McKool Smith Wins $20 Million Verdict in Hotel 'Bed Tax' Class Action Against Online Travel Companies
By Ben Hallman
November 06, 2009
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When the Litigation Daily was in journalism school, we had a professor who preached the gospel of the public document search as a path to great stories. We thought of our professor after we talked to McKool Smith partner Steven Wolens, who on Oct. 30 won a $20 million jury verdict on behalf of 170 Texas cities in a hotel tax suit against a handful of online travel companies.Wolens told us that back in 2004 he was at a party with his wife when he overheard two men talking about how they study corporate 10-Ks. Bored by the party, Wolens listened in, and was inspired when he returned home to do the same. He eventually came upon a note in a 2003 filing by the online travel company Expedia, which mentioned that the company might have some liabilities related to how it paid municipal "bed taxes" on hotel rooms. (For example, if Expedia paid $70 for a hotel room that it later resold for $100, it typically paid municipal taxes only on the $70 purchase price, not the $100 resale price.)
Wolens did some investigating and discovered that Expedia's policy was common among travel companies: They typically remitted bed taxes to municipalities based on their wholesale price for hotel rooms, rather than on the retail price they charged for the rooms. After consulting with the city attorney of Los Angeles, Wolens filed the first online bed tax suit (on contingency). He has since filed suits for San Diego, Anaheim, and Broward County, Fla., in addition to the Texas case. The Anaheim case resulted in a $21 million win for the city following an administrative hearing earlier this year. (The result is on appeal.)
The Texas class action, which involved 170 municipalities, was filed in San Antonio federal district court in 2006. Gary Cruciani, the McKool Smith lawyer who led the four-week trial before Judge Orlando Garcia, told us that the travel companies argued they were simply travel agents, and so they shouldn't be required to pay the extra hotel taxes. McKool Smith countered that since the hotels outsource all the key functions of booking travel to the online companies, they are, in fact, acting as local hotels.
San Antonio attorney Ricardo Cedillo represented the travel companies in the Texas class action. James Karen of Jones Day is Expedia's national counsel. Priceline.com is represented by Darrel Heiber of Skadden, Arps, Slate, Meagher & Flom. Orbitz is represented by McDermott Will & Emery's Elizabeth Herrington. Travelocity is represented by Brian Stagner of Kelly Hart & Hallman.
