Judge: Cities do not need to review unpaid hotel tax claims before proceeding with class action vs Expedia, online travel sites

Dana Herra Jun. 10, 2015, 9:04am

A group of Illinois cities and villages suing Expedia and other online travel companies have won the chance to move forward with a class action over taxes the municipal governments claim the travel sites owe them, as a federal judge said the cities do not necessarily need to first review the tax claims themselves before taking the matter to court.

On June 4, U.S. District Judge Matthew F. Kennelly rejected the online travel companies’ move to prevent the lawsuit from obtaining class action status.

The opinion related to a lawsuit filed by 14 Illinois municipalities against a number of online travel companies, including Hotels.com, Hotwire, Orbitz, Priceline and Travelocity, for failing to pay taxes under the cities’ municipal hotel tax ordinances.

In October 2014, the cities moved for class certification on behalf of at least 276 municipalities. The court at that time denied the motion on a number of grounds. The judge at the time had rejected the cities’ contention administrative exhaustion does not preclude class certification.

The cities, however, filed a motion to clarify, and the companies offered to waive the exhaustion defense as long as the cities make no further motions for class action.

In previous decisions, the court had not decided on the merits of the exhaustion defense, but had ordered a briefing on its viability. After reviewing arguments from both sides, Kennelly’s latest decision states the travel companies’ defense based on administrative exhaustion is not viable in this case.

The opinion says the plaintiffs had indicated their decision on whether to move again for class certification would hinge on the viability of the defense.

Under the doctrine of exhaustion remedies, parties must exhaust all administrative remedies before turning to the courts. But that definition applies only when the administrative agency has exclusive jurisdiction, which the judge’s opinion notes is not the case here. The defendants argued, even though the courts have jurisdiction in this case, exhaustion of remedies is still a viable defense, which would give their offer to waive that defense leverage in negotiations.

However, Kennelly wrote this is a misreading of case law and exhaustion does not apply in cases where the courts have jurisdiction.

“Whatever the origin of the apparent paradox, the Illinois Supreme Court has spoken clearly and consistently on the issue raised in this motion, and it has said unequivocally that exhaustion of administrative remedies is not required when the courts have concurrent jurisdiction,” the opinion says.

With that established, the court agreed with both parties that the case in question should not be turned over to the municipal tax agencies for review. The main issue in the case is not a tax question, but a question of whether the municipal tax ordinances apply to online travel agencies – a question of law best decided by the courts, the judge said.

Kennelly noted the court said only that the exhaustion doctrine does not apply to the 14 named plaintiffs. Having not reviewed the ordinances of the 276 potential class-action members, the court could not say whether it would apply to any of them.

“If the plaintiffs re-move for class certification, and defendants decide to raise exhaustion as an argument against predominance, the Court will expect defendants to identify any ordinances that they contend vest exclusive jurisdiction in the municipal tax agency,” he wrote. “Absent a showing that the exhaustion defense is viable as to some of the putative class members, it will not pose a barrier to class certification.”

The case is set for a status hearing on June 15.

More News