This is a tale of two cities. It is also a tale of how an apparent $84 million lawsuit victory by the City of San Antonio and more than 170 other Texas cities turned into a judgment of more than $2 million against San Antonio alone.
It began three mayors and more than 13 years ago when a Dallas attorney and former state legislator named Steve Wolens became San Antonio’s attorney as the lead plaintiff in a class action lawsuit aimed at online travel companies such Travelocity, Orbitz, and hotels.com.
Now San Antonio taxpayers may wish Wolens had talked his wife, then-Dallas Mayor Laura Miller, into making that city the lead plaintiff instead.
The lawsuit itself was not terribly complicated. The question was whether these online travel companies should pay the cities’ hotel-motel taxes on the full amount they were charging their customers. Instead, the tax was being paid only on the discounted room rates that the hotels were offering through Travelocity and the other online companies. It was not applied to the portion that covered the costs and profits of the online companies.
As simple as the question seems, Wolens and his team of lawyers conducted 95 depositions and amassed a mountain of documents before mounting a month-long trial in 2009 in front of U.S. District Judge Orlando Garcia of San Antonio. The jury heard 38 witnesses and were shown 150 exhibits. By the time the dust settled, the appellate record was more than 50,000 pages.
What the cities had in common was that, according to the record, they all had ordinances that include language “that requires every person owning, operating, managing, or controlling any hotel to collect and remit hotel occupancy taxes.’’ Since the online companies clearly don’t own, operate, or manage the hotels, the key question Garcia put before the jury was whether the online companies “control” the hotels.
If you thought the answer would be no, that the hotels voluntarily used the online companies but were not controlled by them, you would be wrong. The jury unanimously found otherwise. I asked Wolens why he thought they reached that conclusion. He said one factor was likely that several years earlier, the state comptroller had been asked to rule on the question and said the tax must be levied on the total retail price paid by the customers, not just on the amount the hotels received.
He said the issue of control was narrower than the control of the entire hotel, but focused on controlling the price of the room to the customer. The hotel determined the amount they would receive, but the online companies controlled the total price.
“The hotel didn’t even know the price the customers paid for the room,” Wolens said.
After the jury made that finding, it remained up to Garcia to determine “the pure question of law” of which rate would be taxed – the wholesale or retail. As the federal 5th Circuit Court of Appeals noted later, it would take Garcia nearly two years to make that determination. In 2011, he decided for the City of San Antonio and the other 172 cities.
But by that time, the City of Houston had withdrawn from the federal class action suit and filed its own suit in a state district court. The matter went very differently in Houston. There was no trial. Having heard from both sides, the judge ruled as a matter of law that it was obvious that the online companies did not control the hotels and gave a summary judgment to them.
It took Garcia nearly four years after the trial to determine how much to award San Antonio and the other cities. Including penalties and interest, that figure was $55,146,489. In 2016, as the online companies pursued an appeal, Garcia raised the amount to $84,123,089.
Meanwhile, back in 2011, a Houston state court of appeals upheld the Houston judge’s ruling against the cities. And finally, in late 2017, the 5th Circuit overturned Garcia’s findings. San Antonio’s dream of getting a substantial share of the $84 million along with increased future hotel taxes vanished, as did a reported 30 percent fee that would have gone to Wolens and his team of lawyers. They had handled the case on a contingency fee basis, meaning they only got paid if they won.
Not surprisingly, Wolens was not happy with the City of Houston. “They never did any investigation or discovery,” he said with disgust.
Wolens argued that if Houston had stayed in San Antonio’s federal case, it and all the other cities would have prevailed. He based his argument on a longstanding federal principle that in a case involving parties from multiple states, the courts must follow the laws of the state in which the dispute is centered.
As the appeals court wrote in its ruling, it must follow the law ‘‘as announced by that state’s highest court, or, in the absence of such a decision, we must predict what the highest court would decide if it confronted the same issue.”
As the state Supreme Court had decided not to hear the case, it was clearly not eager to overturn the appeals court. The all-Republican state Supreme Court is consistently pro-business and has, as the federal appeals court noted, consistently held that if a tax is ambiguous, the courts must find in favor of the taxpayer.
Wolens may be right that his victory would have held up in federal courts if the City of Houston hadn’t provoked an adverse ruling in the state courts, but there is reason to doubt it. Before reaching the matter of applying state law, the federal appeals court appeared to cast doubt in its opinion on the issue of control: “Only the hotel can issue a reservation. When a traveler chooses to book a room through an OTC [online travel company], it requests a reservation on the traveler’s behalf. If the hotel chooses not to make a reservation available, the OTC cannot make the reservation. If the hotel issues the reservation, it does so in the traveler’s name, and the OTC forwards a confirmation to the traveler.” It gave no space to Wolens’ argument that “control” referred only to the retail price.