Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

CITY OF CHICAGO v. STUBHUB! (November 23, 2011)

The City of Chicago assesses an amusement tax on the sale of tickets to sporting events, concerts, etc. StubHub! and eBay both operate Internet auction sites on which they resell tickets. The City of Chicago brought separate suits against StubHub! and eBay, alleging that it had a right to assess and collect from them a tax on the difference between the original and the resale price. Judges Andersen (N.D. Ill.) and Manning (N.D. Ill.), respectively, rejected Chicago's argument. On appeal, the Seventh Circuit certified (opinion and intheiropinion) the issue to the Illinois Supreme Court. On October 6, 2011, a unanimous Illinois Supreme Court held that Chicago was not allowed to collect the amusement tax from Internet auction sites. Instead of filing a position statement pursuant to Circuit Rule 52 (b), Chicago sought an extension of time, indicating that it was going to request a rehearing from the Illinois Supreme Court.

In their opinion, Seventh Circuit Chief Judge Easterbrook and Judges Bauer and Kanne denied the request for an extension and affirmed the district court judgments. It concluded that the extension would serve no practical purpose, that Chicago did not explain why it thinks a unanimous court would suddenly reverse course, and that Chicago could file post-judgment motions in the district courts in the unlikely event the Illinois Supreme Court changed its ruling.

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GEORGE v. NATIONAL COLLEGIATE ATHLETIC ASSOC. (October 18, 2010)

Tom George and the other plaintiffs took part in a basketball ticket distribution system operated by the National Collegiate Athletic Association (NCAA). They submitted applications for tickets with payment for the requested tickets and a $6.00 fee for every application. Successful applicants received their tickets – unsuccessful applicants received a refund of the ticket price. Both forfeited the fee. The plaintiffs, all unsuccessful applicants, brought suit alleging that the scheme was an unlawful lottery under Indiana law. Judge Lawrence (S.D. Ind.) found that the in pari delicto defense applied and dismissed the complaint. On appeal, the Seventh Circuit reversed (opinion and intheiropinion). The Court concluded that the in pari delicto defense did not apply. It also held that the plaintiffs alleged the elements of an unlawful lottery under Indiana law and that Indiana’s “bona fide business transaction” exception did not apply. It distinguished the Indiana Supreme Court’s approval of a similar ticket distribution system used by the Indianapolis Colts. Judge Cudahy dissented, disagreeing with the majority on each of its three conclusions. The NCAA petitioned for rehearing and rehearing en banc.

In their opinion, Circuit Judges Cudahy and Kanne and District Judge Darrah granted the petition for rehearing, vacated the earlier opinion, and certified three questions to the Indiana Supreme Court. The Court noted that the question was a close one that could have significant consequences on sports ticket distribution systems. It certified to the Indiana Supreme Court three questions: a) do the complaint allegations state the elements of an unlawful lottery, b) if a), does the NCAA system meet the “bona fide business transaction” exception to an unlawful lottery, and c) if a), are the claims subject to the in pari delicto defense.

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CITY OF CHICAGO v. STUBHUB! (September 29, 2010)

The practice of "scalping" tickets, or selling them above face value, is generally illegal in Illinois. But there are exceptions. One is for an Internet auction site -- but only if it registers with the State, either collects and remits taxes or publishes a notice on its site advising the actual reseller of its tax obligations, and agrees to provide information about any reseller if requested by law enforcement or government official. StubHub! operates just such a site and complies with those requirements of Illinois law. It has chosen the "notice" alternative rather than the "collects and remits" alternative. The City of Chicago would rather have StubHub! collect the tax so it does not have to worry about whether each of thousands of resellers pay it – so it amended an ordinance requiring direct payment by StubHub!. The City filed suit seeking a declaration that StubHub! is responsible for the taxes. Judge Andersen (N.D. Ill.) dismissed the complaint on the ground that tickets are "tangible or personal property" and that, therefore, the Preemption Act prohibits a home-rule municipality from imposing the tax. Chicago appeals.

In their opinion, Chief Judge Easterbrook and Judges Bauer and Kanne certified a question to the Illinois Supreme Court. The Court first disposed of StubHub's arguments that federal law somehow barred the tax. First, the Communications Decency Act is simply irrelevant to the issue. Second, the Internet Tax Freedom Act prohibits “[m]ultiple or discriminatory taxes on electronic commerce.” The Chicago tax is neither. Turning back to state law, the Court recognized that an intermediate state court has concluded that a ticket is "tangible or personal property" (ironically, adopting a point argued by the City). A federal court sitting in diversity will frequently follow (even though not required to) an intermediate state court's ruling, if there is no reason to believe that the state Supreme Court would rule otherwise. Even if the ruling is erroneous, later state-court cases that address the same issue can correct the error. Here, however, the Court was concerned that the state Supreme Court might never be heard on the issue. Apparently, there are only two cases that address the issue. Both started in state court but were removed to federal court – and any future-filed case will likely be removable. The Court, therefore, requested the Illinois Supreme Court to advise "whether municipalities may require electronic intermediaries to collect and remit amusement taxes on resold tickets."

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STORIE v. RANDY'S AUTO SALES (December 17, 2009)

Larry Storie purchased a truck from the Duckett Truck Center in June of 2004. Unbeknownst to Storie, the truck had quite a history. Duckett purchased the truck from West Side Auto Parts in February, who purchased it from Randy's Auto Sales in January, who purchased it from St. Paul Mercury Insurance Company, also in January. St. Paul acquired the truck after it was involved in an accident -- an accident in which its driver was killed -- and declared a total loss. St. Paul applied for a certificate of title in Tennessee. The title was issued to St. Paul and forwarded to Randy's -- and to Westside -- and to Duckett. No one applied for a salvage title. Storie learned of his truck's checkered past only after 18 more months and 200,000 more miles. He brought suit against Randy's. He alleges that Randy's violated an Indiana statute that requires a person who obtains a wrecked vehicle without a salvage title to apply for one within 31 days of his receipt of title. The district court granted summary judgment to Randy's, concluding that it could not have obtained a salvage title since it no longer owned the vehicle by the time it received the title from St. Paul. Storie appeals.

In their opinion, Judges Cudahy, Wood and Sykes certified a question to the Indiana Supreme Court. The Court noted that, read literally, the Indiana statute could apply to current and former owners. However, the Court identified several competing interpretations of the statute -- some supporting its application to former owners and others not. For example, one argument that it might be limited to current owners is that it requires the state to issue a certificate of a salvage title as proof of ownership. That suggests that a former owner should not apply for the title. An opposing argument is that the presumed purpose of the statute, to protect consumers from purchasing wrecked vehicles, could be evaded simply by selling the vehicle before the certificate of title is transferred. The Court concluded that the statute was ambiguous and that the question raised should be answered by the Indiana Supreme Court. Before the Court certified the question, however, it had to conclude that the answer to the question would be outcome determinative. The Court considered and rejected Randy's alternate arguments, concluded that the answer to the question was outcome determinative and certified it to the Indiana Supreme Court.

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