Priceline.com Inc. v. City of Anaheim

Another contingent fee case is working its way through the California appellate courts, Priceline.com Inc. v. City of Anaheim, No. G041338 (Cal. Ct. App. Feb. 27, 2009).  The City of Anaheim hired private contingent fee counsel to enforce a transient occupancy tax against online travel companies (e.g., Priceline, Travelocity, Expedia, Hotels.com.)  Anaheim claims these internet services are proprietors or managing agents of hotels and are therefore subject to the tax.  The superior court allowed contingent fee counsel to proceed in the name of the City on the ground that the California Supreme Court’s prohibition against contingent fee counsel in People ex rel. Clancy v. Superior Court, 39 Cal. 3d 740 (1985) should apply to bar government hiring of outside contingency counsel only in the prosecution of eminent domain and nuisance abatement actions. 

On appeal, the online travel companies and their amici curiae point out that the City’s tax collection actions involve prosecutorial discretion and that the reasoning in Clancy bars private attorneys with a contingent fee interest from pursuing any such public enforcement actions in order to avoid tainting the prosecutorial decision-making process. 

The Council on State Taxation amicus brief explains that [c]ontingent-fee arrangements with third parties whom the government entrusts with the power to determine the amount of liability in tax matters – or even to determine if there is an outstanding tax liability – create an environment where there is a substantial risk of abuse.  To be sure, the fundamental responsibility of every government tax auditor is to determine the proper amount of tax liability.  By contracting with third parties who determine tax liability on a contingent-fee basis, the City of Anaheim has provided an express incentive for [  ] outside auditors to determine the highest liability rather than the proper liability. . . . Contingent-fee arrangements encourage auditors and attorneys to be overly aggressive; to interpret State laws to their own advantage rather than in society’s best interest; to “cherry pick” audit targets; and to ignore taxpayer errors that would result in lower assessments. The risk of abuse creates a perception of unfairness that colors taxpayers’ relationships with administrators and creates an atmosphere of mistrust that hinders compliance. . . . [I]f this decision stands, there will be immeasurable harm done to the trust that is involved in taxpayer voluntary compliance and administration.  That trust will be irreparably harmed if financially interested parties are allowed to participate in tax enforcement matters.

(Brief for Council on State Taxation as Amici Curiae Supporting Plaintiffs-Appellants’ Priceline.com Inc. v. City of Anaheim, No. G041338 (Cal. Ct. App. June 25, 2009), 2009 WL 2360162, at *3-*5.)

The City counters in its brief that the Clancy principle does not apply to a tax collection action: 

The liberty and property interests identified in Clancy  are simply not present in cases involving the collection of taxes, debts or other money owed to the government.  . . . In this case, private attorneys will  . . . be arguing that the [online travel services] owe the City money.  That argument is either right or wrong, and the money is either owed or it is not.  . . . The government is not seeking to regulate private property or individual liberty; the government is seeking to recover money that is claimed to be owed.  The resolution of that question does not turn on any balancing of interests. 

(Respondents’ Opening Brief, Priceline.com Inc. v. City of Anaheim, No. G041338 (Cal. Ct. App. Apr. 17, 2009), 2009 WL 1684815, at *16-*17.)

The City also argues that it is exercising sufficient control over outside contingent fee counsel to eliminate any concern.  (Whether there is a “control exception” to the Clancy rule is currently before the Supreme Court in County of Santa Clara v. Superior Court, No. S163681 (Cal. July 23, 2008.)

The online travel services counter that [t]his is not a case where the government hired someone on a contingency fee basis to collect a liquidated tax judgment or contractual debt, which might or might not implicate the duty of neutrality.  Rather, the City, through its enforcement proceedings, admittedly seeks to impose liability for its [transient occupancy tax] on Appellants’ internet services that have never before been subject to the tax, determine what tax, if any, Appellants owe, impose substantial penalties on Appellants on top of any tax and interest owed, and then pay Contingency Fee Counsel thirty percent of any recovery.  The City’s choice of label cannot change the reality that these are government enforcement proceedings that involve the exercise of sovereign power, the potential deprivation of property, and thus the balancing of public and private interests. 

(Plaintiffs-Appellants’ Reply Brief, Priceline.com Inc. v. City of Anaheim, No. G041338 (Cal. Ct. App. June 11, 2009), 2009 WL 2035152, at *5.)

And as to whether the government’s supervision or “control” of Contingency Fee Counsel is enough to fix the problem, the online travel companies have this to say:

Irrespective of whether the City Attorney retained normal or actual control, there can be no question there is a “reasonable possibility” that Contingency Fee Counsel, involved in every step of the tax enforcement process, to whom the City Attorney continuously looked to for legal advice and representation, could have influenced the outcome.

Indeed, it would be contrary to human nature to believe that the positions regarding key issues in the tax enforcement proceedings taken by Contingency Fee Counsel when advocating for adoption of their views by the City Attorney were completely unaffected by the direct, personal, substantial financial interest they have gambled on prevailing in those proceedings.  It is unreasonable and illogical to believe that Contingent Fee Counsel would not attempt to influence the City Attorney to approve the positions that maximize the potential return on their investment.

Again, the degree and nature of Contingency Fee Counsel’s involvement in this case is undisputed. . . . Contingency Fee Counsel has been intimately involved in every step of the tax proceedings, from making the determination to proceed against Appellants, to initiating the administrative enforcement process, and then conducting that process on the city’s behalf, in exchange for potentially millions of dollars if (and only if) the City prevails against Appellants.  . . .  If this level of self-interested involvement does not destroy neutrality, or can be swept under the rug by a naked assertion by the city Attorney that he maintained control, the rule of absolute neutrality will be rendered a nullity.

However closely the City Attorney monitors the activity of Contingency Fee Counsel, he cannot ensure that their personal, substantial financial interest will not impact their advice and representation or otherwise affect the outcome of the proceeding, and cannot erase the harm to the integrity of the tax enforcement and judicial systems.  . . . It is also unreasonable and illogical to believe that the City Attorney would not take into consideration the economic considerations of his longstanding co-counsel. 

(Plaintiffs-Appellants’ Reply Brief Priceline.com, Inc. v. City of Anaheim, No. G041338 (Cal. Ct. App. June 11, 2009) WL 2035152, at *34-*35.)

The online travel companies have the better argument.  However cut and dried tax collection may seem, there is always an element of prosecutorial discretion involved in deciding whom to target for tax collection (especially where, as here, there is a real question whether the tax even applies), whether to settle, and for how much.  If the profit motive of contingent fee counsel is allowed to skew these results in favor of aggressively pushing for the largest possible recovery whether or not it is warranted by a fair reading of the law, public confidence in the neutrality of prosecutorial discretion will be eroded, precisely the result that the Clancy decision is designed to prevent.  And, no amount of “control” can eliminate either the risk that the profit motive will improperly influence the exercise of prosecutorial discretion or the public perception that prosecutorial neutrality has been sacrificed to the hunt for profit.

The Priceline.com case is fully briefed and set for oral argument on October 19 in the California intermediate appellate court.