The Fifteenth Court of Appeals justices traveled to Texas A&M School of Law in Fort Worth Thursday to hear arguments in disputes over taxes and trade secrets.
The first case they heard originated from the 200th District Court in Travis County. Following a bench trial, Judge Jessica Mangrum denied the comptroller and attorney general’s counterclaim and awarded American Airlines a tax refund of $107,577.04, plus interest.
American Airlines filed suit seeking to recover its protest payment of the Texas franchise tax paid on baggage fee revenue for 2015. It claims that the federal Anti-Head Tax Act preempts the imposition of franchise taxes on the revenue stream of baggage fees.
The comptroller and attorney general allege in a counterclaim that the airline improperly excluded revenue from passenger ticket sales and freight transportation and owes additional Texas franchise tax for 2015 based on the inclusion of those revenue streams.
Two questions were presented to the justices. First, does the federal Anti-Head Tax Act preempt the inclusion of transportation receipts in the Texas franchise tax calculation? Second, for report year 2015, did American Airlines improperly exclude from its Texas franchise calculation over $36 billion of passenger revenue and freight revenue?
Kyle Counce of the attorney general’s office argued on behalf of the state and said the case presents an issue of first impression for the court.
Justice April Farris asked whether Texas’ franchise tax law is unique.
Counce responded no, but that Texas is also a large state with a lot of interstate travel and no state income tax.
“It’s the perfect storm for this to come forward,” Counce said.
Holland & Knight partner Richard Phillips argued on behalf of American Airlines.
Chief Justice Scott Brister said, “This is just a puzzle.”
“What is going on with this franchise tax?” Brister asked.
Phillips said that the tax is on baggage fees and not ticket fees.
The case is Kelly Hancock, Acting Comptroller of Public Accounts of the State of Texas and Ken Paxton, Attorney General of the State of Texas v. American Airlines Inc., 15-24-00113-cv.
After a short break, the justices then heard arguments in a trade secrets case that originated in the Texas Business Court.
CreateAI Holdings filed suit against Bot Auto Tx for alleged violations of the Texas Uniform Trade Secrets Act and sought a temporary injunction, alleging Bot Auto started its business operations using confidential, proprietary and trade secret information that belonged to CreateAI.
CreateAI has allegedly lost hundreds of millions of dollars in researching and developing technology for an autonomous driving system that would allow the autonomous operation of semitrucks on open public roads without a human in the vehicle or remote human intervention.
The confidential, proprietary and trade secret information that Bot Auto allegedly misappropriated included power and steering systems.
Last December, just three days after Christmas, Judge Sofia Adrogué denied CreateAI Holdings’ application for a temporary injunction against Bot Auto Tx.
Dykema member Christopher Kratovil argued on behalf of CreateAI Holdings.
“There is not a smoking gun here, but there is a mountain of circumstantial evidence,” Kratovil told the justices.
Brister said seeing driverless cars has become normalized in Austin, but a driverless 18-wheeler sounded “terrifying.” He then asked if CreateAI still does business. Kratovil said it no longer does business in the U.S. but does operate in Asian countries, including Japan.
“This is the easiest irreparable harm showing I have ever had to make,” Kratovil said.
Jackson Walker associate Alli Allman argued on behalf of Bot Auto and told the court that CreateAI bore the burden to connect the dots for the Business Court on irreparable harm and failed to do so.
During Kratovil’s rebuttal, he urged the court to rule in a way that would protect his client’s trade secrets, arguing, “I have no control over what they do unless there’s an injunction preventing them from transferring or disseminating our trade secret material.”
The case is CreateAI Holdings Inc. F/K/A TuSimple Holdings Inc. v. Bot Auto TX Inc., 15-25-00001-cv.
Correction: A previous version of this story incorrectly identified the lawyer for Jackson Walker who argued on behalf of Bot Auto. The Lawbook regrets the error.