JTH, doing business as Liberty Tax Service, unsuccessfully appealed from a large judgment against it, awarding the people of the state of California about $1.169 million in civil penalties, ordering Liberty to pay roughly $135,000 in restitution, and permanently enjoining Liberty in several ways for violating state and federal lending, unfair competition, consumer protection, and false advertising laws. I won’t discuss the federal Truth In Lending Act claims.
Liberty provides tax preparation and related loan services (refund anticipation loans and “electronic refund checks”), with 195 franchised stores in California, and two company-owned stores during part of the relevant period, all doing business as Liberty Tax Service. The AG’s lawsuit claimed that Liberty and its franchisees made misleading or deceptive statements in ads, and also had inadequate disclosures on Liberty’s RAL and ERC applications about various costs/risks to consumers. Liberty made a lot of money from RALs and ERCs, including in California; it got percentages or flat fees from the banks with which it worked, and RALs and ERCs also cross-subsidized its tax preparation services, which was important because many of its customers couldn’t afford to pay for them out of pocket.
The trial court found that Liberty’s handling fee charged to ERC customers was an undisclosed finance charge in violation of TILA (since an ERC was a form of credit allowing delayed payment for tax preparation services), and that the failure to disclose this also violated the UCL and FAL. Second, the trial court found that using “cross-collection” to collect tax refund loan debts from prior transactions, including non-Liberty transactions, was deceptive, unfair, and illegal. (This could occur when consumers’ prior RALs were larger than the refunds they ultimately received; because a RAL was a loan, they remained potentially liable on the debt.) Third, the trial court found that certain print and TV ads were likely to deceive within the meaning of the UCL and FAL; Liberty was liable for its own ads and those placed by California franchisees. Among other things, Liberty was enjoined from directly or indirectly representing a RAL as an actual refund, and from failing to state conspicuously that the product is a loan and including the name of the lending institution and the fee or interest it will charge.
The court of appeals upheld the determination that Liberty’s cross-collection practices violated multiple state laws along with the federal Fair Debt Collection Practices Act (FDCPA). Liberty waived its arguments about the fraudulent and unfair prongs of the UCL and about the FAL, so the court didn’t need to reach other bases for liability. Liberty was responsible for bringing customers to the banks, soliciting loan applications and getting consumers to sign applications that authorized cross-collection. These authorizations covered any unpaid RAL debts, whether owed to Liberty or to anyone else, and whether the debt was stale or otherwise uncollectable. The trial court found that both unsophisticated and reasonable consumers were unlikely to recall the details of such debts, particularly those “incurred far in the past and perhaps in connection with a loan issued by a different lender and/or obtained through a different tax preparer.” Consumers had no meaningful notice of whether there was a claim against them before they authorized the cross-collection; they thus lost the right to dispute the debt, and thus the practice was deceptive, unfair, and in violation of the FDCPA. The cross-collection authorization “appeared on the second or third pages of lengthy and complex contracts that on their face had nothing to do with debt collection, making it unlikely that applicants would read and understand the significance of the information.”
The trial court found that Liberty had wrongly attempted to collect an extant debt as to 118 customers from 2002 to 2005 and imposed $118,000 in civil penalties under the UCL and FAL, given that the violations were serious, persistent, and long-standing. Even if Liberty’s construction of the state and federal FDCPA and the CLRA were correct and its conduct was not “unlawful,” it didn’t address the trial court’s finding that Liberty’s practices were fraudulent and unfair.
Liberty also challenged its liability for franchisee advertising. The district court explained that a franchisee can be a franchisor’s agent, depending on the extent of the franchisor’s control. Franchisors face “the Scylla of failing to exercise sufficient control to protect their marks, and the Charybdis of exercising so much control they are vicariously liable for the torts of the franchisees or other licensees.” (It’s not clear to me why this is Scylla and Charybdis: in seeking the benefits of franchising, franchisors of course don’t want to be responsible for their franchisees’ bad behavior, but why should the legal system honor that desire while still deeming them in total control of their marks?) Anyway, the trial court determined that its agency inquiry had to focus on “the extent to which the control reserved to the franchisor plainly exceeds that required to police the mark, which is control so pervasive that it amounts to complete or substantial control over the daily activities of the franchisee's business.”
This was the right standard. Though a couple of other cases have said that “vicarious liability” isn’t available in an action for unfair business practices, the key case with that language involved only “reverse vicarious liability,” meaning that “officers and directors are not automatically (vicariously) liable for the acts of the company that employs them.”
The trial court pointed to Liberty’s operations manual, which showed a right of control far in excess of that needed to police the mark:
Liberty required franchisees to offer RAL's and ERC's via banks mandated by Liberty; prohibited franchisees from offering products and services without Liberty's permission; mandated franchisees' minimum operating hours, computers to be used, and day-to-day tasks such as how to open the store and when to clean the bathrooms; reserved the right to intervene in disputes with customers, including the right to pay refunds directly to customers and bill the franchisees for them; required franchisees to commit to maintaining Liberty's prescribed filing system and the setup for the tax return processing center; and controlled franchisee pricing by controlling the discounts franchisees could offer at different times of the year.
The trial court also emphasized Liberty's “particularly extensive” right of control over franchisee advertising, which Liberty used to not only protect its marks, “but also to dictate business strategy to franchisees.” For example, it controlled discounts because of its beliefs about customers’ price sensitivity over time, and barred certain advertising as “a waste of time and money.” The operation manuals provided detailed advertising instructions divided by time of year; mandated extensive pre-approval; and provided samples. Liberty was “literally providing a detailed, step-by-step guide for every aspect of marketing and advertising.” Further, Liberty retained an open-ended right to modify the manual without franchisees’ consent; its essentially complete control over operations, specifically over advertising, exceeded that reasonably necessary to protect the mark. Thus, at least for purposes of advertising, Liberty’s franchisees were its agents.
As a result, Liberty was responsible for more than 100 illegal ads by Liberty franchisees, including 43 ads that falsely promised “most refunds in one day” or a variation on that theme, including four specifically approved by Liberty, and 67 ads that unlawfully omitted mandatory bank name and lender fee disclosures.
The court of appeals approved the trial court’s reasoning. Liberty argued that it didn’t exercise day-to-day operational control and that franchisees were solely responsible for training, hiring, firing, and supervising their employees; outfitting their offices; complying with all laws; and choosing how many offices to operate. They also had discretion to select among marketing methods, design ads subject to Liberty’s approval, and pick a marketing budget. This wasn’t enough to save Liberty under California law; it wasn’t essential that the right of control be exercised or that the principal actually supervise the agent’s work. The existence of the right established the agency relationship.
It was true that the franchisor-franchisee relationship allows certain controls to protect the franchisor’s marks and goodwill without transforming the relationship into one of agency. But it was also true that the franchisor’s “unique interests” don’t remove agency liability “if the franchisor exercises a right of control that goes beyond its interests in its marks and goodwill.” This was a question of fact, and the trial court articulated the correct standard. Since there was substantial evidence to support its findings, they would not be disturbed.
Liberty required preapproval of all ads, which it used not just to protect its marks and goodwill but also to control business strategies and tactics; there was evidence that it rejected certain ads for being inconsistent with its pricing strategies. The trial court specifically found that Liberty controlled RAL- and ERC-related ads and disclosures. Rejecting ads because it was “good for business,” as Liberty argued, wasn’t coextensive with “protecting the goodwill in its mark.” The court of appeals wouldn’t reweigh the trial court’s conclusions.
In another case, the California Supreme Court suggested in dicta that a Ford dealer might not be responsible for a salesperson’s false statement if it showed that “it made every effort to discourage misrepresentations; had no knowledge of salespeople's misleading statements; and, when so informed, refused to accept the benefits of any sales based on misrepresentations and took action to prevent a reoccurrence.” Liberty argued that it qualified for this “exception,” but the discussion in the Ford case indicated that this was a question of fact for the trial court, and the undisputed facts did not show that Liberty made “every effort” to discourage misrepresentations.
Though its manual prohibited use in any advertising of the phrases “instant refund” or “refunds in 24 hours,” the evidence indicated that Liberty became aware of the unapproved ads “sort [of] by happenstance” and didn’t then put a system in place to monitor them, for example by checking Pennysaver, the publication where the unapproved ads were showing up. There was evidence that it let the problem slide for 2 years, while dozens of ads began appearing in Pennysaver that improperly promised such things as “Most Refunds in One Day,” “Get $1200 in Minutes ... And the Rest of Your Tax Refund in 24 Hours,” “Most Refunds in 24 Hours” and “Got W–2? 24 Hour Refunds.” After an early low-level contact with Pennysaver failed, Liberty didn’t reach out to a senior executive until six months after the AG found the illegal ads and two months before trial. Liberty argued that it took reasonable steps, but that wasn’t what the Ford exception would require, which was “every effort.”
The court of appeals then affirmed the civil penalties under the UCL and FAL. The penalty for each violation can’t exceed $2500 (though the UCL and FAL penalties are cumulative), but what counts as a “violation” depends on the facts and circumstances. The trial court’s ruling on this is reviewed for abuse of discretion. Each copy of a newspaper shouldn’t count as a “violation,” because that could easily lead to outsize liabilities. But a single edition of a newspaper isn’t necessarily, as a matter of law, a single violation either. Instead, a single publication constitutes a minimum of one violation, with as many additional violations “as there are persons who read the advertisement or who responded to the advertisement by purchasing the advertised product or service or by making inquiries concerning such product or service.” This is reasonably related to the gain or opportunity achieved by disseminating a deceptive ad. Expert testimony and circumstantial evidence could provide the necessary proof. Other factors bearing on the determination include whether the misrepresentations were intentional or negligent, the medium’s circulation, the nature and extent of public injury, and the advertiser’s size and wealth.
Liberty argued that the trial court imposed excessive penalties based only on gross circulation for print publications and Nielsen ratings for TV shows. However, the People’s expert provided a reasonable basis for calculating how many people actually saw the ads, and even for showing that viewers saw the deceptive ads multiple times; the district court didn’t impose penalties for multiple viewings. Given that the ads aired 1829 times, the maximum penalty could have been over $9 million; $715,344 was reasonable. Anyway, Liberty’s arguments would essentially require proof of each individual who saw an illegal TV ad, which would defeat the purpose of the civil penalty.
The court reasoned similarly with respect to penalties imposed for Pennysaver ads mailed to homes. The trial court didn’t rely on gross circulation figures, but used a fraction of circulation as a proxy—here .0088 for Liberty-approved Pennysaver ads, and .0044 for ads for which Liberty was vicariously liable. The resulting figure of nearly $1 million was then reduced to $50,000 because the initial calculation was grossly disproportionate to Liberty’s role and the harm inflicted. Still, there was circumstantial evidence to support this penalty. Liberty’s marketing department and its franchisees considered Pennysaver to be particularly effective at reaching its target audience, and many of the illegal ads appeared on the front cover, increasing the chances they’d be read. And Liberty didn’t provide a better means of calculation.
The court of appeals also upheld the injunctive relief ordered by the trial court, which was designed to “address Liberty's failures not only to educate its own internal staff on the legalities of advertising, but its failure in controlling its franchises.” Liberty was required to discipline employees with escalating sanctions for violating the requirements, as well as to give franchisees written warnings and order them to pay $15,000 fines to the AG for a second violation, then terminate them for a third. It was further required to audit at least 10 California franchisees each year, monitor Pennysavers to make sure franchisees are complying with the law, and notify California franchisees during tax season reminding them of their obligations.
A court has the power to order “necessary” relief, and its discretion is broad; the court of appeals found no abuse of that discretion here. Liberty argued that a franchisee that inadvertently violated the law once by using an insufficiently conspicuous disclaimer, and then did so again 15 years later, could be required to pay the fine. The court was unimpressed by this speculation. Liberty also argued that it didn’t have the contractual right to fine franchisees (and that the fine was six times the penalty available for a single violation of the UCL or FAL).
But the trial court found that the violations were serious and persistent. Liberty didn’t devote enough resources to monitoring franchisee ads, even though it knew it had a problem with unapproved and illegal ads in Pennysaver in particular. As to one illegal TV ad, Liberty’s chief marketing officer testified that she’d still approve it for use in California. An injunction was needed to address Liberty’s failure to educate its internal staff and its failure in controlling franchisees.
Liberty complained about the permanence of the injunction, but the court maintained jurisdiction. Liberty could apply for modification or termination as appropriate.
Then, Liberty argued that the injunction didn’t give reasonable notice of what conduct was prohibited because Liberty would have to draw legal conclusions about whether a franchisee’s ad disclaimer was “conspicuous.” But conspicuousness is a requirement that provides sufficient notice, and a more specific order wouldn’t be feasible, since conspicuousness can vary with an ad’s size, color, placement, and design.