Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—Tex. App.: TaxMasters' CEO not personally liable for firms' deceptive trade practices, (Jul 3, 2014)

By Edward L. Puzzo, J.D.

The CEO, majority stockholder and television spokesman for a tax resolution service was not personally liable for his corporation's violations of the Texas Deceptive Trade Practices Act absent a piercing of the corporate veil, the Texas state appellate court in Amarillo has ruled (Cox v. State of Texas, July 1, 2014, Hancock, M.).

DTPA violations. Patrick R. Cox, a certified public accountant, was President, Chief Executive Officer, Chairman of the Board, and majority shareholder of TaxMasters, Inc.—a tax resolution service—as well as its sole spokesman on television commercials broadcasted nationwide. After a jury verdict, the state trial court found that Cox and TaxMasters had violated the Texas Deceptive Trade Practices Act (DTPA) over 15,000 times. Cox was personally ordered to pay over $14 million in restitution, over $31 million in civil penalties, and over $300,000 in attorney fees.

On appeal, Cox conceded that TaxMasters violated the DTPA, but argued that—individually—he did not and could not be held personally liable for TaxMasters' acts without a finding that justifies piercing the corporate veil. The State of Texas did not seek or obtain findings that would impute liability onto Cox, such as piercing the corporate veil. However, the State argued that the situation here was analogous to the federal case law for FTC violations; that is, the actions of a corporation could be imputed onto an individual if the individual: personally participated in the business; committed, oversaw, or was purposefully ignorant of the deceptive actions of the business; and was so involved in the business as to be seen as the “guiding spirit” of the business and its deception.

"Guiding spirit" doctrine. No Texas court has applied the federal "guiding spirit" doctrine to hold an individual liable under the DTPA for actions taken by a corporation, the appellate court stated. In cases that addressed the federal "guiding spirit" doctrine in other contexts, continued the court, jurisdiction required some direct personal tortious or fraudulent action on the part of the person alleged to be the "guiding spirit" of the corporation. Therefore in the instant case, without a piercing of the corporate veil, evidence would have to establish that Cox personally violated the DTPA in order for him to be personally liable, the court declared.

Disclosures. The jury found that TaxMasters and Cox had accepted payments from consumers without making required disclosures as to the non-refundable nature of the payments and the assessment of an administrative fee. The appellate court found that the evidence did not support this finding as to Cox, because no evidence showed that Cox ever directly or indirectly accepted payments from consumers. Texas argued that Cox knew TaxMasters was not making these disclosures and did nothing to remedy the situation. He was also the only person with authority to authorize refunds after TaxMasters received payments without making the disclosures, but he refused to authorize such refunds. The court, however, ruled that Cox's failure to remedy a non-disclosure situation was not the same as a failure to make disclosures himself. There also was no evidence that Cox failed to make disclosures or directed others to not make these disclosures, the court found.

Affiliation. The jury had also found that TaxMasters and Cox had caused confusion as to the sponsorship, approval, affiliation, and certification of their services. But the court found that there was no evidence that Cox ever represented that any entity endorsed or approved TaxMasters' services, or that it had any affiliation or certification from any other entity.

Rights conferred. Other jury findings were that TaxMasters and Cox had represented that their agreements with consumers conferred rights or remedies it did not have or that were prohibited by law. Texas argued that Cox should be held personally liable for allowing TaxMasters employees to make such representations, but the court found that the evidence did not establish that Cox personally made or directed any representations that an agreement would confer or involve rights, remedies, or obligations that it did not have or that were prohibited by law. Thus there was no evidence to support this jury finding, the court ruled.

Spokesman role. The jury had also found that Cox advertised goods or services with the intent not to sell them as advertised. However, the court ruled that Cox, as advertising spokesman for TaxMasters, did not advertise his personal services. Rather, the court stated, TaxMasters advertised the sale of tax resolution services and utilized Cox in those advertisements. Thus Cox could not be held personally liable for advertising TaxMasters' services with the intent not to sell them as advertised.

Substantiation of claims. TaxMasters sales scripts stated that consumer's tax debts would be settled for "pennies on the dollar," but the court found no evidence that Cox personally developed the sales script or directed TaxMasters' employees to use the sales script. Separately, Cox made statements in advertisements that TaxMasters would settle debts to the IRS for "pennies on the dollar." Texas argued that the statements were "wholly unsubstantiated", but the court disagreed, stating that an unsubstantiated claim was not necessarily a false, misleading or deceptive claim.

Cox also made statements in TaxMasters' advertisements that "former IRS agents and tax professionals" were available for representation. Texas argued that such statements were false or misleading because most consumers did not have former IRS agents or tax professionals handling their cases. The court disagreed that these statements were deceptive, because TaxMasters did employ such professionals.

The court concluded that there had been no evidence supporting the jury's findings of DTPA violations by Cox personally, and therefore reversed the trial court's judgment of personal liability by Cox for DTPA violations.

The case is Civil Action No. 07-12-00453-CV.

Attorneys: Mark E. Erickson (Sprouse Shrader Smith, PC) for Patrick R. Cox. Nanette Marie DiNunzio, Attorney General's Office, for the State of Texas.

Cases: StateUnfairTradePractices Advertising ConsumerProtection TexasNews