The Pennsylvania Supreme Court decision last week in Basile v H&R Block, Inc. may be the end of the line for a class action suit that has been bouncing around for almost twenty years. Block was somewhat worried about the case. According to its 10-K:
We have not concluded that a loss related to this matter is probable nor have we accrued a loss contingency related to this matter. We believe we have meritorious defenses to this case and intend to defend the case vigorously, but there can be no assurances as to the outcome of this case or its impact on our consolidated financial position, results of operations and cash flows.
A class action suit with 600,000 members in the class could really add up.
The business principle that seemed to be at work in the case is that you should establish yourself as your client’s trusted advisor. Why do you want to do this ? So you can make a lot of money selling them other stuff, besides your core product of course. What good is trust if you can’t cash in on it ? The only problem is that if you are not careful, you might create a fiduciary relationship.
The extra product that was the subject of this litigation was refund anticipation loans. Only that is not what Block was calling them at the time. It was the “Rapid Refund” program. Apparently it was not clear to some of the customers that they were taking out a loan, an expensive loan :
Ms. Basile asserted that the program was deceptive, because, while customers may have understood that payment of a fee was required, they did not apprehend that they actually received a loan, and they did not know the high rate of interest imposed. See id. (explaining that the annual interest rate on a refund anticipation loan “will often exceed 100 percent — easily a quarter of the refund, even though the loan may be outstanding for only a few days”). Ms. Basile sought to assert claims on behalf of herself and others who were similarly situated.
Frankly, the case kind of lost me there. Somebody tells me that I can have $500 in a month or $375 tomorrow. Does it really make any difference whether it is a loan or not ? Apparently it would to some people:
Block explicitly trained (as described in its Tax Preparer Manual) its tax preparers to avoid explaining the Rapid Refund program beyond letting the client know when the check would be ready and that the fee would be deducted so the client did not have to go out of pocket for the service. And, Block trained the tax preparer in this manner because it knew that if the client learned that the Rapid Refund was not a refund but a high interest loan, many would decline the program. Block had a conscious plan to target the class to take advantage of them.
I think there is a branch of microeconomics that concerns itself with this type of thinking. It is probably not called stupinomics, but it should be.
At any rate, in order for people to have a claim against Block it would have to be established that there was a “confidential relationship” (otherwise it is “Caveat emptor”, I guess).
A confidential relationship appears when the circumstances make it certain the parties do not deal on equal terms, but, on the one side there is an overmastering influence, or, on the other, weakness, dependence or trust, justifiably reposed; in both an unfair advantage is possible.
The problem that the plaintiffs had was establishing that Block had a “confidential relationship” with everybody in the class. They hoped to do this by focusing on Block’s internal documents:
In support of its decision, the intermediate court catalogued evidence proffered by Appellees — particularly documents obtained from the Block companies in discovery — indicating that: the Block companies actively cultivated customer trust through an extensive media ad campaign; Block appreciated that many of its customers “entered their relationships with Block in a position of pronounced economic and intellectual weakness”; and, despite reports of customer confusion, the Block companies intentionally provided only minimal information concerning the character of refund anticipation loans.
The Court found that the necessary degree of gullibility could not be projected on all 600,000 members of the class:
While in this case, the Panel presumed all class members were “overmastered” based solely on their predominant socio-economic level, such demographic information obviously does not directly correlate to the capacity of individual members to be overmastered, or, conversely, the strength of their independent judgment. Here, Plaintiffs did not establish what percentage of the class was comprised of inhabitants of urban centers and rural areas, persons who did not complete high school, as well as high school and college graduates, those who are impoverished fortuitously and those who are of modest means by choice or avocation, or persons with some financial acumen versus those without any.
The class certification bounced back and forth several times over the decades. If the certification had stuck, I wonder how long the case would have gone on from there.
You can follow me on twitter @peterreillycpa.
Originally published on Forbes.com on September 13th, 2012