Intuit, the creator of TurboTax, defeated a class-action lawsuit filed on behalf of consumers who believe they were duped into paying to file their taxes. The corporation said that its consumers had consented to waive their right to sue and instead use the private arbitration system.
However, even as Intuit prevailed in the class-action lawsuit, the arbitration system was weaponized against the Silicon Valley firm.
A Chicago law firm is pursuing an unusual legal approach by funding consumers who bring thousands of arbitration cases against Intuit. Whether it succeeds or fails, this technique may cost Intuit tens of millions of dollars in legal expenses alone — a threat that may force the business to be more receptive to a massive settlement.
Nearly three years after ProPublica first revealed how many customers paid for TurboTax when they could have completed their taxes for free, Intuit is engaged in a complicated series of court fights to prevent consumers from attempting to recoup the money.
Apart from the massive number of customer complaints, federal authorities and state prosecutors are also pursuing action against the deep-pocketed corporation, which earned $2 billion last year.
The most unexpected front in the battle is the approach of arbitrating tens of thousands of individual consumer claims, an alternative to the public court system that has long been deemed pro-business.
The so-called mass-arbitration strategy was pioneered in recent years as the legal landscape shifted away from class-action lawsuits, the conventional method for consumers to recover money through the court system.
The strategy is comparable to guerrilla warfare instead of massing men on the battlefield and facing one other in lines. Keller Lenkner of Chicago, the legal firm pursuing Intuit, has garnered recognition for successfully utilizing the technique on behalf of DoorDash and Postmates delivery drivers.
Intuit has defended its procedures vehemently, denying any illegality in each instance. It emphasizes that millions of individuals use TurboTax each year to submit their taxes for free.
“Intuit was always upfront and honest with its customers,” a company spokesperson told ProPublica, adding that the company “not only did not conceal free filing options from consumers but also helped drive the adoption of free tax prep by assisting more people in filing their taxes for free than all other online tax prep linked.”
Intuit was originally sued in federal court in May 2019 in response to ProPublica’s initial reporting. The issue included charged clients after beginning the filing process with TurboTax’s Free Edition.
TurboTax at the time offered a strongly publicized Free Edition in addition to a similarly called Free File package. The Free Edition sent some filers to a TurboTax version that charged a fee based on the tax forms they needed to submit.
Meanwhile, the Free File product, offered with the IRS, did not redirect customers to paid products and was free for anybody earning less than a specified income level.
However, it was tough to locate. Intuit modified its website to exclude the product from search engine results at one time. (The corporation eventually deleted those lines of code.)
According to a later examination by the Treasury Inspector General for Tax Administration, over 14 million tax filers paid for online tax preparation software from TurboTax and other corporations they could have acquired for free in 2019. The industry earned around $1 billion in sales due to this.
The 2019 lawsuit was a classic class action in which plaintiffs’ attorneys sued a firm on behalf of an entire group of allegedly affected consumers. Millions of individuals may be entitled to receive money from the defendant if the plaintiff’s triumph or the firm settles.
However, corporate America successfully fought class-action lawsuits for decades, attempting to limit their use. Companies received assistance in recent years from the Supreme Court, which issued a series of decisions suffocating several class-action cases by making it easier for businesses to compel customers to enter into binding arbitration agreements.
When customers, including TurboTax users, join up for a service, the terms-of-service documents they click frequently include a secret language requiring them to pursue any grievances through private arbitration rather than a lawsuit.
Numerous studies have revealed that few consumers read these lengthy contracts. TurboTax’s current terms of service agreement, which retains an arbitration clause, is almost 15,000 pages long and written in opaque legalese.
Arbitrations are conducted in a private venue separate from the judicial system. Importantly for corporate defendants, these claims are not consolidated, as they are in class-action lawsuits.
This has a profound effect on economic incentives: If only one consumer were cheated of $50, pursuing the case would waste a lawyer’s time. If a lawyer can display an entire class of 20 million clients who each lost $50, the calculus changes.
“It’s been a disaster for consumers and employees,” said Paul Bland of Public Justice, a nonprofit advocacy organization linked with plaintiff-side legal firms.
“It has eliminated a slew of well-founded and forceful instances in which businesses blatantly violate the law and get away with it due to arbitration agreements.”
Business organizations have maintained that arbitration is a “simpler and more flexible” alternative to litigation and that class-action lawsuits have benefited mostly plaintiffs’ lawyers.
After greater than a year of litigation and an appeal, Intuit successfully defended itself against a federal class-action lawsuit by relying on the arbitration provision in TurboTax.
The United States Court of Appeals for the Ninth Circuit determined that TurboTax customers agreed to arbitration when they clicked a “Sign In” button on the program, claiming they agreed to the service’s terms. The arbitration clause was included in those provisions.
The law firm Keller Lenkner saw an opportunity in that phrase. The firm’s tactic effectively called the bluff of businesses that compelled their employees and consumers to settle problems through binding arbitration.
Additionally, it took advantage of the fact that businesses are often required to pay costs to the private arbitration group, ranging from a few thousand dollars to several thousand dollars each case.
The plan even odder is that the business lacks the ancestral lineage of plaintiffs’ lawyers, a long-standing Democratic Party base.
Two former clerks created Keller Lenkner for Supreme Court Justice Anthony Kennedy, a Reagan appointment; one also clerked for Brett Kavanaugh while he was an appeals judge nominated by George W. Bush.
If just a few customers seek arbitration, the expenses that businesses must pay are negligible. However, if firms are confronted with hundreds of individual arbitrations – a method they did not foresee — the potential expenses quickly accumulate, and businesses may feel pushed to settle.
Additionally, the technique necessitates substantial financial resources on the side of the plaintiffs’ legal firm, as they advance funds to their clients to meet a nominal arbitration filing cost.
While the strategy has been used in a limited number of cases, Georgetown Law professor Maria Glover described it as a revolution in the civil justice landscape, “one in which virtually all Americans are subject to mandatory arbitration agreements with class-action waivers, and one in which a broad swath of claims—for consumer fraud, racial discrimination, gender discrimination, wage theft, and workplace sexual harassment—have shifted to the arbitration forum.”
In a separate court filing in 2020, Keller Lenkner stated that over 100,000 consumers had sought individual arbitration against Intuit. Consumers received several million dollars in filing fees from the business.
Intuit has made many attempts to halt the bulk arbitrations. In late 2020, in response to an appeals court decision that effectively ended the federal class-action lawsuit, the corporation proposed to pay a $40 million settlement in that case.
Consumers who did not opt-out of the class-action settlement would be unable to pursue their arbitration claims if the court approved it. A settlement on behalf of the whole class of customers might have resolved many pending arbitrations at a relatively low cost. Keller Lenkner expressed opposition to the settlement.
At a hearing before United States District Court Judge Charles Breyer, an Intuit lawyer stated that “the Keller company can scare businesses — not just Intuit — into paying $3,000 in arbitration fees for a $100 claim.”
Breyer expressed doubts about the proposed settlement’s consumer-friendly nature.
“When I looked at this and realized that this was a method to avoid or circumscribe arbitration, it appeared that Their own petard was hoisting intuit,” Breyer said, adding, “I believe arbitration is the petard that Intuit now faces.” Reuters was the first to report on his remarks.