City of Goodlettsville v. Priceline.com, Inc.

• Decision Date: 21 February 2012
• Docket Number: Case No. 3:08–cv–00561.
• Citation: 844 F.Supp.2d 897
• Parties: The CITY OF GOODLETTSVILLE, TENNESSEE, on behalf of themselves and all similarly situated taxing authorities within the State of Tennessee, Plaintiff, v. PRICELINE.COM, INC.; Lowest Fare.Com, Inc.; Travelweb, LLC; Travelocity.Com, Inc.; Travelocity.Com, LP; Site 59.COM, LLC; Expedia, Inc.; Hotels.Com, LP Hotwire, Inc.; Travelnow.Com, Inc. Trip Network, Inc. (d/b/a Cheaptickets, Inc.); and Orbitz, LLC, Defendants.
• Court: U.S. District Court — Middle District of Tennessee

844 F.Supp.2d 897

The CITY OF GOODLETTSVILLE, TENNESSEE, on behalf of themselves and all similarly situated taxing authorities within the State of Tennessee, Plaintiff,

v.PRICELINE.COM, INC.; Lowest Fare.Com, Inc.; Travelweb, LLC; Travelocity.Com, Inc.; Travelocity.Com, LP; Site 59.COM, LLC; Expedia, Inc.; Hotels.Com, LP Hotwire, Inc.; Travelnow.Com, Inc. Trip Network, Inc. (d/b/a Cheaptickets, Inc.); and Orbitz, LLC, Defendants.

Case No. 3:08–cv–00561.

United States District Court,

M.D. Tennessee,

Nashville Division.

Feb. 21, 2012.

Andrew M. Volk, Christopher A. O'Hara, Karl P. Barth, Steve W. Berman, Nicholas J. Styant–Browne, Hagens, Berman, Sobol, Shapiro, LLP, Seattle, WA, Christopher Lovell, Jody Krisiloff, Lovell, Stewart & Halebian, LLP, New York, NY, James Todd Moore, Thomas Holland McKinnie, Jr., Franklin, TN, Paul M. Weiss, Freed & Weiss, LLC, Chicago, IL, Richard Burke, Richard J. Burke LLC, St. Louis, MO, Elizabeth A. Sanders, Keli J. Oliver, Metropolitan Legal Department, Nashville, TN, for Plaintiff.

Celso M. Gonzalez–Falla, Jr., Skadden, Arps, Slate, Meagher & Flom, Houston, TX, Darrel J. Hieber, Skadden, Arps, Slate, Meagher & Flom, LLP, Los Angeles, CA, Karen Lynn Valihura, Randolph K. Herndon, Skadden, Arps, Slate, Meagher & Flom, LLP, Wilmington, DE, James M. Doran, Jr., Waller, Lansden, Dortch & Davis, Nashville, TN, Brian S. Stagner, Scott Wiehle, Kelly, Hart & Hallman, Fort Worth, TX, Deborah S. Sloan, James P. Karen, Tamara Marinkovic, Jones Day, Dallas, TX, Elizabeth Brooke Herrington, Lazar Pol Raynal, Stephanie Lynn Poulos, McDermott, Will & Emery, Chicago, IL, for Defendants.

MEMORANDUM

ALETA A. TRAUGER, District Judge.

In this class action for which the City of Goodlettsville, Tennessee (“City”), serves as the party plaintiff, the parties have filed cross-motions for summary judgment. The defendants filed a joint Motion for Summary Judgment (Docket No. 299), which the City opposed (Docket No. 347), and the defendants filed a joint Reply (Docket No. 366). The City also filed a Motion for Summary Judgment (Docket No. 302), which the defendants jointly opposed (Docket No. 351), and the City filed a Reply (Docket No. 369). For the reasons stated herein, the defendants' Motion for Summary Judgment will be granted and the City's Motion for Summary Judgment will be denied.

BACKGROUND

I. Procedural History

The City and the other class members are political subdivisions of the state of Tennessee. The defendants (“Defendants”), which include Priceline.com, Inc., Travelocity.com, L.P., Expedia, Inc., and Orbitz Worldwide, Inc., as well as certain subsidiaries and corporate siblings of these entities, all do business as online travel companies (“OTCs”).

On June 2, 2008, the City filed a class action Complaint,¹ broadly alleging that the Defendants had failed to remit hotel occupancy taxes to the City and other local taxing authorities. (Docket No. 1.) The Complaint asserted claims for violation of the Goodlettsville City Code, unjust enrichment, and conversion. ( Id.) The Defendants then filed a Motion to Dismiss, which the court denied. City of Goodlettsville, Tenn. v. Priceline.com, Inc., 605 F.Supp.2d 982 (M.D.Tenn.2009). Thereafter, the court granted the City's motion for class certification. City of Goodlettsville, Tenn. v. Priceline.com, Inc., No. 3:08–CV–0561, 2011 WL 1595847 (M.D.Tenn. Apr. 27, 2011).² The City then voluntarily dismissed with prejudice the claims for unjust enrichment and conversion. (Docket No. 290.) The City now seeks damages on behalf of itself and the class members only for alleged hotel occupancy tax code violations. The parties have submitted various legal and factual materials in support of their positions.³

II. Factual Background(A) The Merchant Model

OTCs generally offer services to hotels ⁴ under one of two different business models: the “Agency Model” and the “Merchant Model.” Under the Agency Model, an OTC functions as a hotel's agent, facilitating consumer bookings at the hotel, charging a service fee to the hotel and, sometimes, charging a service fee to the consumer as well. In this model, the hotel sets the price of the room paid by the consumer, the hotel is listed as the merchant of record on the transaction with the consumer, and the hotel is paid the full consideration for the room reservation by the consumer directly.

By contrast, under the “Merchant Model,” which is the subject of this lawsuit, an OTC contracts with a hotel to pay a contractually agreed upon room rate to the hotel—a wholesale rate or “net rate”—for each room that customers ultimately book through the OTC. Contractually, the OTC is permitted to include information about the hotel on its website (positive or negative) and to allow consumers to reserve rooms through the website. The OTC does not purchase or take title to any rooms, nor is any payment made to the hotel before a booking is made. Thus, the OTC has neither possession nor control of the hotel rooms before a reservation is made.⁵ However, once a reservation is made through an OTC's website for a particular hotel, the hotel must honor that reservation. The City concedes that, even after a booking is made, the OTC does not have possession of the room, although it disputes whether the OTC exercises “control” over the room after the booking. The OTCs do not suffer any penalties for failing to book rooms.

The contracts between OTCs and hotels typically provide the hotel some discretion to change both the discounted rate it charges the OTC for any bookings and the number of reservations it will allow the OTC to book for a given night. However, this discretion is often subject to special limitations, such as a “base allocation” ( e.g., 10 rooms per night minimum must be available for the OTC to book during a specified period), a “most favored nation” provision (if any company is selling rooms on behalf of the hotel, the OTC must be afforded the same right), and “last room availability” (any unbooked rooms must be made available for booking under certain circumstances). Furthermore, the contracts often provide for a minimum markup margin to the OTC relative to the hotel's published rates. For example, a contract might provide that the net rate for a Merchant Model booking must be no more than X% below the hotel's published rates for that day, thereby affording the OTC the ability to make at least that X% differential on any bookings at a rate equivalent to the hotel's published rates.⁶ Some contracts also provide that the OTC may not “undercut” a hotel's public rates.

The OTC markets the hotel's rooms on the OTC's website. The OTC sets the (higher) retail rate for the room by adding its markup to the discounted rate. Unless the contract with the hotel provides otherwise, the OTC may set the retail rate at its discretion. In any case, the built-in markup that an OTC adds to the net rate provides its profit margin on each Merchant Model transaction.

Once a consumer has identified a hotel room on an OTC's website that the consumer intends to book, the consumer typically is presented with three line items: the room price, a combined charge for “taxes and service fees” (or roughly equivalent language), and the combined total price. The “taxes and fees” line item reflects a combination of (1) taxes assessed on the undisclosed net rate and (2) an embedded “service fee” that accrues to the OTC, which essentially constitutes a portion of the markup. The OTCs combine the service fee and taxes into one line item to preserve the opacity of the markup and the underlying net rate.⁷

To make a reservation, the consumer must accept the OTC's terms and conditions, which include a cancellation policy that typically incorporates the underlying hotel's cancellation policies and, in some instances, may add additional cancellation provisions specific to the OTC. If the consumer accepts the reservation subject to these terms and conditions, the OTC charges the consumer's credit card. Once the room is booked, the hotel is obligated to honor the consumer's booking. The OTCs provide a room confirmation and room receipt to the consumer. The consumer does not receive a rental receipt from the hotel prior to checking in. The consumer does not need to pay any additional amount to the hotel for the right to stay at the hotel. If the consumer wishes to cancel the reservation, the consumer typically must contact the OTC in the first instance.

When the consumer arrives at the hotel, the hotel chooses which specific room to assign that consumer, arranges for payment of any incidentals, and provides room access. Around the time of check-in or soon after, the hotel then invoices the OTC for the consumer's stay. That invoice typically includes line items for (1) the net rate for the booking; and (2) the applicable hotel occupancy taxes assessed relative to that net rate. Then, pursuant to its agreement with the hotel, the OTC remits payment to the hotel for the total of both of these charges. The hotel then remits the occupancy tax revenue (assessed against the net rate that it received for the booking) to the taxing authority. Ultimately, the OTC retains the full value of its markup—effectively, the retail rate less the discounted rate—which is not taxed. This mode of business is referred to as the “Merchant Model” because the OTC—not the hotel—serves as the merchant of record in the transaction with the consumer.

To illustrate the mechanics of these transactions with numbers, assume that an OTC agrees with a hotel on a net rate per room of $100 and that the applicable local hotel occupancy tax is 3%, as it is under the Tax Ordinance at issue here. If the OTC markets the room for a retail rate of $150 ( i.e., builds in a $50 markup for its services) and the consumer accepts that rate, the OTC would bill the consumer for $150 plus 3% of $100—the underlying net rate—or $3.00, for a total of $153.00. When the hotel later invoices the OTC on or about the...