Reply Brief — At&t Corp. v. Allen Et Ux., on Behalf of Themselves and All Others Similarly Situated

AT&T Corp.,

Petitioner,

V.

BOBBY GENE ALLEN AND DEBORAH JANE ALLEN,

ON BEHALF OF THEMSELVES

AND ALL OTHERS SIMILARLY SITUATED,

Respondents.

On Petition for Writ of Certiorari

to the Oklahoma Court of Civil Appeals

REPLY BRIEF

KENNETH N. MCKINNEY CARTER G. PHILLIPS

JEFFERSON I. RUST JOSEPH R. GUERRA*

MCKINNEY & STRINGER, P.C. ROBERT N. HOCHMAN

101 North Robinson SIDLEY AUSTIN BROWN &

Suite 1300 WOOD LLP

Oklahoma City, OK 73102-5510 1501 K Street, N.W.

(405) 239-6444 Washington, D.C. 20005

(202) 736-8000

LAURA A. KASTER

DEBORAH S. DROLLER

AT&T Corp.

900 Route 202/206N

Room 3A213

Bedminster, NJ 07921

(908) 532-1888

Counsel for Petitioner

April 6, 2004 * Counsel of Record

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WILSON-EPES PRINTING Co., INC. — (202) 789-0096 -— WASHINGTON, D.C. 20001

TABLE OF CONTENTS

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REPLY BRIEF

CONCLUSION

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TABLE OF AUTHORITIES

CASES Page

Alford Chevrolet-Geo v. Jones, 91 S.W.3d 396

CT, ADD. ZINE Disus<innsicciniisencahciedeeenneanaamannain 4

City of Phila. v. Cohen, 184 N.E.2d 167 (N.Y.

FIIEE P v<sxssicecnnsanmpiesionan iio neteenieniianaaanaaa nae aaanale 6

Cox Broad. Corp. v. Cohn, 420 U.S. 469 (1975)... 9

Davidson v. Rochester Tel. Corp., 558 N.Y.S.2d

SGPC Ar. DV. FG ccsesiissansesimataieieclanuannennesen 3, 4,6

Franchise Tax Bd. v. Alcan Aluminium Ltd., 493

AS a 329 CEP ievicesiscicidaniaananabae » ej

Heaven v. Rite Aid Corp., No. 0596, 2000 WL

33711049 (Pa. Ct. Com. Pl. Oct. 27, 2000)......... 3

Local No. 438 Constr. & Gen. Laborers’ Union v.

Cory, 374 UB. BE Ce cekciouchssencdeticaceneneonens 9

Mercantile Nat’l Bank v. Langdeau, 371 U.S. 555

EPI Do xatesinvncncsisnstasressnnccsmnniiaiamalinnmatacsstaacaccaasaes 10

P.R. Mktg. Group, Inc. v. GTE, Fla., Inc., 747 So.

2d 962 (Fla. Dist. Ct. App. 1999) ..............sssecceees 3,6

P.J.’s Concrete Pumping Serv., Inc. v. Nextel W.

Corp., 803 N.E.2d 1020 (Ill. App. Ct. 2004)....... 7

Perry v. Thomas, 482 U.S. 483 (1987) ............00 8,9, 10

Phillips Petroleum Co. v. Shutts, 472 U.S. 797

CDI) 0x eincnesnstivisictpssciiseniiicdabaramancammuadamadmaaia 7

Serna v. H.E. Butt Grocery Co., 21 S.W.3d 330

CE. AUD. Bees cienisdtinelliiaiimennianatis ys

Smith v. United States, 502 U.S. 1017 (1991)......... 8

Southland Corp. v. Keating, 465 U.S. 1 (1984)...... 9,10

STATUTES

Oe APA 6 Re sncinsnencraaiced ahaa 10

GUE oooniissenccctaencen sees 5

REPLY BRIEF

As AT&T explained in its opening brief, the class

certification order that the Oklahoma Supreme Court

approved in this case violates fundamental principles of state

sovereignty and due process. By permitting Oklahoma state

courts to exercise jurisdiction over, and apply Oklahoma law

to, claims challenging the collection of municipal sales taxes

in 27 other States, the decision below interferes with the core

sovereign authority of these other States to administer their

own tax laws. Indeed, the Multistate Tax Commission, which

represents 23 of the affected States as well as Oklahoma

itself, has filed an amicus brief urging this Court to review the

“perverse” decision of the Oklahoma courts, which

“impairs... legitimate State tax policies” and “directly

den[ies] the sovereign interests of sister States.” Multistate

Tax Commission Br. (“MTC Br.”) 2.

The Oklahoma courts’ conclusion that it can treat this case

as one that does not involve tax refunds does not obviate the

constitutional violation; that conclusion causes the violation.

As the Multistate Tax Commission has confirmed, whatever

the rule in Oklahoma, in other States this lawsuit—an action

against an involuntary agent who allegedly over-collects taxes

that it remits to the State—would be defined as a tax refund

action. Some States bar this type of suit altogether, while

others require that such a suit be brought only after

administrative remedies are exhausted, or only in certain

courts. The class certification order entered in this case

unconstitutionally interferes with the judgments of these other

States, and no effort to distinguish cases on their specific facts

can obscure this fundamental violation of state sovereignty.

Nor is there any merit to respondents’ finality argument.

This case falls within a well-recognized exception to the final

judgment rule. In fact, the finality rule is rooted in principles

of federalism and respect for the sovereign rights of States—

EE

-_~

2

the very same principles Oklahoma’s courts violated in this

case. Respect for one State’s judicial processes should not

shield from review a decision that intereferes wiih the

processes and legislative judgments of 27 other States.

1. This case squarely presents the federal issue of

whether a state court can entertain a suit by non-residents

challenging an alleged over-collection of local taxes, when

the States in which those plaintiffs reside prohibit such suits.

Contrary to respondents’ central claim, the Oklahoma courts

necessarily—and_ incorrectly—resolved this legal issue.

Whether this suit is a prohibited tax refund action is not “a

mixed question of fact and law” to be resolved on the basis of

testimony. Opp. 2. It is a legal determination that must be

made under the laws and policies of each State in which

particular taxpaying class members reside. And several of the

States in which class members reside have concluded that this

precise type of lawsuit is an improper tax refund action.

Indeed, the Oklahoma Court of Civil Appeals itself

expressly recognized that other States treat lawsuits against

vendors for alleged over-collection of taxes as tax refund

actions. Pet. App. 4a-Sa (citing P.R. Mktg. Group v. GTE,

Fla., Inc., 747 So. 2d 962 (Fla. Dist. Ct. App. 1999), and

Serna v. H.E. Butt Grocery Co., 21 S.W.3d 330 (Tex. App.

2000)). In Serna, the Texas court concluded that, under

Texas law, any suit “claiming [that] taxes were collected in an

amount greater than the legal rate[] actually amounts to a suit

for a tax refund.” 21 S.W.3d at 335 (emphasis added). Like

respondents here, the plaintiff in Serna argued that a suit

seeking “damages” from a vendor for the allegedly unlawful

collection of excess sales taxes was not a suit for “a refund of

a sales tax,” id. at 332, but the court squarely rejected that

claim. “[P]Jermittihg a party to cloak a suit under a different

cause of action, in order to seek redress from the agent who

collects the tax (and who no longer holds the funds in

question)” would impermissibly thwart Texas statutes

3

designed to protect vendors and promote “the fair and

efficient administration of the Texas sales tax.” /d. at 334-35.

Similarly, in P.R. Marketing Group, the Florida court

concluded that, under binding state precedent, customers

could not sue either the vendor who “collected more sales tax

than the law allows” or the state agency that received those

excess taxes without exhausting certain administrative

remedies. 747 So. 2d at 962, 964. In Davidson v. Rochester

Tel. Corp., 558 N.Y.S.2d 1009 (App. Div. 1990), the New

York court held that plaintiffs could not bring an “unjust

enrichment” claim against a telephone company for

overcollection of sales taxes; the taxpayers’ sole recourse was

to sue the State for a refund, after exhausting administrative

remedies. /d. at 1011. And a Pennsylvania court concluded

that Pennsylvania’s tax code precluded a fraud action based

on over-collection of taxes. Heaven v. Rite Aid Corp., No.

0596, 2000 WL 33711049, at *5 (Pa. Ct. Com. Pl. Oct. 27,

2000).

These cases make clear that, unlike Oklahoma, other States

would regard this lawsuit as a tax refund action. More

fundamentally, these cases demonstrate that the Texas,

Florida and New York residents who are members of the class

in this case are, by virtue of the certification order, bringing

direct actions against AT&T for over-collection of local taxes

that their home States do not allow those residents to bring.

That order is thus a direct affront to the sovereign rights and

interests of these States.

None of the factual distinctions respondents offer can

obscure or minimize the impropriety of that affront.

' Although respondents object to citation of this decision, Op. 22-23,

AT&T does not rely on the case for its precedential value, but as evidence

that Pennsylvania’s tax laws have been applied in the same manner as the

tax laws of other States. Indeed, the Multistate Tax Commission, which

represents Pennsylvania, has confirmed that Pennsylvania requires claims

implicating taxes to be brought against the State itself. MTC Br. 6.

4

Respondents make much of the fact that the plaintiffs in P.R.

Marketing Group sued the state taxing authority and sought

refunds directly from the state treasury. Opp. 20. But the

plaintiffs in that case also sued the vendor, and the court held

that they could not proceed with any of their claims because

they had not exhausted administrative remedies.

Respondents’ suggestion that Davidson is distinguishable

because the plaintiff in that case “sought tax refunds directly

from the” State, Opp. 20, is wrong. Davidson “maj[de] no

claim against the State.” Davidson, 558 N.Y.S.2d at 1011.

Respondents’ assertion that Davidson “did not assert that the

phone company’s conduct was wrongful,” Opp. 20, is also

incorrect. Like respondents here, Davidson alleged that the

“collection of sales taxes was ‘improper, unnecessary,

unauthorized by law, and . . . an unjust enrichment.’”

Davidson, 558 N.Y.S.2d at 1011 (omission in original). And,

like respondents here, Davidson did not challenge the

“validity” of the tax but its applicability, arguing that the

specific service (like the specific non-municipal residents

here) was not subject to the tax in question. /d.

Nor can respondents distinguish the decision in Serna,

which held that Texas citizens cannot sue vendors at all for

over-collection of taxes. Neither Serna nor the statutes cited

in that case recognize any exception for citizens who have

“ongoing contractual relationship[s]” with vendors or who

seek injunctive relief in addition to damages. Op. 21.

Respondents’ suggestion, id. at 21-22, that Serna was

modified by Alford Chevrolet-Geo v. Jones, 91 S.W.3d 396

(Tex. App. 2002), is utterly baseless. The vendors in Jones

defrauded consumers into paying taxes that the vendors owed.

In stark contrast to Serna, P.R. Marketing Group, Davidson

and this case, therefore, the State did not receive any of the

contested payments; the windfall went to the vendors, who

had larger after-tax profits than they would have enjoyed had

they paid their obligations to the State with their own funds

instead of money they bilked from customers. In allowing the

5

victims of this fraud to sue, Jones did not alter the rule that

vendors cannot be sued for collecting and remitting taxes in

an allegedly erroneous amount.

As the Multistate Tax Commission has explained, Texas,

Florida, New York and other States whose residents were

certified as part of the class prohibit suits like this or require

exhaustion in order “to enhance the efficient functioning of

state tax systems.” MTC Br. 2. These rules promote “willing

cooperation from those responsible to collect and pay over”

taxes, “safeguard [the States’] fisc,” “protect[] the court

system from needless litigation,” and ensure that tax disputes

are resolved by those who are “familiar with the intricacies of

tax laws.” Jd. at 2,6. While Oklahoma is free to decide that

these policies should not bar a suit by its citizens for over-

collection of state or local taxes, it cannot make that decision

for any other State. Yet that is precisely what it has done

here.

Indeed, in concluding that the trial court had jurisdiction to

certify a multi-state class, the Court of Civil Appeals stressed

that the primary purpose of respondents’ suit was to obtain

injunctive relief, Pet. App. 7a; see also Op. 19-22. As the

policies behind the federal Tax Injunction Act, 28 U.S.C.

§ 1341, attest, however, such relief is the most severe

interference with “‘the imperative need of a State to

administer its own fiscal operations.’” Franchise Tax Bd. v.

Alcan Aluminium Ltd., 493 U.S. 331, 338 (1990).

Respondents try to brush aside this violation of state

sovereignty by blithely asserting that no State permits

imposition of municipal taxes on those who reside outside the

municipality. Op. 7. But error-free tax collection is simply

not possible in light of the enormous complexity and expense

of the activity. See Council on State Taxation (“COST”) Br.

6-8. Accordingly, the class certification order in this case

creates strong incentives for businesses to under-collect taxes

in order to avoid damages liability, see id. at 8-9—the very

incentives States like Texas, Florida, New York and others

6

seek to prevent by, among other things, barring direct suits

against vendors for over-collection of taxes.”

Similarly, while Oklahoma is free to decide for itself that

administrative remedies need not be exhausted in a case such

as this, other States have made a contrary determination. In

P.R. Marketing Group and Davidson, the courts weighed the

very same practical burdens and problems that the court

below identified, but concluded that exhaustion was still

required. See P.R. Mktg. Group, 747 So. 2d at 964-65;

Davidson, 558 N.Y.S.2d at 1012 (Yesawich, J., dissenting)

(identifying problems). By certifying a class that includes

Florida and New York residents, the Oklahoma courts have

directly impaired the sovereign rights of other States to

manage their own fiscal operations.

In short, the certification order in this case squarely raises a

fundamental federal question concerning the duty of one State

to respect the sovereign taxing prerogatives of sister States.

And Oklahoma’s determination that it can adjudicate claims

challenging a vendor’s alleged over-collection of taxes in

other States conflicts with the decision of the highest court of

New York, which has recognized that “[f]or our tribunals to

sit in judgment on a tax controversy between another State

and its present or former citizens would be an intrusion into

the public affairs of another State.” City of Phila. v. Cohen,

184 N.E.2d 167, 169 (N.Y. 1962). Once again missing the

doctrinal forest for the factual leaves, respondents argue that

Cohen only addressed whether New , York courts were

required to hear a tax suit brought by another State. Op. 12-

13. But Cohen deemed it an “intrusion” to hear claims

involving another State’s taxes even when the other State

wanted New York to do so. It follows a fortiori that New

> These incentives, moreover, completely belie respondents’ simplistic

claim that the order in this case will “not impact any state’s ability to

collect taxes.” Op. 6.

7

York would not entertain a suit challenging the collection of

taxes in other States when those States prohibit such suits.

Even without this conflict, however, this case warrants

review. This Court recently granted certiorari in the absence

of any split in authority in order to review an isolated decision

that merely chilled California’s ability to conduct residency

audits as part of its tax enforcement efforts. See Petition for

Writ of Certiorari, Franchise Tax Bd. v. Hyatt, No. 02-42

(U.S. filed July 2, 2002) (“California Petition”)? The

decision in this case is not an isolated problem; an [Illinois

court recently upheld a multi-state class certification order

that violates the sovereignty of other States in precisely the

same manner as the order in this case. P.J.’s Concrete

Pumping Serv., Inc. v. Nextel W. Corp., 803 N.E.2d 1020 (III.

App. Ct. 2004). Moreover, the orders in this case and in

Nextel have far greater and more immediate adverse impacts

on the sovereign right of States “‘to administer [their] own

fiscal operations,’” Alcan Aluminium, 493 U.S. at 338, than

was true in Hyatt. These orders do not merely chill ancillary

enforcement efforts, they permit over-collection suits that

other States bar, and create perverse incentives for the under-

collection of taxes. The decision in this case plainly warrants

review in this Court, the only Court that can prevent these

fundamental harms to the sovereign interests of other States.

2. Respondents’ attempt to show that the decision in this

case is consistent with the due process requirements set forth

in Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 811-12

(1985), fails for essentially the same reasons. Respondents

rely on the same boot-strapping premise that this case is not a

tax refund action. Opp. 15-17. Not only is this contention

wrong, see supra 2-3, it is irrelevant. Due process prohibits

Oklahoma from applying its substantive law to claims

* California’s petition cited only two lower court state decisions

involving cooperative federalism principles in two non-tax cases. See

California Petition at 12-14.

8

involving taxes, taxpayers and transactions entirely beyond its

borders, regardless of the nature of those claims.

Nor is it true that there is no “material conflict” between

Oklahoma’s law and that of the 27 other affected States. Op.

17-19. Texas, New York and Florida may all recognize 4

general “futility” exception to their administrative exhaustion

requirements. But both Texas and New York flatly prohibit

direct actions against vendors for over-collection of taxes,

whether or not administrative remedies are exhausted. See

supra at 2-3. And Florida has squarely held that its exhaus-

tion requirement applies in precisely the circumstances

presented here. /d. at 3. Finally, the fact that respondents

seek injunctive relief does not obviate the constitutional

infirmity of the class certification order. Op. 19-22. Enjoin-

ing the collection of taxes in other States based on the extra-

territorial application of Oklahoma law directly interferes

with the sovereign rights and prerogatives of those States.

2, Unable to defend the constitutional propriety of the

order in this case, respondents seek to shield it from review.

They stress that the decision of the Court of Civil Appeals is

unpublished and thus is not binding precedent. Op. I, 3, 5.

But this Court has not permitted publication status to insulate

intermediate state court decisions from review where, as here,

those decisions clearly violate federal law. See, e.g., Perry v.

Thomas, 482 U.S. 483, 488-89 (1987) (reviewing and

reversing unpublished, interlocutory decision in which

intermediate state court refused to compel arbitration in

accordance with federal law); see also Smith v. United States,

502 U.S. 1017, 1020 n.* (1991) (Blackmun, O’Connor and

Souter, JJ., dissenting) (“Nonpublication must not be a

convenient means to prevent review”). Whether or not the

decision of the Court of Civil Appeals must be followed by

other Oklahoma courts in the future, that decision necessarily

harms the sovereign rights of other States.

Nor does the interlocutory nature of the decision preclude

review. The Oklahoma Supreme Court has decided, by a 5-4

9

vote, that Oklahoma courts can entertain over-collection suits

brought by non-resident taxpayers whose own States prohibit

those very claims. This Court has repeatedly reviewed

interlocutory state court decisions in cases, such as this one,

where the federal issue is whether state courts have the power

to entertain certain claims at all. See Pet. 3 (describing

cases); see also Perry, 482 U.S. at 488-89. in this case,

moreover, “a refusal immediately to review the state court

decision” will not just “seriously erode federal policy.” Cox

Broad. Corp. v. Cohn, 420 U.S. 469, 483 (1975). Where, as

here, non-residents are barred from suing vendors for alleged

over-collection of taxes, the very act of permitting such suits

violates the sovereign rights of other States and the principles

of cooperative federalism that underlie our system of

government. Where interlocutory decisions cause immediate

harms to important federal interests, this Court does not

postpone review while the merits are improperly addressed.

See, e.g., Perry, 482 U.S. at 488-89; Southland Corp. v.

Keating, 465 U.S. 1, 6-8 (1984); Local No. 438 Constr. &

Gen. Laborers’ Union v. Curry, 371 U.S. 542, 546-50 (1963).

Indeed, there is a very real danger that the interests of

affected States will never be vindicated if review is denied

now. Large class actions create enormous pressures for

defendants to settle rather than risk massive damages awards.

AT&T has neither all of the incentives nor all of the resources

that a State would have to litigate this case to a final

judgment. Yet the States will be directly harmed by a

settlement, which will create strong incentives for other

vendors to resolve all good faith doubts in favor of under-

collection, given the comparative risks of under-collection

versus over-collection of state taxes. See COST Br. 8-9.

* By contrast, there is little chance that non-residents will ever be

excluded from the class. While certification orders can be amended, the

question of including non-residents in the class has been decided as one of

jurisdiction, not one of class definition. Indeed, the trial court has

“repeatedly rejected” AT&T’s jurisdictional argument, Op. 8, insisting

~

10

It would be particularly inappropriate for this Court to

countenance such impairments of the sovereign interests of

numerous States based on the finality requirement of 28

U.S.C. § 1257. The final judgment rule itself is rooted in

principles of federalism that compel respect for the sovereign

rights of States. But these very principles have been violated

by Oklahoma’s approval of the class certification order in this

case. A statute designed to ensure federal court respect for

state judicial processes should not shield from review a state-

court decision that intereferes with the judicial processes and

sovereign legislative judgments of 27 other States. Because

the final judgment rule does not stand as a barrier to this

Court’s review of interlocutory state-court decisions that

violate federal arbitration and venue policies, see Perry, 482

U.S. at 488-89; Southland Corp., 465 U.S. at 6-8; Mercantile

Nat’! Bank v. Langdeau, 371 U.S. 555, 558 (1963), it cannot

preclude review of an interlocutory decision that “impairs . . .

legitimate State tax policies” and “directly den[ies] the

sovereign interests of sister States.” MTC Br. 2. |

Finally, immediate review will not result in any

inefficiency or undue expense. Op. 5. While such review

will not terminate litigation by Oklahoma taxpayers, it will

end litigation on causes of action that non-residents have no

right to bring and that Oklahoma courts cannot entertain, and

thus will significantly simplify the litigation and eliminate the

need for further proceedings following this Court’s review of

a final judgment. In all events, considerations of judicial

economy must yield where, as here, an interlocutory decision

creates an intolerable risk of interference with the core

sovereign rights of other States.

CONCLUSION

This Court should grant the petition for a writ of certiorari.

that it is “law of the case.” Pet. App. 47a. Respondents do not suggest

how the issue could even arise again in any subsequent proceedings.

KENNETH N. MCKINNEY

JEFFERSON I. RUST

MCKINNEY & STRINGER, P.C.

101 North Robinson

Suite 1300

Oklahoma City, OK 73102-5510

(405) 239-6444

LAURA A. KASTER

DEBORAH S. DROLLER

AT&T Corp.

900 Route 202/206N

Room 3A213

Bedminster, NJ 07921

(908) 532-1888

Respectfully submitted,

CARTER G. PHILLIPS

JOSEPH R. GUERRA*

ROBERT N. HOCHMAN

SIDLEY AUSTIN BROWN &

WOOD LLP

1501 K Street, N.W.

Washington, D.C. 20005

(202) 736-8000

Counsel for Petitioner

April 6, 2004

* Counsel of Record