Northern District of California Denies Preliminary Approval of TurboTax Class Action Settlement, Arena v. Intuit Inc., Case No. 19-cv-02546-CRB, 2021 U.S. Dist. LEXIS 41994 (N.D. Cal. Mar. 5, 2021)

Diana Yen, UCLA 2022 J.D. Candidate, yen2022@lawnet.ucla.edu.

In an order and opinion denying a motion for preliminary approval of class action settlement, U.S. District Judge Charles R. Breyer of the Northern District of California found the proposed settlement in Arena v. Intuit Inc., Case No. 19-cv-02546-CRB, 2021 U.S. Dist. LEXIS 41994(N.D. Cal. Mar. 5, 2021) was not fair, reasonable, and adequate, and therefore did not satisfy Rule 23(e) of the Federal Rules of Civil Procedure, which requires the Court to approve class action settlements in light of due process concerns for absent class members. In particular, a court may give such approval “only after a hearing and only on finding that” the proposed settlement is “fair, reasonable, and adequate.” Fed. R. Civ. P. 23(e)(2).

The Court was especially wary of unequal treatment among class members, citing In re Bluetooth Headset Prods. Liability Litig., 654 F.3d 935, 946 (9th Cir. 2011), noting that pre-class certification settlements are subject to heightened scrutiny. Arena, 2021 U.S. Dist. LEXIS 41994 at *17. The Court noted that issuing such an injunction at the preliminary approval stage “would be an extraordinary measure best reserved for extraordinary circumstances,” citing 4 Newberg on Class Actions § 13:19 (5th ed. 2011). Id. at *19.

The Court did not consider whether it would be likely that the court would be able to certify the proposed class, or other like subsidiary issues. The Court found the proposed settlement award insufficient and opt out procedures unduly cumbersome and declined to approve the class settlement.

BACKGROUND

Intuit owns TurboTax, an online tax preparation service.Intuit agreed to provide low-income taxpayers and active military members the option to file their taxes for free in exchange for the U.S. government to not enter the tax preparation software and e-filing services market. Plaintiffs allege that instead of steering eligible taxpayers to its free-filing option, or simply letting customers find their way to it, Intuit misleadingly channeled free-filing eligible taxpayers to its paid services. Arena, 2021 U.S. Dist. LEXIS 41994 at *2.

On November 12, 2020, Plaintiffs moved for preliminary approval of a settlement agreement with Intuit. Id. at *3. Under the proposed settlement, Intuit would pay a fixed sum approximately $28 million ($40 million adjusted for expenses) to settlement class members who must sign an attestation that they paid a fee to Intuit when they “expected” to file for free. Id. at *4.

On Oct. 28, 2019, Intuit moved to compel arbitration, which the Ninth Circuit has granted. Thus, the proposed settlement comes in the context of tens of thousands of Intuit customers who have already begun individually arbitrating analogous claims against Intuit, bearing significant financial consequences for Intuit. Id. at *6.

On October 28, 2020, the arbitration claimants asked the Superior Court to enjoin Intuit from agreeing to a settlement with Plaintiffs that includes the arbitration claimants and that burdens their right to opt out. Before the Superior Court ruled on that motion, Intuit and Plaintiffs’ counsel agreed to a preliminary settlement, and Plaintiffs’ counsel filed the Motion for Preliminary Approval at issue here.

In addition to Intuit’s deal with the U.S. government, in particular, the I.R.S., the ongoing arbitrations, and current proceeding, there is also a possibility that there will be a government enforcement action against Intuit. Thus, the members of the proposed class include the arbitration claimants, those who may recover via a government enforcement action against Intuit, and the rest of the class. Plaintiffs had moved for class certification in January 2020, but the Court is yet to certify any class in relation to this case. Id. at *3.

THE PROPOSED SETTLEMENT AWARD

The proposed settlement would provide $28 million in monetary relief in addition to injunctive relief for claimants in the case at hand. The Court provided a rough calculation of $1.9 billion as a conservative estimate of Intuit’s potential liability for a projected class of 19 million people, who paid an average of $100 per-year for at least one year. The proposed recovery would constitute just 28% of damages for class members who paid to file for one year, and less for those who paid to file for multiple years. In light of these facts and the fact that the proposed settlement would bar arbitration and other parallel proceedings arising from the same claims and may preclude participation in state enforcement actions, the Court deemed the proposed settlement award inadequate. Similarly, the Court was unable to conclude that the compensation is adequate relative to Intuit’s potential exposure, in part due to Plaintiff’s failure to provide a definite estimate of that exposure.

The Court wrote that because Intuit is a massive company that dominates the tax-filing space, it has no excuse, financial or otherwise, for undercompensating the class to avoid facing claims in arbitration. Moreover, mostly low-income class members suffered at least $100 in damages, with some paying much more over the course of several years. Because these sums might be the difference in whether someone can pay rent for a month or buy groceries for a week, the Court emphasized that the harm here was significant.

The Court also wrote that the proposed settlement fails to account for obvious and important differences among large groups of class members, namely that some have paid fees over multiple years, some have already paid arbitration fees. These members would receive the same award as members not similarly situated. The Court acknowledged that the proposed settlement would secure what Plaintiffs characterize as “very important injunctive relief” for the class but wrote that the proposed settlement’s injunctive relief for the class cannot overcome these inadequacies, and the Court may not trade-off the interests of some class members (i.e., those participating in the present proceedings) for others (i.e., those not participating).

THE PROPOSED OPT OUT PROCEDURES

The Court also concluded that the proposed opt out procedures were unduly burdensome. The proposed settlement required class members to opt out by mailing a hard copy letter with a “wet-ink” [signed in ink] signature. The court considered this to be burdensome, especially considering that Intuit can administer settlement claims electronically, and for tens of thousands of class members who are arbitrating claims against Intuit, opting out is the obvious financial choice.

The Court wrote that the proposed settlement’s primary effect on arbitration claimants is to stall their arbitrations until they comply with the proposed opt out procedures. The arbitration claimants would be subject to an immediate injunction and must opt out of the settlement to continue pursuing their arbitration claims. The Court noted it would be irrational for claimants with legitimate claims to opt for the proposed $28 recovery, especially given Intuit’s weak bargaining position in the arbitration proceedings. Moreover, because the Ninth Circuit has held that Plaintiffs’ claims against Intuit must be arbitrated, there is no realistic way for the rest of the class members to recover in Court or as a class except via settlement. Under the proposed settlement, these class members could either submit a claim, opt out and pursue individual arbitrations, or get nothing. The Court also took into consideration that there are class members who may recover via government enforcement actions against Intuit.

CONCLUSION

As noted, the Court found that the proposed class settlement amount was inadequate.  In addition, the Court was not willing to approve a settlement which would effectively “halt all parallel proceedings until class members complied with the onerous op out procedures described above.” Arena, 2021 U.S. Dist. LEXIS 41994 at *19.  The Court concluded that “although enjoining parallel proceedings may ultimately be necessary to achieve a global resolution of this controversy, the Court declines to do so at this stage, in these unique circumstances.” Id. at *20.