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On The Case

Judge Breyer rejects $40 million Intuit class settlement amid arbitration onslaught

(Reuters) - U.S. District Judge Charles Breyer of San Francisco has refused to grant preliminary approval to a proposed $40 million class action settlement that would have resolved allegations that the financial software company Intuit steered millions of taxpayers into paying for tax preparation services instead of receiving free help.

The judge has not yet issued an opinion explaining his one-sentence Dec. 17 order denying the motion for preliminary approval of the settlement. But a newly-released transcript of the hearing that preceded the order suggests Judge Breyer was concerned Intuit was using the class action to dissuade its customers from pursuing arbitration against the company – even though it was Intuit that litigated before Judge Breyer and at the 9th U.S. Circuit Court of Appeals to enforce the mandatory arbitration clause and class waiver in its contract with consumers.

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Judge Breyer was all too familiar with the backstory on Intuit’s enforcement of the arbitration provision. When the company moved in 2019 to compel arbitration after being hit with a class action claiming that it duped customers into paying for tax services, Judge Breyer denied the motion, finding that the company’s online contract didn’t offer adequate notice to consumers. In August, the 9th Circuit overturned his decision, effectively stripping class counsel from Girard Sharp and Stueve Siegel Hanson of leverage in negotiations of a class settlement.

In the meantime, as I’ve been reporting, the plaintiffs' firm Keller Lenkner signed up more than 100,000 Intuit customers to file individual demands for arbitration at the American Arbitration Association. Intuit has tried all kinds of tactics to mitigate the mass arbitration onslaught, including attacks on Keller Lenkner’s ethics and its client screening processes. Nevertheless, Intuit has already paid $13 million in AAA arbitration fees and is facing upcoming deadlines for another $23 million in fees over the next several weeks.

Judge Breyer suggested at the Dec. 17 hearing on the proposed class action settlement that Intuit has only itself to blame for its mass arbitration predicament. “You knew what the rules of arbitration were. You knew all these things. And you elected - you elected to go to arbitration. And you fought fairly, vigorously, and it turns out correctly, that you had this right to insist on arbitration,” the judge told Intuit counsel Rodger Cole of Fenwick & West. “Now you come in, when you see how it is unfolding, and say: ‘Not so fast … Now we want to turn and do something else.’”

Judge Breyer said Intuit’s insistence on enforcing its arbitration clause was “the petard.” And now, he said, quoting Hamlet, the company was being “hoisted by (its) own petard.”

Even Intuit counsel Cole seemed to concede at the hearing that the class action settlement was a response to pressure the company felt from tens of thousands of demands for individual arbitration, and the accompanying millions of dollars in AAA fees. “The game is that by filing these arbitrations, and collecting clients on Facebook and Twitter and other social media, the Keller firm is able to threaten companies — Intuit’s not alone — into paying $3,000 in arbitration fees for a $100 claim,” Cole told Judge Breyer. “What we’re trying to say now is: If that’s the game you want to play, then we’re willing to give 950,000 — maybe more — people relief instead of paying an extortion charge to avoid the AAA fees.” (Cole was referring to the anticipated 5% claims rate in the proposed settlement. If the settlement had been approved, Intuit and class counsel estimated that about 950,000 customers, of the more than 19 million people in the class, would receive an average of $28.)

An Intuit spokesman said in a statement that the company is committed to free tax services for eligible taxpayers, did not mislead its customers and had strong defenses in the class action. Intuit agreed to the now-rejected settlement “to put this matter behind us so the company can continue focusing on delivering for our customers,” he said. “Although the court has declined to approve this settlement, Intuit will continue to be clear and fair with our customers.”

Class counsel Norman Siegel of Stueve Siegel reminded Judge Breyer at the Dec. 17 hearing that the settlement called for millions of people to receive notice that they may be eligible for free tax prep services. Intuit, he said, agreed in the settlement to much more robust disclosures than it would otherwise be required to make. Siegel also said that negotiations with Intuit were under way even before the 9th Circuit sided with Intuit on enforcement of the arbitration clause, so it wasn’t fair to insinuate that class counsel agreed to a cheap deal because they had no leverage.

In an email statement, class counsel Daniel Girard said via email that he and Siegel understood Judge Breyer’s concern about Intuit’s initial pursuit of arbitration and subsequent resort to a class action. “But our obligation is to the class as a whole, and we are committed to finding a process to deliver the critical injunctive relief to the class including providing needed transparency to millions of Americans regarding the availability to file for free through the Free File Program,” Girard said. Class counsel, he said, will either work with Intuit to revise the settlement or, if that is not possible, will pursue injunctive relief in arbitration before the AAA.

Based on the hearing transcript, Judge Breyer seems unlikely to approve any settlement that includes onerous opt-out provisions like those proposed in the deal he rejected. (Among them: Class members who want to opt out must personally sign the opt-out form in ink, not electronically, and cannot be opted out by their counsel.) Intuit and class counsel pointed to other class action settlements, including the NFL concussion litigation and claims by farmers who blamed Syngenta’s genetically-modified seeds for crop losses, that have required class members to sign opt-out documents in ink. But Judge Breyer seemed unpersuaded that consumers’ relatively small claims against Intuit demanded such elaborate protections, especially because Intuit made it so easy for those same consumers to click approval of the electronic contracts that required them to arbitrate claims.

The now-rejected settlement would also have enjoined consumers from proceeding with their individual arbitration cases unless and until they formally opted out of the settlement. Keller Lenkner argued that the injunction ran afoul of the Federal Arbitration Act. Judge Breyer asked at the hearing if Intuit would agree to a settlement without an injunction halting pending arbitrations, at least temporarily. Intuit counsel Cole said the settlement would not go forward without such an injunction.

One final point: Intuit, like many companies targeted in mass arbitration campaigns by Keller Lenkner, asserted that the plaintiffs’ firm did not properly vet its thousands of clients, filed unwarranted arbitration demands and may have committed ethical breaches if the firm failed to offer individualized advice to clients about whether they should accept or reject the class action.

Judge Breyer pushed back at last week’s hearing on those allegations. He said Intuit had not provided evidence of “bogus” cases by Keller Lenkner and told Intuit counsel Cole that the plaintiffs’ firm is entitled to advertise for clients.

“I don’t know any bar rule that says: Excuse me, you can’t use social media. Or: Excuse me, you can’t use DocuSign,” the judge said. “I’m of a different generation. Lawyers didn’t advertise, when I was a baby lawyer. Well, they sure do, now. And my guess is that you don’t, Mr. Cole. But in the plaintiffs’ bar, they do. And that’s a way that is recognized and sanctioned.”

We’ll know more about why Judge Breyer rejected the Intuit proposed settlement when he issues his opinion. But it seems clear that he has joined the judicial resistance to companies that unilaterally imposed arbitration on their workers and customers, then tried to shut down those same workers and customers when they attempted to enforce their contractual rights.

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