The opinion of the court was delivered by: FRIENDLY
These are motions for a temporary injunction in three consolidated actions wherein various plaintiffs and intervenors seek to enjoin orders of the Interstate Commerce Commission authorizing the merger of the New York Central Railroad Company (NYC) with the Pennsylvania Railroad Company (PRR) [the proposed merged company being hereafter referred to as the Transportation Company] and the issuance of securities and assumption of obligations by PRR in accordance with numerous conditions therein set forth and others that may later be imposed. The orders were to become effective on September 30, 1966.
On September 21 we heard argument on the motions, granted leave until September 27 to file additional briefs addressed to new issues raised by the Commission's report on reconsideration served September 19, and because of the impracticability of concluding our deliberations and preparing an opinion before September 29 under the circumstances, entered an order temporarily restraining consummation of the merger pending further order of this court. We have concluded that a temporary injunction should be denied.
The proceedings before the Commission, F.D. 21989 and 21990, were initiated by applications filed March 9, 1962. After extensive hearings, the examiners rendered a recommended report and order on March 29, 1965. In a document of 446 pages with many appendices, they advised the Commission to find the transactions consistent with the public interest, 49 U.S.C. §§ 5(2)(b) and 20a(2), subject to numerous conditions primarily for the protection of other carriers and of labor. In a report dated April 6 and served April 27, 1966, which fully complied with the directions of the Supreme Court in such recent decisions as Minneapolis & St. Louis R. Co. v. United States, 361 U.S. 173, 186, 80 S. Ct. 229, 4 L. Ed. 2d 223 (1959), and Seaboard Air Line R. Co. v. United States, 382 U.S. 154, 86 S. Ct. 277, 15 L. Ed. 2d 223 (1965), the Commission accepted their ultimate recommendation but with conditions differing in several respects.
The Commission's report attracted many petitions for reconsideration. Only one, by Milton J. Shapp, an industrialist and PRR stockholder, questioned the desirability of the merger. The petitions went rather to its consummation before certain other merger or control proceedings had been finally determined; to the sufficiency of special protective traffic and financial provisions fashioned by the Commission for the benefit of Erie-Lackawanna (E-L), Delaware & Hudson (D & H) and Boston & Maine (B & M); to the lack of similar or other provisions in favor of other carriers; and to a fear that the financial provisions for the protection of E-L, D & H and B & M might lead to manipulation of traffic favorable to the Transportation Company or the protected lines and adverse to others. Complaint was made also that the novel protective provisions had been imposed without the hearing required by § 5(2)(b) of the Interstate Commerce Act, § 5 of the APA and the due process clause of the Fifth Amendment, and that the financial provisions constituted a pooling arrangement under § 5(1) of the Interstate Commerce Act.
In order to consider these petitions the Commission deferred the effective date of the merger from May 31 to September 30, 1966, but, on August 29, declined to postpone this further although its report on reconsideration had not yet been filed. E-L thereupon brought an action to enjoin the merger; and two other actions were brought and later consolidated, one by the Baltimore & Ohio (B & O), Chesapeake & Ohio (C & O), and Norfolk & Western (N & W), the other by the Central of New Jersey (CNJ) and the Reading. D & H and B & M, also beneficiaries of the special protective conditions, intervened as plaintiffs in E-L's action; two other railroads, the Chicago & Eastern Illinois (C. & E.I.) and Western Maryland (WM), intervened in the others. Shapp and the Borough of Freedom and City of Scranton also intervened as plaintiffs. PRR, NYC and the Trustees of the New Haven (NH) intervened as defendants. Numerous public bodies and chambers of commerce also intervened as defendants.
We interrupt the narrative at this point to describe the special protective conditions in favor of E-L, D & H and B & M and the background for them.
Transportation Act, 1920, which in returning the railroads to private management placed them "more completely than ever under the fostering guardianship and control of the Commission", Dayton-Goose Creek Ry. v. United States, 263 U.S. 456, 478, 44 S. Ct. 169, 172, 68 L. Ed. 388, 33 A.L.R. 472 (1924), directed the Commission to "prepare and adopt a plan for the consolidation of the railway properties of the continental United States into a limited number of systems"; once the plan was adopted, all consolidations must be in harmony therewith. 41 Stat. 481 (1920). Despite the expenditure of vast amounts of time and effort, nothing came of this grand design, and the provision was later eliminated. Congress has "consistently and insistently denied the Interstate Commerce Commission the power to take the initiative in getting one railroad to turn over its properties to another railroad in return for assorted securities of the latter." St. Joe Paper Co. v. Atlantic Coast Line R.R., 347 U.S. 298, 305, 74 S. Ct. 574, 579, 98 L. Ed. 710 (1954). Railroad consolidation has thus proceeded on a voluntary case by case basis and, until recently, with less than even deliberate speed. However, the intensified competition from other forms of transportation after World War II gave a new impetus to railroad consolidation, and the Commission has freely utilized its power under § 5(2)(d) to insist that carriers avid for matrimony should adopt some disfavored children.
This process has already resulted in a considerable realignment of the railroads serving the northeastern states. We here refer only to the two most important of these steps, the control of the B & O by the C & O authorized in 1962, 317 I.C.C. 261, and the acquisition, in one form or another, of the Nickel Plate, Wabash, Pittsburgh & West Virginia, and Akron, Canton and Youngstown by the N & W authorized in 1964, 324 I.C.C. 1.
There remained the two large roads which have sought to merge in these proceedings and several smaller ones.
The most important smaller independent lines in the northeastern states are NH, for some years in a proceeding under § 77 of the Bankruptcy Act, E-L, D & H and B & M.
The Commission's order binds the Transportation Company to take over the operations of NH on terms to be agreed or, in the absence of agreement, to be fixed by the Commission, all subject to approval by the bankruptcy court, 327 I.C.C. 553.
This provision has the enthusiastic support of the Trustees of the NH and of the four states, New York, Connecticut, Rhode Island and Massachusetts, which it serves. E-L had initially asked to be included in the proposed unification of the N & W and other lines and opposed that transaction if not so included; however, in October 1961, having entered into an agreement with the Nickel Plate for joint construction of an electronic classification yard at East Buffalo, N.Y., and for good faith negotiation for affiliation with the new system, it withdrew its application for compulsory inclusion and supported the N & W merger without such a provision. 324 I.C.C. 19-20. D & H and B & M had likewise petitioned for inclusion, but the withdrawal of E-L's petition eliminated what would have been the only physical connection between them and the N & W system. 324 I.C.C. 29-31. The Commission therefore did not require immediate inclusion of the three roads in the N & W system but prudently retained jurisdiction for a period of five years to entertain applications for such inclusion and, if this was found consistent with the public interest, to prescribe equitable terms; consummation of the approved transactions was to constitute "acquiescence in and irrevocable assent" to this condition by the N & W. 324 I.C.C. 148. We are advised that such applications have been filed and hearings completed.
The Commission denied a request of E-L, D & H and B & M for mandatory inclusion in the Transportation Company, except in the event of an adverse determination by it with respect to their absorption by N & W. 327 I.C.C. 530-31, 553. It found, however, "that when the various consolidations of yards and equipment and the new through routes contemplated by the applicants are effectuated, a substantial amount of traffic could be diverted from E-L, D & H, and B & M," and that "it is doubtful that, without inclusion in a major system, these three carriers could withstand the competition of the applicants merged"; hence, "unless they are protected during the period necessary to determine their future, we would not authorize consummation at this time, even though approving the merger." 327 I.C.C. 531-32. To that end the Commission imposed conditions on "approval of the merger for undelayed consummation," which were "designed to prevent any loss of revenue over the three railroads as a direct result of immediate consummation of this merger," such conditions to be applicable pending final determination of the petitions for inclusion of the three carriers in a major system or such other period as the Commission may prescribe, "the protective period."
These conditions, unprecedented in their severity in the history of railroad mergers, provided for "(1) the temporary preservation of present practices and patterns (as to both routes of movement and volume) on traffic for which E-L, D & H and B & M compete with applicants and other railroads making up the proposed system; (2) the payment of an indemnity by the Transportation Company to E-L, D & H and/or B & M whenever, in a given year, the revenues of E-L, D & H and B & M are, as to each of them, proportionally less than the combined revenues of each protected carrier and the Transportation Company, as computed on the basis of the relationship existing between such revenues for the year 1964; and (3) procedures for the determination of questions arising under" the two sets of conditions, hereafter referred to as "the traffic conditions" and "the financial conditions" or "the indemnity." 327 I.C.C. 532-33. Some further explanation of the method for calculating the indemnity may be helpful. The first step is to obtain a "base revenue ratio" by dividing the protected carrier's freight revenues for 1964 by the sum of the revenues of that carrier, PRR and NYC for that year. The freight revenues of the Transportation Company and the protected carrier for a future year would then be totalled and multiplied by the base revenue ratio to arrive at what the protected carrier's revenues hypothetically would have been but for the merger, the "standard revenue." Subtraction from this of the actual freight revenues of the protected carrier for the year in question, the "earned revenue," produces the "indemnification base." The final step is to multiply the indemnification base by the difference between 100% and the protected carrier's average freight operating ratio for 1962-65. 327 I.C.C. 533-34. In the event of failure by applicants to accede to these special traffic and financial provisions, consummation of the merger was to be deferred for two years or such time as the Commission may determine to be necessary to protect the interests of the three carriers. 327 I.C.C. 563.
In sharp contrast to most actions to enjoin orders of the Commission approving railroad mergers, none of the carriers who are plaintiffs or intervenors and almost none of the other intervenors question the ultimate desirability of the merger. Rather the complaints and motions for a temporary injunction raised substantially the same objections as had been presented to the Commission in petitions for reconsideration. Consummation of the merger on any terms prior to a definitive solution of the future of the protected roads was claimed to be contrary to the public interest both by the protected carriers and by other lines. The protected carriers assailed the traffic and financial conditions as vague and insufficient in respects too numerous to mention. Other roads claimed entitlement to similar or other protection. Both these latter roads and B & O, C & O and N & W contended that the indemnity provisions had introduced a new element making the merger more detrimental to them in the protective period than theretofore supposed. The contention was that these provisions created a "community of interest" between the protected roads and the Transportation Company whose impact the Commission had failed to appreciate. The indemnity formula, it was alleged, would give the protected carriers an abnormal incentive to throw interline traffic to the Transportation Company rather than to its competitors in order to increase the figure used in computing the "standard revenue" of the protected carrier for a future year, and would give the Transportation Company a similar abnormal incentive to throw interline traffic to the protected carriers rather than to others in order to increase the formers' "earned revenue." The indemnity was also contended by the unprotected carriers to be a pooling arrangement ordered without the hearing and findings required by § 5(1) of the Interstate Commerce Act. Particular emphasis was placed, both in this connection and otherwise, on the lack of proper opportunity to be heard. PRR and NYC countered, among other things, with affidavits alleging that the estimates of the diversionary effects of the indemnity formula on other carriers ignored the realities of life. They pointed to the large proportion of the traffic routed by the shipper, estimated to be 85% of the total, which he directs in his own interest regardless of the desires of any carrier; to the fact that if the carriers had the influence alleged by the unprotected roads, they would use it to cause much of the traffic cited to move over their own lines rather than over any other; to the time required to change established routing practices; and to what they considered the unlikelihood of the three protected roads' temporarily diverting interline traffic to the Transportation Company, which was likely to be their principal future competitor, in preference to the N & W or other lines.
The Commission's report on reconsideration, served September 19, 1966, put the controversy with respect to the special protective conditions in favor of E-L, D & H and B & M in a new posture, at the same time that it rejected almost all the contentions raised by the petitions concerning other phases of its initial report.
The Commission reopened the proceedings for further consideration, with limited further hearing, to determine in what respects the protective traffic and financial conditions should be modified, including modification to prevent "manipulations" of the financial conditions of the nature described above, and also whether a provision should be included to compensate the protected carriers from a loss in capital values arising from diversion of revenues not met by indemnity provisions. N & W, which had not theretofore intervened, was granted leave to participate in these further hearings. Consummation of the merger was permitted to proceed on September 30, 1966, but this would "constitute irrevocable assent on the part of the applicants to any modification resulting from the further consideration herein described and ordered and which are found to be just and reasonable; as well as irrevocable agreement by the applicants to comply fully with the conditions as modified" save only that "it should be clearly understood that the consummation of the merger will not foreclose or limit court review of any decision the Commission may make in regard to the capital indemnity issue." Pending reconsideration the special traffic conditions stated in the initial report were to remain in effect but the indemnity provisions were rescinded; modified protective provisions would be effective "as of the date prescribed in a modification order" except that any provision decided upon for the payment of indemnities would be retroactive to the date of consummation. Since the report on reconsideration thus answered many of the complaints of the carriers who were plaintiffs or intervening plaintiffs but created new issues, we were impelled, as indicated, to grant leave for the filing of further briefs and to enter a temporary restraining order.
The magnitude and importance of this proceeding do not mean that a temporary injunction should issue as a matter of course; in great cases as in small the issuance of such an injunction rests in sound judicial discretion. Yakus v. United States, 321 U.S. 414, 440, 64 S. Ct. 660, 88 L. Ed. 834 (1944). We see no basis for the notion, apparently entertained by certain plaintiffs, that all railroad mergers should be temporarily enjoined on the mere request of other carriers; rather the fact that such mergers come to a court with the imprimature of the "tribunal appointed by law and informed by experience," Illinois Central R.R. v. I.C.C., 206 U.S. 441, 454, 27 S. Ct. 700, 704, 51 L. Ed. 1128 (1907), in this instance unanimous, and the consequent limitations on judicial power place a greater burden on those seeking interlocutory relief than when no administrative screening has occurred. The history of other proceedings to enjoin commission approved mergers with delays of many years, which has been cited as a worthy example for us to follow, seems rather to indicate the need of circumspection before granting injunctive relief - particularly in a case such as this where there is general agreement that the merger should occur. It is just as important that a court should not subject a valid railroad merger to unnecessary delay as that it should permanently enjoin one that does not conform to statutory standards or temporarily enjoin one as to whose validity there are truly serious doubts which it needs time to resolve. We accept as a correct formulation of the standards governing the exercise of our discretion the frequently cited statement of the Court of Appeals of the District of ...