Judge denies Ill. municipalities' request for a class in suit against travel websites over hotel taxes

By Andrew Thomason | Jan 14, 2015

A lawsuit filed by 14 Illinois municipalities against a group of online travel discount websites will not proceed as a class action as proposed, a federal judge held this month.

In 2013, municipalities in Cook, DuPage and Winnebago counties sued what essentially amounts to the online discount travel industry, including giants like Expedia, Orbitz, Priceline and Travelocity, over claims they are avoiding certain taxes.

The plaintiff cities and villages include Arlington Heights, Bedford Park, Burr Ridge, Des Plaines, Lombard, Oak Lawn, Oakbrook Terrace, Orland Hill, Orland Park, Rockford, Tinley Park, Schaumburg, Warrenville and Willowbrook.

The heart of the municipalities' argument is that the online travel discount companies aren’t paying the full amount of taxes owed under their hotel tax ordinances.

Each of the plaintiffs involved in the suit collect some form of tax from hotel and motel room rental, whether it’s from an individual renting a room or from an online company renting rooms wholesale.

The defendants all turn profits by being the middle man-- they purchase rooms at wholesale prices from various hotels, aggregate available rooms on their individual websites and then sell those rooms at a higher rate than wholesale.

Because the defendants are paying tax on the wholesale rate that they pay for the rooms and not on the rate they sell the rooms to consumers for, the municipalities assert they are skipping out on taxes by only paying on the wholesale rate.

Shortly after the lawsuit was removed to federal court from Cook County Circuit Court and several of the claims were dismissed, the plaintiffs filed a motion to certify a class in the suit of hundreds of other municipalities. They proposed creating four sub-classes in order to cover differences in hotel tax ordinances.

In a ruling handed down Jan. 6, U.S. District Judge Matthew F. Kennelly ruled against certifying the proposed class chiefly because of the variation between the municipalities' ordinances.

“The fact that defendants' course of conduct was the same statewide—and, therefore, the defendants may be liable to each plaintiff—does not, on its own, establish that a class action is appropriate,” Kennelly wrote.

Moreover, the judge held, the plaintiffs failed to explain how the four subclasses would address the discrepancy between ordinances. Kennelly said even within the four subclasses, ordinances vary widely between municipalities.

For example, one proposed subclass included municipalities that have a “use and privilege” tax on hotel rooms, but those ordinances differ greatly on their definitions of who is responsible for collecting the tax. T

The defendants, however, don’t actually say the ordinances present different legal standards in their request for class certification. What defendants do assert is that the court would have to review each ordinance to judge whether different legal standards exist, creating an unwieldy burden on the court.

“Plaintiffs do next to nothing to explain why this is not so ... It is plaintiffs' burden to demonstrate that the proposed subclasses are governed by materially identical legal standards, and they have failed in that regard,” Kennelly explained.

He also said the plaintiffs failed to show that there were legal issues common to the whole class. Just because the plaintiffs allegations are similar, the judge noted that it does not mean they have the same legal remedy.

Despite denying the class certification request, Kennelly highlighted a potential path in his 20-page ruling the plaintiffs might want to take to see if they can get a class certified.

“It may be that plaintiffs can resolve these problems by configuring the proposed subclasses in a different way or describing why what the Court has found appear to be ordinance-by-ordinance questions actually are not,” he wrote.

The plaintiffs municipalities are represented by a team of attorneys, including Chicago area attorneys Michael Sean Krzak and Thomas K. Prindable of Clifford Law Offices; Dominick L. Lanzito and Paul A. O'Grady of Peterson Johnson & Murray; and Thomas Justin Halleran, Richard J. Ramello and Donald J. Storino of Storino, Ramello & Durkin. Georgia attorneys Kristen L. Beightol, William Q. Bird, John W. Crongeyer and Robert K. Finnell are also on the team.

Defendants Orbitz LLC, Internetwork Publishing Corp. and Trip Network, Inc. are represented by Chicago attorneys Mark Jacob Altschul, Lisa Nicole Haidostian, Elizabeth Brooke Herrington and Jeffrey A. Rossman of McDermott, Will & Emery LLP.

Nicole C. Henning, Mark P. Rotatori and Meghan Eileen Sweeney of Jones Day in Chicago are representing defendants Egencia, Expedia, Inc., Hotels.com  and Hotwire Inc.

Site59.com and Travelocity.com are represented by Chicago attorneys Luke DeGrand and Tracey L. Wolfe of DeGrand & Wolfe, as well as Texas attorneys Derek Lee Montgomery, Brian S. Stagner and Scott Ryan Wiehle.

Priceline.com is represented by Chicago attorney Albert Lee Hogan, III of Skadden, Arps, Slate, Meagher & Flom, along with his colleague in the firm's Delaware office, Randolph K. Herndon.

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