Palo Alto will have to spend $1.275 million on refunds to phone customers and attorneys fees as part of a settlement that the city has reached with a resident who filed a lawsuit almost six years ago.

At issue is the utility users tax, which Palo Alto first began collecting in 1987 and moved to modernize seven years ago, when voters approved Measure C. In her lawsuit, Eileen Staats argued that prior to the 2014 amendment, the city had been illegally collecting taxes for telephone services that are exempt from the federal excise tax. Staats then filed a class-action lawsuit that sought a refund to Palo Alto taxpayers of all taxes that the city had collected between Aug. 1, 2006, and December 2014.

The suit advanced in 2018, when the Santa Clara County Superior Court supported the plaintiffs' request and granted them class certification. The court also supported in 2019 a motion from the city to limit any tax recovery to the period between Dec. 24, 2013, and Dec. 18, 2014, based on time limitations in the Government Claims Act.

The court did not, however, issue any rulings as to whether the tax was legally collected. Rather, the two sides reached a settlement agreement that requires the city to set aside $1.275 million for a "settlement fund" that would pay for refunds, attorney's fees and a $10,000 incentive payment to Staats for serving as class representative.

JND Legal Administration, the firm representing the plaintiffs, has indicated that it will seek $197,000 in attorney fees from the settlement fund, though the settlement specifies that the amount designated for fees cannot exceed $475,000. The firm noted in its announcement that if any balance remains in the settlement fund after all the fees and refunds are made, the balance will be returned to the city.

"To avoid the expense and burden of further litigation," the settlement states, the parties have agreed to settle "all known and unknown claims, disputes, and causes of action between them" arising from Staats' lawsuit.

If the Superior Court approves the terms of the settlement on Sept. 2 as expected, the process of issuing the refunds will proceed over the coming months, as the plaintiffs' attorney issues notices to customers who may be eligible for refunds. Residents and businesses that paid the utility tax between Dec. 24, 2013, and Dec. 18, 2014, will have until Aug. 30, 2021, to submit their claim form and supporting documentation, according to an announcement published by JND (the firm also created the site utilityuserstax.com with more information about the settlement).

The settlement stipulates that eligible customers will receive refunds of $8.50 per telephone line for the first five telephone lines; $7.50 per line for the next five phone lines; and $6.50 per line for the all remaining phone lines.

The Staats lawsuit is one of two class action suits that Palo Alto is now facing relating to its financial practices. Last year, the Superior Court ordered the city to issue $12 million in refunds to gas customers following a class-action lawsuit initiated by resident Miriam Green, who challenged the city's practice of transferring money from utilities to its general fund. The final judgment and order in that case is expected later in the summer, at which point both sides will have a chance to file an appeal.