The Attorney General brought a lawsuit against an income tax preparation business alleging violations of state and federal lending, consumer protection, unfair competition, and false advertising laws. The court of appeal upheld the trial court’s judgment finding that the tax preparation business unlawfully failed to disclose a finance charge, violated debt collections laws when it collected tax refund loan debts from prior transactions, and used deceptive print and television advertisements. (The People v. JTH Tax, Inc. (--- Cal.Rptr.3d ----, Cal.App. 1 Dist., January 17, 2013).
JTH Tax, Inc., which does business as Liberty Tax Service (“Liberty”), is a Delaware corporation that is headquartered in Virginia Beach, Virginia. Liberty has more than 2,000 company-owned stores and franchises throughout the United States, including over 190 stores in California. The stores do business as “Liberty Tax Service” and offer tax preparation services, e-filing services for tax returns, “refund anticipation loans” (“RAL”) and “electronic refund checks” (“ERC”).
California’s Attorney General filed a lawsuit against Liberty in February 2007 alleging that Liberty had violated several laws including California’s unfair competition law (“UCL”), Business and Professions Code section 17200 et seq., and the false advertising law (“FAL”). The Attorney General also claimed that Liberty and its franchisees were responsible for misleading or deceptive statements in print and television advertising about the RALs and ERCs and inadequate disclosures regarding debt collection practices, costs and interests on the extension of credit, the time it takes to receive refunds and loans, and other matters.
The trial court found that the RALs provided by Liberty were short-term loans from lender banks with which Liberty contracted. However, it was primarily Liberty instead of the banks that advertised and promoted the RALs, offered the loans to Liberty customers, provided those customers with loan applications that consisted of multiple pages that were filled out by Liberty employees, who obtained the customers’ signatures on the applications. Liberty then delivered the applications to the banks and ultimately distributed the proceeds of the loans to most customers. If an application was approved, the banks usually disbursed an RAL in one or two days. The RAL was secured by the borrower’s anticipated tax refund.
The amount of the loan was based on the borrower’s anticipated refund, minus charges and fees including a finance charge, preparation fees, and a “handling fee,” which was “charged for the lender bank’s establishment of a temporary, special purpose account into which the customer’s tax refund was deposited directly by the Internal Revenue Service (IRS).” The loan was repaid to the bank out of the special purpose account. The borrower was responsible for repaying the full amount of the loan, no matter how much money was deposited from the refund into the account. In the case of an ERC application, the bank also set up a temporary, special purpose account for a customer’s tax refund and when the IRS deposited the tax refund into this account, the bank would deduct the tax return preparation fees, along with the handling fee, and other applicable charges, and then pay any remainder to the customer.
Liberty benefits not only from a flat fee provided from the banks that made the loans, but also from the fact the RALs and ERCs made Liberty’s tax services more affordable to lower-income customers who could not afford to pay out of pocket for tax preparation. Liberty focused on the loans programs in its marketing efforts as a way to attract customers with promises of speedy cash.
The trial court found the $24 to $30.95 handling fee charged to ERC customers was an undisclosed finance charge in violation of the federal Truth in Lending Act (“TILA”) “because an ERC was a form of credit that allowed customers to delay payment for tax preparation services.” The court concluded the failure to disclose the finance charge also violated California’s UCL and FAL and “ordered Liberty to pay $240,500 in civil penalties, disclose any fee incident to the extension of credit as a finance charge, and state the cost of such fees as an annual percentage rate.” The trial court also found that Liberty’s use of “cross-collection” practices when it sold RALs and ERCs “to collect applicants’ tax refund loan debts from prior transactions, including non-Liberty transactions, were deceptive, unfair, and violated both federal and state laws.” The court imposed civil penalties on Liberty in the amount of $118,000 for cross-collection practices, ordered it to pay $135,886 in restitution, and permanently enjoined Liberty from engaging in certain practices.
The trial court also found Liberty liable for print and television advertisements that were “likely to deceive” within the meaning of the UCL and FAL. The court found Liberty liable for advertisements Liberty created or approved and also those placed by California franchisees because, the franchisees were acting as Liberty’s agents when they placed the advertisements. The trial court permanently enjoined Liberty from certain practices in advertising. The court also required Liberty to monitor its employees and franchisees to ensure they were not engaged in false advertising and “to warn, then fine, and then terminate those who commit violations, and to promptly notify the Attorney General’s office of violations.”
The appellate court held the handling fee for the ERC was a finance charge that violates TILA. Under TILA, a finance charge is defined as “the cost of consumer credit as a dollar amount” and “includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.” A finance charge “does not include any charge of a type payable in a comparable cash transaction.” Liberty asserted that even if the handling fee for the ERC is a finance charge, it is exempt from TILA because “it is also payable in a comparable cash transaction.” The court of appeal held the trial court properly rejected this argument because virtually all of Liberty’s ERC business was credit sales. Of the 60,125 ERC transactions with customers from 2002 to 2007, only four of those customers paid Liberty in cash.
The trial court found that Liberty’s “cross-collection” practices violated state and federal law. The applications for RALs and ERCs authorized collections for prior RAL debts. Once RAL and ERC applications were submitted, Liberty processed the applications through a system that contains a cross-collection file compiled by Liberty, which contained a list of customers who allegedly owed prior RAL debt, whether to the bank from which the Liberty customer was to obtain the loan or other banks. Liberty also assisted the bank by mailing debt validation notices to RAL customers who were denied a loan because they owed a prior RAL debt. Liberty’s contract with the bank provided that is would receive 65 percent of all debts collected from Liberty’s California customers. The court of appeal affirmed the trial court’s decision on the “cross-collection” practices.
The court of appeal also affirmed the trial court’s decision that Liberty could be held liable for the actions of its California franchisees. A franchisee “operates a business ‘under a marketing plan or system prescribed in substantial part by a franchisor,’ which operation ‘is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor.” Because of a franchisor’s interest in the reputation of its marketing, “it may exercise a right of control over such activities as advertising to protect its marks and goodwill.” This unique interest of the franchisor does “not eliminate or alter the application of agency theory if the franchisor exercises a right of control that goes beyond its interests in its marks and goodwill.”
The court of appeal noted that Liberty exercised control over the offering and marketing of products and services in a variety of ways. For example, a franchisee could not offer any services or products unless it first obtained Liberty’s written consent. Liberty controlled the prices a franchisee could charge a customer, set standards for the number of free returns a franchisee could do each year, and controlled the discounts that franchisees could offer depending on the time of the year. Liberty required franchisees to submit all advertising to Liberty for approval. Liberty required approval of advertising “not only to protect its marks and goodwill, but also to control the business strategies and tactics of its franchisees.” Liberty controlled all of the advertising and the disclosures made to the customers by franchisees regarding RALs and ERCs. The court of appeal found no error in the trial court’s conclusion that even if the franchisees were not agents for all purposes, they are Liberty’s “agents at a minimum for purposes of advertising.”
The trial court imposed $774,399 in civil penalties on Liberty for illegal advertising pursuant to the UCL and FAL. Pursuant to section 17206 of the UCL, “any person who has engaged in unfair competition is liable for a civil penalty not to exceed $2,500 for each violation.” Pursuant to section 17536, “any person who violates any provision of the FAL is also liable for a civil penalty not to exceed $2,500 for each violation.”
The court of appeal held that Liberty failed to show that the trial court erred in determining the number of violations for which Liberty was liable based on the viewership and readership of print and television advertisements. The court of appeal affirmed the decisions of the trial court regarding injunctive relief, including its order for Liberty to discipline its employees and franchisees if they engage in false advertising.