Free File Controversy Sparks Litigation Frenzy

Billing Practices Apps, Websites and Software

MLEX US Tax Watch
Paul Merrion
May 27, 2019

Free File Controversy Sparks Litigation Frenzy

MLEX US Tax Watch

May 27, 2019

Byline: Paul Merrion

What was a political and public relations mess is turning into a legal migraine for Intuit’s TurboTax and other tax software providers accused of steering consumers away from the Free File program they offer in conjunction with the Internal Revenue Service.

Five (5) proposed class actions in federal court and two (2) consumer fraud cases in California state courts have been filed against Intuit since late April. At least two (2) state consumer fraud and false advertising suits have been filed against H&R Block as well. All cases were filed after reports surfaced that Intuit and H&R Block took steps to hide their free, IRS-approved tax filing software from Internet search engines while directing taxpayers to their own tax products.

The IRS is conducting a high-level review and is in the process of hiring and independent consultant to assess its 16-year-old memorandum of understanding with the Free File partners. Meanwhile, litigation is likely to play out over years, long after Congress and the IRS have finished scrambling to quash the controversy.

The five (5) federal cases in the US District Court for Northern California will have to overcome Intuit’s user agreement, which bars class actions and requires most disputes to go through arbitration, rather than the courts. Those cases have been consolidated or are in the process of consolidation.

While the federal class actions face an arbitration hurdle, the state court cases against Intuit may be able to sidestep the user-agreement clauses by seeking injunctions under California’s Unfair Competition Law rather than class-action monetary damages.

Intuit’s user agreement excludes injunction suits from its arbitration clause. Gutride Safier LLP, a firm specializing in consumer fraud suits in San Francisco, California, filed a lawsuit on May 1 on behalf of two TurboTax users, noting “Although the Terms of Service also include an arbitration provision, this action is not subject to arbitration because it seeks only injunctive and declaratory relief.”

Gutride Safier also filed a class action suit in California Superior Court on behalf of two H&R Block customers. The suit, which claimed the firm violated California’s Consumer Legal Remedies Act, False Advertising Law and Unfair Competition Law, contended that H&R Block doesn’t exclude injunctions from the arbitration clause in its user agreement, making it unenforceable under California law.

“Under McGill v. Citibank, Na., 2 Cal. 5th 945 (2017), Defendants’ arbitration provision purports to deprive California taxpayers of their right to seek a public injunction under the CLRA, FAL, and UCL in any forum and thus is not enforceable,” according to the suit. “This action is not subject to arbitration because it seeks public injunctive and declaratory relief, under McGill, to prohibit Defendants from continuing their deceptive and unfair practices and to protect the general public from the threat of future injury.”

Intuit hasn’t responded in court to any of the lawsuits, and a spokesman declined to comment on the litigation. H&R Block also declined to comment on the litigation.

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