Court Opinion

ID: 3065028
Source: CourtListenerOpinion
Date Created: 2015-10-14 22:28:23.870845+00
Date Added: 2024-06-11T11:49:43.106584
License: Public Domain

FOR PUBLICATION
  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

CITY OF OAKLAND, CALIFORNIA,            
                 Plaintiff-Appellant,
                 v.
HOTELS.COM LP; HOTELS.COM GP,
LLC; TRIP NETWORK, INC., d/b/a
Cheap Tickets, Inc.; TRAVELPORT,              No. 07-17258
INC., f/k/a Cendant Travel
Distribution Services Group Inc.;               D.C. No.
EXPEDIA, INC.; INTERNETWORK                CV-07-03432-SBA
PUBLISHING CORP., d/b/a                      ORDER AND
Lodging.com; LOWESTFARE.COM                   AMENDED
INC.; ORBITZ, INC.; ORBITZ, LLC;               OPINION
PRICELINE.COM, INC.; SABRE
HOLDINGS CORP.; SITE59.COM, LLC;
TRAVELOCITY.COM INC;
TRAVELOCITY.COM LP; TRAVELWEB
LLC; TRAVELNOW.COM, INC.,
              Defendants-Appellees.
                                        
       Appeal from the United States District Court
          for the Northern District of California
      Saundra B. Armstrong, District Judge, Presiding

                   Argued and Submitted
         April 17, 2009—San Francisco, California

                   Filed July 16, 2009
                 Amended August 20, 2009

                            11439
11440            CITY OF OAKLAND v. HOTELS.COM
     Before: John T. Noonan, Glenn L. Archer, Jr.,* and
           M. Margaret McKeown, Circuit Judges.

                 Opinion by Judge McKeown

  *The Honorable Glenn L. Archer, Jr., Senior United States Circuit
Judge for the Federal Circuit, sitting by designation.
               CITY OF OAKLAND v. HOTELS.COM             11441

                         COUNSEL

Monique Olivier, The Sturdevant Law Firm, San Francisco,
California, for the plaintiff-appellant.

Darrel J. Hieber, Skadden, Arps, Slate, Meagher & Flom, Los
Angeles, California, for the defendants-appellees.

                          ORDER

  The Opinion filed on July 16, 2009, is amended as follows:
On slip Opinion page 9152, line 19, strike the following text:

    The “hotel tax” in California derives from a state law
    that permits municipalities to “levy a tax on the priv-
    ilege of occupying a room or rooms, or other living
    space, in a hotel, inn, tourist home or house, or other
    lodging.” Cal. Rev. & Tax Code § 7280(a).

  and insert the following text:

    Oakland’s authority to enact a “hotel tax” is derived
    from the city’s status as a “Charter City.” See City
11442            CITY OF OAKLAND v. HOTELS.COM
of San Bernadino Hotel/Motel Ass’n v. City of San Bernadino,
59 Cal. App. 4th 237, 243 (1997).

  No further petitions for rehearing will be entertained.

                            OPINION

McKEOWN, Circuit Judge:

   This is a classic case of jumping the gun. The City of Oak-
land brought suit against ten Internet travel companies, claim-
ing that they failed to calculate and remit occupancy taxes in
violation of the Transient Occupancy Tax Ordinance. The dif-
ficulty is that Oakland never assessed or imposed the tax;
instead, the City filed suit in federal court for, among other
things, collection of the taxes. The district court dismissed the
suit with prejudice because the City failed to comply with the
Ordinance’s exhaustion requirement. We agree that exhaus-
tion is required, although we conclude that dismissal without
prejudice is appropriate. Absent a tax assessment, there is
nothing to enforce nor could we divine what the “unpaid
taxes” might be. The starting point for resolution of this dis-
pute is not the federal court but the administrative process,
which is geared to address precisely these questions.

                           BACKGROUND1

   According to the complaint, the Internet travel companies
negotiate discount hotel rates and then sell hotel rooms to
consumers. The retail charge to the customer includes the
wholesale price that the operators pay to the hotels, an online
service charge, and any taxes. The Internet travel companies
collected taxes from users based on the retail price of the
room, but remitted to Oakland the taxes based only on the
  1
   This background description is derived from the Complaint, which we
accept as true.
                CITY OF OAKLAND v. HOTELS.COM              11443
wholesale price. The companies kept the “tax” they collected
from the consumers on the markup from the wholesale price
to the retail price. Although the parties disagree as to the
applicability of the Ordinance, they do agree that no tax has
yet been assessed by the City via the assessment process cre-
ated by the Ordinance.

   Oakland’s authority to enact a “hotel tax” is derived from
the city’s status as a “Charter City.” See City of San
Bernadino Hotel/Motel Ass’n v. City of San Bernadino, 59
Cal. App. 4th 237, 243 (1997). Oakland enacted an ordinance
to levy such a tax, the Transient Occupancy Tax Ordinance,
which provides: “For the privilege of occupancy in any hotel,
each transient is subject to and shall pay a tax in the amount
of eleven (11) percent of the rent charged by the operator.”
Ordinance § 4.24.030. The Ordinance defines an operator as
“the person who is proprietor of a hotel whether in the capac-
ity of owner, lessee, sublessee, mortgagee in possession,
licensee, or any other possessory agent of any type or charac-
ter . . . .” Id. § 4.24.020. The operator, who is required to col-
lect the tax “to the same extent and at the same time as the
rent is collected from every transient,” id. § 4.24.050, must
remit the tax to the City, id. § 4.24.070. Failure to abide by
the Ordinance subjects the operator to penalties and interest.
Id. § 4.24.080.

   The Ordinance lays out a multi-step administrative process
for assessment. In mandatory terms, the Ordinance provides
that the Tax Administrator “shall proceed to determine and
assess against such operator the tax, interest and penalties”
and provide notice of the assessment. Id. § 4.24.090. If the
operator does not contest the Tax Administrator’s assessment,
it “shall become final.” Id. The operator may appeal, how-
ever, in which case the Tax Administrator must provide a jus-
tification for the assessment and conduct a hearing, following
which the Tax Administrator “shall determine” the tax owed.
The operator is permitted a further appeal to the Oakland Tax-
ation and Assessment Board of Review. Id.
11444           CITY OF OAKLAND v. HOTELS.COM
   Against this backdrop, the district court dismissed the case
with prejudice for lack of subject matter jurisdiction. The
court concluded that failure to exhaust the administrative pro-
cess was fatal to the City’s tax liability claim and that Oak-
land had not made any assessment against the travel
companies and “indeed not . . . even initiated any administra-
tive process.” Because the City’s other claims—conversion,
unfair business practices, unjust enrichment, and imposition
of a constructive trust—are dependant on the Internet travel
companies’ tax liability, the court likewise dismissed these
claims for failure to exhaust.

                           ANALYSIS

  I.    Exhaustion is Required Under California Law

   [1] Under California law, exhaustion of administrative rem-
edies is a jurisdictional requirement and “absent a clear indi-
cation of legislative intent [a court] should refrain from
inferring a statutory exemption from [the State’s] settled rule
requiring exhaustion of administrative remedies.” Campbell v.
Regents of Univ. of Cal., 35 Cal. 4th 311, 322 (2005). More
specifically, in addressing a tax matter, the California Court
of Appeal has counseled that “when administrative machinery
exists for the resolution of differences, the courts will not act
until such administrative procedures are fully utilized and
exhausted. To do so would be in excess of their jurisdiction.”
City of Los Angeles v. Centex Telemanagement, Inc., 29 Cal.
App. 4th 1384, 1387 (1984) (citing Horack v. Franchise Tax
Board, 18 Cal. App. 3d 363, 368 (1971)).

    [2] Oakland is not the first California city to dispute the
hotel tax vis-a-vis Internet travel companies. In consolidated
litigation involving a municipal ordinance similar to the one
at issue here, the cities of Los Angeles and San Diego sued
a group of Internet travel companies in Los Angeles Superior
Court. That court rejected arguments mirroring those made by
Oakland here and held that the cities did not initiate the tax
                CITY OF OAKLAND v. HOTELS.COM            11445
assessment scheme, “let alone exhaust [their] administrative
remedies prior to filing suit.” Transient Occupancy Tax
Cases, City of San Diego, California v. Hotel.com, L.P., No.
GIC 861117 (Cal. Super. Ct., July 27, 2007); City of Los
Angeles, California v. Hotels.com, L.P., No. BC 326693 (Cal.
Super. Ct. July 27, 2007). Other state and federal courts to
consider the issue have similarly required administrative
exhaustion. See, e.g., City of Atlanta v. Hotels.com, L.P., 654
S.E.2d 166 (Ga. Ct. App. 2007); City of Orange, Texas v.
Hotels.com, L.P., No. 1:060-CV-413, 2007 WL 278795 (E.D.
Tex. Sept. 21, 2007); County of Nassau v. Hotels.com, L.P.,
594 F. Supp.2d 251 (E.D.N.Y. 2007); City of Philadephia v.
Hotels.com, Nos. 0106023, 122014, 2006 WL 1520749 (Pa.
Ct. Com. Pl. May 25, 2006). We are in accord with the ratio-
nale employed in these decisions—exhaustion is required
because the tax Ordinance provides for administrative reme-
dies.

   Oakland argues that its Ordinance does not require a tax
assessment before suit is brought and that, in any case, the
administrative remedies apply only to the operators, not the
taxing authority. This strained interpretation is belied by the
plain language of the Ordinance. The Ordinance uses manda-
tory language to impose the City’s initial obligation, i.e. the
Tax Administrator “shall obtain facts and information on
which to base his or her estimate of the tax due,” “shall . . .
assess . . . the tax,” and “shall give notice of the amount to
be assessed.” Ordinance § 4.24.090 (emphasis added). The
operator may challenge this assessment of course and is enti-
tled to a hearing and review. Id.

   [3] To suggest that the City is somehow exempt from this
administrative process because the Ordinance does not spell
out a right to an appeal process for the City would upend the
Ordinance. The City has nothing to appeal after the assess-
ment process—it unilaterally imposes the tax. The provision
permitting the City to bring an enforcement action for the
recovery of outstanding taxes, Ordinance § 4.24.130, does not
11446           CITY OF OAKLAND v. HOTELS.COM
mean that there can be an enforcement action without an
assessment. This same argument was labeled “flawed” and
rejected by the state court in Los Angeles: “The City’s posi-
tion makes two assumptions that are not supported by the alle-
gations in its complaint. First, an action seeking judicial
enforcement assumes there is something to enforce. With no
assessment, however, there is nothing that the City is seeking
to ‘enforce.’ Second, the City’s assumes there are unpaid
taxes.” City of Los Angeles v. Hotels.com, L. P., No. BC
326693 at 8. The assessment and appeal are part of an interre-
lated administrative process that fixes the tax due.

   Oakland offers an alternate argument, namely that exhaus-
tion is excused because the administrative remedy is inade-
quate and the process would be futile. We acknowledge that
the exhaustion requirement has some flexibility and that in
appropriate cases, these principles support exceptions to the
exhaustion requirement. See Ogo Assoc. v. City of Torrance,
37 Cal. App. 3d 830, 834 (1974). This is not such a case.

   The notion that the administrative process leaves the City
out in the cold makes no sense here. As the district court
noted, “The City’s remedy for collecting suspected unpaid
taxes begins with an audit and assessment.” The City is cen-
tral to the administrative process, once there is a final assess-
ment and the tax remains unpaid, the City may file suit to
collect the tax. This administrative chronology, which
imposes an obligation on the City to first assess the tax,
hardly renders the administrative remedy inadequate.

   [4] Although the City is correct that it would not be able to
recover on its other claims via the administrative process—
conversion, unfair business practices, unjust enrichment, and
imposition of a constructive trust—it does not follow that the
City can simply sue in federal court without exhausting its
administrative remedies. The City’s theory of liability for all
of the torts and contracts claims is completely dependent on
the Internet travel companies owing the tax to the city. Put
                 CITY OF OAKLAND v. HOTELS.COM               11447
simply, if the tax is not owed, the claims brought by the City
fail. Because the City’s other claims are intertwined with the
tax claim, the City must actually assess the tax before it can
sue in federal court.

   Similarly, we reject the City’s characterization that exhaus-
tion would be futile because the position of the parties is
already “clear.” The issue in this case is not the “positions”
of the parties but rather the actual tax liability. If such a futil-
ity exception to the administrative exhaustion requirement
were triggered by a taxpayer taking the position that the tax
is not owed, the exception would swallow the rule.

  II.   Unexhausted Claims Should Be Dismissed Without
        Prejudice

   [5] Claims should be dismissed with prejudice only when
it is clear that no amendment could cure a defect in the com-
plaint. The district court mistakenly concluded that dismissal
with prejudice was appropriate “because it is clear that absent
any actual assessment of tax liability against the Defendants,
any amendment to the complaint would be futile.” However,
failure to exhaust administrative remedies is properly treated
as a curable defect and should generally result in a dismissal
without prejudice. See O’Guinn v. Lovelock Corr. Center, 502
F.3d 1056, 1063 (9th Cir. 2007); Wyatt v. Terhune, 315 F.3d
1108, 1119-20 (9th Cir. 2003). Nothing in this case suggests
a reason to depart from this general rule. Hence, we affirm the
dismissal for lack of subject matter jurisdiction but remand so
that the dismissal is without prejudice.

  AFFIRMED IN PART; REVERSED IN PART. Costs
on appeal are awarded to Appellees.