Qwest Commc'ns Corp. v. Free Conferencing Corp.

• Decision Date: 15 September 2016
• Docket Number: No. 15-2406,15-2406
• Citation: 837 F.3d 889
• Parties: Qwest Communications Corporation, a Delaware corporation, Third Party Plaintiff-Appellant v. Free Conferencing Corporation, a Nevada corporation, Third Party Defendant-Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

837 F.3d 889

Qwest Communications Corporation, a Delaware corporation, Third Party Plaintiff-Appellant

v.Free Conferencing Corporation, a Nevada corporation, Third Party Defendant-Appellee.

No. 15-2406

United States Court of Appeals, Eighth Circuit.

Submitted: June 16, 2016

Filed: September 15, 2016

Rehearing and Rehearing En Banc Denied October 31, 2016^*

Counsel who presented argument on behalf of the appellant was Charles W. Steese, of Denver, CO. The following attorney(s) appeared on the appellant brief; Thomas Blumeyer Weaver, of Saint Louis, MO, Sandra L. Potter, of Denver, CO.

Counsel who presented argument on behalf of the appellee was Stephen Wald, of Boston, MA. The following attorney(s) appeared on the appellee brief; Scott R. Swier, of Avon, SD.

Before MURPHY, BRIGHT, and SHEPHERD, Circuit Judges.

BRIGHT

, Circuit Judge.

Following a bench trial, the district court found third-party plaintiff-appellant Qwest Communications Corporation (Qwest) failed to prove its claims for intentional interference with a business relationship, unfair competition, and unjust enrichment against third-party defendant-appellee Free Conferencing Corporation (FC).¹ Qwest appeals. We affirm the district court on the claims for intentional interference with a business relationship and unfair competition. We reverse and remand on the claim for unjust enrichment.

I. BACKGROUND

Qwest is a long-distance telephone service provider, referred to as an interexchange carrier (IXC). Sancom, Inc. (Sancom), the original named plaintiff, is a local telephone service provider, referred to as a local exchange carrier (LEC), for the Mitchell, South Dakota, area.

When IXCs like Qwest transmit calls from one local area to a different local area, they pay fees to the LEC in each local area in order to compensate the LEC for delivering, or “terminating,” the call locally on the LEC's infrastructure. These fees are typically paid on a per-minute basis, so the longer the call the more the IXC must pay the LEC.

Federal laws and regulations govern the contractual relationship between the IXC and the LEC. The Communications Act of 1934 requires the LEC to file with the Federal Communications Commission (FCC) its proposed charges for the IXC, and the FCC must approve this fee, called a tariff. 47 U.S.C. § 203(a)

. Unless specified in this tariff, the LEC may not otherwise charge the IXC a fee for terminating calls to local customers under its tariff rate. Id. at § 203(c). LECs may, however, receive some compensation from IXCs for calls they deliver to non-customers. Qwest Commc'ns Corp. v. Farmers & Merchants Mutual Telephone Co., 24 F.C.C. Rcd. 14801, 14812 n.96 (2009) (hereinafter Farmers II).

The terms of Sancom's tariff authorized it to charge IXCs, including Qwest, more than three cents per minute for calls it delivered to an “end user,” which the tariff defined as an individual or other entity “which subscribe[d] to the services” Sancom offered. (Appellant's Appendix pp. 532, 535, Sancom Tariff § 2.6 (defining an “end user” as “any customer of an interstate or foreign telecommunications service that is not a carrier” and a “customer” as an individual, company, or other entity “which subscribes to the services offered under this tariff”)). Therefore, if Sancom did not deliver a call to an individual or entity which subscribed to its services, it could not charge IXCs under the terms of the tariff for terminating the call.

In 2004, FC, a company that provides conference calling services to its customers free of charge, hired Darin Rohead, operating as PowerHouse Communications, to find LECs that would be interested in contracting with FC to host its conference call bridges. Rohead identified Sancom and drafted a contract that the parties later signed.

Under the terms of the contract, Sancom agreed to host FC's conference call bridges on its premises in Mitchell, South Dakota. FC guaranteed its conference call bridges would increase call traffic to Sancom's service area by a minimum number of minutes per month. In return, Sancom agreed to pay FC a “marketing fee” of 2.5 cents for each minute of call traffic that terminated at FC's conference call bridges.

Although unwritten in the contract, FC knew Sancom would charge the IXCs under its tariff for each minute of call traffic it terminated at FC's conference call bridges. The contract was therefore designed to take advantage of the tariff system: FC would increase the volume of call traffic IXCs delivered to Sancom's service area; Sancom would bill IXCs under its tariff for the increased traffic; and Sancom would pay FC a per-minute “marketing fee,” effectively splitting the revenues from the increased traffic. While FC knew this contract would take advantage of the tariff system, the district court found FC President David Erickson credible when he testified that he did not know the arrangement was unlawful, he did not intend to premise his business model on an unlawful source of revenue, and he would have taken any steps necessary to comply with the law.

FC's call bridges heavily increased call traffic to Sancom's service area. From March to April 2005, Sancom terminated roughly 3.7 million minutes of FC traffic. By the end of 2007, that number jumped to roughly 50 million minutes of FC traffic per month. In 2007 and the first half of 2008, FC traffic accounted for 98% of Sancom's overall traffic. During this time period, Sancom terminated roughly 686 million minutes of FC traffic and only 14 million minutes of traffic for all other customers. The FC traffic never interfered with Sancom's service to the other customers.

Today, it is well-settled that an LEC cannot bill an IXC under its tariff for calls “terminated” at a conference call bridge when the conference calling company does not pay a fee for the LEC's services. But when FC and Sancom first entered into their contract, this issue had not been litigated. The FCC first considered this issue in 2007. Qwest Commc'ns Corp. v. Farmers & Merchants Mutual Telephone Co., 22 F.C.C. Rcd. 17973 (2007)

(hereinafter Farmers I).² In Farmers I, the FCC held that a conference call company could qualify as an “end user” under the terms of an LEC's tariff as long as it paid the LEC a subscription fee for its services, even if the LEC, in turn, paid the conference call company a marketing fee that exceeded the subscription fee. Id. at 17987–88. Therefore, even if the conference call company received a net payment from the LEC, it could still qualify as an “end user,” and the LEC could charge the IXC under its tariff for traffic that terminated at the conference call bridge. Id. at 17988.

Following Farmers I

, Qwest filed a motion to reconsider with the FCC, asking it to revisit its holding in light of newly discovered evidence that the conference call companies were not actually paying a subscription fee to the LECs. See Farmers II, 24 F.C.C. Rcd. at 14801. The FCC granted Qwest's motion, and in November 2009 it held that an LEC could not charge an IXC under its tariff for calls delivered to a conference call bridge when the conference call company did not pay a fee to subscribe to the LEC's services. Id. at 14812-13. The FCC, however, indicated in a footnote that the LEC was not “precluded from receiving any compensation at all for the services” it provided to the IXC. Id. at 14812 n.96.

II. PROCEDURAL BACKGROUND

Prior to Farmers I

, Qwest stopped paying Sancom access charges, and on October 9, 2007, Sancom sued Qwest to recover the charges, advancing a handful of different legal theories. Qwest filed counterclaims against Sancom and also claims as a third-party plaintiff against FC for unfair competition, tortious interference with contract, civil conspiracy, and unjust enrichment.

After the FCC decided Farmers II

, the district court referred three issues to the FCC: (1) whether Sancom violated its tariff by charging Qwest for calls that terminated at FC's call bridges; (2) whether Sancom was entitled to some compensation from Qwest for these calls even if it could not bill Qwest under its tariff; and (3) if so, what rate Sancom could charge Qwest for those calls. The FCC found FC was not an “end user” because it did not subscribe to Sancom's services, and therefore Sancom could not bill Qwest under its tariff for calls that terminated at FC's bridge. The FCC reserved ruling on the remaining two issues. Qwest subsequently settled with Sancom on all claims for an undisclosed amount.

In May 2014, Qwest and FC proceeded to trial before the district court. Following the bench trial, the district court issued an order and entered judgment in favor of FC on all claims. Qwest filed a motion to vacate judgment, which the district court denied on June 5, 2015. Qwest timely appealed.

III. DISCUSSION

Qwest appeals the district court's judgment on its claims of intentional interference with a business relationship, unfair competition (via FC's inducement of regulatory violations), and unjust enrichment. “In reviewing a judgment after a bench trial, we review the district court's factual findings and credibility determinations for clear error, and its legal conclusions de novo.” Affordable Cmtys. of Mo. v. Fed. Nat'l Mortgage Ass'n, 815 F.3d 1130, 1133 (8th Cir. 2016)

(citing Fed. R. Civ. P. 52(a)(6) ). “We will overturn a finding of fact only if it is not supported by substantial evidence, it is based on an erroneous view of the law, or we are left with a definite and firm conviction that an error has been made.” Id.

A. Intentional Interference with a Business Relationship

Qwest argues the district court erred when it entered judgment in favor of FC on its claim for intentional interference with a business relationship. Under South Dakota law,³ the plaintiff must prove five elements for a claim of intentional interference with a business relationship: “(1) [T]he existence of a valid business relationship or expectancy; (2) knowledge by the interferer of the relationship or expectancy; ...