slurry. As a consequence, the ETSI record affords
insights that may be of use to this Committee in evaluat-
ing the legislation before it.



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300



Economics

The record in the ETSI case demonstrates that coal

slurry pipelines are more economic than rail for moving

coal in large quantities over long distances, and that the

railroads so recognized. For example, a National Economic

Research Associates (NERA) study presented at trial by

Dr. Alfred E. Kahn, ETSI's expert economic witness,

reviewed eighteen comprehensive studies of the relative

economics of slurry and rail. Twelve of those studies

concluded that slurry is clearly more economic than rail;

five concluded that slurry is probably more economic than

rail; and only one found that rail is more economic than

slurry. (Interestingly, documents from the railroads'

files disclosed that the railroads themselves viewed the

minority study as flawed.) As early as 1974, Burlington

Northern slurry economics analysts advised BN's top

management:

"Clearly there is a point at which a
high volume slurry line can operate at
costs which are less than those of the
railroad. Of great importance is the
fact that after the first heavy capi-
tal cost the slurry line is insulated
against anticipated increases in labor
costs with which the railroads will
have to deal and which under the
escalator clause will become an ele-
ment of the rate paid by the utility."

Notwithstanding the economic superiority of slurry

pipelines as a means of moving large quantities of coal

long distances, the Black Mesa Pipeline is the only



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301



operating coal slurry pipeline in the United States today.
That pipeline traverses only 273 miles and moves rela-
tively small quantities of coal. If pipelines are in
fact a more economic means of moving coal, one may fairly
inquire why Black Mesa is the only operating coal slurry
pipeline in the United States today.

The ETSI verdict and judgment hold that a principal
reason ETSI is not currently operating is that a rail-
road conspiracy, formed in 1974, delayed, hindered, and
ultimately stopped the pipeline. Though the verdict and
judgment addressed only the ETSI situation, the evidence
in the case indicates that the conspiracy was aimed at
preventing construction of all coal slurry pipelines.

The ETSI record also spells out the economic motive
for the railroad conspiracy. A four-year study of
internal railroad records concerning rates, costs, and
profits was conducted by NERA, under the leadership of
Dr. Kahn. The study concluded that, during the ten-year
period from 1974 to 1984, the six defendant rail-
roads realized aggregate "markups" — in effect monopoly
profits — of approximately $1.4 billion on the movement
of Powder River Basin coal to utility customers that ETSI
sought to serve. See Attachment C. Those profits were
over and above the amounts that the railroads' own
records show were required to cover long-run incremental
costs, including targeted returns on invested capital.



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302



Dr. Kahn testified that preserving those monopoly profits
provided a powerful incentive for the railroads to oppose
competition from ETSI and other coal slurry pipelines.

Railroad Strategy

After hearing nine weeks of testimony, Judge Parker
directed a verdict for ETSI on the key conspiracy issue,
finding (according to the legal test) that reasonable men
could not differ about the existence of an illegal con-
spiracy to delay, hinder, or stop ETSI. Each of the six
defendant railroads was expressly found to have been a
participant in that conspiracy.

The strategy of the conspiracy was to defeat ETSI and
other coal slurry pipelines by creating "risk, uncer-
tainty, and delay." In a truly remarkable document, an
outside consultant hired by the Union Pacific Railroad
counseled as follows:

"Suggested by the above thumbnail
sketch are the softspots in the
slurry pipeline challenge: to wit —
risk, uncertainty, and delay. If the
pipeline developers cannot reliably
assure prospective customers of ser-
vice on a predictable and believable
schedule, they will be severely ham-
pered in their negotiation of requi-
site long-term revenue-generating
contracts; and without such contracts
their ability to raise capital,
through private placements or public
offerings, is materially impeded.
Delay, of a sort associated with
complex legal procedures calculated
to expose the many vital issues to
thorough examination, is thus a major



- > -



303



consideration. Delay equals uncer-
tainty and enhanced risk, the funda-
mental enemies of investment."

Shown the consultant's proposal, the senior legal officer
of the Union Pacific acknowledged that it correctly stated
not only the strategy of the Union Pacific but that of the
entire rail industry. He termed it a strategy to "delay
and time constrain the development of coal-slurry pipe-
lines," and conceded that the strategy had been pursued by
the railroad industry since 1974.

Right-of-way Boycott

The principal railroad vehicle for injecting risk,
uncertainty, and delay — and virtually the sole vehicle
from 1974 to about 1979 — was the concerted denial of
railroad crossings, a classic group boycott. On May 3,
1974, the Presidents of Burlington Northern and Chicago &
North Western sat down at a table and explicitly agreed
that both railroads would deny crossings to ETSI and that
if either railroad changed its mind on that agreement, it
would inform the other. These two railroads even went
so far as to memorialize their agreement in memoranda
prepared by the respective general counsels.

Later the BN-CNW agreement was expanded to include
the other defendant railroads. Thus, when ETSI offered
$1,500 per crossing for the railroad crossings it needed,
BN, UP, and CNW exchanged blind copies of their letters



- 8 -



304



refusing ETSI's offer. And Santa Fe, wishing to assure
that it did not get out of step with the other railroads,
authorized one of its officers to poll five other
railroads to assure their continued refusal to grant
crossings to ETSI. Having satisfied itself that the
boycott was intact, Santa Fe then declined to negotiate
with ETSI.

Faced with a concerted refusal to grant crossings
voluntarily, ETSI devised an alternative strategy —
the so-called "window program." ETSI first identified
"windows" in the railroad lines — places where the
railroads held their rights-of-way only as an easement
rather than in fee. The railroads uniformly refused to
acknowledge ETSI's right to cross at these windows or
easement locations, notwithstanding clear legal precedent
in ETSI's favor in most jurisdictions. As a result, ETSI
was required to file 69 separate lawsuits to confirm its
right to cross at the window locations. The railroads
mounted what they called a "joint defense," answering
every one of those 69 lawsuits and defending many of them.

Documents from the railroads' files (produced as a
result of the court's crime-fraud ruling) make clear that
the railroads' strategy in opposing ETSI's window suits
was, in the words of a lawyer for Kansas City Southern,
"to delay every way we can." In another notable letter, a
lawyer representing the Burlington Northern in Wyoming



- 9 -



305



bragged that he had "ETSI in court for approximately one
and a half years" even though he was "without any proof"
to support his side of the lawsuit.

The last of the original window lawsuits was decided
by the Oklahoma Supreme Court at the end of 1981, five-
and-a-half years after the initial suit was filed in
mid-1976. During those five-and-a-half years, ETSI won 69
straight lawsuits at the trial court level and prevailed
on appeals in the Eighth Circuit, Tenth Circuit, and
Oklahoma Supreme Court. By the end of the original
window program, there can have been no doubt about ETSI's
ability to force crossings at all easement locations.

Nonetheless, even in the 1980 's, each of the six
defendant railroads continued to delay granting crossings
at easement locations. For example, ETSI was forced to
file three lawsuits against Santa Fe in Oklahoma in 1982;
a lawsuit against BN in ArKansas was not resolved until
June of 1983.

Moreover, since the window approach had no appli-
cation to fee crossings, the railroads continued their
previous policy of denying fee-owned crossings. In fact,
by the time ETSI went out of business at the end of July
1984, not one of the six defendant railroads had ever
intentionally granted a fee crossing to ETSI. The chief
executive officers of Union Pacific and Burlington
Northern explicitly testified that their railroads' policy



- 10 -



306



was to deny all fee crossing requests by coal slurry
pipelines.

It goes without saying that, had federal eminent
domain authority been available, the railroads would have
been unable to use crossing denials as a means of
hindering and delaying ETSI. Thus, the principal strategy
of the railroad conspiracy would have been removed.

CONCLUSION

If one assumes that the United States economy is best
served by having the most efficient means of transporta-
tion provide transportation services, then there is a
national policy interest in allowing slurry pipelines to
compete on an even footing with railroads. At the very
least this means that coal pipelines should be given
eminent domain authority. The ETSI case demonstrates that
such authority would prevent railroads from, utilizing one
of the principal vehicles they have historically employed
to forestall construction of slurry pipelines.



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307
ATTACHMENT A

FILED

U. S. DISTRICT COURT

E«STESS DISTRICT 07 HXAS

OCT 2S87

IN THE UNITED STATES DISTRICT COURT ^v'"^'^^. "^"' <^^*w
FOR THE EASTERN DISTRICT OF TEXAS ^ - ^^-/^-^-^^ ^. :^^ ^
BEAUMONT DIVISION

s RECEIVED

ETSI PIPELINE PROJECT. AS* OPT «; WRT

XINT VENTURE and ENERGY S '^^**'

TRANSPORTATION SYSTEM. INC. S MICHAEL J HENKE

S
VS S B-84-979-CA

S
BURL I NGTON NORTHERN, ET AL. S



Flndtnos of Fact. Conclusions of Law, and Or der of the Court

SI INTRODUCTION

This Is an antitrust suit. The motion before the court is plaintiff
ETSis Renewal of its Motion for Production of Documents to which the
defendants have asserted a Noerr-Pennlngton defense, attorney-client
privilege, and work product defenses The motion has been briefed and
over-briefed. It was fully argued at a hearing held September 28, 1987 The
matter is considered under guidelines established by the United States
Court of Appeals for the Fifth Circuit. In re Burlington Northern. 822 F.2d
5l8(5thCtr. 1987).

S2 PLAINTIFFS- BURDEN OF PROOF

Plaintiffs have previously established a prima fade case that a



308



conspiracy existed to thwart plaintiffs' attempt to build a coal slurry
pipeline from northern coal producing states to serve customers in the
southwest In violation of the antitrust laws. A prima fade case has been
made that each defendant railroad was a member of that conspiracy What
the motion at bar addresses is documents that the plaintiffs claim were
made in the course and furtherance of the conspiracy.

For the plaintiffs to prevail, it must be proven that the documents in
question, whose genesis was in litigation and in activities before
administrative agencies, were a part of a sham. Proof of a sham requires a
prima facie showing that the litigation was undertaken without a genuine
desire for Judicial relief as a significant motivating factor, an that there
was no reasonable expectation of judicial relief, qc that there was no
reasonable basis for party standing, in re Burlington Northern. 822 F.2d 5 1 8,
534(5thC1r. 1987).

The initial question for this court to address concerns the meaning of
prima facie proof In the context of the motion presently before the court.
Plaintiffs forcefully argue that prima facie proof, as used by the Fifth
Circuit In its order. Is equatable to the analysis required in determining
whether an issue of fact exists sufficient to go to a jury. The court
disagrees. The concept of prima facie proof is much used and occasionally
abused, it can mean different degrees of proof under different
circumstances. To require merely sufficient evidence to raise a fact issue
does a disservice to the Noerr-Pennlngton doctrine, in order for a moving
party to pierce the Noerr-Penntngton shield surrounding petitioning activity,
the proof of sham must be sufficient to overcome a presumption of validity.
Plaintiffs must come to grips with Coastal States' recognition that
invariably there exists a multiplicity of motivations giving rise to judicial
litigation or agency petitioning. Sfig, Coastal States Marketing. Inc v. Hunt.



309



694 F2d 1358, 1371 (5th Clr, 1983). Ultimate success may not be achieved
until the plaintiffs prove a negative — that there was no genuine desire
for judicial relief as a significant motivating factor. Defendants have
argued correctly that the burden is an onerous one indeed.

Prima facie proof means that a party has presented sufficient proof
to be entitled to proceed. !n the context of its use in the motion before the
court, that is in order for the plaintiffs to overcome the presumption of
validity and prove the negative—that defendants were without a genuine
desire for judicial relief as a significant motivating factor, ETSI can only
make a prima facie case if its proof is both clear and convincing, in
Addlngton v Texas. 441 U.S. 418. 424, 99 SCt. 1804, 1808, 60 L.Ed.2d 323,
329 ( 1 979), former Chief Justice Burger noted that the traditional burden of
proof in a civil fraud case was by the intermediate standard of clear and
convincing evidence. The fact that the common law standard was by clear
and convincing evidence further reinforces this court's opinion that this is
the proper standard In a scenario such as this where important interests are
at stake The plaintiff's proof in this case is clear and convincing.

A preponderance analysis is Inappropriate in the sense that it
assumes all the evidence is before the fact finder, which is not the case
here. However, based on available evidence, a preponderance analysis in
terms of whether the plaintiffs have established the fact to be "more likely
true than not true" is both appropriate and proved. £t. Herman & Maclean v.
Huddleston. 459 U.S. 375, 103 S.Ct. 683, 691-92, 74 L.Ed.2d 548
(l983)(lower preponderance of the evidence standard appropriate in
statutory securities fraud case). Certainly, sufficient evidence under either
standard is available to the court for the following Findings of Fact.



310

S3 FINDINGS OF FACT

1. The defendant railroads engaged in each of the "window"
lawsuits, S££ attached Exhibit 1 , without a genuine desire for judicial relief
as a significant motivating factor.

2. The defendant railroads" desire to influence and obtain
judicial relief throughout each of the "window" lawsuits, 5SS. attached
Exhibit 1. was insignificant, incidental, and not a significant motivating
factor.

3. The railroad defendants" primary motive in each of the
""window" lawsuits, Sfi£ attached Exhibit 1. was to harm a competitor
through the mere invocation and maintenance of the judicial process.

4. Kansas City Southern initiated and engaged in Kansas Cltv
Southern Railway v. Andrews. CV82-L-443 (D. Neb. 1984), sub nom.. MlSSQUri
V. Andrews. 586 F.Supp, 1268 (D. Neb. 1984). alDL 787 F.2d 270 (8th Cir.

1 986), cert granted. US 1 07 S.Ct. 1 346, 94 L. Ed. 2d 5 1 7 ( 1 987)

without a genuine desire for judicial relief as a significant motivating
factor.

5. Kansas City Southem"s desire to influence and obtain judicial
relief in Kansas Cltv Southern Railw ay v Andrews. CV82-L-443 (D. Neb.
1984), sub nom. . Missouri v Andrews. 586 F.Supp. 1268 (D. Neb. 1984), affd,

787 F.2d 270 (8th Clr. 1 986), cert granted. U.S . 1 07 S.Ct. 1 346,

94 L Ed. 2d 517 (1987) was insignificant, Incidental, and not a significant
motivating factor.

6. Kansas City Southem"s primary motive in Kansas Citv
Southern Railway v. Andrews. CV82-L-443 (D. Neb. 1984) was to harm a
competitor through the mere invocation and maintenance of the judicial
process.

4



311



7. Union Pacific, although not named as a formal party to the
suit, Initiated and facilitated Missouri v Andrews. (CV82-L-442) 586
F.Supp. 1268 (D. Neb. 1984), alLl 787 F.2d 270 (8th Cir. 1986), ££LL

granted. US 1 07 S.Ct. 1 346, 94 L Ed. 2d 5 1 7 ( 1 987) without a

genuine desire for judicial relief as a significant motivating factor.

8. Although not named as a formal party to the suit, Union
Pacific's primary motive in Missouri v Andrews. {CV82-L-442) 586 F Supp.

1 268 (D. Neb. 1 984), aim 787 F 2d 270 (8th CIr. 1 986), cert, granted.

US , 1 07 S.Ct. 1 346, 94 L Ed. 2d 5 1 7 ( 1 987) was to harm a competitor

through the mere invocation and maintenance of the Judicial process.

9. The other railroad defendants represented to this court that
they were not involved in Kansas Citv Southern Railway v. Andrews.
CV82-L-443 (D Neb. 1984) or Missouri v Andrews. CV82-L-442 (D. Neb.
1984), and therefore any documents they may have relating or referring to
the Andrews litigation would not be protected by Noerr-Pennlng ton. the
attorney-Client privilege, or the worl< product privilege.

10. Burlington Northern, Union Pacific, and Kansas City
Southern engaged in numerous attempts to stir up opposition on the part of
other entities with regard to the granting of permits sought by ETSI from
various administrative bodies.

11. All of the railroad defendants engaged in multiple efforts
to oppose the granting of permits sought by ETSi from various
administrative agencies.

12. The petitioning activities of Kansas City Southern with
regard to the granting of permits sought by ETSi from various
administrative bodies were a sham.

13. The defendants sole significant motivating factor in the
"window" lawsuits, the Andrews litigation, and the administrative



312



petitioning activities was anticompetitive. The sole significant motivation
was to "kill" the coal slurry pipeline project by delay facilitated through the
mere invocation and maintenance of the Judicial and administrative process.

1 4. At this time, the court finds no need and therefore makes no
finding with regard as to whether the railroad defendants may have had a
reasonable expectation of Judicial relief in either the "window" or Andrews
litigation.

15. At this time, the court finds no need and therefore makes no
finding with regard as to whether the railroad defendants may have had a
reasonable basis for party standing in the Andrews litigation.



S4 CONCLUSIONS OF LAW

I. The plaintiffs (collectively referred to as ETS!) have
sustained their burden to make a " Drtma fade" showing that the railroad
defendants engaged In each of the "window" lawsuits without a genuine
desire for Judicial relief as a significant motivating factor. The court
specifically makes this finding with regard to each of the "window"
lawsuits, sss. Exhibit 1 which Is hereby incorporated by reference for
purposes of this opinion and order. Since the railroad defendants engaged in
each of the "window* lawsuits without a genuine desire for Judicial relief
as a significant motivating factor, their participation in each of these
"window" suits constituted a sham. The Noerr-Pennington doctrine offers no
protection to sham activities. Accordingly, the crime-fraud exception to the
attorney-client and work product privileges allows full discovery of any
matters relating or referring to the individual "window" lawsuits from each
defendant railroad.



313



2. The plaintiffs have sustained their burden to make a •• pnma
fade" showing that Kansas City Southern and Union Pacific engaged in and
facilitated the Andrews lawsuits without a genuine desire for judicial
relief as a significant motivating factor. Since these defendants engaged in
each of the Andrews lawsuits without a genuine desire for Judicial relief as
a significant motivating factor, their participation in each of these suits
constituted a sham. The fact that Union Pacific was not a formal party to
Missouri V. Andrews Is of no consequence. The Noerr-Pennlngton doctrine
offers no protection to sham activities. Accordingly, the crime-fraud
exception to the attorney-client and work product privileges allow full
discovery of any matters relating or referring to the Individual Andrews
lawsuits from Kansas City Southern and Union Pacific. Since the other
railroad defendants represented to this court that they were not involved in
Kansas CItv Southern Railway v. Andrews (CV82-L-443) or Missouri v
Andrews ( CV82-L-442). any documents that these defendants may have
relating or referring to the Andrews litigation are not protected from
discovery by Noerr- Penning ton, the attorney-client privilege, or the work
product privilege.

3 The plaintiffs have sustained their burden to make a ' orlma
facie" showing that the anticompetitive activities of Burlington Northern,
Union Pacific, and Kansas City Southern, designed to stir up opposition to
various administrative permits sought by ETSI, were not sufficiently
motivated by a genuine desire for relief as a significant motivating factor.
Therefore, any documents and correspondence between these particular
defendants and their attorneys come within the crime-fraud exception to
the two asserted privileges. Furthermore, prima fade evidence connecting
each defendant with an effort to delay the administrative process Justifies
the Invocation of the crime-fraud exception with respect to all of the



314



railroad defendants.

4. The plaintiffs have sustained their burden to make a prima
facie showing that the petitioning activities of the Kansas City Southern in
connection with administrative hearings regarding permits sought by ETSI
were sham. The Noerr-Pennington doctrine offers no protection for sham
petitioning, and therefore the crime-fraud exception becomes applicable
Consequently, the documents and correspondence between Kansas City
Southern and its lawyers regarding these administrative hearings during the
course of, or prior to, the termination of such petitioning activities are
subject to discovery.

5. The states of Iowa, Missouri, and Nebraska may validly
assert the attorney-client privilege to the extent that confidentiality was
maintained.



S5QRr:T OF THE COURT

1. Pursuant to the preceding Findings of Fact and Conclusions of Law,
IT IS HEREBY ORDERED, ADJUDGED. AND DECREED that each of the railroad
defendants produce all documents for which an attorney-client or work
product privilege has been claimed which relate, refer to, mention, or
concern the following:

A. Each of the Individual lawsuits commonly known as
the "window" litigation, see attached Exhibit 1;

B. Each of the Individual lawsuits commonly known as the
Andcewaittigation;

C. Any application or filing by ETSI before an
administrative agency (federal, state, or local) for a permit or authorization

8



315

concerning the coal slurry pipeline.

2. Any document claimed as privileged by the states of Iowa,
Missouri, or Nebraska shall be submitted to this court for an in camera
inspection.

3. Because of the ongoing nature of the Andrews litigation, all
documents produced by any party which refer or relate to the Andrews
litigation shall be subject to in camera Inspection by this court. Similar to
a Fed. R. Evid. 403 analysts, the court will consider whether the probative
value of the evidence is substantially outweighed by the danger of unfair
prejudice to the defendants. After engaging In this balancing analysis, the
court shall then determine whether such evidence is discoverable.

4. All other discovery matters are hereby assigned to
Magistrate Mike Bradford pending further orders of this court.



^^



SIGNED and ENTERED this ^^^ day of October, 1 987




ROBERT M. PARKER
United States District Judge



316



B-34-949-CA



Exhibit 1



WINDOW LITIGATION



Style of Case Cause No

Energy Transportation Systems, C-76-131
Inc., a Delaware corporation v.
Chicago Northwestern Transpor-
tation Company

Energy Transportation Systems, C-76-130
Inc., a Delaware corporation v.
Burlington Northern, Inc.

Energy Transportation Systems, C-76-129B
Inc. , a Delaware corporation v.
Union Pacific Railroad Company,
a Utah corporation

Energy Transportation Systems, CV-77-L-164
Inc., a Delaware corporation v.
Burlington Northern, Inc. , a
Delaware corporation

Energy Transportation Systems, , 5911
Inc., a Delaware corporation v.