Appeal from the United States District Court for the Western District of Wisconsin. No. 00-C-446-C--Barbara B. Crabb, Chief Judge.
Before Flaum, Chief Judge, and Bauer and Easterbrook, Circuit Judges.
The opinion of the court was delivered by: 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 ...