Melea Limited v. Commissioner , 118 T.C. No. 12 ( 2002 )

118 T.C. No. 12UNITED STATES TAX COURT
MELEA LIMITED, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7268-00. Filed March 22, 2002.
R sought production of certain transcripts of
depositions taken in a patent infringement suit in
which P was a defendant. Pursuant to stipulation and
agreement of the parties to the infringement suit, the
U.S. District Court entered a protective order
regarding materials that any of the parties could label
as confidential without leave of the District Court.
In response to R’s request, P refused to produce the
deposition transcripts, contending that to do so would
be in violation of the protective order. The
transcripts are otherwise discoverable and relevant to
the tax issue before this Court. The infringement suit
is closed, and expense, loss of time, and inconvenience
would be occasioned by requiring the parties in this
case to proceed to the District Court to attempt to
reopen the closed infringement suit.
Held: P will be compelled to produce the
protected materials, and this Court’s compulsion order
will incorporate the requirements of the District
Court’s protective order to continue the protection of
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any proprietary business information that may be
contained in the deposition transcripts.
Eric J. Zinn, for petitioner.
Michael J. Cooper, for respondent.
OPINION
GERBER, Judge: We consider respondent’s motion seeking to
compel production of transcripts of certain depositions from
petitioner. Petitioner’s refusal to produce is based on its
argument that production would result in a violation of a
protective order issued by another court. We consider whether it
would be appropriate to compel petitioner to produce under such
circumstances.
Background
Melea Limited is a Gibraltar corporation with a business
address in Geneva, Switzerland. Michael Ladney (Ladney), who is
the petitioner in a related case pending in this Court, is a U.S.
citizen who was the prior owner of several patents associated
with petitioner’s business activity, as it relates to plastic
injection molding. Ladney is the principal shareholder of
several U.S. corporations involved in the manufacture of plastic
parts. At some time, Ladney transferred patents and other assets
to offshore entities, including petitioner.
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Without detailing the relationships of the various entities
that respondent contends exist, we note that respondent
determined generally that certain U.S. entities related to Ladney
are dependent agents of petitioner which, within the context of
section 864(c)(5),1 negotiated contracts on behalf of
petitioner. On that premise, respondent determined that
petitioner’s income is from sources outside the United States
which are effectively connected with petitioner’s U.S. trade or
business. Apparently, petitioner does not deny that it had a
U.S. trade or business but disputes that its income from sources
outside the United States is effectively connected with its U.S.
trade or business.
Respondent seeks copies of deposition transcripts taken in
connection with litigation in the U.S. District Court for the
Middle District of Florida. Petitioner was a defendant in
litigation styled Cinpres Ltd. v. Hendry, Case No. 96-752-CIV-T-
24B (M.D. Fla., Dec. 12, 1998) (Cinpres case). That case
involved a patent infringement action brought by Cinpres, a
British company, against petitioner and a competitor of
petitioner. Petitioner, a foreign corporation, questioned the
U.S. District Court’s jurisdiction over it, and depositions were
taken, in part, to discern the relationship between petitioner
1
Section references are to the Internal Revenue Code, and
Rule references are to the Tax Court Rules of Practice and
Procedure.
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and two of Ladney’s U.S. entities (the same ones that respondent
determined were petitioner’s dependent agents).
Pursuant to stipulation and agreement of the parties in the
Cinpres case, the District Court entered a protective order on
June 10, 1997, in order to “expedite the flow of discovery
material, facilitate the prompt resolution of disputes over
confidentially, adequately protect material entitled to be kept
confidential, and insure that protection is afforded only to
material so entitled”.
Although there had been disagreement between the parties as
to the content of the order, the parties, after assistance from
the District Court, stipulated and agreed to an order, which the
District Court approved. Under the protective order, any party,
without court approval, could designate documents as either
“confidential” or “attorney’s eyes only” by stamping same on the
document. Only documents containing “highly sensitive business
or technical information” could be stamped for “attorney’s eyes
only”. The Cinpres case was closed on December 12, 1998, without
a trial and following a settlement reached by the parties.
In pertinent part, the Cinpres protective order contained
the following prohibition on the use of documents classified as
confidential by the parties: (1) Other than use by the parties
to the Cinpres litigation and their counsel, disclosure of a
classified document was not permitted without prior written
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consent of the party that had classified the document as
confidential; (2) parties could apply to the court for
declassification of a document; (3) confidential information in
depositions could be classified as confidential by underlining
the confidential portion and designating that portion as under
the protective order; (4) if a classified document was subpoenaed
or ordered produced by another court, the party that classified
the document was to be advised; (5) classified documents were to
be used only for preparation and trial in the Cinpres case; (6)
the protective order provisions did not terminate at the
conclusion of the Cinpres case; and (7) within 120 days of the
termination of the Cinpres case the parties’ counsel were
permitted to maintain one set of protected matter, and all other
copies were to be returned to originating party or destroyed, at
the option of the originating party.
Initially, petitioner refused to produce any of the
depositions but now has produced redacted versions to respondent.
The redacted versions reflect that the redacted portions had been
classified as confidential under the protective order.2
Respondent contends he is entitled to the redacted portions.
Petitioner contends that to the extent it has not produced
2
There is no indication who classified the redacted
portions as protected. We assume that the deponent classified
the redacted portions. The deponents were generally either
parties or their agents.
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documents or provided the redacted portions, it is unable to do
so because of the protective order entered in the Cinpres case.
Discussion
Petitioner urges this Court to respect the terms of the
protective order, which prohibits disclosure without modification
of the order and/or approval of the District Court that issued
the order. Petitioner suggests that respondent should first
attempt to request the District Court that issued the order to
modify it in order to accommodate the disclosure. Petitioner
further postulates that this Court should not entertain
respondent’s discovery request until after respondent has shown
that he was unable to obtain the materials from the District
Court. Petitioner, however, also argues that respondent is not
entitled to the protected material. We note that petitioner, who
was a party in the Cinpres case and would have standing under the
terms of the protective order, has not offered to approach the
District Court to facilitate respondent’s access to the protected
material.3 Petitioner is vigorously attempting to keep
3
We observe that petitioner has resisted the production of
the depositions. Petitioner appears to be using another court’s
protective order as a shield or bar to compliance with
respondent’s discovery request. Petitioner has not suggested any
alternatives and has displayed an aversion to seeking
modification of the protective order under consideration.
Petitioner does not contend that any portion of the deposition
transcripts it has withheld contains proprietary business
information that would be in need of protection.
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from respondent the redacted portions of the deposition
transcripts.
The material sought by respondent is relevant to the issues
we consider. As stated in Rosenfeld v. Commissioner, 82 T.C.
105, 112 (1984):
Rule 70(b) limits discovery to information or responses
which are relevant to the subject matter of the pending
litigation and which are not otherwise protected from
discovery on the ground of privilege or other
limitation. The standard of relevancy in a discovery
action is liberal. Zaentz v. Commissioner, 73 T.C.
469, 471-472 (1979). The burden of establishing that
the documents or responses sought are not relevant or
otherwise not discoverable is on the party opposing
production. Rutter v. Commissioner, 81 T.C. 937(1983); Branerton II, supra at 193; P.T. & L.
Construction Co. v. Commissioner, supra at 408.
Petitioner has not shown that the material sought by respondent
is not relevant. Petitioner, however, has raised the question of
whether the protective order issued in the Cinpres case is a
limitation on production in this proceeding.
This is our first occasion to consider whether this Court
should order the production of material which was subject to
another court’s protective order in a case which has been closed.
Under the District Court’s protective order, a party or
“aggrieved entity” was permitted to intervene to declassify a
document. Clearly, petitioner would have been entitled to seek
to declassify the redacted portions of the deposition. To the
extent petitioner is the classifying party, it may have been
entitled to disclose without declassification. Respondent,
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possibly as an “aggrieved entity”, would have been able to seek
declassification of the materials sought here.4
There appears to be no question about whether the protective
order survived the Cinpres litigation and continues to have full
force and effect on the parties subject to it or about the
issuing District Court’s ability/authority to modify or revoke
the order. See Public Citizen v. Liggett Group, Inc., 858 F.2d
775, 780-782 (1st Cir. 1988).
Matters of comity influence courts’ decisions whether to
issue orders that affect or modify protective orders issued by
other courts. See, e.g., Deford v. Schmid Prods. Co., 120 F.R.D.
648, 650, 655 (D. Md. 1987); Puerto Rico Aqueduct & Sewer Auth.
v. Clow Corp., 111 F.R.D. 65, 67-68 (D.P.R. 1986). “These
principles, while unquestionably important, are not absolute, and
courts asked to issue discovery orders in litigation pending
before them also have not shied away from doing so, even when it
would modify or circumvent a discovery order by another court”.
Tucker v. Ohtsu Tire & Rubber Co., 191 F.R.D. 495, 499-500 (D.
Md. 2000).
Respondent did not have the opportunity to intervene in the
Cinpres case to seek access to the materials, and we are not
4
We must assume from petitioner’s argument that respondent
should first attempt to obtain the documents by seeking them from
the District Court that petitioner believes that respondent had
standing under the protective order to seek declassification of a
document.
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certain that respondent has standing to currently seek
modification of the protective order that was entered. The
materials in question go to the heart of the merits of the tax
controversy in this case; i.e., the relationship between
petitioner and certain U.S. corporations. Under similar
circumstances, courts have recognized that a practical solution
may be needed. In that regard, the Cinpres case is closed, and
considerable delay and expense would be occasioned by the
reopening of that case or the filing of a new action to seek
modification of a protective order. Tucker v. Ohtsu Tire &
Rubber Co., supra at 500.
One pivotal consideration is whether the court issuing the
order merely sanctioned the agreement of the parties or whether
the terms of the order instead reflect the issuing court’s
deliberative process. Where the issuing court has merely
sanctioned the parties’ agreement, those circumstances have been
considered to be more like a private “contract” between the
parties than a holding of a court. Id.
The circumstances of the case before us appear to fit within
the guidelines that have been established by other courts for
compelling discovery of material that was specifically or
generally under a protective order of another court. We proceed
with caution and employ a pragmatic approach to a difficult
procedural problem. In doing so we follow the direction of
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several other Federal courts.5 The court in Tucker v. Ohtsu Tire
& Rubber Co., supra, formulated guidelines, which it distilled
from various court holdings, to assist in deciding whether it is
appropriate to enter a discovery order that would have the effect
of modifying an order issued by another court. We find that
formulation helpful in our consideration of respondent’s motion
to compel petitioner’s production of the deposition transcripts
in question.
The first area of inquiry is the nature of the other court’s
protective order. This inquiry focuses on whether the order was
issued by a court as its resolution of a controversy or whether
the court simply approved the parties’ agreement. Courts have
afforded less deference to orders based on an agreement of the
parties and merely approved by the court. Conversely, more
deference has been afforded in situations where a court’s order
resulted from a holding that is based on the court’s deliberative
process.
5
Cases where one court compelled production of material
from a prior proceeding subject to a protective order: Morton
Intl., Inc. v. Atochem N. Am., Inc., 18 U.S.P.Q.2d 1411 (D. Del.
1990); LeBlanc v. Broyhill, 123 F.R.D. 527 (W.D.N.C. 1988); and
Carter-Wallace Inc. v. Hartz Mountain Indus., Inc., 92 F.R.D. 67(S.D.N.Y. 1981). Cases where production was denied: Dushkin
Publg. Group, Inc. v. Kinko’s Serv. Corp,, 136 F.R.D. 334, 335
(D.D.C. 1991); Deford v. Schmid Prods. Co., 120 F.R.D. 648, 650,
655 (D. Md. 1987); and Puerto Rico Aqueduct & Sewer Auth. v. Clow
Corp., 111 F.R.D. 65, 67-68 (D.P.R. 1986).
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Concerning this aspect, petitioner contends that the
protective order in the Cinpres case was entered after an
extended period of disagreement by the parties, hearings by the
District Court, and assistance/involvement of the judge.
Petitioner also points out that the protective order that was
finally entered was different in some respects from those
originally proposed by each party. Petitioner contends that the
order we consider did not merely represent a ministerial act by
the District Court, and, accordingly, more deference should be
afforded the order.
Respondent points out that the parties stipulated and agreed
to the protective order entered by the District Court. In that
regard, the order and the matters it covers were not subjected to
deliberation by the District Court. Although the District Court
played a role (mediator or monitor) in resolving the parties’
disagreement/negotiations regarding the content of the proposed
protective order, the District Court did not deliberate or decide
the controversy. Ultimately, the District Court entered a
protective order which had been stipulated and agreed to by the
parties. Under those circumstances, less deference need be
afforded the protective order on the theory that it is
essentially an agreement of the parties. Although we pay less
deference to the order conceptually, we defer to its substance
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and intent to protect the confidential materials that may be
contained in the deposition transcripts.
The second Tucker factor concerns the identity of the party
from whom discovery is sought. This factor focuses on whether
the document sought is from a person originally entitled to have
it. As a party to the Cinpres case, petitioner was entitled to
the transcript of depositions, and, therefore, petitioner was an
original holder of this document.
Petitioner points out that the Tucker case involved a one-
sided order; i.e., the protected materials flowed from one
source. Petitioner contends that the circumstances of this case
are different because it was not a one-sided (sole source) order.
Respondent counters that the documents sought (depositions) could
have been designated as protected by any of the parties in the
Cinpres case. In effect, the deposition transcripts are the
rightful property of each litigant and could have been treated by
any as confidential. In that regard, petitioner has not shown or
contended that the redacted portions of the deposition testimony
were exclusively sourced in another party in the Cinpres case.6
Additionally, petitioner does not contend that the redacted
portions of the deposition transcripts contained material that,
6
If petitioner had shown that the protected material was
exclusively sourced in another, the protective order provides for
notice to that party before production of a protected document
pursuant to another court’s order.
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in substance, requires protection, such as proprietary business
information.
The third Tucker factor concerns whether the case in which
the order was issued is still pending, and if not, the court is
to consider the burden and expense that will be incurred in order
to seek modification of the order. The District Court proceeding
was settled by the parties and is no longer pending. On this
aspect, petitioner recognizes that expense and delay would be
occasioned by an action to reopen the infringement proceeding
simply to seek modification of the protective order. Petitioner,
however, contends that it is the only avenue by which the
protective order should be approached and that this Court should
not “circumvent” the District Court’s order.
Respondent contends that he is not a party to the Cinpres
case. In addition, intervention in the Cinpres case would
require the involvement of the U.S. Department of Justice, which
would further complicate this matter and increase the expenditure
of public resources. Respondent also contends that it would be
an imposition on the District Court to interject it into a
discovery dispute in the U.S. Tax Court.
We agree with respondent. The District Court would have to
be asked, for the first time, to interpret and/or to modify an
order negotiated by the parties in a case that is now closed and
final. The additional cost in expense, time, and inconvenience
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of the courts and the parties to seek review by the court that
issued the order is not warranted in this setting.
The final factor concerns whether this Court, by
incorporating similar terms and protections in our order, could
continue the protections originally approved in the District
Court’s order. On that point, petitioner argues that neither
petitioner nor respondent has moved this Court for such a
protective order. Petitioner’s concern is that the Cinpres case
involved patent infringement and the possible need to protect any
proprietary business information. In that regard, the District
Court’s protective order appears to adequately provide for
protection of any proprietary business information. If we
incorporate the terms of the District Court’s protective order
into an order compelling the production of the requested
deposition materials, the same obligations and restrictions will
be imposed, with the exception that they will now be imposed on
respondent. We see no reason why the terms of the District
Court’s protective order cannot be incorporated into this Court’s
order compelling any production of materials from the Cinpres
case.
As explained, the information respondent seeks is relevant
to the issues we consider. It would be unjust to permit
petitioner continued access to this type of information with no
access to respondent. Another approach to remedying this
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situation would have been to order petitioner to produce the
materials without addressing the protective order. To simply
order such production would, however, place petitioner in the
position of having to seek modification of the Cinpres order and
to bear the expense of same. As a practical matter, petitioner
has not shown why the approach we have chosen (order production
with continued protection under the terms of the protective
order) is not appropriate under the conditions we consider.
To reflect the foregoing,
An order will be issued
granting respondent’s motion to
compel and providing for continued
protection of the materials to be
produced.