Judge stays case against Famous Dave's BBQ franchise over disputed liquor tax

A federal judge has granted a motion by the owner of three Famous Dave’s restaurants in Philadelphia to stay the case against him by a city man who sued in late January over allegations that the eatery has been imposing an unnecessary 8 percent sales tax on alcoholic beverages.

Attorneys with Cohen, Placitella & Roth filed suit on Jan. 24 at the U.S. District Court for the Eastern District of Pennsylvania on behalf of Alan Johnson, a Philadelphia man who claims he and others have been hit with an illegal levy on booze.

The lawsuit, which the Pennsylvania Record first reported on after it was filed, claims that under a Philadelphia ordinance, the restaurant chain is only allowed to charge a 10 percent tax on liquor, not the 18 percent tax on each beverage that Johnson was allegedly hit with while dining at the South Philadelphia Famous Dave’s barbecue joint late last year.

Johnson’s lawsuit, which seeks class action status, claims that when the plaintiff confronted restaurant management about the issue, he was told that that was “what they had always done,” with regard to the total 18 percent tax on each drink.

The complaint names as potential class members anyone who dined at a Philadelphia Famous Dave’s location between 2006 and the present and who purchased alcoholic beverages while dining at the establishment.

In her May 9 memorandum, U.S. District Judge Mary A. McLaughlin denied a motion to dismiss that had been filed by franchisor Famous Dave’s of America and franchisee Pit Masters, but she granted a motion to stay the case.

In seeking dismissal, the defendants had argued that the federal court lacks subject matter jurisdiction and/or that the plaintiff failed to state a claim.

The plaintiff, however, had asserted jurisdiction under the Class Action Fairness Act, which triggers federal jurisdiction if a matter in controversy exceeds the sum or value of $5 million.

In his case, Johnson seeks damages under Pennsylvania’s Consumer Protection Law. The statute states that any person who suffers an ascertainable loss of money as a result of a CPL violation can recover actual damages or $100, whichever is greater.

Johnson relied upon this statutory damage award of $100 for each class member to reach the amount-in-controversy requirement for federal jurisdiction, according to McLaughlin’s memorandum.

The defendants had argued that Johnson would be unable to certify a class because “individual reliance is an element of the plaintiff’s CPL claims. And without class members who can collect the statutory remedy, the plaintiff cannot meet the amount-in-controversy requirement.”

McLaughlin wrote in her memorandum that because the court cannot resolve a “complicated issue of class certification at this state, and the Court of Appeals has advised courts to demand less proof than required for the substantive issue when jurisdictional issues are intertwined, the Court cannot conclude that there is a legal certainty that the plaintiff will be unable to meet that amount-in-controversy requirement.”

McLaughlin also brushed aside the defendants’ claims that the suit should be dismissed for failure to state a claim for which relief can be granted.

The defendants argued that they are not prohibited from charging any amount for the sale of alcohol in their restaurants, and they also argued that Famous Dave’s did not benefit from the overcharged amount.

“Neither argument merits dismissal of the claims,” McLaughlin wrote. “The plaintiff is alleging more than an unwanted premium on the sale of alcohol. He alleges that he paid the additional 8% tax in reliance on the defendants’ inaccurate claim that it was a required tax.”

The defendants also argued that the case should be stayed pursuant to a Pennsylvania Superior Court case that held that before litigation, any dispute involving the payment of sales tax must first be resolved by the Pennsylvania Revenue Department.

Referencing another case in which a woman was charged a 6 percent state sales tax on an article of clothing she ordered from a catalogue, an essential item not normally taxed, McLaughlin wrote that the state appellate court held while the lower court had jurisdiction, it had to stay the case so the plaintiff could pursue a remedy with the state Revenue Department.

“Because of the agency’s expertise in the area, its primary policy role in determining issues of taxation, and the statutory requirements of the internal revenue code, the plaintiff had to petition the Department of Revenue for the collected tax before resorting to the courts,” McLaughlin wrote, referencing the prior case.

In the present case, McLaughlin wrote that while the court is sympathetic to Johnson’s argument “this is not a complicated taxation issue requiring agency expertise … the statutory framework of the Pennsylvania internal revenue code is clear.”

McLaughlin’s stay of the case means Johnson will have to petition the Revenue Department for a refund of the disputed tax money before the matter could proceed in the courts.

The memorandum also said the parties are free to pursue settlement before a U.S. Magistrate Judge if that’s the desire.