funda-

mental to the construction of the pipeline since there was

no way to build around the railroads. ETSI was even-

tually forced to litigate for the right to cross under the

tracks. After determining that the railroads’ right-of-way

interests stemmed from easements rather than from own-

ership in fee, ETSI purchased crossing rights from the

abutting fee owners. ETSI then filed quiet title actions

against the railroads. In defending these cases, the rail-

roads pursued full exhaustion of their appellate remedies.*

However, their efforts were to no avail. From the middle

of 1976 to the end of 1981, ETSI prevailed in all of the

more tnan sixty quiet title actions.

Well into this period of “window litigation,”* in the

late 1970’s, KCS and the other railroads determined that

they would also oppose the ETSI pipeline project in the

administrative forum. In order to construct the pipeline,

ETSI was required to obtain a great number of permits

and approvals from local, state, and federal agencies.

4A prime example of this tactic occurred in Oklahoma where

KCS’ rights-of-way existed through easements. Oklahoma law

clearly disfavored KCS’ position in resisting the quiet title actions.

KCS nonetheless pursued the appeals of these cases in the spirit

of its professed objective: “delay every way we can [ETSI’s] ob-

taining permits or grants for construction of their lines * * *.”

KCS app. at 645.

5 This phrase was coined to describe “gaps” in land ownership

“where the railroads did not own their rights-of-way in fee but

held instead only an easement interest.” SD brief at 4. See also

In re Burlington Northern, Inc., 822 F.2d 518, 521 (5th Cir. 1987).

et aaa

The railroads focused their collective efforts in opposing

the pipeline project in proceedings in which ETSI sought

the various permits and approvals necessary for construc-

tion. Although they were participants in scores of ad-

ministrative proceedings, the railroads’ efforts were uni-

formly unsuccessful. KCS’ most significant opposition

related to the submission by ETSI of its Environmental

Impact Statement (EIS). The railroads focused much of

their resources toward criticism of this EIS with the

intention of making the “environmental evaluation as

difficult as possible * * * [and h]opefully, the State Agen-

cies (with suggestions from Railroad people) could bog

down the study with numerous statistical studies which

we would hope to show would have an adverse effect on

labor, local communities, and perhaps on other indus-

tries.” SD supp. app. at 1001-02 (letter from W.A. Thie

to Ed. Dudley, General Counsel, Oklahoma Railways Com-

mittee (June 13, 1979)). The State of South Dakota also

opposed ETSI in the EIS proceedings, labeling the project

“inadequate and almost cavalier in its attitude and treat-

ment of impacts to South Dakota” and advising the De-

partment of the Interior (Interior) to order the redraft

and recirculation of ETSI’s proposed EIS. KCS app. at

540. South Dakota Governor William Janklow joined

with the Governors of the States of Wyoming, Montana,

and Nebraska to petition the Secretary of the Interior to

delay the decision on ETSI. KCS app. at 790. Despite

this opposition, the EIS process was completed in the

early 1980's.

As previously stated, before late 1981 South Dakota

also participated in opposition to the pipeline proposal in

the administrative forum. This opposition was inspired

by SD’s concern that ETSI would use Madison water for

the pipeline and thereby deprive residents of western

South Dakota of their prime water source. For a long

time, South Dakota had also opposed the use of water

from the Oahe Reservoir. The Oahe Reservoir is a large

body of water located in central South Dakota along the

Missouri River. In 1975, Janklow, then SD’s Attorney

General, had officially concluded that South Dakota lacked

authority to transfer or assign Oahe water rights. KCS

app. at 774-786. Subsequently, a proposed sale of Oahe

water by South Dakota was vetoed in 1977 by then-

Governor Richard Kneip. KCS app. at 787-89.

South Dakota officials formally dropped their opposi-

tion on December 23, 1981, when the South Dakota Con-

servancy District (SDCD) executed an agreement with

the ETSI Pipeline Project (SDCD/ETSI contract) in

which ETSI agreed to use water from the Oahe Reservoir

rather than from the Madison Formation. The SDCD/

ETSI contract provided that the SDCD would issue ETSI

a permit to draw 50,000 acre-feet of Oahe water per

year. SDCD did obtain such a permit with the aid of the

legislature and subsequently transferred this permit to

ETSI in February of 1982. In exchange for this permit,

ETSI agreed to make payments to SDCD in the following

manner: $2,000,000 upon the issuance of the permit;

$2,000,000 if SDCD’s authority to issue such a permit

was unchallenged or, if challenged, was affirmed by the

state’s courts; $3,000,000 on the anniversary of the is-

suance of the permit and every anniversary thereon

until construction of the pipeline was commenced;

$9,000,000 upon commencement of construction; and every

year thereafter, for fifty years, payments based on an

amount adjusted according to the Fixed-Weighted Price

Index for the Gross National Product.* Additionally,

* The payments were to be made in accordance with the following

formula:

A = 0.5 B(1 + (C/D)) where

A = amount of payment, provided that no payment shall

ever be less than the immediately preceding payment.

B = Nine Million Dollars ($9,000,000) for the second

payment under this Paragraph A.4., and thereafter the

immediately preceding payment under this Paragraph A.4.

C = the Fixed-Weighted Price Index for the Gross Na-

tional Product for the latest available calendar year at

ETSI agreed to pay SDCD $1,500,000 if the West River

Aqueduct, which was the pipeline that would carry Oahe

water from central South Dakota to Wyoming, was not

constructed on or before July 1, 1984. As part of the

agreement, residents of western South Dakota would be

allowed to tap water for their own consumption from

the West River Aqueduct. ETSI retained the right to

cancel this contract on thirty days notice where there was

pending litigation or if it intended to abandon the pipe-

line project, and on sixty days notice if it intended to

secure an alternative water source. If ETSI did not in-

voke its cancellation rights, this contract had a potential

term of fifty years following completion of the pipeline.

On July 2, 1982, the ETSI Pipeline Project and the

Department of the Interior, through the Bureau of Rec-

lamation (BOR), executed a contract which authorized

ETSI to withdraw at least 20,000 acre-feet of water an-

nually from the Oahe Reservoir (BOR/ETSI contract).

The States of Iowa, Missouri, and Nebraska, as well as

KCS and several additional interested parties, filed an

action to enjoin the contract and sought a declaration

that Interior officials violated several federal statutes by

their execution of the ETSI contract. The United States

District Court for the District of Nebraska permanently

enjoned the BOR/ETSI contract on the ground that In-

terior was not empowered to furnish Oahe water for in-

dustrial use. Missouri v. Andrews, 586 F. Supp. 1268, 1281

(D. Neb. 1984). In reaching its conclusion, the court

interpreted the Flood Control Act of 1944, 33 U.S.C.

$§ 701-709b (1982 & Supp. 1986), to mean that the Army

the time of payment for which the Index has been pub-

lished in the “Survey of Current Business” (or successor

publication).

D = the Fixed-Weighted Price Index for the Gross Na-

tional Product for the calendar year immediately preceding

the calendar year applicable to “C”, above.

KCS app. at 663.

Corps of Engineers (Corps) was to build, operate, and

control main stem reservoirs while the Department of

the Interior, through the Bureau of Reclamation, was to

build, operate, and control the irrigation works attached

to those reservoirs. Andrews, 586 F. Supp. at 1277. With

respect to the Oahe Reservoir, the district court found no

evidence that demonstrated specific storage space assigned

to irrigation, much less any authority granted to Interior

to use or assign Oahe water for a nonirrigation purpose

such as industrial projects. Jd. This court affirmed the

district court’s decision. Missouri v. Andrews, 787 F.2d

270, 287 (8th Cir. 1986). Ultimately, Andrews was af-

firmed by the United States Supreme Court. ETSI Pipe-

line Project v. Missouri, 484 U.S. 495 (1988). The Court

expressly noted, however, that it did not pass on “the

relative interests of the United States and South Dakota

in Lake Oahe water.” Jd. at 808 n.2.

Soon after the district court permanently enjoined the

BOR/ETSI contract in May of 1984, South Dakota re-

fused a request by ETSI to postpone contract payments.

On July 31, 1984, ETSI, describing the opposition by the

railroads as insurmountable, announced its decision to

terminate the pipeline project and exercised its unilateral

power to cancel its at-will contract with SDCD. Later

that year, ETSI attempted to renegotiate an agreement

but again South Dakota refused. On May 28, 1985, South

Dakota filed an amended complaint * against KCS in fed-

* The original complaint had been filed on March 16, 1988. On

January 9, 1984, KCS moved to dismiss the original complaint for

lack of standing. This motion was granted in part and denied in

part on July 26, 1984. See infra note 18. Those plaintiffs who

served in a capacity as parens patriae were dismissed. The dis-

trict court, the Honorable Andrew W. Bogue presiding, held that:

The State is not in the coal transportation business, and the

Court sees no argument relating to harm to the State which

would result from lack of competition in coal transportation.

That claim belongs to ETSI. ETSI is not a party to this action.

Therefore, the State’s claim to anti-trust damages hinges on

eral district court asserting federal antitrust violations of

sections 1 * and 2° of the Sherman Act and a pendant (sic)

state claim of tortious interference with a contractual

relationship. Motions to dismiss for lack of personal juris-

diction, improper venue," and lack of standing filed by

its demand for damages resulting from Defendants’ alleged

unlawful interference with the contract for sale of water.

Janklow v. Kansas City Southern Indus., Inc., No, 83-5046, slip op.

at 15 (D.S.D. July 26, 1984) (emphasis added).

$15 U.S.C. § 1 (1982).

®15 U.S.C. §2 (1982). South Dakota also asserted state anti-

trust violations of S.D. Codified Laws Ann. §§ 37-1-3.1 et seq.

This claim, however, was not submitted to the jury.

In originally deciding these issues, the district court inter-

preted 15 U.S.C. § 22 (1982) to permit both personal jurisdiction

and venue in this case. Jank’ow v. Kansas City Southern Indus., Inc.,

No. 83-5046, slip op. at 5 (D.S.D. Sept. 1, 1983) (Bogue, J.).

Section 22 states:

Any suit, action, or proceeding under the antitrust laws

against a corporation may be brought not only in the judicial

district whereof it is an inhabitant, but also in any district

wherein it may be found or transacts business; and all process

in such cases may be served in the district of which it is an

inhabitant, or wherever it may be found.

The district court stated that “[slince Congress provided for

nationwide service of process over both Defendants, it intended

that the Court would have the authority to enforce a judgment

over those same defendants. Accordingly, the Court holds that it

does have personal jurisdiction over both Defendants.” Janklow,

No. 83-5046, slip op. at 8. However, the application of section

22’s “provision for extra-territorial service must in every case

satisfy constitutional due process principles. Satisfaction of the

requisite due process standards are [sic] tested by the familiar

‘minimum contacts’ analysis of /nternational Shoe and its progeny.”

Reynolds Metals Co. v. Columbia Gas Sys., Inc., 694 F. Supp. 1248,

1250 (E.D. Va. 1988) (original emphasis). The district court

provided a detailed consideration of KCS’ contacts with South

Dakota in its determination of the venue issue. These contacts

included the fact that KCS had injected itself, either directly or

indirectly, into a number of state administrative proceedings, that

at least three KCS employees are regularly dispatched to make

10a

KCS were all denied by the district court. On April 8,

1988, following a ten week trial, the jury awarded the

State of South Dakota $200,000,000 on the federal anti-

trust claim, which the court trebled, and $244,200,000 on

the state Jaw tortious interference with a contractual re-

lationship claim.

II. Antitrust Standing

The district court found that the State of South

Dakota had standing to sue KCS.

[T]he harm to [South Dakota] was clearly foresee-

able, and indeed is a necessary step in effecting the

ends of the alleged conspiracy. Under the holding

of [Blue Shield of Virginia v.] McCready [,457 U.S.

465 (1982),] such an integral aspect of the alleged

conspiracy is unquestionably the sort of direct injury

whicn the antitrust laws were intended to redress.

Janklow v. Kansas City Southern Indus., Inc., No. 83-

5046, slip op. at 7 (D.S.D. Mar. 6, 1986). We respect-

fully disagree with the district court’s conclusion that the

State of South Dakota has standing to raise federal anti-

trust claims in this case.

In Blue Shield of Virginia v. McCready, 457 U.S. 465

(1982), a subscriber brought an action under section 1

of the Sherman Act attacking the practice of a group

health plan which denied reimbursement for psychother-

sales calls in South Dakota, that as the result of its operation as a

common carrier KCS received approximately $309,000 in revenue

from shipments originating from or terminating in South Dakota

in 1982, and that KCS has provided 28 of its locomotives to Bur-

lington Northern for its regular use in South Dakota. Janklow,

No. 83-5046, slip op. at II-T2. We believe that these contacts are

sufficient to support the district court’s finding of personal juris-

diction and venue in this case.

11The Honorable John B. Jones, United States District Judge

for the District of South Dakota.

lla

apy performed by psychologists but permitted reimburse-

ment for comparable treatment when rendered by psy-

chiatrists. The Court held that the proper analysis re-

quired examination of (1) “the physical and economic

nexus between the alleged violation and the harm to the

plaintiff’ and, more particularly, (2) “the relationship

of the injury alleged with those forms of injury about

which Congress was likely to have been concerned in

making defendant’s conduct unlawful and in providing

a private remedy under § 4.” Jd. at 478. In applying the

first criterion, the Court found that McCready’s injury

was neither “fortuitous” nor “incidental.” Jd. The harm

was “clearly foreseeable; indeed, it was a necessary step

in effecting the ends of the alleged illegal conspiracy.” Jd.

at 479. The Court further found that, as a consumer of

psychotherapy services entitled to reimbursement under

the greup health plan, “McCready was within that area

of the economy . . . endangered by [that] breakdown of

competitive conditions’ * * *.” Jd. at 480-81 (quoting

In re Multidistrict Vehicle Air Pollution M.D.L. No. $1,

481 F.2d 122, 129 (9th Cir. 1973)). Turning to the

second and more significant criterion, the Court found

that as a result of an anticompetitive scheme, McCready,

although not a competitor, suffered injuries that were “in-

extricably intertwined with the injury the conspirators

sought to inflict” on the market. Jd. at 484."

12 Blue Shield argued that McCready could not have standing

by virtue of Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S.

477 (1977), because her injury “ ‘did not reflect the anticompetitive

effect’”’ of the alleged violation. McCready, 457 U.S. at 482. The

Court did not accept this interpretation:

Brunswick is not so Jimiting. Indeed, as we made clear in a

footnote to the relied-upon passage, a §4 plaintiff need not

“prove an actual lessening of competition in order to recover.

[Clompetitors may be able to prove antitrust injury before

they actually are driven from the market and competition

is thereby lessened.”

Id. (quoting Brunswick, 429 U.S, at 489 n.14).

12a

One year after McCready was decided, in Associated

General Contractors of Calif., Inc. v. California State

Council of Carpenters, 459 U.S. 519 (1983), the Supreme

Court again addressed the topic of standing when a num-

ber of labor unions alleged that a multiemployer associa-

tion coerced its members and certain third parties to do

business with nonunion firms. While noting the difficulty

in clearly stating standards for determining standing and

comparing the level of difficulty of such a task to the

articulation of a standard that adequately contains the

concept of proximate cause,’* the Court discussed several

factors relevant to determining whether a party has

standing to raise federal antitrust claims: (1) the causal

connection between the alleged antitrust violation and the

harm to the plaintiff; (2) the existence of an improper

motive; (3) whether the injury was of a type that Con-

gress sought to redress with the antitrust laws; (4) the

directness of the connection between the injury and the

alleged restraint in the relevant market; (5) the specula-

tive nature of the damages; and (6) the risk of duplica-

tive recoveries or complex apportionment of damages.

Id. at 537-545.

With regard to the first Associated General factor, it

can be argued that South Dakota’s injuries were in some

13 The Court observed that:

There is a similarity between the struggle of common-law

judges to articulate a precise definition of the concept of “proxi-

mate cause,” and the struggle of federal judges to articulate

a precise test to determine whether a party injured by an

antitrust violation may recover treble damages. It is common

ground that the judicial remedy cannot encompass every con-

ceivable harm that can be traced to alleged wrongdoing. In

both situations the infinite variety of claims that may arise

make it virtually impossible to announce a black-letter rule

that will dictate the result of every case. Instead, previously

decided cases identify factors that circumscribe and guide

the exercise of judgment in deciding whether the law affords

a remedy in specific circumstances.

Associated General, 459 U.S. at 535-37 (footnotes omitted).

tecnica ag

13a

way causally connected to KCS’ allegedly anticompetitive

conduct. However, as the Supreme Court has observed,

the determination of whether there is antitrust standing

is similar to the determination of whether there is proxi-

mate cause. Associated General, 459 U.S. at 535-37;

McCready, 457 U.S. at 477. “[A] mere causal connection

between an antitrust violation and harm to a plaintiff

cannot be the basis for antitrust compensation unless the

injury is directly related to the harm the antitrust laws

were designed to protect.” McDonald v. Johnson & John-

son, 722 F.2d 1370, 1374 (8th Cir. 1983) (citing Bruns-

wick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477

(1977) ). Furthermore, for the purposes of our analysis,

we grant the assumption that KCS’ activities were im-

properly motivated.’* Alberta Gas Chems. Ltd. v. E.lI.

Du Pont de Nemours & Co., 826 F.2d 1235, 1241 (3d

Cir. 1987); McDonald, 722 F.2d at 1374. This enables

us to address the factor which both McCready and Asso-

ciated General seem to consider paramount: whether

SD’s injuries were of a type that Congress sought to

redress with the antitrust laws.

Without a doubt ETSI, as a competitor in the coal

transportation market, and the participating utilities in

the south central states, as consumers of that coal, have

standing to raise antitrust claims against KCS. See

Pinney Dock & Transp. Co. v. Penn Central Corp., 838

F.2d 1445, 1464 (6th Cir. 1988) (Associated General

factors include existence of more direct victims) ; Adams

v. Pan American World Airways, Inc., 828 F.2d 24, 29-30

_ (D.C. Cir. 1987) (existence of superior plaintiffs who

have reached settlements sufficiently viiidicate public in-

terest). These parties were obviously participants in the

coal transportation market and have been the most directly

14 We, however, express the caveat that “an allegation of im-

proper motive * * * is not a panacea that will enable any complaint

to withstand a motion to dismiss.” Associated General, 459 U.S.

at 537 (footnotes omitted).

l4a

affected by KCS’ actions.** South Dakota claims that,

although it was not a consumer or a competitor,’® it too

was a participant in the relevant market. Essentially, SD

maintains that it was constructively a member of the

ETSI joint venture because it played a vital role in pro-

curing a source of water for the pipeline. KCS, of course,

claims that SD was at best a supplier existing completely

outside the coal transportation market. Resolution of this

15 These parties have in fact brought suit. Thus KCS’ alleged

anticompetitive activity has been attacked by market participants.

ETSI and a number of the utilities have brought suit against the

railroads in the United States District Court for the Eastern

District of Texas. ETSI Pipeline Project v. Burlington Northern,

Inc., No. B-84-979CA. KCS has since reached a settlement with the

plaintiffs and has been released as a defendant in that case.

16 The antitrust laws “were enacted for ‘the protection of com-

petition, not competitors.’” Brunswick, 429 U.S. at 488 (quoting

Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962) (original

emphasis) ). This does not mean that the statute confines its

protection solely to consumers, competitois, buyers, and sellers.

McCready, 457 U.S. at 472 (quoting Mandeville Island Farms, Inc.

v. American Crystal Sugar Co., 334 U.S. 219, 236 (1948)). See

also Southaven Land Co. v. Malone & Hyde, Inc., 715 F.2d 1079,

1086 (6th Cir. 1983) (finding that plaintiff is not direct participant

in relevant market not dispositive of section 4 standing issue). But

see General Indus. Corp. v. The Hartz Mountain Corp., 810 F.2d

795, 809 (8th Cir. 1987) (citing Associated General, 459 U.S. at

539). Standing determinations must be made on a case by case

basis. Pocahontas Supreme Coal Co. v. Bethiehem Steel Corp., 828

F.2d 211, 219 (4th Cir. 1987); Los Angeles Memorial Coliseum

Comm’n v. National Football League, 791 F.2d 1356, 1363 (9th

Cir. 1986); Crimpers Promotions, Inc. v. Home Box Office, Inc.,

724 F.2d 290, 293 (2d Cir. 1983). Nevertheless, the fact that a

party is not a participant in the relevant market must be weighed

heavily against a grant of standing. Lucas v. Bechtel Corp., 800

F.2d 839, 844 (9th Cir. 1986). See also Feeney v. Chamberlain

Mfg. Corp., 831 F.2d 93, 96 (5th Cir. 1987); Eagle v. Star-Kist

Foods, Inc., 812 F.2d 538, 540 (9th Cir. 1987).

15a

dispute requires a close examination of the State of South

Dakota’s involvement in the ETSI pipeline project.

During the early stages of the project, the State of

South Dakota had vigorously opposed the pipeline project

because the proposed use of Madison water threatened to

deprive residents of western South Dakota of their water

source. Furthermore, until 1981, SD even opposed use of

Oahe water in the coal slurry pipeline. In late 1981,

however, the State of South Dakota and ETSI entered

into negotiations in which the State proposed to assign its

rights in Oahe water in exchange for an annual fee and

the distribution of a portion of that water from the West

River Aqueduct. ETSI officials faced the following choice:

confront South Dakota’s continuing opposition by using

Madison water for which Wyoming had already granted

permits or enjoy South Dakota’s cooperation and assist-

ance by using Oahe water.

Eventually, ETSI decided to use Oahe water. In order

to facilitate this decision, the South Dakota legislature

enacted a statute authorizing the South Dakota Conserv-

ancy District to market water for energy industry use.

1981 $.D. Laws HB 1002 (amendments to S.D. Codified

Laws §§ 46-1 et seg.). On December 23, 1981, the SDCD

entered into an agreement with ETSI to assign a water

right to energy industry use. In the SDCD/ETSI con-

tract, SDCD accepted responsibility “for securing the is-

suance of the Oahe Permit from the [South Dakota] Wa-

ter Management Board.” KCS app. at 657. The SDCD/

ETSI contract placed responsibility for obtaining federal

permission to use Oahe water on ETSI. SDCD, however,

agreed to “assist and cooperate with ETSI in securing

such permission.” Jd. at 669.

As the district court had earlier ruled, South Dakota

was not an actual participant in the coal transportation

market. See supra n.7. We find that, for purposes of the

16a

alleged antitrust injury, the State did nothing more than

make an assignment of its rights in Oahe water." Tradi-

tionally, suppliers of competitors in the relevant market

have been denied standing because any alleged injury is

considered derivative of the harm sustained by the com-

petitor. L. Sullivan, Handbook of the Law of Antitrust

§ 247, at 773 & n.11 (1977). Because the antitrust laws

were intended to protect competition, standing has been

generally limited to the actual participants in the relevant

market: competitors and consumers. Suppliers are al-

lowed standing only if they were directly involved in the

market. Compare Volasco Prods. Co. v. Lloyd A. Fry

Roofing Co., 308 F.2d 383, 393-95 (6th Cir. 1962) (sup-

plier of raw materials to asphalt manufacturer denied

standing) with South Carolina Council of Milk Producers,

Inc. v. Newton, 360 F.2d 414, 418 (4th Cir. 1966) (stand-

ing granted to milk producers who provided essentially

the same commodity as homogenized milk eventually sold

in market) and Karseal Corp. v. Richfield Oil Corp., 221

F.2d 358, 362-65 (9th Cir. 1955) (manufacturers of fin-

ished product as it eventually entered market through

distributors deemed to have standing). See also 2 P.

Areeda & D. Turner, Antitrust Law 8&§ 340a-340b

(1978) ; L. Sullivan, supra § 247.

SD’s interest in the success of the coal slurry pipeline

was limited to the receipt of annual payments from ETSI

in exchange for the assignment of its rights to draw water

17KCS and the State of South Dakota have engaged in ex-

tensive debates over whether SD was even a “supplier,” i.e.,

whether the State had any legal interest in the water it pur-

ported to sell or assign, or if the Corps of Engineers had exclusive

authority to make such an assignment. See infra discussion at

note 28. We decide the standing issue on the antitrust claim with-

out reaching this issue. We simply assume for the purposes of

our discussion on standing that SD did have Oahe water rights to

assign to ETSI.

17a

from the Oahe Reservoir.’* At the time of cancellation,

SD had already received over $5,000,000 under the terms

of the contract. However, as significant as the continu-

ance of the payments was, this contractual relationship

does not mirror the type of interest a participant has in

maintaining competition in the coal transportation mar-

ket.

The State of South Dakota’s interest is most directly

tied to decisions made by the ETSI pipeline project au-

thorities and, although the fate of the at-will contract

that existed between ETSI and SD may have been influ-

enced indirectly by activities in the coal transportation

market, the State’s interest does not constitute the in-

terest of a competitor in the coal transportation market.

Similarly, as the case law makes clear, SD’s role as a

supplier does not create such a symbiotic relationship

with ETSI that its situation is “inextricably intertwined

with the injury” to the relevant market. McCready, 457

U.S. at 484. The State’s role in providing opposition

against ETSI prior to December, 1981, does not reflect

the actions of a partner in the coal slurry pipeline proj-

ect. Furthermore, supplying water for the slurry pipe-

line does not place SD in the coal transportation market.

The State of South Dakota’s cross-appeal alleges that

it was a participant in the “water rights market for

coal slurry pipelines.” The existence or nonexistence of

18 When this lawsuit was originally filed, motions were heard by

the Honorable Andrew W. Bogue, then Chief Judge, United States

District Court for the District of South Dakota. Judge Bogue

found that state officials had no standing to bring a parens patriae

suit on behalf of the citizens of South Dakota who had been de-

prived of a potential source of potable water from the proposed

West River Aqueduct. Such an injury was deemed too remote from

the alleged anticompetitive activities. Janklow v. Kansas City

Southern Indus., Inc., No. 83-5046, slip op. at 14 (D.S.D. July 26,

1984). Thus, the sole injury alleged by SD was the loss of revenue

that it would have received but for the cancellation of the SDCD/

ETSI contract. Jd. at 15.

18a

a water rights market for coal slurry pipelines does not

change the fact that the State was not a participant in

the coal transportation market. However, even assuming

that SD has proven the existence of a water rights for

coal slurry pipelines market, KCS was not a participant

in that market. Furthermore, the fact that ETSI needed

and contracted for water as a raw material to transport

coal does not by any means place the pipeline project in

competition with those parties who sold water rights.”

SD’s competitors in the water rights market are limited

to those entities that were ready, willing, and able to

sell the quantity of water needed to operate a coal slurry

pipeline.

Although the State of South Dakota was allegedly in-

jured by KCS’ anticompetitive behavior, its injuries did

not result from the anticompetitive nature of these prac-

tices. Brunswick, 429 U.S. at 489; Gregory Mkg. Corp.

v. Wakefern Food Corp., 787 F.2d 92, 95-96 (38d Cir.

1986). The State’s injuries were “purely an incidental

result of anti-competitive activity in another segment of

19 At trial Dr. John Beyer testified that SD was a participant in

the coal transportation market in the same way in which the

Atomic Energy Commission (AEC) had been a participant in the

uranium market due to AEC’s position as the sole source for

uranium enrichment. In essence, this argument states that a sup-

plier can be so unique and vital to production that its interests are

the same as the interests of those competitors who are actually in

the market. We do not believe that this model applies to this case.

The enrichment of uranium necessarily involves a manufacturing

process. Huffman v. Western Nuclear, Inc., 108 S. Ct. 2087, 2088

n.2 (1988). As our previous discussion illustrates, suppliers who

are essentially manufacturers of a finished product are certainly

more than mere suppliers. Coal slurry, on the other hand, simply

describes a transportation process which in no way alters the nat-

ural composition of the material that is being transported. The

supplier of the water may in no way be deemed to be the manufac-

turer of the coal in the way that the AEC was the manufacturer of

enriched uranium. The supplier of the water is instead just one

supplier of the many components involved in the proposed pipeline

transportation of the coal.

19a

the economy * * * .” Comet Mechanical Contractors, Inc.

v. E.A. Cowen Constr., Inc., 609 F.2d 404, 407 (10th

Cir. 1980). The loss of future revenues clearly flowed

from the cancellation of the contract rather than from

injury to competition in the market in which it was

involved. Gregory, 787 F.2d at 96. See also Pocahontas

Supreme Coal Co. v. Bethlehem Steel Corp., 828 F.2d

211, 219-220 (4th Cir. 1987); Larry R. George Sales Co.

v. Cool Attic Corp., 587 F.2d 266, 272 (5th Cir. 1979).

It is evident that South Dakota would have suffered an

identical loss in the event that the railroads had done

nothing and ETSI had simply decided to terminate the

SDCD/ETSI contract for some other reason.”° McDonald,

722 F.2d at 1376-77. Its injuries are connected to the

cancellation of the contract which is necessarily an in-

direct effect of the alleged anticompetitive behavior.

Consequently, we find that there was no proximate causa-

tion between the alleged market restraint and the harm

sustained by SD. McDonald, 722 F.2d at 1374 (footnote

omitted). See also Sundance Land Corp. v. Community

First Fed. Sav. & Loan Ass’n, 840 F.2d 653, 660 (9th

Cir. 1988). We hold that the State of South Dakota did

not suffer an injury which could be characterized as a

type that Congress sought to redress by enacting sections

1 and 2 of the Sherman Act.** Consequently, we hold

20 Although ETSI’s professed reasons for terminating the SDCD/

ETSI contract related to the resources necessary to deal with the

railroads’ opposition, the record contains a number of different

factors which hastened the end of the coal slurry pipeline project.

These factors include the decline in the price of oil, the deregulation

of the railroad industry, and the remaining federal, state, and local

agency authorization that ETSI had yet to obtain. A significant

hurdle which yet remained involved securing authorization for use

of Oahe water from the Army Corps of Engineers.

2t This finding alone is sufficient to bar standing because where

there is no antitrust injury there can be no entitlement to damages.

Midwest Communications, Inc. v. Minnesota Twins, Inc., T79 F.2d

444, 450 (8th Cir. 1985). Moreover, this finding of course obviates ‘

20a

that the State of South Dakota has no standing to sue

KCS for alleged antitrust violations.

III. State Law Claim for Intentional Interference with

Contractual Relationship

In addition to its verdict for the State of South Dakota

on the antitrust claim, the jury awarded $244,200,000 on

SD’s state law claim of intentional interference with a

contractual relationship. This amount is composed of the

sum of $200,000,000 in actual damages; $10,900,000 in

loss of sales, use, and contractor’s excise tax that would

have been generated from construction of the West River

Aqueduct; $8,300,000 in prejudgment interest; and

$25,000,000 in punitive damages.

The relationship with which KCS allegedly interfered

was based on the SDCD/ETSI contract. The State argues

that but for KCS’s petitioning activities against ETSI,

the pipeline project would have proceeded and South

Dakota would have reaped the full worth of its contract

with ETSI. KCS, relying on the provisions of the Flood

Control Act,” contends that there was not a valid con-

tractual relationship which could have been interfered

the need to consider KCS’ contention that SD’s antitrust claim

should have been dismissed because the statute of limitations had

run,

22 Section 708 of the Flood Control Act states:

Sale of surplus waters for domestic and industrial uses; dispo-

sition of moneys

The Secretary of the Army is authorized to make contracts

with States, municipalities, private concerns, or individuals, at

such prices and on such terms as he may deem reasonable, for

domestic and industrial uses for surplus water that may be

available at any reservoir under the control of the Department

of the Army: Provided, That no contracts for such water shall

adversely affect then existing lawful uses of such water. All

moneys received from such contracts shall be deposited in the

Treasury of the United States as miscellaneous receipts.

33 U.S.C. § 708 (1982).

2la

with because South Dakota did not have any water rights

in the Oahe water to assign. Although the use of the

surplus water within the Oahe Dam was the essential

ingredient and sole purpose of the contract, KCS over-

looks the fact that the contract provided other benefits to

ETSI (for which it has paid substantial consideration).

Additionally, South Dakota promised its cooperation and

assistance to ETSI in securing a water source. The use

of Madison water involved a number of potential diffi-

culties, not the least of which would have included South

Dakota’s opposition. Furthermore, ownership and con-

trol as between state and federal authorities over Oahe

water was far from settled. Under the contract, the

State not only ended its opposition to the pipeline but

in fact agreed to use whatever power it had to assist

ETSI’s efforts to secure permission to use Oahe water

from the federal authorities.

This court has observed that “South Dakota seems to

have adopted the Restatement (Second) as its statement

of the tort of interference with contractual relations.”

Cutter v. Lincoln Nat'l Life Ins. Co., 794 F.2d 352, 356

(8th Cir. 1986) (citing Johnson v. Schmitt, 309 N.W.2d

838 (S.D. 1981)). See also Groseth Int'l, Inc. v. Tenneco,

Inc., 410 N.W.2d 159, 172 (S.D. 1987). The Restatement

(Second) of Torts § 766B provides:

One who intentionally and improperly interferes with

another’s prospective contractual relation (except a

contract to marry) is subject to liability to the other

for the pecuniary harm resulting from loss of the

benefits of the relation, whether the interference

consists of

(a) inducing or otherwise causing a third person

not to enter into or continue the prospective relation

22a

(b) preventing the other from acquiring or con-

tinuing the prospective relation.

The factors to be considered in determining whether the

interference was improper include:

(a) the nature of the actor’s conduct,

(b) the actor’s motive,

actor’s conduct interferes,

(d) the interests sought to be advanced by the

actor,

(e) the social interests in protecting the freedom

of action of the actor and the contractual interests

of the other,

(f) the proximity or remoteness of the actor’s con-

duct to the interference and

(g) the relations between the parties.

Restatement (Second) of Torts § 767 (1979). For pur-

poses of applying the Restatement (Second) of Torts, it

is essential to acknowledge the fact that the contractual

relationship in the instant case was terminable at will.

“One’s interest in a contract terminable at will is pri-

marily an interest in future relations between the

parties, and he has no legal assurance of them. For

this reason, an interference with this interest is closely

analogous to interference with prospective contractual

relations.” Restatement (Second) of Torts § 766 com-

ment g (1979).

In the spirit contained in Restatement (Second) of

Torts § 767(e), there are certain privileged activities

which may result in interference of contractual relation-

ships but which shall not incur liability. One such ac-

tivity involves the first amendment right to petition the

government for redress of grievances. The Noerr-

23a

Pennington doctrine* has been applied in evaluating

whether this particular activity is entitled to protection

from liability.** Missouri v. National Org. for Women,

Inc., 620 F.2d 1301, 1317-19 (8th Cir. 1980).*° See also

Gorman Towers, Inc. v. Bogoslavsky, 626 F.2d 607, 614-

15 (8th Cir. 1980); Surgidev Corp. v. Eye Technology,

Inc., 625 F. Supp. 800, 802-05 (D. Minn. 1986); First

Nat’l Bank of Omaha v. The Marquette Nat'l Bank of

Minneapolis, 482 F. Supp. 514, 524-25 (D. Minn. 1979).

This exemption shall not apply, however, if the petition-

ing activities in question were “sham” and in fact solely

intended to cause injury to competitors rather than to

obtain governmental action. Allied Tube & Conduit Corp.

v. Indian Head, Inc., 108 S. Ct. 1931, 1987 n.4 (1988).

The “sham exception” shall apply where defendant’s re-

sort to the courts and agencies “ ‘is so clearly baseless

as to amount to an abuse of process * * * ..” Razorback

Ready Mix Concrete Co. v. Weaver, 761 F.2d 484, 487

(8th Cir. 1985) (quoting Chest Hill Co. v. Guttman,

23 The Noerr-Pennington doctrine, which arose out of the United

States Supreme Court’s decision in Eastern R.R. Presidents Con-

ference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961), and

United Mine Workers of Am. v. Pennington, 381 U.S. 657 (1965),

exempts from the antitrust laws certain petitioning of courts and

administrative agencies that results in anticompetitive effects.

California Motor Transp. Co. v. Trucking Unitd., 404 U.S. 508, 510

(1972).

24 This same doctrine has been applied to other areas of litigation.

See, e.3., Bill Johnson's Restaurants, Inc. v. NLRB, 461 U.S. 731

(1983) (unfair labor practices); Hufsmith v. Weaver, 817 F.2d

455 (8th Cir. 1987) (antitrust).

25 Although National Organization for Women dealt with a politi-

cal boycott, one of plaintiff’s complaints alleged intentional infliction

of harm without legal excuse. 620 F.2d at 1316. Moreover, the

court cited the analysis in Sierra Club v. Butz, 349 F. Supp. 934

(N.D. Cal. 1972) for support of its position. Jd. at 1817. Sierra

Club was a nonantitrust case which applied Noerr-Pennington to

“interference with advantageous relationship” claims. Sierra Club,

349 F. Supp. at 938.

24a

1981-2 Trade Cas. (CCH) {64,417 (S.D. Ohio May 29,

1981) ).

KCS’ initial opposition to the ETSI coal slurry pipe-

line project involved its participation in defending the

title actions beginning in the mid-1970’s. The railroads

failed to prevail in any of these actions. In the late

1970’s, this “window litigation” began to wind down and

was replaced by activity in the administrative forum.

From that time until the early 1980’s, KCS was involved

in over thirty federal and state agency proceedings re-

lating to the coal slurry pipeline. KCS’ most significant

effort in this regard involved its opposition to ETSI’s

proposed Environmental Impact Statement. As discussed

earlier, KCS had been joined in this effort by the State

of South Dakota until the SDCD/ETSI contract was exe-

cuted in December, 1981.

To support its allegation of sham petitioning by KCS,

SD points to the window litigation and administrative

proceedings described above. Certainly the legitimacy of

these activities is subject to debate. See In re Burlington

Northern, Inc., 822 F.2d 518 (5th Cir. 1987), cert. denied

sub nom. Union Pac. R.R. Co. v. Energy Transp. Sys, Inc.,

108 S. Ct. 701 (1988).*° However, we find that a determi-

nation of whether these pre-December, 1981, activities

constitute sham petitioning is irrelevant to the issue of

whether the State of South Dakota may raise a claim

of improper interference with contractual performance.

The SDCD/ETSI contract was not executed until De-

26In Burlington Northern, the Fifth Circuit reviewed ETSI’s

claims that the railroads had committed sham petitioning and

therefore were not entitled to first amendment protection. The

court held: “We believe that ETSI’s claims. if found by the district

court to be supported by prima facie evidence, are sufficient to

deprive the railroads’ defense of the window litigation of Noerr-

Pennington protection.” 822 F.2d at 532.

25a

cember 23, 1981. Consequently, regardless of whether

KCS’ conduct prior to that date can be characterized as

sham, we are confined to consider only those activities

that took place between December 23, 1981, and July 31,

1984: the period between the date of execution and date

of termination of the SDCD/ETSI contract.”

During the period in which the contract was in effect,

KCS continued to participate in a number of the ad-

ministrative proceedings which had been commenced ear-

lier in the decade. Again, its most prominent involve-

ment related to the final stages of the EIS proceedings.

These activities, however, were gradually being displaced

by KCS’ participation in the Andrews litigation which

challenged ETSI’s contract with the Bureau of Reclama-

tion. The action for a permanent injunction barring per-

formance of the BOR/ETSI contract was filed on August

18, 1982. The events in this case moved quickly and, on

May 3, 1984, the United States District Court for the

District of Nebraska enjoined performance of the con-

tract. Missouri v. Andrews, 586 F. Supp. 1268 (D. Neb.

1984), aff'd, 787 F.2d 270 (8th Cir. 1986), aff'd sub nom.

ETSI Pipeline Project v. Missouri, 484 U.S. 495 (1988).

The record leaves little dispute that the district court’s

decision in Andrews was the single most important event

immediately preceding the termination of the ETSI coal

slurry pipeline project. Similarly, the record makes clear

that, in examining KCS’ overall activities between late-

1981 and mid-1984, the Andrews litigation was by far the

dominant component of those activities. Indeed, roughly

one-third of the administrative actions mentioned above

were directly related to the Andrews litigation.

27 The trial court’s blanket instruction to the jury, although not

excepted to in this regard, submitted the question of improper in-

terference without attempting to distinguish between the alleged

interference occurring before and after the date of the contract.

26a

We need not reach KCS’ claim that the State’s contract

was null and void because only the Corps of Engineers

could contract for the use of the water.”®* We hold as a

28 Although we do not pass on this issue, it is clear that a condi-

tion precedent to future performance of the SDCD/ETSI contract

required that ETSI obtain a contract with the Army Corps of

Engineers to use the water in the Oahe dam. The statute, 33 U.S.C.

§ 708, and the decisions in the Andrews litigation, make this condi-

tion clear. It is our impression that obtaining the contract from

the Corps was a condition in fact for any future payment by ETSI

to SD. The record, however, is silent as to whether the Corps’

approval was obtainable.

In the absence of such proof we think it clear that plaintiff’s

alleged damages are entirely speculative and not supported by sub-

stantial evidence. Dr. Ralph J. Brown, the economic expert retained

by South Dakota _ to testify regarding damages, altogether ignored

the possibility that ETSI could have invoked the cancellation rights

(as it eventually did) in any of a number of situations. Dr. Brown

instead treated the SDCD/ETSI contract as if it were a promissory

note. He assumed that construction of the pipeline would commence

on April 1, 1986, and be completed by June 1, 1988. From the date

of the actual cancellation of the contract to Brown’s projected date

for the pipeline completion, he testified that SDCD would receive

payments totaling $24,100,000. Brown further testified that SDCD

would subsequently receive $9,000,000 annually for the next fifty

years. Brown added these annual payments to the future sales tax

payments that would have accompanied maintenance of the West

River Aqueduct, adjusted the entire sum for three percent infla-

tion, and reached a present value amount of $210,900,000.

The most important consideration relating to the determination

of damages in this case is the fact that the SDCD/ETSI contract

was terminable at ETSI’s will if certain events should occur. Re-

statement (Second) of Torts § 766 comment ¢g (“The fact that the

contract is terminable at will * * * is to be taken into account in

determining the damages that the plaintiff has suffered by reason

of its breach.”). First, should the pipeline project be abandoned,

ETSI could terminate the contract on thirty days notice. Even if

ETSI were able to attain the Corps’ permission to use Oahe water,

the project still faced a number of obstacles in each of the seven

states through which the pipeline was to pass. Perhaps ETSI

had secured the necessary rights-of-way tuo avoid further window

litigation with the railroads. Nonetheless in each of these states

ETSI would have to respond to concerns that include the pipeline’s

impact on the environment, compliance with safety regulations,

27a

matter of law that KCS’ activities following December,

1981, in opposing the pipeline (1) had no significant or

proximate causal relation to the cancellation by ETSI of

the SDCD/ETSI contract and, even if they did con-

tribute to the cancellation of the contract, (2) KCS’ ac-

tivities in the Andrews litigation were protected by the

Noerr-Pennington doctrine.

First, we find that the successful Andrews litigation

which enjoined the BOR/ETSI contract for use of the

Oahe water never involved the formal adjudication of

whether KCS had standing to participate as a party in

the litigation. Although the district court originally held

KCS did not have standing, it thereafter vacated its

effect on the local work force, and proper zoning of the land through

which the pipeline would pass. Success in these matters would re-

quire cooperation on the part of each state just as obtaining a

water source required a great deal of cooperation from South

Dakota authorities. In addition, succeeding occurrences in the

economy such as the decline of inflation and a severe decrease in oil

prices certainly made the coal slury pipeline project a much less

lucrative investment. Moreover, the economic experts at trial testi-

fied that the deregulation of the transportation industry virtually

assured a market situation in which the railroads could transport

coal at lower rates than a coal slurry pipeline.

Furthermore, we find it entirely speculative that construction

of the pipeline would commence by the middle or even late 1980’s.

In fact, KCS presented unrefuted testimony by its economic experts

that the drastic economic changes and the deregulation of the rail-

road industry which occurred in the early 1980’s made a coal slurry

pipeline project infeasible.

The record also reflects that, following the district court’s deci-

sion to enjoin the BOR/ETSI contract, ETSI found it necessary to

exercise its right to cancel the SDCD/ETSI contract because SD

refused to postpone the payment of fees under the contract. We

find that under the circumstances reflected by the record, the only

factor that could have prolonged the existence of the contract would

have been a decision on SD’s part to postpone the payment by ETSI

of fees owed under the SDCD/ETSI contract. We therefore find

that the jury’s award of damages is in no way supported by sub-

stantial evidence in the record.

28a

order and held that in the interests of judicial economy

the court would “reserve a decision on standing until one

needs to be made.” SD brief at 29 n.21. This court, in

affirming the permanent injunction of the contract, held

that the issue of KCS’ standing was “superfluous.” Mis-

souri v. Andrews, 787 F.2d at 274. Thus the Andrews

litigation which brought the pipeline project to a sudden

halt was successful through the efforts of the various

plaintiff states: Missouri, Iowa, and Nebraska. The

efforts to obtain standing by KCS were de minimis as a

matter of law and at best only remotely related to ETSI’s

withdrawing from the contract. This determination rend-

ers KCS’ motive in pursuing its right to join in the suit

irrelevant. Furthermore, any impropriety in KCS’ efforts

to obtain standing was mooted by the successful litigation

of the named party plaintiffs. In so holding, we do not

overlook situations in which a party might unreasonably

assert standing, and in which such conduct could be

deemed harassment as a matter of fact and would there-

fore be unprotected by the Noerr-Pennington doctrine.

See Comment, Meritorious Litigation as a Section 2

Violation—In re Burlington Northern, Inc. Broadens

Noerr-Pennington’s Sham Exception, 74 Iowa L. Rev. 271,

278 (1988).*° However, KCS’ efforts were formally

aborted and they were not one of the successful parties.

Their efforts to become formal parties in the litigation to

enjoin the SDCD/ETSI contract, successful or unsuccess-

ful as they may have been, could hardly be deemed a proxi-

mate cause of ETSI’s decision to terminate the contract.

In In re Burlington Northern, Inc., 822 F.2d 518 (5th

Cir. 1987), the Union Pacific Railroad, although not a

formal party in Andrews, was found to have assisted the

—

2° This is not true here because the district court certified the

question of KCS standing under 28 U.S.C. § 1292(b) as an issue

where reasonable minds might differ. We find that KCS had a

reasonable basis in law and fact in asserting standing in the

Andrews litigation.

oo il

Mil wo

29a

State of Nebraska in the litigation. 822 F.2d at 530-32.

Assuming the record would support a similar factual find-

ing with regard to KCS in the present case, we move to

the second ground of our holding: KCS’s participation in

the Andrews litigation did not, as a matter of law,

constitute “sham” petitioning and was fully protected by

the first amendment.

South Dakota urges this court to adopt the reasoning

contained in Burlington Northern. In Burlington North-

ern, the Fifth Circuit was asked to review the district

court’s denial of a discovery motion in an antitrust action

brought against the railroads by ETSI and the southern

utility companies. The court, which considered all of the

petitioning done by the railroads from the mid-1970’s

until the mid-1980’s, found that the totality of these ac-

tivities could constitute “sham.” It remanded the case for

further findings relating to the petitioners’ subjective in-

tent so as to determine whether the actual desire for

relief was a significant factor in the underlying petition-

ing. Id. at 534. So long as such a desire existed, the

issue of whether the petitioners also possessed anticom-

petitive motives is irrelevant. Jd. at 528. Thus, SD

argues that even if the petitioning in question is success-

ful there nonetheless remains a factual question as to

whether the petitioner’s subjective intent was solely to

harass and interfere with a defendant’s business relation-

ship, or whether the petitioner possessed an actual desire

and a justifiable expectation for judicial relief. Comment,

supra at 278-79.

Although this circuit has indicated that “intent” is the

critical factor in assessing sham litigation, Mark Aero,

Inc. v. Trans World Airlines, Inc., 580 F.2d 288, 297

(8th Cir. 1978), we have not extended sham analysis to

require submission of factual intent to the degree urged

by South Dakota. In fact, this court has granted a sum-

mary judgment under an analogous circumstance where

litigation was successful and consequently deemed to pre-

30a

clude a finding of sham or unlawful intent. Razorback

Ready Mix Concrete Co. v. Weaver, 761 F.2d 484, 487

(8th Cir. 1985) .*°

However, even if we were to apply SD’s interpretation

of the Fifth Circuit’s analysis in Burlington Northern,

when the pre-December, 1981, petitioning activities are

380 This is not to say that successful litigation shall categorically

preclude a finding of sham. The Honorable Richard A. Posner,

Circuit Judge of the United States Court of Appeals for the

Seventh Circuit, has aptly described a number of circumstances

where a lawsuit may have a reasonable basis and yet be undeserv-

ing of first amendment protection:

Many claims not wholly groundless would never be sued on

for their own sake; the stakes, discounted by the probability of

winning, would be too low to repay the investment in litigation.

Suppose a monopolist brought a tort action against its single,

tiny competitor; the action had a colorable basis in law; but

in fact the monopolist would never have brought the suit—its

chances of winning, or the damages it could hope to get if it

did win, were too small compared to what it would have to

spend on the litigation—except that it wanted to use pretrial

discovery to discover its competitor’s trade secrets; or hoped

that the competitor would be required to make public disclosure

of its potential liability in the suit and that this disclosure

would increase the interest rate that the competitor had to pay

for bank financing; or just wanted to impose heavy legal costs

on the competitor in the hope of deterring entry by other

firms. In these examples the plaintiff wants to hurt a competi-

tor not by getting a judgment against him, which would be a

proper objective, but just by the maintenance of the suit,

regardless of its outcome.

Grip-Pak, Inc. v. Illinois Tool Works, Inc., 694 F.2d 466, 472 (7th

Cir. 1982) (citations omitted). See also Westmac, Inc. v. Smith,

797 F.2d 313, 315-18 (6th Cir. 1986); Sunergy Communities, Inc.

v. Aristek Properties, Ltd., 535 F. Supp. 1327, 1331 (D. Colo. 1982) ;

Kintner & Bauer, Antitrust Exemptions for Private Requests for

Governmental Action: A Critical Analysis of the Noerr-Pennington

Doctrine, 17 U.C. Davis L. Rev. 549, 576 & n.113 (1984). The

instant case, however, can be distinguished from the circumstances

described by Judge Posner in that the Andrews litigation went far

beyond the pretrial stage. Moreover, there really is no dispute that,

regardless of its motive, KCS genuinely sought judicial relief.

3la

excluded we must hold that no evidence exists in the

record in this case to suggest that KCS did not possess

the intent to succeed in the Andrews litigation. In so

holding we deem it significant that in Burlington North-

ern the parties were merely at the pretrial stage and the

court was appraising sham litigation in terms of whether

there was sufficient evidence based on the totality of

KCS’ petitioning activities to allow discovery as to KCS’

intent. The court already had evidence of improper intent

of KCS manifested by the pre-1982 window litigation.

It was dealing with the overall allegation of an antitrust

conspiracy extending through the entire record from the

mid-1970’s to 1984. Here the window litigation is im-

material, as was any involvement with the EIS proceed-

ings in which SD joined with KCS in opposing ETSI

project. The significant portion of these activities oc-

curred before the execution of the SDCD/ETSI contract

in December, 1981. There is no evidence to prove that

KCS’ involvement in the Andrews litigation following De-

cember, 1981, was not significantly motivated by a desire

to prevail on the merits. Moreover, the plaintiffs did

prevail in Andrews, thereby proving that there was a

reasonable basis for the lawsuit. See Bill Johnson’s

Restaurants, Inc. v. NLRB, 461 U.S. 731, 7438, 749

(1983); Razorback Ready Mix Cement Co. v. Weaver,

761 F.2d 484, 487 (8th Cir. 1985); Columbia Piciures

Indus., Inc. v. Redd Horne, Inc., 749 F.2d 154, 161 (3d

Cir. 1984) ; Omni Resource Dev. Corp. v. Conoco, Inc., 739

F.2d 1412, 1414 (9th Cir. 1984); Taylor Drug Stores,

Inc. v. Associated Dry Goods Corp., 560 F.2d 211, 213-14

(6th Cir. 1977) ; Edward B. Marks Music Corp. v. Colo-

rado Magnetics, Inc., 497 F.2d 285, 290-91 (10th Cir.

1974). Consequently, we hold as a matter of law that

KCS’s petitioning in the Andrews litigation was not sham

and was fully protected under the first amendment be-

cause a significant factor in pursuing the action was the

actual desire to obtain judicial relief and there was a

reasonable basis for the action.

32a

We therefore conclude that the judgment of the district

court should be vacated on the grounds that (1) the State

of South Dakota had no standing to bring the antitrust

claim and (2) the evidence fails to show that KCS im-

properly interfered with the SDCD/ETSI contract through

the petitioning activities occurring after December 23,

1981.

Judgment reversed and dismissed; the district court is

instructed to enter judgment for the defendants.

A true copy.

Attest:

Clerk, U.S. Court of Appeals, Eighth Circuit.

33a

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

No. 88-2158

STATE OF SOUTH DAKOTA; SOUTH DAKOTA CONSERVANCY

DISTRICT, an Agency of the State of South Dakota,

v. Appellee,

KANSAS CITY SOUTHERN INDUSTRIES, INC., a Foreign Cor-

poration; KANSAS CITY SOUTHERN RAILWAY COMPANY,

a Foreign Corporation,

Appellants.

No. 88-5375

STATE OF SOUTH DAKOTA; SOUTH DAKOTA CONSERVANCY

DISTRICT, an Agency of the State of South Dakota,

v. Appellants,

KANSAS CITY SOUTHERN INDUSTRIES, INC., a Foreign Cor-

poration; KANSAS CITY SOUTHERN RAILWAY COMPANY,

a Foreign Corporation,

Appellees.

No. 88-5422

STATE OF SOUTH DAKOTA; SOUTH DAKOTA CONSERVANCY

DISTRICT, an Agency of the State of South Dakota,

vy. Appellant,

KANSAS CITY SOUTHERN INDUSTRIES, INC., a Foreign Cor-

poration; KANSAS CITY SOUTHERN RAILWAY COMPANY,

a Foreign Corporation,

Appellees.

34a

Appeals from the United States District Court

for the District of South Dakota

JUDGMENT

[Filed August 17, 1989]

This appeal from the United States District Court was

submitted on the record of the district court, briefs of the

parties and was argued by counsel.

After consideration, it is hereby ordered and adjudged

that the judgment of the district court is reversed and

cause is remanded to the district court for proceedings

consistent with the opinion of this Court.

June 29, 1989

A true copy.

ATTEST:

s/ Robert D. St. Vrain

Clerk, U.S. Court of Appeals,

Eighth Circuit

Mandate issued 8/15/89

35a

APPENDIX C

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

No. 88-2158

STATE OF SOUTH DAKOTA; SOUTH DAKOTA CONSERVANCY

DISTRICT, an Agency of the State of South Dakota,

vy. Appellee,

KANSAS CITY SOUTHERN INDUSTRIES, INC., a Foreign Cor-

poration; KANSAS CITY SOUTHERN RAILWAY COMPANY,

a Foreign Corporation,

Appellants.

STATE OF SoUTH DAKOTA: SOUTH DAKOTA CONSERVANCY

DISTRICT, an Agency of the State of South Dakota,

y Appellants,

KANSAS CiTy SOUTHERN INDUSTRIES, INC., a Foreign Cor-

poration; KANSAS CiTy SOUTHERN RAILWAY COMPANY,

a Foreign Corporation,

Appellees.

No. 88-5422

STATE OF SOUTH DAKOTA; SOUTH DAKOTA CONSERVANCY

DISTRICT, an Agency of the State of South Dakota,

v. Appe'lant,

KANSAS CITY SOUTHERN INDUSTRIES, INC., a Foreign Cor-

poration; KANSAS CITY SOUTHERN RAILWAY COMPANY,

a Foreign Corporation,

Appellees.

36a

Appeals from the United States District Court

for the District of South Dakota

Filed: August 8, 1989

ORDER

Appellees’ suggestion for rehearing en banc has been

considered by the court and is denied by reason of the

lack of a majority of active judges voting to rehear the

case en banc. Judge John R. Gibson did not participate

in the passing upon of the suggestion for rehearing en

banc.

Petition for rehearing by the panel is also denied.

The court on its own motion has amended footnote 27 of

the opinion and the amended footnote shall read as

follows:

** Indeed the trial court instructed the jury to this

effect, to-wit, to consider only evidence in the tortious

interference claim that occurred after KCS’ knowl-

edge of the contract. However, the trial court’s

blanket instruction to the jury, although not excepted

to in this regard, submitted the question of sham

petitioning without attempting to distinguish between

the alleged interference occurring before and after

the contract.

The state urges that the evidence of sham peti-

tioning before the contract was entred into should

be considered relevant to the intent of KCS in the

post-contract period. Perhaps this was the reasoning

behind the last paragraph in instruction 33 which

did not attempt to distinguish between the pre-

contract and post-contract period. We do not ignore

the state’s srgument concerning intent in this regard.

37a

We rule, however, that the post-contract activity pre-

dominantly involved Andrews litigation and the op-

position by the other states: as we discuss, infra, the

railroad’s interference or opposition was de minimus

(sic) in the post-contract period and as a matter of

law was not a direct cause to the cancellation of the

contract.

It is so ordered.

88a

APPENDIX D

UNITED STATES DISTRICT COURT

DISTRICT OF SOUTH DAKOTA

WESTERN DIVISION

CIV. 83-5046

WILLIAM J. JANKLOW, Governor STATE OF SOUTH Da-

KOTA; MARK V. MEIERHENRY, Attorney General of the

State of South Dakota; CITY OF PHILIP, a Political Sub-

division of the State of South Dakota; SouTH DAKOTA

CONSERVANCY DISTRICT, an Agency of the State of

South Dakota,

on. Plaintiffs,

KANSAS CITY SOUTHERN INDUSTRIES INC., a Foreign

Corporation; KANSAS CITY SOUTHERN RAILWAY CoM-

PANY, a Foreign Corporation,

Defendants.

ORDER

[Filed July 26, 1984]

Pursuant to the Memorandum Opinion filed concern-

ing Plaintiffs’ standing, it is hereby

ORDERED that William Janklow, Governor and Mark

Meierhenry, Attorney General as parens patriae for the

citizens of South Dakota, and the City of Philip lack

standing for treble damages actions for alleged violations

of §§ 1 and 2 of the Sherman Act, and Defendants’ Mo-

tion to Dismiss those claims is granted. It is further

39a

ORDERED that the State of South Dakota and SDCD

have standing for treble damages actions for alleged vio-

lations of §$ 1 and 2 of the Sherman Act and Defend-

ants’ Motion to Dismiss those claims is denied. It is

further

ORDERED that Defendants’ Motion to Dismiss the

state anti-trust claims is denied.

Dated this 26th day of July, 1984

BY THE COURT:

ANDREW W. BOGUE

Chief Judge

ATTEST:

WILLIAM F. CLAYTON

Clerk

By Alice R. Raesly

Deputy

40a

UNITED STATES DISTRICT COURT

DISTRICT OF SOUTH DAKOTA

WESTERN DIVISION

CIV. 83-5046

WILLIAM J. JANKLOW, Governor STATE OF SOUTH Da-

KOTA; MARK V. MEIERHENRY, Attorney General of the

State of South Dakota; CITY OF PHILIP, a Political Sub-

division of the State of South Dakota; SouTH DAKOTA

CONSERVANCY DISTRICT, an Agency of the State of

South Dakota,

oi Plaintiffs,

KANSAS CITY SOUTHERN INDUSTRIES INC., a Foreign Cor-

poration; KANSAS CITY SOUTHERN RAILWAY COMPANY,

a Foreign Corporation,

Defendants.

MEMORANDUM ORDER

[Filed July 26, 1984]

Plaintiffs sued Defendants for alleged violations of

federal and state anti-trust laws and for tortious inter-

ference with contract. Defendants now challenge Plain-

tiffs’ standing to bring the federal and state anti-trust

claims. The Court is called upon to reconcile two recent

Supreme Court decisions and a more recent Eighth Cir-

cuit Court of Appeals decision with the facts alleged in

Plaintiffs’ Complaint.

PLAINTIFFS’ COMPLAINT

The Complaint lists the Plaintiffs as William Janklow,

Governor of South Dakota and Mark Meierhenry, Attor-

PRD OWA We” Qe at ro, ag yA

4la

ney General of South Dakota in their capacity as parens

patriae for the benefit of the citizens of the State of

South Dakota; the State of South Dakota; City of Philip,

South Dakota and South Dakota Conservancy District

(SDCD), an agency of the State of South Dakota. De-

fendants are listed as Kansas City Southern Industries,

Inc., a holding company and Kansas City Southern Rail-

way Company, a railroad corporation. The Complaint

lists, but does not name as Defendants six cther railroad

companies as co-conspirators. The Complaint also lists

Energy Transportation Systems, Inc. (ETSI) as a par-

ticipant but non-party.

The Complaint alleges that South Dakota, SDCD and

ETSI executed a contract for the sale of water from the

Missouri River in South Dakota to ETSI. Plaintiffs al-

lege that South Dakota would receive One Billion Three

Hundred Seventy Four Million Dollars ($1,374,000,000)

from ETSI over the term of the contract. Defendants

(sic) actions in regard to this contract comprise the is-

sues in this case.’ Plaintiffs allege that the actions of

1In this Complaint, Paragraph 35, Plaintiffs’ (sic) allege that

Defendants specifically have combined and conspired to do, and are

continuously to:

(a) Prohibit the financing, construction and development of

coal slurry pipelines;

(b) Prohibit the construction, financing and development of

any non-railroad method of transportation of coal from the

Powder River Basin in Wyoming to points in other states;

of the coal slurry pipeline project;

(d) Delay, impede, and prohibit the State of South Dakota’s

water from moving in trade and commerce.

(e) Prevent the distribution of water from the Oahe Reservoir

to drought stricken areas of western South Dakota;

(f) Prevent distribution of potable water to other citizens of

South Dakota in betterment of their health and enjoyment

of life.

(zg) Deny the revenues rightfully due and contractually agreed

to the State of South Dakota;

42a

the Defendants and alleged co-conspirators caused harm

to the

Plaintiffs by obstructing the completion of the

terms of the water sale contract and thereby preventing

the benefits of that contract from flowing to Plaintiffs.

Plaintiffs’ Complaint states that Defendants’ acts violate

Sections 1 and 2 of the Sherman Act (15 U.S.C. §§ 1, 2)

it’s state counterparts (SDCL 37-1-3.1 et seq.), and

(h) Acquire and maintain through concerted action the rail-

(i)

(j)

(k)

roads’ monopolistic position in coal transportation from

the Powder River basin;

Attempted to intervene in bad faith in administrative pro-

ceedings before the South Dakota Water Management

Board concerning the assignment of and the water right

from SDCD to ETSI pursuant to the ETSI contract for

the purpose of imposing a direct restraint and delay in

completion of legal requirements of the coal slurry pipeline

project.

Engaged in sham litigation as part of a scheme to restrain

trade, consisting of the following:

i. Participating in multiple lawsuits in the State of Okla-

homa and other states solely for the purpose of imped-

ing and delaying the coal slurry pipeline project and

furthering their monopolistic position;

ii. Making appearances in bad faith before numerous fed-

eral state, local, and county boards for the purpose of

delaying the coal slurry pipeline project;

iii. Filed a bad faith action, which is frivolous and dila-

tory in the District Court of Nebraska entitled Kansas

City Southern Railway Company, et al v. Andrews, et

al., (Civil File No. 82-L-443) ;

iv. Directed litigation through others in the circuit courts

of South Dakota for the purpose of delay of the coal

slurry pipeline project;

Conspired through written communication and by numer-

ous telephonic and personal meetings in March, April,

May, July, and August of 1974 to establish and further the

goals of the conspiracy and have contrived to conspire until

the present time. Further. (sic) engaged in meetings in

Washington, D.C. during the month of June, 1974, to fur-

ther accomplish the conspiratorial goals and aims.

43a

tortious interference with contract. Whether Plaintiffs

have standing to pursue their federal anti-trust claims

is the major question presented.

CASES

A. McCready

In Blue Shield v. McCready, 457 U.S. 465 (1982), the

Supreme Court held that an insured had anti-trust stand-

ing to sue an insurance company which had a policy of

paying for psycho-therapy services provided by psychia-

trists but denying payment for like services procured

from psychologists. The Court began its analysis by ex-

amining $4 of the Clayton Act which provides a treble

damages remedy to “!a]ny person who shall be injured

in his business or property by reason of anything for-

bidden in the anti-trust Jaws. 15 U.S.C. § 15.” 457

U.S. at 472. The Court used expansive language in dis-

cussing this statute’s scope? “As we recognized, ‘[t]}he

statute does not confine its protection to consummers.

(sic) or to purchasers, or to competitors, or to sellers

- The act is comprehensive in its terms and cover-

age, protecting all who are made victims of the forbidden

practices by whom ever they may be perpetrated.” 457

U.S. at 572.

Utilizing this expansive foundation. the McCready

Court analyzed plaintiff's claim. The Court found direct

harm in the fact that plaintiff was forced to pay for the

psychologist’s services out-of-pocket when defendant re-

fused to pay. 457 U.S. at 475. The Court then disposed

of the remoteness question by finding that because Plain-

tiff was harmed by the precise means that Defendant

attempted to use to reach its illegal ends, that Plaintiffs

* The discussion concerning scope appears to this Court to be a

major distinction between McCready and Associated General, Con-

tractors v. Carpenters, U.S. , 74 L. Ed.2d 723 (1983) dis-

cussed below. Therefore, the Court approaches this language with

some caution. However, the Court did cite McCready with approval

in Associated General. 74 L. Ed.2d at 7388.

44a

were not too remote. 457 U.S. at 479 (citing Brunswich

(sic) Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. at 489).

The McCready Court held that as a consumer, Plain-

tiff was a person entitled to protection under the anti-

trust laws. 457 U.S. at 480. In discussing the type of

injury suffered, the Court held that to recover treble

damages, Plaintiff’s injuries should “be linked to the pro-

competition policy of the anti-trust laws.” 457 U.S. at

482. The Court concluded that McCready had alleged an

anti-trust injury because her injury “flow[ed] from that

which makes defendants’ acts unlawful .. .”. 457 U.S.

at 484.

B. Associated General

Less than a year later, the Supreme Court again ex-

amined the question of standing for treble damages ac-

tions. Associated General Contractors v. Carpenters | As-

sociated General], US. , 74 L. Ed. 2d 723

(1983). The Associated General Plaintiffs alleged that

defendants coerced landowners and others to give busi-

ness to non-union firms. 74 L. Ed. 2d at 732. The

Court held that plaintiffs had stated an anti-trust claim.

An agreement to restrain trade may be unlawful even

though it does not entirely exclude it (sic) victims

from the market. [citation omitted] Coercive ac-

tivity that prevents its victims from making free

choices between market alternatives is inherently de-

structive of competitive conditions and may be con-

demned even without proof of its actual market ef-

fect.

74 L. Ed. 2d at 732.

The Court turned to whether the union was a proper

party to bring the anti-trust claim. In contrast to the

expansive language of McCready, the Court proceeded to

determine what limitations should be placed on Section 4.

45a

The Court noted that the union was neither a competitor

nor 2 consumer in the relevant market. 74 L. Ed. at 738.

The Court also noted that it was not clear whether the

union’s interests would be served or disserved by en-

hanced competition in the market. 74 L. Ed. at 739.

Finally, the Court held that each case must be analyzed

to determine whether it is of the type that the anti-trust

laws were designed to forestall. Jd. The Court then iden-

tified several factors relevant to determine whether a

plaintiff in a given case is a proper party to bring an

anti-trust action. Ultimately, the Court concluded that

the union was not a proper party to bring the anti-trust

claim.

Other relevant factors—the nature of the union’s in-

jury, the tenuous and speculative character of the

relationship between the alleged anti-trust violation

and the union’s alleged injury, the potential for dupli-

cative recovery or complex apportionment of dam-

ages, and the existence of more direct victims of the

alleged conspiracy—weigh heavily against judicial

enforcement of the union’s anti-trust claim.

74 L. Ed.2d at 748.

C. McDonald

The Eighth Circuit Court of Appeals confronted the

anti-trust standing question after McCready and Associ-

ated General. McDonald v. Johnson & Johnson, 722 F.2d

1370 (8th Cir. 1983). In McDonald, plaintiffs alleged

that Johnson & Johnson inhibited the market for TENS

(a non-medicinal pain reliever) devices by buying the

corporate stock of plaintiffs’ corporation and refusing to

market the device properly. The Eighth Circuit cata-

logued the factors identified by the Associated General

court to determine whether plaintiffs were proper parties

to bring a treble damages action.

46a

Whether the plaintiffs are proper parties depends on

the factors articulated in Associated General. These

are: (1) the causal connection between the alleged

anti-trust violation and the harm to the plaintiff;

(2) improper motive; (3) whether the injury was of

a type that Congress sought to readress (sic) with

the anti-trust laws; (4) the directness between the

injury and the market restraint; (5) the specula-

tive nature of the damages; (6) the risk of duplicate

recoveries or complex damage apportionment.

772 F.2d at 1374.

In discussing these factors the Eighth Circuit noted

that mere causal connection was insufficient. The injury

must be of the type that the anti-trust laws were designed

to prevent. Jd. The Eighth Circuit disposed of the case

by holding that because plaintiff sold their entire interest

in the competition, their injury could not be related to

anti-competitive actions. 722 F.2d at 1376. The court

summarized its conclusion as follows:

(We find that (1) plaintiffs voluntarily withdrew

themselves from competition; (2) there was no

causal connection between plaintiffs’ harm and the

alleged market restraint; (3) there was only specu-

lative damage shown; and (4) any injury plaintiffs

have shown was not a type that Congress sought to

redress under the anti-trust laws.

772 F.2d at 1379.

APPLICATION TO PRESENT FACTS

The above cases indicate that this Court must decide

the standing question on the individual facts of this case.

Substitution of labels for analysis is clearly counterpro-

ductive. The Court must decide whether each individual

Plaintiff entity has proper standing pursuant to the anal-

ysis outlined above. In viewing this case, this Court

47a

assumes that Plaintiffs can prove the facts alleged in their

Complaint, but does not assume that Plaintiffs can prove

facts that they failed to allege or that Defendants vio-

lated anti-trust laws in ways not alleged in the Complaint.

Associated General, 74 L. Ed.2d at 731.

William J. Janklow and Mark V. Meierhenry are

named Plaintiffs only in their capacity as parens patriae

for the citizens of the State of South Dakota. Therefore,

their standing to bring the federal anti-trust treble dam-

ages claim is dependent on the standing of the citizens of

the State. Plaintiffs’ Complaint states several allegations

of the effects of Defendants’ actions.* Liberally reading

Plaintiffs’ Complaint, only the deprivation of potable

water appears to apply to the citizens of the State. Ap-

parently, Plaintiffs agree. Plaintiffs’ response to Defend-

ants’ Motion to Dismiss at page 37-39.

The interests of the City of Philip are identical to that

of the Plaintiff citizens. Therefore, their standing is

identical to that of the Plaintiff citizens. This Court will

3 Plaintiffs’ Complaint at p. 14 states:

36. The aforesaid combinations and conspiracies have had, and

are continuing to have, the following effects, among others:

(a) Restricting and eliminating competition among other

modes of transportation of coal;

(b) Restricting and eliminating competition in the interstate

shipment of water;

needed jobs, and property which would be subject to taxa-

tion and would produce revenue for the State of South

Dakota

(d) The City of Philip and other western communities have

been deprived of much needed potable water. The water

development of the State of South Dakota has been

impeded.

(e) The possibility that the ETSI contract with the State of

South Dakota would be cancelled.

(f) The coal slurry pipeline project is presently being delayed.

48a

consider both Plaintiff citizens and City of Philip as

water consumers for purposes of discussion. The question

then is whether a water consumer would have standing

to bring an anti-trust action against Defendants for the

deprivation of potable water because of the alleged ob-

struction of the pipeline from the Oahe Reservoir to the

Powder River Basin.

This Court must first determine the causal connection

between the alleged anti-trust violation and the harm to

Plaintiffs. McDonald, 722 F.2d at 1874. The water

consumers allege that but for Defendants’ alleged illega!

activities they would have cheaper potable water. Their

loss would be the difference between the cost of water

from the pipeline to be built by ETSI as compared with

alternative sources. If Plaintiffs prove their case, they

will have shown a direct harm to the persons who would

consume water from the ETSI pipeline. This harm would

directly flow from obstruction of the project. Therefore,

this element balances in favor of the Plaintiff water

consumers.

Next, the Court must consider Defendants’ motive.

McDonald, 722 F.2d at 1874. Plaintiffs allege that De-

fendants acquired a monopolistic position and conspired

and combined through a list of illegal activity solely to

prevent Plaintiffs from fulfilling the terms of the water

sale contract. Plaintiffs’ Complaint at p. 11-14. If Plain-

tiffs can prove the allegations of their Complaint, they

would prove that Defendants acted unlawfully, inten-

tionally, maliciously and in bad faith. Again, this factor

tips in favor of the water consumers.

Third, the Court must consider whether the injury was

of a type that Congress sought to redress with the anti-

trust laws. MeDonald, 722 F.2d at 1374. As the Asso-

ciated General court noted, “[T]he Sherman Act was

enacted to assure customers the benefits of price com-

49a

petition, and our prior cases have emphasized the central

interest in protecting the economic freedom of partici-

pants in the relevant market.” 74 L. Ed.2d at 738.

If Plaintiffs prove their case, they will show that

Defendants are in the business of transporting coal.

Further, ETSI is attempting to enter the coal transpor-

tation field by building a pipeline from the Oahe Reser-

voir in South Dakota te the Powder River Basin in

Wyoming. ETSI would use that water to run a coal

slurry pipeline to points south. Without the pipeline the

western South Dakota citizens do not reap the benefits of

the pipeline, namely cheaper water. South Dakota is

selling to ETSI a permit which would allow it to pipe

the Missouri River water. Plaintiffs allege that the South

Dakota water consumers will pay a higher price because

of Defendants’ conspiracy targeted at the supply of water.

Defendants argue that the water consumers are too re

mote. They argue that Defendants are in the coal trans-

portation business and any injury suffered by a water

consumer is too remote, since the competition is in the

coal transportation business. Again, however, assuming

Plaintiffs are correct, the unlawful! conspiracy is targeted

precisely at the water supply. The other side of the coin

is that even assuming that Plaintiffs are correct, Defend-

ants have no interest in increasing the cost of water in

South Dakota nor depriving the citizens of water. Their

only alleged interest is in stopping the supply of water

necessary to complete the coal slurry pipeline. Is this

the type of injury that the anti-trust laws were designed

to remedy? This Court agrees with Defendants that the

above discussed cases indicate that the water consumers

injured because of Defendants’ alleged attempt to stop

the supply of water to Wyoming are too remote and

their injuries are not of the type which the anti-trust

laws were designed to remedy. This factor then weighs

in favor of Defendants.

50a

Next, the Court must examine the directness between

the injury and the market restraint. McDonald, 722

F.2d at 1374. As the discussion above indicates, the

Court finds that any injury to this class of Plaintiffs is

indirect. No doubt that if Plaintiffs prove their case,

they will have established a harm caused by the target-

ing of the water supply. However, the Complaint seems

to indicate a conspiracy directed at ETSI and South

Dakota. The harm to the water consumer is indirectly

caused by targeting the water supply; not caused by a

scheme designed to deprive the water consumers of

Missouri River water. Therefore, this factor also weighs

in favor of the Defendants.

Are the damages speculative? McDonald, 722 F.2d at

1374. The water consumers claim that the water they

would have received from the pipeline would have been

cheaper than from other sources. The Court has not way

of knowing whether Plaintiffs can prove what other

sources exist and to accurately project the cost of water

from them. Assuming they could, the amount of damages

would not be speculative. If they cannot, the damages

would be speculative. The Court has insufficient informa-

tion to balance this factor one way or the other.

Finally, the Court must consider the risk of duplicate

recovery or complex damage apportionment. McDonald,

722 F.2d at 1374. In considering this factor, it seems

that the Court must consider not only the Plaintiffs, but

also the potential Plaintiffs. ETSI is, of course, the most

significant of the potential Plaintiffs. Assuming that

Plaintiffs succeed, they will prove an illegal conspiracy

to interfere with ETSI. ETSI is Defendants’ direct com-

petitior in the coal transportation business. The Court

must at least consider whether duplicate recoveries or

complex damage apportionment could result should the

Court allow all actual and potential Plaintiffs to proceed.

If ETSI sued, they would presumably seek lost profits

resulting from Defendants’ obstruction of their market

5la

entry. The State of South Dakota basically seeks re-

covery of the revenue it would receive if the contract

were performed. The citizen Plaintiffs would attempt to

recover the difference between the cost of water with

or without the pipeline.

ETSI would not receive revenue from the water con-

sumers for water. See attachment to Complaint at p. 21.

Nor would the State’s attempt to recover duplicate either

ETSI’s or the water consumers’ potential damages.

Neither does it appear that it would be difficult to appor-

tion rétovery among the Plaintiffs and ETSI. Therefore,

it appears that this final factor weighs in favor of the

Plaintiff water consumers.

The above discussion indicates that the question of

standing of the water consumers must be struck in favor

of the Defendants. The Court finds that the water con-

sumers are too remote and their injury is not the type

of injury that the federal anti-trust laws were designed

to remedy. Therefore, the water consumers lack standing

to seek recovery for Defendants’ alleged violations of the

Sherman Act.

B. Plaintiffs State of South Dakota and SDCD

Plaintiffs’ State of South Dakota and SDCD interests

are also identical in this case. SDCD is an entity of the

State. Both entities seek performance of the ETSI con-

tract to insure that the contract benefits flow to the

State and its citizens. The State and SDCD will be jointly

referred to as the State for ease of discussion. Footnote

3 at p. 11 Supra contains Plaintiffs’ specific allegations

of the alleged effects of Defendants’ actions. It appears

that the State is seeking to recover for alleged inter-

ference with competition in the coal transportation busi-

ness and with its attempt to provide water for the ETSI

project. The State is not in the coal transportation busi-

ness, and the Court sees no argument relating to harm to

52a

the State which would result from lack of competition in

coal

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