(Adds details from oral arguments, background, paragraphs 4, 7-9)
By Lawrence Hurley
WASHINGTON, Dec 8 (Reuters) - The U.S. Supreme Court appeared divided on Monday as it considered whether Amtrak, the government-owned passenger rail company, wields too much clout in setting regulations that private freight carriers also must follow.
The nine justices heard arguments in a challenge by the Association of American Railroads to a federal law that gives Amtrak, a government-owned corporation, a key role in setting standards for railroads, including for on-time performance.
Freight carriers own the tracks that Amtrak uses. They object to Amtrak's role because they can then be forced to pay damages if Amtrak trains fail to meet performance targets.
Under the 1970 arrangement with private rail companies that led to Amtrak's creation, Amtrak trains get top priority on the tracks. In return, private railroads no longer had to provide passenger service. The railroad law allows Amtrak and the U.S. Federal Railroad Administration to work jointly on the regulations.
Among the questions raised by the case is whether or not Amtrak is a government entity and, if it considered a purely private entity, whether freight companies should also have a say in setting the standards.
Based on the justices' questions, one possible outcome is they could hand the government a narrow victory but send the case back to a federal appeals court for further litigation over whether the freight carriers' due-process rights were violated by their exclusion from the decision-making process.
Justice Anthony Kennedy, often the deciding vote in close cases, raised concerns about the due-process issue. He asked Justice Department lawyer Curtis Gannon whether there would be a due-process violation if a car manufacturer assisted the government in issuing regulations other manufacturers had to follow. "That seems wrong," Kennedy said.
Other justices appeared more supportive of the government's position. Justice Stephen Breyer raised the prospect that a ruling favoring the railroads could cast into doubt other quasi-government entities such as the Internet Corporation for Assigned Names and Numbers, or ICANN, which through a contract with the Commerce Department has a role overseeing the internet.
Breyer expressed concern that a loss for the government in the Amtrak case "would work havoc, possibly with the internet, possibly with industry throughout the United States."
The railroad association challenged regulations finalized by the government in 2010 that freight carriers contend set unrealistic performance targets. Association members include BNSF Railway Company and CSX Transportation Inc.
Amtrak, not directly involved in the litigation, is also an association member.
A ruling is due by the end of June.
The case is Department of Transportation v. Association of American Railroads, U.S. Supreme Court, No. 13-1080. (Reporting by Lawrence Hurley; Editing by Will Dunham)