On The Case

Intuit defends $40 million class settlement, attacks mass arbitration firm

(Reuters) - In a new brief defending its proposed $40 million settlement of allegations that it duped 19 million people into paying for Turbo Tax products, the financial software firm Intuit said there is nothing unusual or untoward about a company using a class action to resolve consumer claims – even when that same company won’t allow its consumers to litigate as a class.

Intuit also attacked the plaintiffs' firm Keller Lenkner for attempting to intervene in the class action on behalf of 125,000 clients who have retained Keller Lenkner to demand arbitration against the tax prep company. Intuit argued in its brief and in an accompanying declaration from Berkeley law professor Stephen Bundy, that it’s unethical for Keller Lenkner to attempt to exclude its clients from the class deal. Intuit suggested that Keller Lenkner’s true motivation is its own $8 million stake in its mass arbitration campaign against the company. If Keller Lenkner’s clients decide to accept the class settlement offer, Intuit said, then the mass arbitration firm won’t make any money from their cases.

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Keller Lenkner fired back in an email statement. “Intuit is perfectly happy to release the claims of 19 million consumers for $2.10 each in its one-size-fits-all class deal, yet the company has been offering our clients hundreds of dollars when they proceed in individual arbitrations,” the firm said. “So it is rich of Intuit to pretend it has our clients’ interests at heart and claim there is an ethical problem with our protecting our clients’ right to opt out of Intuit’s lowball deal. As we have told the court, if the settlement is approved, we will make sure our clients receive the class notice and give them an opportunity to participate in the settlement, without charging any fees. Our concern at this stage is simply stopping Intuit from throwing up roadblocks that are obviously designed to make it hard for clients to opt out of the class if they decide to continue their arbitrations.”

I’ve written a lot about the Intuit showdown because it brings together just about all of the hot issues of mass arbitration in a single case. Intuit was sued in a class action in federal court in San Francisco after Pro Publica reported that the company was steering taxpayers who qualified for free tax prep services into paying products. (Intuit has denied wrongdoing and has said that it has a long-standing commitment to offering free tax-prep services to eligible consumers.) The company moved to compel arbitration, citing the class action waiver in its consumer contract. The 9th U.S. Circuit Court of Appeals ruled in August that consumers cannot proceed in a class action because their contract required individual arbitration.

Keller Lenkner had by then signed up tens of thousands of Intuit customers to bring individual arbitration cases. The mass arbitration firm paid $8 million in fees to the American Arbitration Association to launch cases for its first wave of clients. Intuit paid $13 million in fees.

But it also tried various strategies to curtail the mass arbitration campaign. Intuit tried, unsuccessfully, to shift thousands of arbitration cases to small claims court. It offered full refunds to more than 100 Keller Lenkner clients, reaching settlements with about 25 of them. And it challenged Keller Lenkner’s individual arbitration filings. Of the more than 45,000 cases in the mass arbitration firm’s first wave against Intuit, Keller Lenkner withdrew about 8,300. (Keller Lenkner said it has voluntarily withdrawn cases to investigate Intuit’s allegations that they are unfounded, in a show of good faith that “proves that we are not using arbitration filing fees to obtain leverage,” the firm said.)

The 9th Circuit’s decision in August stripped class action lawyers of almost all of their leverage against Intuit. But that gave the company an opportunity to attempt a sweeping resolution. In November, after a formal mediation before a retired federal magistrate, Intuit lawyers from Fenwick & West and Wilmer Cutler Pickering Hale and Dorr and class counsel from Girard Sharp and Stueve Siegel Hanson reached a deal. Intuit would put up $40 million and would agree to notify millions of consumers of their eligibility for free services. Class counsel estimated that, depending on the claims rate, consumers could receive recover as much as half of what they paid for Turbo Tax services.

Keller Lenkner had anticipated the class action settlement and went to state court in Los Angeles in what proved to be an unsuccessful effort to exclude its clients from the deal. Judge Terry Green of Los Angeles Superior Court denied the firm’s motion for a temporary restraining order before the class settlement deal was filed. After class counsel moved for preliminary approval, Judge Green refused to grant a preliminary injunction to keep Keller Lenkner’s clients out of the case.

Keller Lenkner also moved to intervene in the class action, arguing that the deal was bad for its clients. Keller Lenkner said its arbitration clients have asserted claims averaging between $2,000 and $3,000 – vastly more than the $28 or so recovery predicted in the class action. Keller Lenkner protested the proposed settlement’s stringent rules for opt-outs, including a requirement that class members who don’t want to participate in the settlement must sign opt-out notices individually and must include a case ID supplied by the settlement administrator. The mass arbitration firm also challenged a clause in the proposed settlement that purported to enjoin all class members – including Keller Lenkner clients – from proceeding with their own cases against Intuit until opting out of the class.

Of course, the subtext of Keller Lenkner’s protest is the irony that yet another company facing mass arbitration is attempting to use a class action to resolve its liability to plaintiffs who were forced to waive their own right to sue as a class.

But Intuit’s filings this week argue that there’s nothing wrong with that. The settlement, negotiated under the auspices of an experienced mediator, is fair and adequate, Intuit said. Class counsel were in a weak position after the 9th Circuit ruling, the company conceded, but that’s how deals are made: “Litigation setbacks form the backdrop against which all settlements are negotiated,” Intuit said.

It has become commonplace for mass arbitration defendants like Intuit to cast aspersions on Keller Lenkner, questioning its ability to fulfill its ethical obligations as it represent tens of thousands of clients with potentially conflicting interests. Intuit, for instance, cites filings in which the telecom CenturyLink sought to disqualify Keller Lenkner from representing thousands of mass arbitration clients who were also members of a consumer class that had reached a proposed $15 million settlement. Keller Lenkner urged its clients to opt out of the CenturyLink class. CenturyLink, like Intuit, said the firm was not looking out for its clients but was protecting its own interest in its clients’ arbitration cases.

Intuit refers to the CenturyLink dispute throughout its brief. But the one thing it didn’t mention: CenturyLink didn’t get Keller Lenkner disqualified and the firm’s clients ended up opting out of the CenturyLink settlement by the thousands.

We’ll see if Intuit has more success.