For nearly a century, the United States railroads were exempt from the Sherman Antitrust Act of 1890 and Clayton Antitrust Act of 1914. Broadly speaking, the Sherman Act condemns monopolies, contracts, combinations, and conspiracies in restraint of trade. The Clayton Act forbids price discrimination, illegal tying and exclusive dealing, and limits mergers and acquisitions. Criminal charges may be brought against both individuals and companies violating the antitrust laws; equally important, and perhaps even more powerful a deterrent, civil suits seeking treble damages are also allowed under these acts. However, until 1980, the nation’s railroads were immune from antitrust prosecution, either civil or criminal.
As a result of being exempt from the application of the antitrust laws, the railroads could and did legally meet together to decide upon rates. As part of that discussion, they could also discuss their costs, a significant element of the decision on pricing. Thus the railroads could agree on what the rates between two points would be, so long as those rates were not, as determined by the Interstate Commerce Commission, unreasonably high. Apart from challenging a rate as unreasonably high, shippers had no choice about the rates they would pay for the transportation of goods between any two points; they were forced to pay the rates the railroads set for each traffic lane. In other words, there was no competition between rail carriers based on rates.
The Staggers Rail Act of 1980 changed that picture. It stripped the railroads of their antitrust immunity. The result was not a pretty picture from the railroads’ perspective. Suddenly, each of them had to compete for customers by setting rates which would attract customers to them rather than their competitor. At the same time, those rates needed to cover their costs and make a profit for their shareholders. The result initially, at least for Southern Pacific, was a bloodbath. There was such a frenzy to compete by offering the lowest rates that often those rates did not cover operating and capital improvement costs, and a return on investment. The idea that more volume was the goal often left out the crucial element: did the rates for that volume cover costs and create any profit for the company?
Because the railroads could now deal individually with a shipper, setting specific rates for that shipper, they began to enter into so-called private contracts. A summary of each contract had to be filed with the Interstate Commerce Commission (without stating the rates) but the contract itself was confidential between the railroad and customer. These contracts could have volume requirements or service requirements or equipment requirements, depending upon the shipper. Questions which arose as the railroads entered the world of contracts included some of the following: Could a railroad insist on exclusivity with that railroad? Was it legal to require a specific minimum volume requirement of traffic? Could a railroad discriminate in price between different purchasers of rail services and, if so, on what basis? Did the rates for one customer need to be identical to another customer who offered the railroad greater (or lesser) volume? What could the term of these contracts be?
Another major issue was educating employees regarding the hazards of operating under the antitrust laws. This training was particularly essential for the sales and marketing departments as well as the executive department. One key lesson for any railroad employee having contact with another railroad was to understand in no uncertain terms that he or she could not speak with their competitor counterparts about either rates or costs. In addition, they had to refrain from agreeing to boycott a particular customer or a short line railroad or a supplier of goods (including railcars) or services. They had to be warned about requiring a customer to purchase a product or service the customer did not want in order to get the product or service the customer did wish to purchase. All of these concepts were new to railroad personnel.
In the early 1980s, Southern Pacific entered the new world of telecommunications. In conjunction with another railroad, Southern Pacific began to consider creating a national system using their railroad rights-of-way to lay down fiber optic cables for communication purposes. In 1984, one fiber optic cable pair could handle 8,064 conversations simultaneously, which was considered an incredible advancement on the then current communication systems. Intriguing antitrust issues arose around whether Southern Pacific and its partner could have exclusive rights to use the rights-of-way or would be required to allow others to use them as well for purposes of laying fiber optic cable. This issue required looking at other alternatives to the railroads’ rights of way, such as pipeline rights-of-way, which would allow competitors to create competitive fiber optics systems. Another question was whether the initial group of purchasers of service could be required to enter into long term contracts but at lower rates than other later purchasers of service. Each of these issues required an extensive antitrust analysis but, in the end, SPRINT (for more information about SPRINT, please click on the SP Subsidiary Companies tab under the Southern Pacific Story area of this website) was formed, using railroads’ rights-of-way to install and maintain fiber optic cable.