Rejecting the Massachusetts Commissioner of Revenue’s Position That, Under the Massachusetts Sales Tax Statutes, a Purchaser of Goods Who Believes She Has Been Erroneously Charged A Sales Tax May Sue a Vendor For Breach of Contract To Recover The Amount Paid
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This case arises from litigation related to the long-running dispute between Dell (the plaintiff in this case is a Dell subsidiary) and Massachusetts purchasers of Dell computers who allege allege that Dell improperly charged them a Massachusetts sales tax on service contracts that they purchased with their Dell computers.  Initially, the purchasers attempted to bring a Mass. G.L. c. 93A class action in the Massachusetts courts.  NELF was heavily involved in supporting Dell’s eventually successful arguments before the Massachusetts Supreme Judicial Court that  the dispute was subject to the service contracts’ mandatory arbitration provision and class action waiver.  Accordingly, the case was ordered to arbitration on an individual basis, and Dell prevailed before the arbitrator.
 
While the challenge to Dell’s collection of sales taxes was pending in court and, then, in arbitration, Dell, as a protective measure, applied to the Massachusetts Department of Revenue (“DOR”) for an abatement of the disputed sales taxes so that, if it lost on the merits, it would have funds to pay back the sales taxes it had collected. (This was done because, as required under Massachusetts law, Dell had already remitted to the Department of Revenue the disputed sales taxes that it had collected from its purchasers.)  When the DOR denied the abatement request, Dell appealed that decision to the Massachusetts Appellate Tax Board (“ATB”).  While Dell’s appeal was pending before the ATB, one of the plaintiffs in the c. 93A action, Econo-Tennis Management Corporation, d/b/a Dedham Health and Athletic Complex (“Dedham”), successfully intervened in the ATB appeal.  The ATB issued a preliminary decision finding that the sales tax had been wrongly collected by Dell.
 
Dell, having won in the arbitration, moved to dismiss its ATB appeal, with which motion the DOR concurred.  The ATB dismissed the appeal over Dedham’s objection.
 
The central issue before the Massachusetts court in this appeal is whether the ATB was correct in dismissing Dell’s appeals, even though Dedham objected.
 
NELF’s participation was requested because the DOR, in its brief supporting the dismissal of the cases, argued that, even if the ATB appeals were dismissed, Dedham still had a remedy.  The DOR claimed that Dedham had a statutory right to sue Dell for the improper sales tax under a theory of breach of contract.  Dell’s attorneys asked NELF to file an amicus brief disputing the DOR’s position on this issue.
 
In its amicus brief, NELFargued that neither the Massachusetts sales tax statutes nor the common law of agency authorizes a purchaser to sue a vendor  to recover an allegedly erroneous sales tax, which the vendor has collected as an agent of the Commonwealth.  Nowhere does the relevant provision of the sales tax code, G. L. c. 64H, § 3(a),[1] mention or even suggest any right of action by the purchaser against the vendor.  By contrast, the plain language of § 3(a)  protects the rights of the vendor, not the purchaser.  Section 3(a) requires the purchaser to reimburse the vendor for the sales tax that the vendor must pay to the Commonwealth under § 2 of the same statute.  Simply put, the sales tax statute establishes the respective obligations of the vendor and the purchaser in the payment of a sales tax to the Commonwealth.  The statute creates a steady stream of revenue flowing from the purchaser through the vendor to the Commonwealth, and nothing more.
 
Indeed, the SJC recognized in an earlier stage of this very case that the sales tax statute places the vendor in the role of the Commonwealth’s agent or trustee, for the purpose of collecting a sales tax from the purchaser and remitting it to the Commonwealth, as Dell has done here.  See Feeney v. Dell Inc., 454 Mass. 192, 213 (2009) (“[V]endors who, on behalf of the Commonwealth, compute, collect, and file sales tax returns, and remit full sales tax for each customer transaction[,] serve as trustees for the Commonwealth’s retail sales taxes . . . .”) (citation and internal quotation marks omitted).  Moreover, the Department of Revenue in this case expressly instructed Dell that, based on the Department’s own regulation, Dell had the duty to collect the disputed sales tax.
 
Under these circumstances, it is black letter law that Dell, as an agent acting on behalf of the Commonwealth, the known principal, cannot be held liable for any acts performed within the scope of its authority.  This foundational principle of agency law recognizes that Dell acted merely as a conduit between the purchaser and the Commonwealth, for the purpose of delivering the sales tax to the Commonwealth.  Therefore, any dispute over this tax collection is between the Commonwealth (the principal) and the purchaser (the third party). 
 
NELF also argued that adoption of the DOR’s position would contravene the purposes of the tax statutes and would lead to untenable results.  In particular, permitting purchasers to sue vendors every time there is a sales tax dispute would contravene the basic purpose of the sales tax statute, which is to secure a reliable stream of revenue for the Commonwealth.  Recognizing such a right of action would actually encourage vendors to under-collect a sales tax whenever the tax law is unclear (a not infrequent occurrence), to avoid their potential exposure to civil liability.  As a result, the Commonwealth could suffer a decrease in the amount of sales tax collected.  And vendors would be forced to make the impossible choice of incurring either state penalties for under-collection or civil liability for over-collection.  The Legislature could not have intended such absurd and draconian results.
 
In addition, the Commissioner’s position would create the untenable result of allowing purchasers to sue vendors over a sales tax after the expiration of the time period for seeking an abatement of the sales tax.  Specifically, an application for abatement must be made within one to three years of the disputed tax assessment, under G. L. c. 62C, § 37.  Under the Commissioner’s approach, however, a purchaser would have four or six years to sue the vendor over the validity of the same sales tax.  See G. L. c. 106,    § 2-725(1)(four-year statute of limitations for sale of goods); G. L. c. 260, § 2 (six-year statute of limitation for express or implied contract claim).  As a result, a vendor could be exposed to liability over a sales tax long after the vendor’s right to recoup the sales taxes from the Commonwealth has expired.
 
And finally, the Commissioner’s position would allow a court to decide in the first instance whether a tax abatement is due.  This would deprive both DOR and the ATB of their primary jurisdiction to decide such tax issues.


[1] That section of the sales tax statute provides, in relevant part:
 
[R]eimbursement for the [sales] tax hereby imposed [on the vendor under G. L. c. 64H, § 2] shall be paid by the purchaser to the vendor . . . and such tax shall be a debt from the purchaser to the vendor, when so added to the sales price, and shall be recoverable at law in the same manner as other debts.
 
G. L. c. 64H, § 3(a).  

Arguing That Neither An Outside Director of Nor An Investor in a Failed Startup May Be Held Personally Liable for Unpaid Wages and Treble Damages Under the Massachusetts Wage Act
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On September 5, the Supreme Judicial Court heard oral argument in this case, in which NELF filed an amicus brief in support of the defendants, a venture capitalist and his manager who invested considerable funds and efforts in a failed biotech start-up limited liability company.  At issue is whether such directors and outside investors of a company doing business in Massachusetts can be held personally liable for mandatory treble damages under the Massachusetts Wage Act, G. L. c. 149, § 148, for the company’s nonpayment of an employee’s wages.  The Wage Act imposes liability on both the employer and “[t]he president and treasurer of a corporation and any officers or agents having the management of such corporation . . . .”  G. L. c. 149, § 148 (emphasis added).  And this Court has interpreted an “agent having the management of such corporation” to mean a high-ranking manager of the employer who has authority over the employer’s payment of wages.  See Cook v. Patient Edu, LLC, 465 Mass. 548, 549 (2013) (Wage Act applies to “a manager who controls, directs, and participates to a substantial degree in formulating and determining the financial policy of a business entity . . . .”)  (citation and internal quotation marks omitted).
 
The plaintiff in this case, Dr. Andrew Segal, was the president, CEO, and the sole officer of a biotech start-up company called Genitrix, LLC, a Delaware limited liability corporation doing business in Massachusetts.  Genitrix’s mission was to develop a cancer-fighting molecule that would train the body’s immune system to attack cancer cells.  Dr. Segal prevailed in a jury trial in his claim to hold the defendants, H. Fisk Johnson, III and Stephen Rose, personally liable for Genitrix’s nonpayment of his wages.  Neither defendant was ever the president, treasurer, or an officer of Genitrix.  And so the issue is whether either defendant was an “agent having the management of” Genitrix under the Wage Act and Cook, when Genitrix failed to pay Segal his salary.
 
NELF argued that the Wage Act does not, on its face, apply to the directors of a corporation, or to individuals occupying comparable positions in any other entity covered by the Act.  This is because the Wage Act omits directors from its list of those corporate actors who are subject to personal liability--i.e., “[t]he president and treasurer of a corporation and any officers or agents having the management of such corporation . . . .”  G. L. c. 149, § 148.  Nor has the Legislature intended the word “agents” to include directors.  To the contrary, the Legislature has recognized throughout the General Laws that directors are not agents of the corporation.  In particular, the Legislature has named directors separately from agents in several other statutes that address the duties and powers of corporate actors.  In light of the Legislature’s repeated distinction between directors and agents in those other statutes, the word “agents” in the Wage Act should not be interpreted to include directors. 
 
NELF argued further that the Legislature’s frequent distinction between directors and agents is consistent with the common law of agency, under which a director is not an agent of the corporation, for two simple reasons.  First, to be an agent, an individual must be subject to the principal’s control.  But a director is not subject to the control of another (other than her placement in office by the shareholders).  Once in office, a director is free to exercise her own business judgment in overseeing the corporation’s affairs. And second, an agent must be able to act on behalf and for the benefit of the principal.  But a director has no power to act on her own for the corporation.  Instead, she acts only as one of a board of directors that act as a body to supervise the activities of the corporation.
 
NELF also argued that investors in a company, and the individuals who manage their investments, should be allowed to take an active role in protecting those investments without risking the loss of their separate legal identities and becoming “agents” of that company under the Wage Act.  After all, the Wage Act limits personal liability to “agents with the management of such corporation,” i.e., high-ranking managers of the employer who are in charge of the employer’s financial policy.  Cook, 465 Mass. at 549.  But the owners and managers of another company (such as the venture capital firm in this case or, for that matter, a parent corporation) that invests in the employer company are not agents of the employer.  If they are agents at all, those individuals are agents of a separate legal entity that invests in the employer.  Consistent with this foundational principle of corporate separateness, then, investors and their managers should be allowed to take an active role in protecting those investments, such as by specifying the purpose of capital contributions and monitoring the company’s operations, without losing their separate legal identities and becoming agents of the employer under the Wage Act.  To overcome this core principle of corporate separateness, the employee would have to prove extraordinary circumstances to justify disregarding the corporate form and treating those individuals as if they were agents of the employer under the Wage Act.
 
Finally, NELF argued that an adverse decision could chill investment and business growth in Massachusetts, because it would expose venture capitalists and their managers to the additional risk of personal liability for treble damages under the Wage Act.  This could, in turn, undermine the Commonwealth’s economy and the public interest.  Indeed, Massachusetts’ innovative economy owes its success, at least in part, to venture capital.  Without the necessary financing from risk-taking entrepreneurs and the committed efforts of their managers, many start-up businesses with innovative and even life-saving goals (such as the biotech start-up company in this case) would not be able to see the light of day.  After all, Genitrix’s mission was to develop a cancer-fighting molecule, and the facts of this case illustrate the crucial role that venture capital can play in financing the early stages of such a business.
 
However, this case also illustrates that investing in a start-up company is an inherently risky prospect, with no guarantee of success.  Exposing investors to more risk, by subjecting them to potential personal liability under the Wage Act, could deter them from investing capital in already risky start-up companies in Massachusetts.  In the end, society as a whole could be deprived of many potentially innovative and even life-saving products and services because they lacked the initial capital investment to become a reality.  The Legislature could not have intended such socially undesirable results under the Wage Act.  

Urging the Maine Supreme Judicial Court to Adopt Reliance Damages As the Proper Measure  of Compensation for Breach of An Agreement to Negotiate in Good Faith
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This case raises an issue of first impression in Maine, namely what should be the proper measure of damages where a court has determined that there has been a violation of a duty to negotiate in good faith.  Here, the jury, after finding that the duty had been breached and over the defendants’ objection, was permitted by the trial judge to award “lost profits” to the plaintiff.  The appellant, Eastern Maine Electric Corporate, Inc., while not conceding that the jury finding that it had violated its duty was legally correct, also disputes that “lost profits” are a proper measure of damages. 
 
While there is a split in the decisions on this issue throughout the country, NELF has filed an amicus brief urging the Maine Supreme Judicial Court to adopt a general rule that where, as here, a deal has never been finalized, the appropriate measure of compensation for the violation of a duty to negotiate in good faith, should strictly be reliance damages, and not lost profits.  NELF relies on the reasoning of the New York court in Goodstein Constr. Corp. v. City of New York, which focused its legal analysis on the precise nature of the sole obligation that was breached, which was not a breach of a contract, but a breach of the duty of negotiate in good faith a contract not yet in existence.  Since the contract was never executed, NELF argued that it would be anomalous to award expectancy damages for the breach of an agreement that was never finalized.
 
In addition, NELF pointed out several policy and logical reasons that dictate that reliance damages are the most appropriate form of compensation when there has been a failure to negotiate in good faith.  Among these, NELF noted that holding “lost profits” to be the measure of compensation could have a deleterious effect on the use of term sheets and other interim agreements that are routinely used as the parties work through their negotiations; such a ruling would create an in terrorem regime in which such interim documents could be potential bases for “lost profits” damages, which are typically much larger than the actual costs that the parties have sunk into their contract negotiations.  (In this case, the lost profits damage award was $13.6 million, which is exponentially larger than the costs actually incurred by the plaintiff in the negotiations, which were estimated to be not more than $350,000.) 

Opposing Regulatory Encroachment on Coastal Property Rights
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In 1991, the Massachusetts Department of Environmental Protection (DEP) adopted a new regulation under G. L. c. 91 that reversed longstanding common law presumptions about the ownership of shorefront property. Because the most common means of shoreline increase is accretion (slow and gradual addition of upland at the mean high tide line) and because it is so difficult to prove imperceptible, gradual growth, Massachusetts courts have adopted a rebuttable presumption that a shoreline increase is due to accretion. The presumption is important because accretion accrues to the property owner, whereas shoreline increases due to major storms or unpermitted filling do not. The 1991 DEP regulation, 310 CMR § 9.02, reversed this presumption and placed the burden on property owners to prove that all land seaward of the “historic high tide” level has resulted exclusively from “natural accretion not caused by the owner . . . .”
Following promulgation of its regulation, DEP suggested that owners of shorefront property seaward of the “historic” high tide line, as mapped by DEP, apply for amnesty licenses. NELF’s client, Elena Hall, owns a parking lot on shorefront property in Provincetown that provides Ms. Hall with her sole significant source of income. Approximately one-third of the parking lot and a portion of a small rental cottage on the property are seaward of DEP’s “historic” high tide line. Ms. Hall applied for an amnesty license and DEP issued a license imposing several onerous and costly conditions on Ms. Hall’s right to use her property seaward of the “historic” line.
Ms. Hall filed an administrative appeal with DEP and NELF agreed to take over Ms. Hall’s representation in this test case of DEP’s regulation. During the administrative and any subsequent judicial proceedings in this case, NELF will challenge DEP’s mapping of the “historic mean high water mark” and argue that DEP’s regulation exceeds that agency’s statutory authority and effects an unconstitutional taking of private property. NELF will further argue that a license condition requiring a four-foot-wide public access way across the entire width of Ms. Hall’s upland property to the beach effects a taking of her property requiring just compensation. This is so because the public’s limited rights in tidelands do not include a right of access across private upland property to reach the water or coastal tidelands. DEP has therefore imposed a license condition that bears no relationship to any recognized public right, let alone a public right protected under c. 91 and affected by the licensed use of Ms. Hall’s property.
NELF filed a potentially dispositive memorandum of law, accompanied by a detailed and thorough expert affidavit, with multiple map overlay exhibits, arguing that DEP simply has no jurisdiction over Ms. Hall’s property. In particular, NELF staff worked closely with the experts in scrutinizing carefully the historical maps pertaining to Provincetown Harbor and in determining that the application of the mean high tide line derived from the earliest reliable historical map to Ms. Hall’s property leaves the disputed portion of her property free and clear of the designation “Commonwealth tidelands.” NELF received a piecemeal, informal response from DEP challenging various aspects of NELF’s expert’s methodology.
The Administrative Law Judge then ordered the parties’ experts to meet, with the attorneys present, to exchange opinions and determine whether settlement was possible. While the meeting was productive, settlement is not possible at this time. DEP’s most salient challenge concerned the historic location of a lighthouse upon which Ms. Hall’s expert relied in determining the location of the historic mean high water mark. This challenge led the expert to reexamine the historic location of other lighthouses which he used in his methodology. NELF has also researched and briefed potential legal challenges to DEP’s regulation and license conditions under the Takings Clause and the ultra vires doctrine, which NELF would be prepared to reach should it not succeed on its position with respect to the historic high water mark.