Grand Trunk Corporation v. STB (7th Cir. 2025)

Opinion

In the

United States Court of Appeals For the Seventh Circuit ____________________ No. 24-1811 GRAND TRUNK CORPORATION, et al., Petitioners,

v.

SURFACE TRANSPORTATION BOARD and UNITED STATES OF AMERICA, Respondents,

and

NATIONAL INDUSTRIAL TRANSPORTATION LEAGUE, et al., Intervening Respondents. ____________________ Petition for Review of a Final Rule of the Surface Transportation Board. No. EP 711 (Sub-No. 2) ____________________

ARGUED JANUARY 16, 2025 — DECIDED JULY 8, 2025 ____________________ 2 No. 24-1811

Before SCUDDER, KIRSCH, and LEE, Circuit Judges. SCUDDER, Circuit Judge. Before us is a petition challenging a Final Rule promulgated by the Surface Transportation Board following a notice-and-comment period. At its most basic level, the Final Rule allows a railway shipper or receiver to request what the Rule calls a “reciprocal switching agree- ment”—a regulatory tool the Board can use to require a rail carrier that has a monopoly over a certain rail line to compete with another carrier for particular rail traffic. Several rail carriers contend that the Final Rule exceeds the Board’s statutory authority under the Staggers Rail Act of 1980, the statute in which Congress granted the agency au- thority to prescribe reciprocal switching. The carriers also ar- gue that specific aspects of the Final Rule exceed the Board’s ancillary powers conferred by its enabling statute and, sepa- rately, are arbitrary, capricious, and unsupported by the rec- ord. By its terms, the process the Final Rule prescribes to obtain a reciprocal switching agreement does not require a determi- nation by the Board that an existing carrier’s rail service is in- adequate. Because we interpret the Staggers Rail Act to re- quire such a finding, this shortcoming compels us to conclude that the Rule exceeds the Board’s statutory authority. So we grant the petition and vacate the Final Rule. I A We begin with the commercial context that underlies this dispute. The United States rail system is expansive. Spurred by Manifest Destiny, the California Gold Rush, and the Civil War, Americans began exploring ways to connect the nation No. 24-1811 3

by rail in the middle of the nineteenth century. See Leo Sheep Co. v. United States, 440 U.S. 668, 670–77 (1979). A transconti- nental railroad, many believed, would “bind together the widely separated parts of our common country, and furnish a cheap and expeditious mode for the transportation of troops and supplies.” United States v. Union Pac. R.R., 91 U.S. 72, 80 (1875). In 1862 Congress passed and President Lincoln signed into law “[a]n Act to aid in the Construction of a Railroad and Tel- egraph Line from the Missouri River to the Pacific Ocean.” Act of July 1, 1862, ch. 120, 12 Stat. 489. Construction of the first transcontinental railroad began the next year and opened for service in 1869. From there progress abounded. More than 600 freight rail carriers operate in the United States today, forming an integrated network that spans nearly 140,000 miles of track across the country. See Overview of America’s Freight Railroads, Ass’n of Am. R.Rs. 1 (Mar. 2020), https://www.aar.org/wp-content/uploads/2018/08/Overview -of-Americas-Freight-RRs.pdf. In 2023 alone, freight rail con- tributed $233.4 billion to the national economy. See Freight Rail History, Ass’n of Am. R.Rs. 10, https://www.aar.org/wp- content/uploads/2020/07/AAR-Chronology-Americas-Freigh t-Railroads-Fact-Sheet.pdf (last visited July 7, 2025). The Surface Transportation Board is the federal agency tasked by Congress with regulating freight rail transporta- tion. The Board categorizes rail carriers into three classes, Class I, Class II, and Class III, based on each carrier’s annual operating revenue. Class I rail carriers generate the most rev- enue and Class III carriers the least. 4 No. 24-1811

B This dispute arises out of concerns about the service per- formance of Class I rail carriers. Like many aspects of the American economy, railroads were not immune from the workforce challenges of the COVID-19 pandemic. In April 2022, citing widespread concern about service problems with several Class I carriers, the Board convened a two-day hear- ing to explore and address issues related to the reliability of the national rail network. See Notice of Public Hearing, 87 Fed. Reg. 22009 (Apr. 13, 2022). The Board then required sev- eral Class I carriers to submit service recovery plans explain- ing the specific actions each carrier planned to take to im- prove its service. See Urgent Issues in Freight Rail Serv., No. EP 770 (Sub-No. 1), 2022 WL 1442915 (S.T.B. May 6, 2022). In time the Board determined that incentivizing Class I carriers to achieve and maintain higher service levels required further regulatory action. So the Board issued a notice of pro- posed rulemaking, seeking comment on a set of new regula- tions that sought to improve service by increasing competi- tion. See Reciprocal Switching for Inadequate Service, 88 Fed. Reg. 63897 (proposed Sept. 18, 2023). After receiving and considering a significant number of comments to the proposed rule, the Board promulgated the Final Rule now before us: Reciprocal Switching for Inade- quate Service, 89 Fed. Reg. 38646 (May 7, 2024) (codified at 49 C.F.R. pt. 1145). C The Final Rule and its accompanying regulations establish procedures through which a shipper or receiver can request, and the Board in turn can prescribe, a reciprocal switching No. 24-1811 5

agreement. How this scheme works requires some unpack- ing. Unlike motor freight, which utilizes government-main- tained roadway infrastructure, rail freight operates largely on infrastructure privately owned and maintained by railroad companies. So, continuing with the analogy, while one truck- ing company cannot exclude another from using interstate highways funded by taxpayer dollars, a rail carrier generally can refuse to allow another carrier to access its tracks. This matters because some shippers and receivers are geograph- ically located such that the tracks of only one rail carrier reach their commercial facilities. Shippers and receivers with physical access to just one railroad are captive to that single carrier, which the Final Rule calls the “incumbent” carrier. The incumbent alone can take that customer’s freight from the facility to its destination (or to the limits of the incumbent carrier’s rail network) and, as a result, will charge the customer for the entire movement. The incumbent thus holds a monopoly over rail shipments to and from that facility. Reciprocal switching provides a captive customer with ac- cess to an alternate railroad pursuant to an agreement be- tween the incumbent carrier and one of its competitors. When a shipper or receiver relies on a reciprocal switching agree- ment, the incumbent carrier only takes freight from its point of origin—the customer’s facility—to the tracks of another carrier. This movement is called a “switch.” From there the freight transfers to a competitor carrier, which completes the transportation to the destination. This longer movement from the switch to the final destination is called the “line haul.” 6 No. 24-1811

A reciprocal switching agreement can also work in the re- verse: after a competitor rail carrier completes the line-haul movement, the freight is then transferred to the incumbent for switching service to the final destination. In either case, the competitor pays the incumbent carrier a fee for the switching service but keeps the greater share of revenue from the cus- tomer for the line-haul service. The Final Rule requires the transfer of freight to occur within a “terminal area”—defined as a “commercially cohe- sive area in which two or more railroads engage in the local collection, classification, and distribution of rail shipments for purposes of line-haul service.” 89 Fed. Reg. 38646, 38677; 49 C.F.R. § 1145.1. And a shipment’s point of origin or final des- tination on the rail system must be within a terminal area to be eligible for a reciprocal switching agreement. See 89 Fed. Reg. 38646, 38676; 49 C.F.R. § 1145.1. Railroads sometimes voluntarily agree to a reciprocal switching arrangement with another carrier. But absent a Board order, they are not required to do so. The Final Rule establishes a framework under which the Board can compel an incumbent Class I carrier to enter a reciprocal switching agreement with another Class I carrier. A shipper or receiver with physical access to only one Class I rail carrier (or its affiliated companies) may petition the Board for a reciprocal switching agreement. As relevant here, the petitioner must allege that the incumbent has failed to provide service that meets one or more “performance standards” enumerated in the Final Rule. The Rule contains three performance standards, each intended to assess a differ- ent “fundamental aspect[] of adequate rail service”: (1) relia- bility in completing line-haul movements on time; No. 24-1811 7

(2) consistency in how long it takes to complete line-haul movements; and (3) reliability in delivering and picking up railcars at a shipper’s or receiver’s facility on schedule. 89 Fed. Reg. 38646, 38648. Under the Final Rule and its regulations, the Board “will prescribe a reciprocal switching agreement” if the agency finds that an incumbent rail carrier has failed to meet one or more performance standards, the failure is not excused by one of the Rule’s affirmative defenses, and a reciprocal switching agreement is practicable. Id.; 49 C.F.R. § 1145.6(a), (b). The Board will set the length of an initial prescription for between three and five years, with the other terms of the agreement then established by the affected rail carriers. See 89 Fed. Reg. 38646, 38648; 49 C.F.R. § 1145.6(c). The Board’s prescription of a reciprocal switching agree- ment does not wholly or automatically replace the incumbent carrier. Rather, it simply requires the incumbent to offer a switch to a competing Class I carrier, thereby enabling the customer to choose between the two rail carriers for line-haul service. See 89 Fed. Reg. 38646, 38655. The customer gains ac- cess to an additional carrier while allowing the incumbent to still compete for their business—thus incentivizing the in- cumbent to improve its service to keep the line-haul move- ment. Finally, to provide the Board and customers with the in- formation necessary to ascertain whether a carrier did not meet one of the performance standards, the Final Rule re- quires Class I carriers to collect and report data related to those standards. See id. at 38674–76; 49 C.F.R. § 1145.8. Class I carriers must submit this data to the Board on a weekly basis as well as turn over individualized data related to a particular 8 No. 24-1811

shipper’s or receiver’s traffic upon that customer’s request. See 89 Fed. Reg. 38646, 38674–75; 49 C.F.R. § 1145.8(a), (b). D Two Class I carriers (CSX Transportation, Inc. and Union Pacific Railroad Company) and two subsidiaries of another Class I carrier (Grand Trunk Corporation and Illinois Central Railroad Company) challenge the Final Rule. The Adminis- trative Orders Review Act, commonly known as the Hobbs Act, supplies our jurisdiction, governs our judicial review, and provides that any “party aggrieved” by a “final order” of the Board “may, within 60 days after its entry, file a petition to review the order in the court of appeals wherein venue lies.” 28 U.S.C. §§ 2321, 2342(5), 2344. We have an independent obligation to assure ourselves that jurisdiction is secure, and we have no doubt it is. The rail carriers timely petitioned for our review of an appealable final rule. And the Board has not objected to venue. Our attention, then, is on the question of whether these carriers are “part[ies] aggrieved” by the Final Rule. Id. § 2344. The carriers challenging the Final Rule each participated in the Board’s notice-and-comment process, which “estab- lishes their party status.” Owner-Operator Indep. Drivers Ass’n v. Fed. Motor Carrier Safety Admin., 656 F.3d 580, 585 (7th Cir. 2011). Further, these carriers are “aggrieved” because the Fi- nal Rule subjects them to data collection requirements and, when certain conditions are satisfied, directs the Board to im- pose a reciprocal switching agreement upon them. The Hobbs Act requires no more. With our jurisdiction on solid ground, we can proceed to the merits. No. 24-1811 9

II The rail carriers’ challenges come on multiple fronts. But their primary contention is that the Final Rule exceeds the Surface Transportation Board’s statutory authority in the Staggers Rail Act to prescribe reciprocal switching. A While the Hobbs Act specifies the “form of proceeding for judicial review” of the Board’s rules, it is the Administrative Procedure Act that “codifies the nature and attributes of judi- cial review.” ICC v. Bhd. of Locomotive Eng’rs, 482 U.S. 270, 282 (1987). By its terms, the APA provides that a reviewing court shall “hold unlawful and set aside agency action, findings, and conclusions found to be … in excess of statutory jurisdic- tion, authority, or limitations.” 5 U.S.C. § 706(2)(C). As presented to us, the rail carriers do not challenge the application of the Final Rule in any particular instance. In- deed, as far as we are aware, the Board has not yet prescribed a reciprocal switching agreement under the procedures adopted in the Rule. The carriers instead seem to challenge the Final Rule more on its face, inviting us to conclude that the Board’s promulgation of the Rule itself exceeds the au- thority Congress conferred in the Staggers Rail Act to order reciprocal switching. In Bondi v. VanDerStok, the Supreme Court recently de- clined to decide what standard governs a pre-enforcement challenge under the APA where, as here, a party contends that an agency has exceeded its statutory authority. See 145 S. Ct. 857, 866 & n.2 (2025). The Court assumed, but did not resolve, that the proper standard in such cases comes from INS v. National Center for Immigrants’ Rights, Inc.: the 10 No. 24-1811

challenger’s “burden is to show that the Rule itself is incon- sistent with the statute on its face.” Id. at 865–66 (quoting Brief for Petitioners at 27–28 (quoting INS v. Nat’l Ctr. for Immi- grants’ Rights, Inc., 502 U.S. 183, 188 (1991))). The Supreme Court articulated a similar framework in Reno v. Flores, 507 U.S. 292, 300–01 (1993). Where a party does not contest a rule’s “application in a particular instance,” the Court explained there, the challenger “must establish that no set of circum- stances exists under which the [regulation] would be valid.” Id. (alteration in original) (quoting United States v. Salerno, 481 U.S. 739, 745 (1987)). Two Justices dissented in VanDerStok, each expressing concern that applying a “no set of circumstances” test in pre- enforcement challenges to agency rules may, at least in some cases, render it too difficult to conclude that the agency ex- ceeded its statutory authority. See 145 S. Ct. at 881–82 (Thomas, J., dissenting) (“If a regulatory definition survives APA challenge so long as just one item it covers also happens to be covered by the statute it purports to interpret, it is diffi- cult to understand how an agency would ever promulgate an invalid definition.”); id. at 892–94 (Alito, J., dissenting) (ex- plaining that “[a]pplying the Salerno rule [on facial chal- lenges] in a case in which a rule is challenged under that pro- vision as exceeding the agency’s statutory authority may have far-reaching consequences” and “would represent a huge boon for the administrative state”). We need not wade into this debate today. The parties do not say a word on the point. So we focus, as the majority did in VanDerStok, on whether the Final Rule itself is inconsistent with the Staggers Rail Act. In the end, we conclude that it is. The Board exceeded its statutory authority because the Final No. 24-1811 11

Rule, by its terms, deviates from the statutory standards Con- gress established authorizing reciprocal switching. How we arrive at this conclusion requires an extensive analysis of the statutory scheme, to which we now turn. B The Surface Transportation Board is the successor to the now-defunct Interstate Commerce Commission. In 1996 Con- gress abolished the ICC and transferred its remaining func- tions, including regulating rail carriers, to the Board. See ICC Termination Act, Pub. L. No. 104-88, 109 Stat. 803; see also 49 U.S.C. § 10501. Pursuant to what is now codified at 49 U.S.C. § 11102(a), Congress had long authorized the ICC to order one rail carrier to allow another carrier to use a limited section of its tracks— what the statute calls “terminal facilities”—where that use was “practicable and in the public interest.” But whether the Commission also had the power to order reciprocal switching remained unclear until 1980. See Midtec Paper Corp. v. United States, 857 F.2d 1487, 1500 (D.C. Cir. 1988). It was then, in the Staggers Rail Act, that Congress granted the ICC express stat- utory authority to prescribe reciprocal switching agreements. See Pub. L. No. 96-448, § 223, 94 Stat. 1895, 1929 (codified as amended at 49 U.S.C. § 11102(c)). As relevant here, the enact- ment provides that the agency—now the Board—“may re- quire rail carriers to enter into reciprocal switching agree- ments, where it finds such agreements to be practicable and in the public interest.” 49 U.S.C. § 11102(c). Whether the Final Rule exceeds the scope of the Board’s authority in § 11102(c) thus requires us to construe what it means to be “practicable and in the public interest.” We 12 No. 24-1811

“interpret statutes without deference to the agency’s interpre- tation, using the ‘traditional tools of statutory construction,’ exercising our ‘independent judgment in deciding whether an agency has acted within its statutory authority’ while paying ‘[c]areful attention to the judgment of the Executive Branch,’ which ‘help[s] inform that inquiry.’” Gulomjonov v. Bondi, 131 F.4th 601, 609 (7th Cir. 2025) (alterations in original) (quoting Loper Bright Enters. v. Raimondo, 603 U.S. 369, 401, 412–13 (2024)). But in construing what is now § 11102(c), we do not paint on a blank canvas. We interpreted the “in the public interest” provision of the Staggers Rail Act in our 1985 decision in Cen- tral States Enterprises, Inc. v. ICC, 780 F.2d 664. In Central States we reviewed an ICC decision denying a shipper’s petition to require a rail carrier to either share its tracks (pursuant to § 11102(a)) or enter into a reciprocal switching agreement (pursuant to § 11102(c)) with another carrier. See id. at 667–68. “[T]o find a reciprocal switching agreement to be in the public interest,” the Commission had explained, the agency “would have to find that there was some actual necessity or compelling reason for the agree- ment.” Id. at 670. On the facts before it, however, the ICC con- cluded that there was no actual necessity or compelling rea- son for the agreement and, therefore, denied the shipper’s pe- tition. See id. at 670–71. On appeal the shipper insisted that the Commission had applied the wrong standard to assess whether its request for a switching agreement was “in the public interest.” See id. at 674, 677. So our decision focused on the proper construction of what constitutes “in the public interest” within the mean- ing of § 11102(c). No. 24-1811 13

“Both subsections (a) and (c) [of § 11102],” we explained, “provide that the Commission ‘may’ order relief in the form of a joint use or switching agreement where it is ‘practicable and in the public interest.’” Id. at 668. And “[w]hen Congress enacted” § 11102(c) in the Staggers Rail Act, we continued, “the Conference adopted that portion of the Senate bill which provided that the practicable and public interest standard to be considered by the Commission ‘is [to be] the same stand- ard the Commission has applied in considering whether to order the joint use of terminal facilities [under § 11102(a)].’” Id. at 677 (second alteration in original) (quoting H.R. Rep. No. 96-1430, at 116–17 (1980) (Conf. Rep.)); see also S. Rep. No. 96-470, at 42 (1979). So the “practicable and in the public interest” standard, Central States concluded, draws its mean- ing from the ICC precedent that preexisted the Staggers Rail Act. See id. at 677–78 & n.18. Our construction aligned with a longstanding principle of statutory interpretation: where Congress “employs a term of art” with “a long regulatory history,” it “brings the old soil with it” and adopts that “prior agency practice.” George v. McDonough, 596 U.S. 740, 746 (2022) (quoting Taggart v. Lo- renzen, 587 U.S. 554, 560 (2019)). As applied here, Congress employed in § 11102(c) a term of art—“practicable and in the public interest”—from § 11102(a). Because this term had an accepted meaning from pre-Staggers Rail Act administrative proceedings, it follows that Congress “codified and adopted” that meaning within § 11102(c). Id. at 746 (alterations omitted) (quoting Cook v. Principi, 318 F.3d 1334, 1344 (Fed. Cir. 2002) (en banc)); see also United States v. Bd. of Comm’rs of Sheffield, 435 U.S. 110, 134–35 (1978) (explaining that where “there had been a longstanding administrative interpretation of a statute when Congress re-enacted it” and “the legislative history of 14 No. 24-1811

the re-enactment showed that Congress agreed with that in- terpretation,” then “Congress is treated as having adopted that interpretation”). But there was more to Central States, and the more is im- portant here. Relying on four ICC cases that predated the Staggers Rail Act, Central States determined that a test of “some actual necessity or compelling reason” is consistent with the standard the Commission historically employed in considering whether the joint use of terminal facilities was “in the public interest” within the meaning of § 11102(a). 780 F.2d at 677–78 (quoting Jamestown Chamber of Com. v. Jamestown, Westfield & N.W. R.R., 195 I.C.C. 289, 292 (1933)) (first citing Lehigh Valley R.R. Trackage Rights, 312 I.C.C. 389 (1961); then citing Mfrs. Ass’n of York v. Penn. R.R., 73 I.C.C. 40 (1922); and then citing Hastings Com. Club v. Chicago, Milwaukee & St. Paul Ry., 107 I.C.C. 208 (1926)). In enacting § 11102(c), Central States explained, “Congress stated that in assessing the need for a proposed switching agreement, the Commission is to apply the ‘same standard [it] … has applied in considering whether to order the joint use of terminal facilities.’” Id. at 680 (altera- tion in original) (quoting H.R. Rep. No. 96-1430, at 116–17 (1980) (Conf. Rep.)). In the final analysis, then, we had little difficulty concluding that the “legislative[ly] mandated” standard to determine whether a reciprocal switching agree- ment is “in the public interest” within the meaning of § 11102(c) is likewise that there must be “some actual neces- sity or compelling reason” for it. Id. The D.C. Circuit charted a similar course of reasoning a few years later in Midtec Paper Corp. v. United States, 857 F.2d 1487 (1988). Although the court confronted a set of regula- tions not before us in Central States, it concluded—in light of No. 24-1811 15

the Staggers Rail Act’s Conference Report—that “the Com- mission’s discretion should be exercised and constrained in like manner under both [§ 11102(a) and (c)].” Id. at 1502. And “[h]istorically,” the D.C. Circuit observed, “the Commission has required a party requesting terminal trackage rights [pur- suant to § 11102(a)] to satisfy the ‘practicable and in the public interest’ criteria … by demonstrating ‘some actual necessity or compelling reason’ why such an arrangement should be ordered.” Id. at 1492 (quoting Jamestown, 195 I.C.C. at 291). C Our next step, then, is to give content to the “actual neces- sity or some compelling reason” standard. And it is at this precise point that the ICC precedent we relied upon in Central States becomes important. In each of the four cases relied on in Central States, the ICC had determined that the “public interest” did not necessitate shared use of terminal facilities because the shipper failed to demonstrate the incumbent carrier’s rail service was inade- quate. See Jamestown, 195 I.C.C. at 292 (“The record shows that the [incumbent]’s freight service at Jamestown is not only ad- equate but is exceptionally good so far as shipments over its lines are concerned. The desirability, but not the necessity, of the additional operation of a joint terminal freight station is shown, but the record does not show that Jamestown shippers are so inadequately served at the present time as to warrant us, from the standpoint of the public interest, to require the [incumbent] to inaugurate additional terminal facilities and share them with [another rail carrier].”); Lehigh Valley R.R., 312 I.C.C. at 392 (“A number of railroads, in combination, can now provide second-morning service between the desired points, and no evidence of inadequate service to the shipping 16 No. 24-1811

public by such railroads has been shown. … In such a situa- tion, we cannot find that the public interest requires addi- tional competition in an already adequately served terri- tory.”); Mfrs. Ass’n of York, 73 I.C.C. at 50 (“There is no show- ing that the shippers are so inadequately served at present that we are warranted, from the standpoint of the public in- terest, in depriving the carrier first on the ground of an im- portant volume of the traffic originating along its line, by the direct and affirmative exercise of the power to require the [in- cumbent rail carrier] to share its terminal facilities with [an- other carrier.]”); Hastings Com. Club, 107 I.C.C. at 217 (“A switch engine is constantly available for the Hastings ship- pers. Only 14 shippers either ship or receive carload freight, and under normal conditions the record indicates that the [in- cumbent] affords them a reasonably adequate service.”). In other pre-Staggers Rail Act cases, the Commission sim- ilarly declined to prescribe joint use of terminal facilities with- out a finding that the existing service was inadequate. See, e.g., Muskegon Ry. & Navigation v. Pere Marquette Ry., 148 I.C.C. 653, 661 (1928) (explaining that a carrier is “entitled to serve the industries” located on its own tracks and it is “not in the public interest to require joint use of such tracks” unless the service “is not adequate or impartial”); City of Hialeah v. Fla. E. Coast Ry., 317 I.C.C. 34, 37 (1962) (finding that the public interest did not require joint use of terminal facilities where “[t]here has been no allegation, nor do we believe that a basis exists for an allegation, that shippers are now inadequately served as a result of the method of operation by the [incum- bent carrier]”); cf. Spokane, Portland & Seattle Ry., 348 I.C.C. 109, 139–41 & n.20 (1975) (rejecting the “actual necessity or compelling reason” standard based on an overruled ICC de- cision but then concluding that the evidence “clearly No. 24-1811 17

show[ed] a compelling reason” for terminal access because the “current service” was “clearly inadequate” (citing Has- tings Com. Club v. Chicago, Milwaukee & St. Paul Ry., 69 I.C.C. 489, 493 (1922), rev’d, 107 I.C.C. 208 (1926))). Central States made the same point by referencing the Stag- gers Rail Act’s legislative history. By enacting § 11102(c), we explained, Congress “provide[d] ‘an avenue of relief for ship- pers where only one railroad provides service and it[] [i]s inade- quate.’” Cent. States, 780 F.2d at 669 (emphasis added) (quot- ing H.R. Rep. No. 96-1430, at 116 (1980) (Conf. Rep.)). After Congress enacted § 11102(c), the ICC adhered to much the same construction by similarly requiring a showing of inadequate service to prescribe reciprocal switching. See, e.g., Cent. States Enters., Inc. v. Seaboard Coast Line R.R., No. 38891, 1984 ICC LEXIS 499, at *5 (May 11, 1984) (reversing grant of reciprocal switching agreement where “[the incum- bent carrier’s] service has not been shown to be inadequate, nor have its rates been shown to be unreasonable”), aff’d sub nom. Cent. States Enters., Inc. v. ICC, 780 F.2d 664 (7th Cir. 1985); Midtec Paper Corp. v. Chicago & N.W. Transp. Co., 1 I.C.C.2d 362, 364 (1985) (“[A]n affirmative finding that joint terminal use is in the public interest requires a showing of ‘some actual necessity or compelling reason.’ … A corollary of this requirement is that it must be shown that existing ser- vice is inadequate.” (quoting Jamestown, 195 I.C.C. at 291–92) (citing Hastings Com. Club, 107 I.C.C. at 216)). Indeed, the Commission’s own brief in Central States described “inade- quacy of service” as a necessary “prerequisite for a[n] award of either joint terminal use or reciprocal switching.” Joint Brief for the Interstate Commerce Commission and United States of America at 37 n.31, Cent. States Enters., 780 F.2d 664 (No. 84- 18 No. 24-1811

2005). “[T]he shipper[],” the ICC urged in our court, bears the “burden of demonstrating some compelling need, such as a clear inadequacy of service, before the Commission will re- quire a carrier to turn its operating property or traffic origi- nating on its line over to another carrier.” Id. at 38 (citing Mfrs. Ass’n of York, 73 I.C.C. at 49–50). Another point of our statutory analysis warrants empha- sis. At times, the Final Rule and the parties before us describe the “some actual necessity or compelling reason” standard as a “compelling need” test. Our opinion in Central States used this same shorthand. See 780 F.2d at 678 & n.18. For the avoid- ance of any doubt, the precise standard Central States inter- preted § 11102(c) to require was put in the disjunctive—re- quiring “some actual necessity or compelling reason” for a re- ciprocal switching agreement. Id. at 680. But nowhere does Central States state, much less suggest, that these two formu- lations have independent and different meanings, with one setting a higher standard than the other. Nor do we see any point in looking for daylight between them. Quite to the con- trary, we have drawn upon Central States’s interpretation of § 11102(c) and concluded that the statutory provision requires a threshold finding of inadequate service by the incumbent rail carrier. D The Board urges a different statutory analysis, joined by several associations of freight rail shippers who intervened to defend the Final Rule. The Board contends that in evaluating whether to pre- scribe reciprocal switching, § 11102(c)’s “in the public inter- est” requirement, requires not a threshold finding of No. 24-1811 19

inadequate service by an incumbent carrier, but instead a bal- ancing of the respective interests of the affected carriers, ship- pers, and public at large. We cannot get there, for the Board offers an incomplete account of what § 11102(c) demands. In particular, the Board is mistaken in asking us to interpret the statutory language without regard to the “actual necessity or some compelling reason” test, which we concluded in Central States is the “leg- islative[ly] mandated” standard that emerged from the ICC’s pre-1980 administrative precedent. 780 F.2d at 680. The Board also inadequately accounts for the role that a finding of inad- equate rail service played in those ICC adjudications—a nec- essary “prerequisite,” as the Commission represented to us in Central States. Joint Brief for the Interstate Commerce Com- mission and United States of America, supra, at 37 n.31. Taking a different tact, the Board contends that the ICC’s administrative case law used the phrase “actual necessity or some compelling reason” merely to inform what would be re- quired, in some circumstances, to strike a fair balance of inter- ests. But § 11102(c), the Board insists, does not require a threshold showing of any current service problems to be “in the public interest” within the meaning of that statute. To be sure, the Board’s position does find some support in ICC precedent. In several cases relied on by the intervening shippers associations, the Commission balanced whether the benefits of regulatory intervention outweighed the detri- ments and, from there, ordered reciprocal switching or joint use without describing any discrete problems with the exist- ing rail service. See, e.g., Port Arthur Chamber of Com. v. Texar- kana & Fort Smith Ry., 136 I.C.C. 597 (1928); Chicago & N.W. Ry. v. Ann Arbor R.R., 263 I.C.C. 287 (1945); Del. & Hudson Ry. v. 20 No. 24-1811

Consol. Ry., 367 I.C.C. 718, 730–31 (1983) (Sterrett, Vice Chair- man, dissenting) (“In considering whether the [petitioner’s] proposal is in the public interest, neither the Commission nor the review board found that [the incumbent’s] present service in Philadelphia is inadequate.”). But these precedents are both limited and overwhelmed by others. Put another way, it is hardly surprising that, on a handful of occasions throughout the decades, the Commis- sion—as a multi-member body with varying policy prefer- ences—reached results not entirely aligned with one another. Having taken a hard look at the totality of the history, we con- clude that the weight of the ICC’s administrative precedent— and particularly the pre-Staggers Rail Act precedent that Con- gress codified within § 11102(c)—points in one direction: a finding of inadequate service functioned as a prerequisite to regulatory intervention. So a construction of the statute that merely considers, as one aspect of a balancing test, whether the existing rail service is inadequate, but does not require such a finding, rests on legal infirmity. III A What all this history tells us is that the statute authorizing the Surface Transportation Board to order reciprocal switch- ing, 49 U.S.C. § 11102(c), requires “some actual necessity or compelling reason” to do so. And we interpret this standard, as we have emphasized, to demand evidence that the service provided by the incumbent carrier is inadequate. Stated more directly, the inadequacy of the existing service is a necessary finding the Board must make before it can impose a reciprocal switching agreement. No. 24-1811 21

Having determined what § 11102(c) requires, we can now examine whether the Final Rule exceeds the Board’s statutory authority. If the Rule permits the Board to impose a reciprocal switching agreement in the absence of a finding of inadequate service by an incumbent carrier, then the answer to that ques- tion is yes. B We begin by observing that the Final Rule explicitly rejects the “some actual necessity or compelling reason” standard. See 89 Fed. Reg. 38646, 38648–52. This test, the Board tells us, “rest[s] on a misinterpretation of the public interest standard in section 11102(c).” Id. at 38649; see also id. at 38681 n.56 (“[The] carriers have misstated the law in suggesting that the Board must find a compelling need as a condition to a pre- scription under section 11102(c).”). We cannot agree. Indeed, it is the Board that has misinterpreted § 11102(c) and our con- struction of that provision in Central States. For more than 80 years it has been a foundational principle of administrative law that agency action “may not stand if the agency has misconceived the law.” SEC v. Chenery Corp., 318 U.S. 80, 94 (1943) (“[I]f the action is based upon a determina- tion of law as to which the reviewing authority of the courts does come into play, an order may not stand if the agency has misconceived the law.”); see also NLRB v. Brown, 380 U.S. 278, 292 (1965) (“Courts must, of course, set aside [agency] deci- sions which rest on an ‘erroneous legal foundation.’” (quoting NLRB v. Babcock & Wilcox Co., 351 U.S. 105, 112–13 (1956))). We stop short of vacating the Final Rule on this basis alone, however, for the Board presses an argument in the al- ternative. “[E]ven if a compelling need were required under 22 No. 24-1811

the public interest standard in section 11102(c),” the Board urges, the Final Rule “would meet that standard” because it “promotes adequate rail service both by introducing an alter- nate rail carrier via an appropriately defined and scoped re- ciprocal switching agreement when there have been sufficient indications of service issues … and by more broadly creating an incentive for rail carriers to provide adequate service.” 89 Fed. Reg. 38646, 38652 (emphasis added). In advancing this argument, the Board necessarily recog- nizes that the adequacy of an incumbent’s service is at least relevant to determining whether a reciprocal switching agree- ment is “in the public interest” within the meaning of § 11102(c). See id.; see also id. at 38648 (“There is a clear public interest in adequate rail service—a matter of fundamental concern under the Interstate Commerce Act.”). And undoubt- edly the purpose of the Final Rule is to “promote the provi- sion of adequate rail service.” Id. at 38648. Its very title—Re- ciprocal Switching for Inadequate Service—confirms as much. But how does the Final Rule promote adequate rail ser- vice? The Board suggests the Rule’s three performance stand- ards serve as the triggering mechanism to determine whether service is inadequate and, in turn, that prescription of a recip- rocal switching agreement furthers the public interest. These performance standards, the Final Rule states, “address three fundamental aspects of adequate rail service: reliable timing in the arrival of line-haul shipments, consistent shipment times, and on-time local pick-ups and deliveries.” Id. “The standards,” the Board adds, “are set at levels such that perfor- mance below the standards would not meet many shippers’ (and carriers’) service expectations.” Id. And “as a condition No. 24-1811 23

to regulatory intervention,” the Final Rule continues, “there must be sufficient indications, in the form of the incumbent carrier’s failure to meet a service-based performance standard and the absence of an affirmative defense or demonstration of undue impairment, that the introduction of an alternate rail carrier via a[] … switching agreement prescription could be valuable in bringing about better rail service.” Id. at 38650. But here is where the Final Rule departs from what § 11102(c) requires. “[T]he performance standards,” the Rule states, “do not define what constitutes adequate rail service.” Id. at 38647. The Board then doubles down on this statement in its brief, telling us that, in devising the performance stand- ards “the Board declined to predict what would constitute ‘in- adequate rail service’ in any given circumstance.” And it is “incorrect,” the agency continues, “to suggest that failure to meet a performance standard in [the Final Rule] represents a regulatory determination of inadequate service.” On this point, the Final Rule is at odds with itself. The whole objective of the Board’s regulatory action, dating back to its April 2022 hearing, was to improve rail service that the agency deemed inadequate. Nevertheless, the Board now concedes that the Final Rule’s three performance metrics— around which the entire scheme authorizing the prescription of a switching agreement is built—do not correspond with a finding that an incumbent rail carrier’s service is inadequate. And we must take the Board at its word. See Apogee Coal Co. v. Off. of Workers’ Comp. Programs, 113 F.4th 751, 759 (7th Cir. 2024) (“[A]gency action must be judged on the reasoning given by the agency at the time of its decision.” (citing Chenery Corp., 318 U.S. at 87–88)). 24 No. 24-1811

For the Board’s position to make any sense, the perfor- mance standards, necessarily, must measure something less than the adequacy of an incumbent’s existing rail service, thereby creating daylight between the level of service that causes a carrier to fail one of the performance standards and the separate, more critical and statutorily required determina- tion that the level of service it provides is inadequate. But the Final Rule never captures—and never hinges prescription of a reciprocal switching agreement on—the full measure and finding of inadequate service. During the notice-and-comment period, one rail carrier ar- gued that, “because there is no compelling need for a switch- ing prescription where a service inadequacy no longer exists,” the Board “should only permit petitions for alleged service inadequacies that are ‘reasonably contemporaneous with the petition and exist at the time of the petition.’” 89 Fed. Reg. 38646, 38681 n.56 (citation omitted). But the Board rejected this proposal. It would “undermine the purposes of [the Final Rule],” the agency explained, “to require demonstration of an ongoing service issue.” Id. So the Final Rule “does not require demonstration of an ongoing service issue as a condition to a prescription.” Id. Indeed, a carrier can be subject to a recipro- cal switching agreement even after curing the deficiency that led the shipper to file the petition in the first place. See id. at 38686. What this means is that the Final Rule, by its very terms and the Board’s own admission, does not require a showing of inadequate service by an incumbent carrier before it au- thorizes reciprocal switching. Because we have interpreted the statutory standard of “in the public interest” in § 11102(c) No. 24-1811 25

of the Staggers Rail Act to require such a finding, the Board’s concession all but defeats its position before us. C At the risk of repetition, the Final Rule expressly states that “the performance standards do not define what consti- tutes adequate rail service.” Id. at 38647. But perhaps the Final Rule could be saved if another component of its regulatory framework ensures that the Board will not impose reciprocal switching absent a finding of inadequate service. Recall that, under the framework established by the Final Rule, the Board “will prescribe a reciprocal switching agree- ment” where the incumbent rail carrier fails to meet one or more performance standards, the failure is not excused by one of the Rule’s affirmative defenses, and a reciprocal switching agreement is practicable. Id. at 38709; 49 C.F.R. § 1145.6(a), (b). With the Board representing that the performance standards do not define what constitutes adequate rail service, this leaves the affirmative defenses and practicability require- ment. Yet nothing in the text of the Final Rule suggests that either criterion evaluates the adequacy of the existing service. Begin with the affirmative defenses. The Final Rule pro- vides that an incumbent rail carrier “shall be deemed not to fail a performance standard if the carrier demonstrates that its apparent failure to meet a performance standard was caused by conditions that would qualify as an affirmative defense.” 89 Fed. Reg. 38646, 38685; see also 49 C.F.R. § 1145.3. The af- firmative defenses thus do not measure a rail carrier’s service but rather are designed to—as the very words affirmative de- fense suggest—provide the incumbent with an opportunity to explain there is some cause other than its own service that 26 No. 24-1811

excuses a shortcoming in performance. See 89 Fed. Reg. 38646, 38685 (“As a general matter, the Board’s specified affirmative defenses are focused on reasons that a carrier’s service might be below a metric during the relevant 12-week period.”). Even more specifically, the regulations accompanying the Final Rule enumerate five defenses, which contemplate circum- stances such as natural disasters, third-party conduct, and substantial increases in the shipper’s traffic. See 49 C.F.R. § 1145.3. But none of them allow the incumbent to present ev- idence that they provide adequate service to the petitioning shipper or receiver. See id. True enough, the Board has said it will consider additional affirmative defenses “on a case-by-case basis.” Id. But we fail to see how an incumbent carrier could use this provision to avoid a reciprocal switching agreement on the ground that their existing rail service is adequate. During notice and com- ment, one carrier proposed language that would require the Board to consider “any defense relevant to whether there is a service inadequacy for which there is actual necessity or com- pelling reason for a prescribed switching agreement.” 89 Fed. Reg. 38646, 38685 (citation omitted). Yet the Board rejected this proposal too, concluding that there is “less value” in af- firmative defenses that “focus on whether there is a service inadequacy with certain largely undefined effects based on allegations of a petitioner’s particularized service needs or whether the carrier cured the cause of its failure to meet a per- formance standard.” Id. at 38686. We therefore have no basis to conclude that an incumbent carrier can avoid a reciprocal switching agreement by establishing as a defense that they provide adequate service to the petitioning shipper or re- ceiver. No. 24-1811 27

The practicability constraint fares no better. The regula- tions accompanying the Final Rule provide that “the Board will not prescribe a reciprocal switching agreement if the in- cumbent rail carrier or alternate rail carrier demonstrates that the agreement is not practicable.” 49 C.F.R. § 1145.6(b). Prac- ticability is then defined in terms that speak solely to the op- erational feasibility of transferring shipments between the in- cumbent and an alternate carrier. See id. No one suggests that measuring whether reciprocal switching is “practicable” requires an assessment of the ade- quacy of an incumbent rail carrier’s service. For good reason. Remember that § 11102(c) requires a switching agreement to be both “practicable and in the public interest.” 49 U.S.C. § 11102(c)(1) (emphasis added); see also Cent. States, 780 F.2d at 676 (explaining that, pursuant to § 11102, the petitioner “must demonstrate that the requested reciprocal switching agreement is both ‘practicable’ and in the ‘public interest’”). So in resolving whether the Board has satisfied the “public interest” requirement of the statute, it is of little consequence that the Final Rule separately ensures any prescribed agree- ment will be “practicable.” With all of this recognized, the answer to the question be- fore us becomes yet more certain: nothing in the Final Rule assures us that the Board will only impose a reciprocal switch- ing agreement in circumstances where the incumbent’s rail service is inadequate. Indeed, the Final Rule’s text confirms that inadequate service is not a prerequisite to prescription, and the Board has reinforced the shortcoming by declining to adopt an affirmative defense relating to the adequacy of ex- isting rail service. 28 No. 24-1811

Stepping back, consideration of the Final Rule has no doubt immersed us in a complicated regulatory and statutory scheme. And that scheme is informed by an equally compli- cated history of ICC administrative adjudications. But do not let that two-fold complexity overwhelm. We have determined that the statute authorizing the Board to prescribe reciprocal switching requires a finding of inadequate service, and this necessary finding is unambiguously missing from the Final Rule. That outcome reflects legal infirmity. Because the process the Final Rule provides to obtain a re- ciprocal switching agreement does not include a determina- tion of whether an incumbent carrier’s rail service is inade- quate, we conclude that the Final Rule, by its terms, is incon- sistent with the Board’s statutory authority under § 11102(c). D The Board urges us to overlook this defect in the Final Rule’s procedures, assuring us that any decision to order re- ciprocal switching will be made on a case-by-case basis. A rail carrier flunking a performance standard, the agency presses, does not automatically result in a prescription—it merely ini- tiates an involved process in which the Board can and will consider and balance all relevant factors. But the Final Rule specifically forecloses the individual- ized determination that the agency claims it enshrines. No- where does the Final Rule contemplate the Board weighing the interests of the parties, taking testimony on the adequacy of the existing rail service, evaluating whether the introduc- tion of a competing carrier could be beneficial, and, from there, exercising its discretion to either prescribe reciprocal switching or refrain from doing so. To the contrary, the No. 24-1811 29

agency “will prescribe a reciprocal switching agreement” where the incumbent rail carrier fails to meet one or more per- formance standards, that failure is not excused by one of the Rule’s affirmative defenses, and a reciprocal switching agree- ment is practicable. 89 Fed. Reg. 38646, 38648 (emphasis added); 49 C.F.R. § 1145.6(a), (b) (emphasis added). Further, on the critical question before the Board—the adequacy of ex- isting service—the Final Rule announces that the agency does not require an ongoing service issue as a condition to pre- scription and, moreover, has rejected a corresponding affirm- ative defense. Any latitude the Board retains for a case-by- case inquiry in connection with other considerations cannot overcome this legal deficiency. In the end, we are left with no choice but to vacate the Fi- nal Rule. IV Our decision that the Final Rule exceeds the Board’s stat- utory authority to prescribe reciprocal switching under § 11102(c) obviates the need to consider the rail carrier’s chal- lenges to other aspects of the Rule. Yet we still owe them a brief word. The carriers contend that the Final Rule’s three perfor- mance standards are arbitrary, capricious, and unsupported by the record. But this dispute pulls us into complex detail regarding the Board’s selection of each of the three metrics. And any conclusion we reach might be advisory, as the Board may reevaluate these standards in light of our decision and the arguments made on appeal, should it decide to re-prom- ulgate the Rule on remand. 30 No. 24-1811

That leaves us with the challenge to the Final Rule’s re- quirement that Class I carriers collect and report certain per- formance data. The carriers urge that this aspect of the Rule exceeds the Board’s ancillary powers conferred in its enabling statute, 49 U.S.C. § 1321. Resolving this question is compli- cated by the Board’s failure in the Final Rule to rely expressly on its statutory authority under § 1321(b)(3), which grants the Board authority to “obtain from those carriers and persons in- formation the Board decides is necessary to carry out [49 U.S.C.] subtitle IV”—the subtitle that includes its power to prescribe reciprocal switching. Further, the rail carriers made sound points on appeal regarding the need for a non-disclo- sure agreement or protective order in connection with confi- dential information—points that the Board did not disagree with. The Board may well revisit this component of the Final Rule too on remand. But we refrain from deciding today whether the disclosure requirements, as written, exceed the agency’s statutory authority. *** For these reasons, we GRANT the petition, VACATE the Final Rule, and REMAND to the Board for further proceed- ings.