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Suits filed against H&R Block alleging unnecessary fees for electronically filing clients’ tax returns may be tried as a class action and need not be arbitrated individually, the Pennsylvania Superior Court has ruled. According to the opinion in McNulty v. H&R Block Inc., H&R Block asserted that all claims against it must be settled in arbitration, because the plaintiffs entered into a contract with a separate entity for refund anticipation loans available in connection with H&R Block’s e-filing services. “The trial court determined that the arbitration provision did not cover the present claims because the e-filing fee was too removed from the loan application contract that contained the arbitration provision,” Judge Richard B. Klein wrote for the panel. “After careful review of the parties’ submissions — we affirm, both on the rationale of the lower court and additional grounds.” The court also found that the arbitration clause was unconscionable as applied in this case. Klein was joined by Judge John T. Bender and Senior Judge Peter Paul Olszewski. The plaintiffs were represented by Pete Winebrake of Trujillo Rodriguez & Richards in Philadelphia. He said that he anticipates the e-filing class to eventually include thousands of members. When a client utilizes H&R Block’s e-filing system, the opinion states, the client can either have the refund check sent back in due time (usually about two weeks), or apply for a refund anticipation loan (RAL). According to the opinion, the RAL is an agreement made not with H&R Block but with another entity — in the McNulty case, Household Bank — in which the taxpayer receives cash within several days of filing using the promise of a tax refund as security for the loan. The RAL service requires a separate contract with Household, the opinion states. The contract lists H&R Block as the electronic return originator, but it makes clear that H&R Block is otherwise not connected to the loan. Apparently, Klein wrote, the contract does contain an arbitration clause of which H&R Block is a beneficiary, because Household requires that the RAL applicant file electronically with H&R Block. Alternatively, there is no requirement on the part of H&R Block that its e-filing clients submit an RAL application. According to the opinion, plaintiff Erin McNulty said she was charged a $37 e-filing fee in both 2001 and 2002, while plaintiff Brian Erzar claimed he incurred a $34 fee in 2000. The case was in pre-discovery when it was appealed from the Lackawanna County Court of Common Pleas. Both plaintiffs, on at least one occasion, applied for RALs when e-filing. The panel found that H&R Block’s “broad” interpretation of the arbitration provision in the RAL contracts “would produce absurd and inequitable results.” Klein described a hypothetical situation in which an H&R Block client, while having his taxes prepared one year, falls and breaks his arm on the company’s premises due to H&R Block’s negligence. The next year, the client signs an RAL contract with Household and subsequently files a personal injury suit against H&R Block. “Block would have it that this personal injury action, completely divorced from the loan application, would nonetheless be subject to arbitration,” Klein wrote. “This is an absurd result.” Noting that a “court’s role is greater than simply determining whether a contract has been signed,” Klein wrote that the e-filing fee in question is independent of the RAL application, which explicitly denies H&R Block’s agency with respect to the RAL. “At most, Block is a third-party beneficiary solely to the arbitration clause of a loan application,” Klein wrote. “It simply makes no sense to provide Block with independent rights to enforce the arbitration provision of a contract it is not a party to, concerning an issue not covered by the contract. The ‘relationship’ between Block, the customer and Household does not extend to Block, on its own, charging a customer a fee for putting an electronic postage stamp on a tax return.” Klein also noted that McNulty was charged an e-filing fee not only for the year in which she applied for an RAL, but for the year before, too. UNCONSIONABLE CLAUSE Going further than the trial court, the panel deemed the arbitration clause unconscionable in this case. Citing the two-pronged unconscionability test set out by the 2002 Superior Court decision in Lytle v. CitiFinancial Services Inc., Klein wrote that the contractual terms were unreasonably favorable to the drafter and that the signing party did not have a meaningful choice regarding the acceptance of the contract’s provisions. To begin with, Klein wrote, “the contract in question is a classic example of an adhesion contract,” typical of situations in which a consumer has little choice about a contract’s terms. And while the contractual terms do not facially appear to favor either H&R Block or Household, Klein called attention to the fact that here, the arbitration fees would almost definitely outweigh the damages sought. “While there may be a select few who are so incensed by the notion of the e-filing fee [that] they would spend significant time and $50 for the possibility of a $30 reward,” Klein wrote, “this is a situation where the costs of arbitration, minimal though they may seem, work to preclude the individual presentation of claims.” The judge stressed in a footnote that the unconscionability of the arbitration provision in question applies only to the instant set of circumstances. “We’re very pleased with the court’s decision, which we consider a significant victory for Pennsylvania consumers,” plaintiffs lawyer Winebrake said. Assisting him in the case were Gerard Langan Jr. of O’Malley & Langan in Scranton, Pa., and Joseph Mariotti of Coviello & Mariotti in Scranton. H&R Block’s case was handled by Geff Blake of Elliott Reihner & Siedzikowski in Scranton and N. Louise Ellingsworth of Bryan Cave’s Kansas City, Mo., office. “We believe the court’s decision runs counter to the weight of state and federal law,” said H&R Block spokesman Tom Linafelt, “and are considering an appeal of the decision to the Pennsylvania Supreme Court. The court’s decision was limited to ruling on the preliminary procedural question of arbitration and had nothing to do with the substantive questions related to the e-filing transaction.” Michael D. Donovan of Donovan Searles in Philadelphia, who specializes in consumer class actions, said that arbitration clauses such as the one found in McNulty are common in many types of consumer contracts, as corporate attorneys advise their clients that such clauses help minimize overcharging claims. “I think the ruling signifies that the courts are now going to look at whether the arbitration clause is being used as a sword instead of a shield,” Donovan said. “And, if it’s going to bar people from pursuing legitimate claims, they’re going to strike it down.” Donovan said that arbitration clauses are frequently employed in consumer contracts involving termite services, cell phones, credit cards, motor vehicles and other purchases.

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