Jahn, Curtis P. v. 1-800-Flowers.com ( 2002 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 01-2999
Curtis P. Jahn and Capitol Warehousing
Corporation,
Plaintiffs-Appellants,
v.
1-800-FLOWERS.com, Inc., Fresh Intellectual
Properties, Inc., and 800-FLOWERS, Inc.,
Defendants-Appellees.
Appeal from the United States District Court
for the Western District of Wisconsin.
No. 00-C-446-C--Barbara B. Crabb, Chief Judge.
Argued January 17, 2002--Decided March 29, 2002
Before Flaum, Chief Judge, and Bauer and
Easterbrook, Circuit Judges.
Easterbrook, Circuit Judge. When Madison
Truck Brokers subscribed to an incoming-
toll-free number in 1976, at&t assigned it
800 356-9377 at random. Madison Truck
Brokers and its successor Capitol
Warehousing Corporation used the number
in their transportation business until
1982, when they expanded into floral
delivery. William Alexander thought that
800-FLOWERS would be the ideal toll-free
number for a florist--and someone typing
that sequence on a phone’s keypad will
reach 800 356-9377.
Alexander approached Curtis Jahn, the
owner of Capitol Warehousing, with a
proposal to test-market floral sales via
the 800-FLOWERS number. Jahn and
investors recruited by Alexander
organized 800-Flowers, Inc., a Wisconsin
corporation, to explore the idea and, if
events justified, to run a national
flowers-by-phone business. Advertisements
in New Orleans produced enough calls to
encourage further exploration. (The
record does not reveal how the venture
separated the flower-related calls from
truck-related calls, for every call to
that number reached Capitol Warehousing’s
office.) After an infusion of additional
capital and resolution of litigation
brought by another corporation that
claimed trademark rights to "800-FLOWERS"
(though the rival lacked the phone number
to go with the idea), the business was
launched nationwide. At Jahn’s request,
at&t transferred the phone number to 800-
Flowers (Wisconsin), which became the
subscriber and paid all bills. In a move
that he may now regret, Jahn took not
only an equity stake in the new
corporation but also a royalty interest
in revenues derived from phone sales.
Corporate reorganizations transferred the
firm’s assets to 800-Flowers (Texas) and
later 800-Flowers (New York), which is
among the defendants. Jahn gave up his
equity interest but retained his royalty
(as restated by an agreement with 800-
Flowers (Texas) in 1986, an agreement
that contains a Texas choice-of-law
clause).
In this suit under the diversity
jurisdiction, Jahn accuses 800-Flowers
(New York) and its parent corporation 1-
800-Flowers.com, Inc.--a corporate name
mixing Internet with phone symbols,
packet-switched with circuit-
switchednetworks--of failing to pay his
full royalty under the 1986 agreement.
Defendants responded that payment is
illegal under a regulation forbidding the
sale of phone numbers-- and for good
measure they added the inconsistent
defense that they have paid Jahn every
penny that the agreement requires. The
district court concluded that the royalty
interest reflects at least in part the
value of the 800-FLOWERS number and
constitutes a sale proscribed by the 1997
regulation, 47 C.F.R. sec.52.107(a), even
though a stock interest of equivalent
economic value would be lawful today.
This aspect of the district court’s
ruling has not been contested on appeal.
Next the district court concluded that it
is unnecessary to decide whether the 1997
regulation may be applied retroactively.
The ongoing payment is itself illegal,
the judge held, and defendants are
excused from further payment because
Texas law treats illegality as a form of
impossibility that constitutes a defense
to non-performance. See Centex Corp. v.
Dalton, 840 S.W.2d 952 (Tex. 1992).
Given the district court’s uncontested
finding that Jahn’s royalty interest
represents the sale of a telephone
number, we may assume that the 1982 and
1986 transactions would violate federal
law if implemented today. The governing
regulation provides:
(a) As used in this section, hoarding is
the acquisition by a toll free subscriber
from a Responsible Organization of more
toll free numbers than the toll free
subscriber intends to use for the
provision of toll free service. The
definition of hoarding also includes
number brokering, which is the selling of
a toll free number by a private entity
for a fee.
(1) Toll free subscribers shall not hoard
toll free numbers.
(2) No person or entity shall acquire a
toll free number for the purpose of
selling the toll free number to another
entity or to a person for a fee.
(3) Routing multiple toll free numbers to
a single toll free subscriber will create
a rebuttable presumption that the toll
free subscriber is hoarding or brokering
toll free numbers.
(b) The following provision shall be
included in the Service Management System
tariff and in the local exchange
carriers’ toll free database access
tariffs:
[T]he Federal Communications Commission
("fcc") has concluded that hoarding,
defined as the acquisition of more toll
free numbers than one intends to use for
the provision of toll free service, as
well as the sale of a toll free number by
a private entity for a fee, is contrary
to the public interest in the
conservation of the scarce toll free
number resource and contrary to the fcc’s
responsibility to promote the orderly use
and allocation of toll free numbers.
47 C.F.R. sec.52.107. Number "hoarding"
is proscribed, and subsection (a) defines
"hoarding" to include "number brokering",
which includes "the selling of a toll
free number by a private entity for a
fee." As an independent matter it would
be difficult to conceive of Capitol
Warehousing’s corporate mitosis, and the
allocation of its toll-free number to one
of the offspring, as an episode of either
"number hoarding" or "number brokering",
whether or not the original corporation’s
owner was paid for his assistance in the
transaction. Capitol Warehousing did not
tie up "more toll free numbers than the
toll free subscriber intends to use for
the provision of toll free service" or
"acquire a toll free number for the
purpose of selling the toll free number"
(emphasis added).
The Federal Communications Commission
has not made it clear whether every
transfer for value is a form of "number
brokering" even when the transfer does
not entail any of the events listed in
subsections (a)(1) through (a)(3); the
regulation does not contain the word
"all" and thus its scope is open to
question. To say "A includes B" is not
necessarily to say "all B is A." Many
firms transfer their phone numbers to
their successors (or to ventures spun off
into subsidiaries) in order to preserve
the good will and custom of the business.
The regulation shows that phone numbers
cannot be treated like Internet domain
addresses, which regularly are sold
outright for a fee, but it does not show
that all transfers to new ventures are
forbidden; it would not make much sense
to have numbers with economic value (such
as 800-FLOWERS) perpetually assigned to
businesses (such as transportation
brokers) that cannot realize this value.
Moving assets to higher and better uses
is an important goal of any economic
system. Drawing a line between these
normal and lawful transactions and
forbidden "hoarding" or "number
brokering" would be a job for the fcc, not
for the courts, at least as an initial
matter. But we need not send this issue
to the Commission under the doctrine of
primary jurisdiction, because it is
possible to resolve this case on the
assumption that all sales are "number
brokering".
The district court bypassed the question
whether sec.52.107 proscribes sales that
occurred before its adoption. For reasons
explained presently, the answer matters--
and it is a simple "no." Federal
regulations do not, indeed cannot, apply
retroactively unless Congress has
authorized that step explicitly. See
Bowen v. Georgetown University Hospital,
488 U.S. 204 (1988). No statute
authorizes the fcc to adopt regulations
with retroactive effect, and sec.52.107
does not purport to affect transactions
entered into before 1997. Defendants say
that sec.52.107 just restates prior law,
but this position is untenable. Relevant
prior law, from the phone companies’
tariffs, was that subscribers do not own
telephone numbers assigned to them. This
meant that the carriers could change
numbers without liability to the
subscribers. It did not mean that
subscribers were forbidden to transact
about whatever interests they enjoyed in
the use of numbers currently assigned.
Consider Internet domain names. These are
rented by the year from administrators
(one per top domain), yet there is a
thriving market in these addresses. This
is true of other leaseholds: a lessee
does not own the premises but may
transfer his possessory interest for
whatever price the traffic will bear,
unless the lease forbids assignments and
subleases. A football team does not own
its players but may trade their
contracts. And, as University of Georgia
v. Carroll, 338 U.S. 586 (1950), holds,
broadcast licenses may be sold despite
the mantra that the airwaves are a public
resource. If broadcast licenses may be
sold even though they are not "property"
of the licensees, then telephone numbers
could be sold until 1997 even though
they, too, are not the subscribers’
property. Jahn could not have compelled
at&t to transfer the number to 800-Flowers
(Wisconsin), but it proved willing to do
so, and no rule of federal law in force
at the time prevented the firm from
compensating Jahn for his assistance in
securing this transfer.
Thus we arrive at the question whether
deferred payment for a lawful (because
pre-1997) sale violates sec.52.107--for,
if it does, then Texas law gives 800-
Flowers (New York) a defense. Yet nothing
in sec.52.107 speaks to payment; the
regulation concerns future sales, not
compensation for older and thus lawful
sales. That’s what it means to say that
the regulation is not retroactive. All
"retroactivity" could mean for these
parties would be a prohibition against
future payments. (Surely defendants do
not think that the regulation compels at&t
to restore 800 356-9377 to Capitol
Warehousing, the original subscriber!)
Changing today’s financial consequences
of an earlier transaction is the paradigm
of retroactivity. See Landgraf v. USI
Film Products, 511 U.S. 244 (1994). When
Congress compelled mine operators to pay
black lung benefits to miners who retired
before the law’s enactment, the Supreme
Court treated this as classically
retroactive legislation. See Usery v.
Turner Elkhorn Mining Co., 428 U.S. 1
(1976). It did not say, as defendants
here do, that a law is prospective when
it rearranges wealth for the future; a
wealth transfer that depends on events
preceding the rule’s adoption has a
retroactive effect. Defendants insist
that sec.52.107 transfers wealth from
Jahn to themselves, on account of events
that occurred in 1982 and 1986. That
would be an instance of retroactivity;
and as sec.52.107 is not retroactive, it
also does not affect the royalty. (Nor
does any other rule of federal law do so.
Defendants err in supposing that there is
a rule against perpetual royalties. See
Aronson v. Quick Point Pencil Co., 440
U.S. 257 (1979).)
A royalty is a risk-sharing agreement.
Instead of paying Jahn up front the
estimated value of the phone number, the
investors who established 800-Flowers
(Wisconsin) and its successors divided
the risk with Jahn, so that he would be
paid only to the extent the new business
succeeded. Suppose they had done things
otherwise--paying Jahn a lump sum and
dividing the risk among investors who
financed that payment. Any attempt to
force Jahn to disgorge what he received
in 1982 or 1986 would be retroactive. Yet
this is no different, as an economic
matter, from refusing to make ongoing
payments. Suppose that Jahn had
manufactured his own lump-sum payment by
borrowing against the value of the
royalty. A bank could have lent Jahn $1
million (say) in 1986, taking the royalty
agreement as security for repayment. The
effect on such a lender of losing its
security because of a 1997 regulation
would be visibly retroactive. So too if
800-Flowers (Wisconsin) had paid Jahn $1
million cash, borrowing the money from
bondholders who were promised repayment
out of the phone number’s future value.
Defendants could not have used the 1997
regulation as a reason to stop repaying
their bondholders. Or consider yet
another example: suppose that Texas were
to vote to go dry on January 1, 2003, and
ban all imports of liquor, as sec.2 of
the twenty-first amendment permits.
During December 2002 a vintner delivers
1,000 cases of its best cabernet
sauvignon to a merchant in Texas, on
credit. January 1 arrives; no new sales
could be made; would the buyer be free to
ignore the debt for the wine already
received? Surely Texas would not permit
such a step, which would differ but
little from theft. If the buyer of wine
must pay even after new sales have been
forbidden, then the buyer of a phone
number must pay too.
Defendants have other arguments that the
district court did not consider. We leave
these to be sorted out on remand.
Reversed and Remanded
Flaum, Chief Judge, concurring. I join
the panel’s opinion and only comment
separately to underscore what I
understand to be the holding of this
case. The circumstances presented in this
appeal are unique (a toll-free telephone
number was effectively sold, in exchange
for the payment of royalties, prior to
the time when such transfers became
illegal). I do not consider our decision
today to authorize the sale, brokering or
hoarding of toll-free numbers, as the FCC
has clearly spoken on this issue.