Jolly v. Intuit Inc

Background

Intuit owns TurboTax, an online tax-preparation service. Intuit and other tax-preparation companies had agreed with the Internal Revenue Service to give certain taxpayers, including the plaintiffs, an option to file taxes for free. The plaintiffs alleged that Intuit and other companies violated that arrangement by misleading eligible taxpayers toward paid services.

The plaintiffs had agreed to Intuit’s Terms of Service, which required binding arbitration for disputes relating to the services or the agreement, with an exception for qualifying small-claims cases. The agreement incorporated the American Arbitration Association’s Consumer Arbitration Rules, which authorized the arbitrator to decide questions about the arbitration agreement and whether claims could be arbitrated.

The plaintiffs filed arbitration demands asserting state consumer-fraud claims. Intuit opposed the claims on several grounds, including that they should be moved from arbitration to small-claims court. The American Arbitration Association rejected that position and began individual arbitrations. Intuit paid the initial arbitration fees under protest. Intuit then filed a lawsuit in Los Angeles Superior Court seeking declarations about whether the claims belonged in small-claims court, whether the plaintiffs were seeking a form of representative arbitration barred by the agreement, and whether California Senate Bill 707 was preempted by the Federal Arbitration Act.

The plaintiffs later amended their arbitration demands to add Sherman Act claims, alleging that Intuit harmed competition by misleading the Internal Revenue Service into staying out of the online tax-filing market and by coordinating with competitors to hide free-filing programs. They then filed this federal petition to compel arbitration.

Jurisdiction

Intuit argued that the federal court lacked subject-matter jurisdiction because the Sherman Act claims were added only to create federal jurisdiction and were frivolous. The court rejected that argument. It held that the Sherman Act claims invoked federal law, were not clearly added solely to manufacture jurisdiction, and were not wholly frivolous.

The court explained that, for jurisdiction over a petition to compel arbitration, it could examine the underlying claims and apply ordinary jurisdictional standards. The court found that the plaintiffs’ theory that tax-preparation companies agreed to hide free-filing programs plausibly alleged an unlawful price-fixing agreement. It also found that the plaintiffs’ separate theory about misleading the Internal Revenue Service was not enough to make the federal claims wholly frivolous. The court therefore held that it had subject-matter jurisdiction over the petition.

Colorado River doctrine

The court nevertheless declined to exercise that jurisdiction under the Colorado River doctrine. This doctrine permits a federal court, in exceptional circumstances, to defer to a substantially similar state-court proceeding to conserve judicial resources and avoid conflicting results.

The court found the federal and state proceedings substantially similar because they involved substantially the same parties and the same central question: whether the claims were subject to arbitration. It concluded that several factors favored deference to the state case, including the significant risk of duplicative litigation, the fact that California law supplied the most important rule for interpreting the agreement, the state court’s ability to protect the plaintiffs’ rights, the apparent forum shopping, and the state court’s ability to resolve all of the issues presented.

Other factors weighed against deference, including the greater convenience of the federal forum and the fact that the federal proceeding was more advanced. The court concluded that those considerations did not outweigh the risk of redundant proceedings and conflicting outcomes. It held that this was the unusual case in which declining jurisdiction was appropriate.

No refusal to arbitrate

In the alternative, the court held that the petition had to be dismissed because Intuit had not refused to arbitrate. A petition under Section 4 of the Federal Arbitration Act requires an alleged refusal to arbitrate.

The court concluded that Intuit’s state-court lawsuit was permitted by the arbitration agreement because it sought declaratory relief to guide the arbitration rather than a decision on the merits of the plaintiffs’ claims. Intuit had paid the arbitration fees, had not withdrawn from the arbitrations, and had complied with the American Arbitration Association’s rules and orders. The court therefore found that Intuit was still abiding by the agreement. It noted that moving the claims to small-claims court, if Intuit ultimately succeeded, would be another step in the process contemplated by the agreement.

Disposition

The court dismissed the petition to compel arbitration. It did not decide whether the plaintiffs’ claims were subject to arbitration. The opinion does not state that the dismissal was with or without prejudice.