Byers v. Intuit, Inc.

Citation564 F.Supp.2d 385
Decision Date28 May 2008
Docket NumberCivil Action No. 07-4753.
PartiesStacie BYERS and Deborah A Seltzer, each individually and on behalf of all others similarly situated, Plaintiffs, v. INTUIT, INC. and H & R Block Digital Tax Solutions, LLC and Free File Alliance, LLC, each individually and on behalf of all others similarly situated, and the Internal Revenue Service, Defendants.
CourtUnited States District Courts. 3th Circuit. United States District Court (Eastern District of Pennsylvania)

Thomas More Marrone, Alan M. Feldman, Feldman Shepherd Wohlgelernter & Tanne, Thomas Martin, Lavin O'Neil Ricci Cedrone & Disipio, Philadelphia, PA, Kevin J. Handy, Cooley & Handy, Doylestown, PA, for Plaintiffs.

John, F. Schultz, Robert A. Particelli, Erica Cline Blackledge, Morgan Lewis & Bockius LLP, Larry R. Wood, Jr., Pepper Hamilton LLP, Richard E. Coe, Drinker Biddle & Reath LLP, Richard M. Bernstein, U.S. Attorney's Office, Philadelphia, PA, Jason A. Levine, Stephen M. Ryan, McDermott Will & Emery LLP, Michael J. Martineau, U.S. Dept. of Justice—Tax Division, Washington, DC, for Defendants.

MEMORANDUM AND ORDER

O'NEILL, District Judge.1

Before me are the motions of Defendants Intuit, Inc., the Free File Alliance, LLC, and H & R Block Digital Tax Solutions, LLC to dismiss Plaintiffs' First Amended Complaint (Documents No. 32, 33, and 34 respectively), Plaintiffs' responses thereto (Documents No. 45 and 46), and Defendants' reply briefs (Documents No. 47, 48, and 49). For the following reasons, all three motions will be granted, and Plaintiffs' First Amended Complaint will dismissed as to all Defendants except the Internal Revenue Service.

I. Background
A. Overview

Plaintiffs in this action are Stacie Byers and Deborah A. Seltzer, both of whom are citizens of Pennsylvania. First Amended Complaint ("FAC") ¶¶ 6-7. Defendants in this action are Intuit, Inc. ("Intuit"),2 H & R Block Digital Tax Solutions, LLC ("Block"),3 the Free File Alliance, LLC ("FFA"),4 and the Internal Revenue Service ("IRS"). Id. ¶¶ 8-10, 12. Like Plaintiffs, I will refer to Defendants Intuit, Block, and FFA as the "Corporate Defendants." Id. ¶ 10. According to Plaintiffs, Defendants Intuit and Block have been members of Defendant FFA at all times relevant to this lawsuit. Id. ¶ 11.

Plaintiffs assert two claims on behalf of themselves and the proposed class of taxpayers and tax preparers. First, Plaintiffs claim that all the named Defendants and the members of the defendant class have violated the Independent Offices Appropriations Act ("IOAA"), 31 U.S.C. § 9701, by charging them and the proposed class "illegal fees to electronically file (`e-file') their federal tax and information returns with the IRS through the IRS' electronic tax and information return filing program, known as `IRS e-file.'"5 FAC ¶¶ 1-2, 22, 39. Second, Plaintiffs claim that all the named Defendants except the IRS (i.e., the Corporate Defendants)6 and the defendant class have violated Section 1 of the Sherman Act, 15 U.S.C. § 1, by "illegally agree[ing] among themselves that no member of the [FFA] would individually offer free e-filing services to more than fifty percent of taxpayers, and that collectively they would not offer free e-filing services to more than seventy percent of taxpayers." Id. ¶¶ 3, 23, 40. Plaintiffs further allege that they "purchased and used" Defendants Block and Intuit's "tax return preparation software and `e-filing' services in the Commonwealth of Pennsylvania to electronically prepare and e-file [their] 2006 income tax return[s] with the IRS through the IRS's e-file service."7 Id. ¶¶ 14-15.

The significance of this lawsuit is underscored by Plaintiffs' allegations that "hundreds of millions of tax returns have been filed electronically with the IRS through the Corporate Defendants," id. ¶ 20, and that "the Corporate Defendants have illegally charged and/or overcharged Plaintiffs, taxpayers, and tax preparers hundreds of millions, if not billions of dollars to file such returns." Id.

B. The Creation of the IRS's Free File Program

In the Internal Revenue Restructuring and Reform Act of 1998 ("RRA"), Congress set a policy goal of encouraging the electronic filing of federal tax and information returns with Defendant IRS. Specifically, § 2001(a) of the RRA declared that:

(a) In general.—It is the policy of Congress that—

(1) paperless filing should be the preferred and most convenient means of filing Federal tax and information returns;

(2) it should be the goal of the Internal Revenue Service to have at least 80 percent of all such returns filed electronically by the year 2007; and

(3) the Internal Revenue Service should cooperate with and encourage the private sector by encouraging competition to increase electronic filing of such returns.

Pub.L. No. 105-206, Title II, 112 Stat. 723 (1998); accord 26 U.S.C. § 6011(f) (2008). Motivated in part by this policy, Defendant IRS in August 2002 published notice in the Federal Register of its intent to "enter into an agreement (the Agreement) with a consortium of companies in the electronic tax preparation and filing industry (the Consortium) who together desire to work together to offer free, online tax return preparation and filing services to taxpayers (Free Services)."8 67 Fed.Reg. 51621 (Aug. 8, 2002). After comments were received, Defendant IRS, in accordance with this notice and with the requirements of the Administrative Procedures Act ("APA,"), entered into an agreement on October 30, 2002 with the "Consortium"i.e., Defendant FFA—which is described in the agreement as "a non-profit corporation (under the provisions of 26 U.S.C. § 501 (c)(3)) formed under the auspices of, and affiliated with, the Council for Electronic Revenue Communication Advancement."9 FAC, Exhibit A, at 1 (2002 Free On-Line Electronic Tax Filing Agreement); see also 67 Fed.Reg. 67247 (Nov. 4, 2002).

The 2002 Agreement between Defendants FFA and the IRS lasted for three years. See FAC, Exhibit A, art. VILA ("This Agreement has an initial term of three years from its effective date with automatic options to renew for successive two year periods."); see also 67 Fed.Reg. 67247, 67250. On October 30, 2005, Defendants FFA and the IRS renewed this" agreement for an additional four years, subject to certain changes and additional conditions.10 See FAC, Exhibit B (2005 Free On-Line Electronic Tax Filing Agreement Amendment).

C. What the Free File Alliance Does

Although the agreements governing the relationship between Defendants, FFA and the IRS are quite detailed, they have been summarized succinctly as follows:11 To accomplish the above objectives, the IRS and the [FFA] (together, "the Parties") will work together to offer free, on-line tax return preparation and filing services to taxpayers ("Free Services"). The [FFA] will offer Free Services to taxpayers. The IRS will provide taxpayers with links to the Free Services offered by the [FFA] Participants through a web page ..., which will be hosted at irs.gov accessible through firstgov.gov. During the term of this Agreement, the IRS will not compete with the FFA in providing free, online tax return preparation and filing services to taxpayers.

This Agreement is the best method for meeting the above stated objectives because it will promote higher quality Free Services by utilizing the existing expertise of the private sector, maximize consumer choice, promote competition for such Free Services, and thereby meet the objectives in the least costly manner.

FAC, Exhibit A, art. II.

Under the 2002 Agreement, Defendant FFA committed to offering free online federal tax return preparation and filing services to at least 60% of taxpayers during the primary "tax filing season. Id. at arts. III.A and IV.C. Under the 2005 Agreement, that percentage was increased to and capped at 70%, and Defendants FFA and the IRS further "agree[d] that to serve the greater good and to ensure the long-term stability of the Alliance, the scope of this program is focused on covering the taxpayers least able to afford e-filing their returns on their own."12 FAC, Exhibit B, arts. I.B and I.C. Defendants FFA and the IRS therefore agreed that the "IRS will utilize the then current Adjusted Gross Income (AGI) number which equates to 70% of the taxpayers to manage the program." Id. at art. I.E. As of December 19, 2007, this AGI number was $54,000. See Defendant FFA's Motion, Exhibit 3 ("Free File is only available to taxpayers who have a 2007 Adjusted Gross Income (AGI) of $54,000 or less..... If your Adjusted Gross Income (AGI) exceeds $54,000, ... you may continue completing your return, but you will be charged a fee for preparation.") (emphasis in original).

Interestingly, the 2002 Agreement required each FFA member to offer free online federal tax return preparation and filing services to 10% of taxpayers, but did not set an upper limit on the percentage of taxpayers who could be offered free services. See FAC, Exhibit A, art. III.B.2. The 2005 Agreement also provides that "[e]ach Alliance member must provide a minimum of 10% coverage," but adds that "[n]o individual Alliance member offer can cover more than 50 percent of total taxpayers ..., and this taxpayer population must be within the total aggregate coverage scope of 70%." FAC, Exhibit B, arts. LA and I.D. The upshot is that under the 2005 Agreement no FFA member is permitted to offer free services to more than 71.4% (i.e., five-sevenths) of the taxpayers whose AGI is less than $54,000.

D. Plaintiff's Claims
1. General Allegations

According to Plaintiffs, "taxpayers and tax preparers who electronically prepare and file federal tax and information returns through the IRS' e-file program are required to file those returns through private companies, including members of the [FFA], instead of directly with the IRS." FAC ¶ 16. In addition, "the IRS provides substantial incentives to taxpayers who file their returns electronically,...

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