Judge David S. Cunningham, Case JCCP5052 2022-07-25 Tentative Ruling

Altria moves to seal portions of the Arriaza (20STCV36282) and Montelaro (CGC-19-579617) second amended complaints (“SACs”).

The court may order that a record be filed under seal only if it expressly finds facts that establish:

(1) There exists an overriding interest that overcomes the right of public access to the record;

(3) A substantial probability exists that the overriding interest will be prejudiced if the record is not sealed;

The parties’ agreement to seal documents is not enough to support a motion to seal. (See Weil & Brown, Cal. Prac. Guide: Civ. Proc. Before Trial (The Rutter Group 2021) ¶ 9:417.1 [“Parties sometimes operate under an informal arrangement pursuant to which documents are ‘deemed filed under seal’ unless an objection is made. Such an arrangement ‘is entirely inconsistent with the mandatory requirements of rules 2.550 and 2.551 and the constitutional values informing those requirements.’”].)

“Only the specific words of documents that constitute the sensitive material should be sealed; generally, it is not permissible to seal the entire document.” (Id. at ¶ 9:418.5.)

However, the California Constitution’s right of privacy extends to confidential financial information. (See Overstock.com, Inc. v. Goldman Sachs Group, Inc. (2014) 231 Cal.App.4^th 471, 503 [the right of privacy “embraces confidential financial information in ‘whatever form it takes, whether that form be tax returns, checks, statements, or other account information’”].)

Absent voluntary disclosure by the moving party, financial information ordinarily should be sealed because it involves confidential matters relating to business operations and would prejudice the moving party’s business interests if made available to the public. (See Universal City Studios, Inc. v. Superior Court (2003) 110 Cal.App.4^th 1273, 1285-86.)

Altria moves to seal paragraph 637 in the Arriaza SAC and paragraph 637 in the Montelaro SAC. Altria argues that the paragraphs contain sensitive business information. (See Motion, pp. 7-8.)

The paragraphs are identical. They generally allege that Altria Client Services (“ACS”) agreed to assist JUUL Labs, Inc. in preparing a Premarket Tobacco Product Application to submit to the Food & Drug Administration. The paragraphs identify several specific examples of assistance that ACS allegedly provided.

* the purported assistance includes confidential business information relating to ACS’s testing, consulting, regulatory insights, etc.;

* an overriding interest exists in protecting the confidential business information from disclosure to competitors and the public;

* there is a substantial probability that Altria will suffer prejudice – e.g., competitive harm – if the paragraphs are not sealed; and

* the proposed sealing is narrowly tailored and the least restrictive means to protect the confidential business information, especially since Altria merely seeks to seal one paragraph per SAC (the SACs each contain more than 850 paragraphs).

Under Case Management Order (“CMO”) No. 11, each Plaintiff is required to submit a Plaintiff Fact Sheet (“PFS”) within 90 days after CMO No. 11 was entered (10/20/20), or, for cases filed after CMO [No.] 11 was entered, within 90 days from the order coordinating the case with JCCP 5052. (See Motion, p. 3.)

On 4/14/22, the Court issued an order dismissing the claims of numerous Plaintiffs who failed to file PFSs. The Court dismissed those Plaintiffs’ claims without prejudice. (See 4/14/22 Order Granting JLI’s Motion to Dismiss, p. 2.)

Here, JLI moves to convert the dismissals without prejudice to dismissals with prejudice.

Any Plaintiff who fails to comply with his or her PFS obligations under this Order may be subject to having his or her claims dismissed. If a Plaintiff has not submitted a completed PFS within 30 days following the due date set forth herein, Defendants may send a Notice of Overdue Discovery via MDL Centrality.

If a Plaintiff fails to submit a completed PFS within 30 days after receipt of the Notice of Overdue Discovery, any Defendant may move the Court for an Order dismissing the Plaintiff’s Complaint without prejudice. A Plaintiff subject to such motion shall have 14 days from the date of the Defendant’s motion to file a response either (a) certifying that the Plaintiff has submitted a completed PFS or (b) opposing the Defendant’s motion for other reasons. If a Plaintiff certifies that he or she has submitted a completed PFS, the Plaintiff’s claims shall not be dismissed (unless the Court finds that the certification is false or incorrect).

XIII. Motion to Convert Order of Dismissal without Prejudice to Order of Dismissal with Prejudice

If the Court dismisses a Complaint without prejudice under the previous paragraph, any Defendant may move the court no earlier than 30 days after the Court’s entry of the Order of Dismissal Without Prejudice to convert the Order to an Order of Dismissal With Prejudice. If the Plaintiff serves moving Defendant’s counsel or their designee(s) with a completed PFS prior to the filing of Defendant’s motion to convert a dismissal without prejudice to a dismissal with prejudice, the parties shall submit a stipulated motion to vacate the dismissal without prejudice Order.

As noted above, the Court issued the “dismissal without prejudice” order on 4/14/22.

Plaintiffs had 30 days from that date to file PFSs to avoid being subject to dismissals with prejudice. (See CMO No. 11, p. 8, § XIII.)

JLI represents that Plaintiffs failed to submit PFSs within 30 days. (See Motion, p. 3; see also Horowitz Decl., ¶¶ 5-7.)

Accordingly, the Court grants the motion. The 275 Plaintiffs’ claims are now dismissed with prejudice.

[1] The 275 Plaintiffs are identified in the Horowitz declaration, Exhibit B. (See Horowitz Decl., ¶ 7, Ex. B.)

JLI’s motion to compel is granted as to the Out-of-State Plaintiffs who did not file California tax returns or federal tax returns that include equivalent California tax information.

JLI’s motion to compel is granted in part and denied in part as to the California Plaintiffs. It is granted as to the waiver exception and denied without prejudice as to the “public policy” exception.

At issue is JLI’s motion to compel 567 Plaintiffs to submit tax return authorizations pursuant to Case Management Order (“CMO”) No. 11.[1]

“A privilege to resist compelled disclosure of personal and business tax returns is implied from various statutes making it a misdemeanor for taxing authorities to divulge the particulars contained in a required tax return or report.” (Wegner, et al., Cal. Prac. Guide: Civ. Trials and Evidence (The Rutter Group 2021) ¶ 8:2575, emphasis in original.)

“The purpose of the privilege is to facilitate collection of taxes. Permitting compelled disclosure would likely discourage taxpayers from making full and truthful declarations in their tax returns, out of concern their returns could be used against them for other purposes.” (Id. at ¶ 8:2576.)

“There is no comparable privilege under the federal rules of evidence.” (Id. at ¶ 8:2577.)

“The privilege protects all tax returns, whether personal or corporate, including income, employment, estate, payroll and sales tax returns.” (Id. at ¶ 8:2579.) “It also covers business (corporate and partnership) tax returns.” (Ibid., emphasis in original.)

“Further, the privilege protects all entries made on tax returns (e.g., amounts of income reported, deductions claimed, etc.). I.e., the content of the return, as well as production of the returns themselves, is privileged.” (Id. at ¶ 8:2580, emphasis in original.)

“Also protected are any other documents forming an “integral part” of the tax returns — such as W-2 forms.” (Id. at ¶ 8:2581.)

The taxpayer privilege “is not absolute.” (King v. Mobile Home Rent Review Bd. of County of San Luis Obispo (1989) 216 Cal.App.3d 1532, 1537.) “[T]he privilege is waived or does not apply in three situations: ‘(1) there is an intentional relinquishment [citation], (2) the “gravamen of [the] lawsuit is so inconsistent with the continued assertion of the taxpayer’s privilege as to compel the conclusion that the privilege has in fact been waived” [citation], or (3) a public policy greater than that of confidentiality of tax returns is involved [citation].’” (Schnabel v. Superior Court (1993) 5 Cal.4^th 704, 721; see also Weingarten v. Superior Court (2002) 102 Cal.App.4^th 268, 274 [“The privilege will not be upheld when (1) the circumstances indicate an intentional waiver of the privilege; (2) the gravamen of the lawsuit is inconsistent with the privilege; or (3) a public policy greater than that of the confidentiality of tax returns is involved.”].)

JLI claims the motion to compel should be granted as to the Out-of-State Plaintiffs because the taxpayer privilege does not cover out-of-state tax returns. (See Motion, pp. 9-10; see also Reply, pp. 3-4.)

JLI relies on Firestone v. Hoffman (2006) 140 Cal.App.4^th 1408. There, the trial court found the plaintiff’s Canadian tax returns privileged and excluded them from disclosure at trial. The Second District Court of Appeal reversed, holding that the taxpayer privilege “does not apply to foreign tax returns.” (Firestone, supra, 140 Cal.App.4^th at 1419.)

Plaintiffs contend the Court “already ruled that California law applies to all Plaintiffs, regardless of residence.” (Opposition, p. 7.) They additionally contend treating the Out-of-State Plaintiffs “differently than California residents during discovery . . . would make this coordinated action inefficient, inconsistent, and unwieldly.” (Ibid.)

The Court agrees with JLI. The taxpayer privilege applies to California tax returns and federal tax returns that contain the same information as the California tax returns. (See Firestone, supra, 140 Cal.App.4^th at 1419-1420 [noting that the California Supreme Court extended the taxpayer privilege’s reach to federal tax returns “merely as a means of protecting the privileged status of California returns, because ‘forcing disclosure of the information in the federal tax return would be equivalent to forcing disclosure of the state returns”], emphasis added.) JLI fails to show that the Out-of-State Plaintiffs filed such returns, California or federal, so this portion of the motion to compel should be granted.[2]

* The Court did not already rule that California law applies. At the demurrer stage, the Court applied California law because JLI failed to establish the applicability of other states’ laws, but the Court noted that JLI remains free to reraise the “choice of law” issue down the road. (See, e.g., Reply, p. 4 n.2.) The taxpayer privilege did not come up at that hearing.

* Plaintiffs cite zero authority applying the taxpayer privilege to out-of-state returns in complex and coordinated actions for the purpose of judicial management.

Ninety-four of the 567 Plaintiffs live in California. (See Kristovich Decl., ¶ 12.)

JLI contends the 94 California Plaintiffs waived the California taxpayer privilege by seeking lost income. (See Motion, pp. 10-12; see also Reply, pp. 4-6.)

JLI primarily cites Newson v. City of Oakland (1974) 37 Cal.App.3d 1050. In Newson, a motorcyclist collided with a newly constructed concrete traffic island, suffered injuries, and sued Oakland for damages. During trial, the judge rejected the plaintiff’s assertion of the privilege against self-incrimination and ordered him to disclose “his failure to file federal and state income tax returns.” (Newsom, supra, 37 Cal.App.3d at 1052.) The plaintiff appealed, and the Court of Appeal affirmed. The Court of Appeal reasoned that, because the plaintiff claimed loss of income, he waived the privilege and had to either withdraw the claim or answer the tax questions. JLI contends Newsom’s reasoning “is ‘equally applicable’ to the taxpayer privilege.” (Motion, p. 11.)

Plaintiffs assert that, since 1957, “there has not been a single California state court that held the taxpayer privilege is waived in a civil tort suit where the plaintiff made a routine wage loss allegation. Not one case.” (Opposition, p. 3.)

Plaintiffs cite King, supra, 216 Cal.App.3d 1532 and Webb v. Standard Oil Company of California (1957) 49 Cal.2d 509, claiming the situation here is analogous. (See id. at pp. 4-5.)

In King, the plaintiff filed a hardship application to increase rent at his rent controlled mobile home park. The rent review board refused to process the application because he failed to submit his federal tax returns. The trial court granted the plaintiff’s petition for peremptory writ and ordered the review board to accept the hardship application. Affirming, the Court of Appeal found the review board’s waiver argument unavailing:

Appellant's argument, that disclosure of respondent's tax returns is permissible because he waived the privilege of confidentiality by voluntarily submitting a hardship application, has no merit. As respondent notes, the rent control ordinance does not compel tax return information. Such requirement is merely an informal administrative policy established after the ordinance was enacted. Moreover, appellant has not shown that verification of respondent's application will be impossible without the information contained in his returns. [Citation.] Consequently, respondent's attempt to file a rent increase application does not signify his implied consent to have appellant review his tax returns.

The Webb plaintiffs alleged that Standard Oil and its agent negligently installed propane gas cylinders, causing their home to burn down. “Two insurance companies, each of which had paid plaintiff[s] $5,000 in accordance with the terms of fire insurance policies . . . , were joined as parties defendant, and they cross-complained against” Standard Oil and the agent. (Webb, supra, 49 Cal.2d at 510.) The trial court entered judgment for the plaintiffs and the insurance companies. On appeal, Standard Oil and the agent argued that the trial court erred by failing to order the plaintiffs to “produce copies of their state and federal income tax returns for the year of the fire.” (Id. at 512.) They asserted that they were entitled to review the tax returns to see if the plaintiffs had made “claims for deductions” related to the fire. (Ibid.) The California Supreme Court found the tax returns privileged pursuant to the Revenue and Taxation Code and affirmed:

The purpose of the amended statutory provisions prohibiting disclosure is to facilitate tax enforcement by encouraging a taxpayer to make full and truthful declarations in his return, without fear that his statements will be revealed or used against him for other purposes. If the information can be secured by forcing the taxpayer to produce a copy of his return, the primary legislative purpose of the secrecy provisions will be defeated. The effect of the statutory prohibition is to render the returns privileged, and the privilege should not be nullified by permitting third parties to obtain the information by adopting the indirect procedure of demanding copies of the tax returns.

* Newsom is distinguishable because it involved the privilege against self-incrimination, not the taxpayer privilege, and the plaintiff was simply asked to admit that he had not filed federal and state tax returns, not to produce actual returns.

* King is distinguishable because “it arose from an administrative hearing” instead of a court proceeding, and the rent review board requested the tax returns to assess a hardship application whereas Plaintiffs assert judicial lost income claims to which JLI is entitled to prepare defenses. (Reply, p. 5.)

* Webb is the decision that first announced the taxpayer privilege. It is distinguishable because the defendants requested the plaintiffs’ tax returns for impeachment – “to unearth potential claims for deductions” – not to defend against claims for lost income. (Ibid.) Notably, the decision does not address waiver.

But consider the Rutter Guide. Congruent with JLI’s position, it opines that plaintiffs “impliedly waive the privilege by seeking damages for loss of income . . . at least where they refuse to produce any other substantial evidence on the lost income issue. The theory is that plaintiffs should not be allowed to put defendants into an ‘evidentiary straightjacket’ by testifying to some ‘phantom’ existence of proof.” (Wegner, supra, at ¶ 8:2595.)

Ultimately, the Court agrees with JLI. The federal decisions cited in JLI’s papers purport to apply California law and appear to adopt “tender-of-income issue” waiver. In Endsley, for example, the district court held that the taxpayer privilege is waived “where a plaintiff’s complaint places his tax return at issue through an allegation of lost income.” (Endsley v. Travelers Property Cas. Ins. Co. (E.D. Cal., May 16, 2015, Case No. 1:14-CV-00346-LJO-GSA) 2015 WL 2380657, at *3; AJY International, Inc. v. Paldo Co., Ltd. (N.D. Cal., Aug. 19, 2017, Case No. 17-cv-00744-VC (LB)) 2017 WL 3588241, at * 4 [noting that a claim for lost profits can effect waiver of the taxpayer privilege and that a the presence of a protective order weighs in favor of production]; Small v. Travelers Property Cas. Co. of America (S.D. Cal., June 21, 2010, Case No. 08cv1160-BTM (WMc) 2010 WL 2523649, at *3 [finding taxpayer privilege waived because the gravamen of the plaintiffs’ claim was lost income and profits but limiting disclosure, as required by the protective order, to the defendant’s attorneys and experts].) The Court finds these decisions persuasive, and, under the circumstances here, they support compelling production of Plaintiffs’ tax returns given that Plaintiffs allege loss of income claims, and the protective order prohibits disclosure and use outside the litigation.

Plaintiffs seeking lost income cannot shield their tax returns from discovery through any generalized right to privacy. “There is no recognized federal or state constitutional right to maintain the privacy of tax returns.” [Citation.] Rather, when it comes to confidential financial records, the “right of privacy must be balanced against [a] civil litigant’s right to discover facts.” [Citation.] Because their tax returns will “substantiate (or undermine) Plaintiff[s’] assertions of lost income,” any privacy interest Plaintiffs hold in maintaining the confidentiality of their tax returns is outweighed by the relevance of those returns . . . .

The protective order already in place further tips the balance in favor of requiring disclosure of Plaintiffs’ tax returns by expressly protecting tax information as confidential and restricting its use to only this litigation. Courts have found the presence of such a protective order weighs in favor of disclosing tax returns. [Citations.] The protective order also requires Defendants to return or destroy confidential documents following the lawsuit’s final disposition, and upon request, to affirm in writing that specific documents were either returned or destroyed. [Citation.]

These protective order provisions will ensure that whatever intrusion that may result from disclosure of Plaintiffs’ tax returns pursuant to the PFS authorizations will not be “sufficiently serious” in its “actual or potential impact to constitute an egregious breach” of privacy. [Citation.] As such, under these circumstances, the applicable balancing of interests tips well in favor of disclosure.

Plaintiffs contend JLI is invoking the “public policy” exception.[3] They assert that the motion should be denied because the exception is narrow, and JLI fails to “demonstrate[] a policy that outweighs Plaintiffs’ . . . privilege of confidentiality.” (Opposition, p. 6.)

JLI has not invoked the public policy exception to the taxpayer’s privilege, which provides an alternate avenue besides waiver for finding the privilege inapplicable. A public policy justification for overriding the privilege is unnecessary where the privilege has been waived. [Citation.] It is therefore unnecessary for the Court to find a public policy justification to compel compliance with CMO No. 11, because Plaintiffs have waived the taxpayer’s privilege by asserting a claim for lost income, an act “so inconsistent with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished.” [Citation.]

The Court reiterates that the taxpayer privilege “is waived or does not apply in three situations: ‘(1) there is an intentional relinquishment [citation], (2) the “gravamen of [the] lawsuit is so inconsistent with the continued assertion of the taxpayer’s privilege as to compel the conclusion that the privilege has in fact been waived” [citation], or (3) a public policy greater than that of confidentiality of tax returns is involved [citation].’” (Schnabel, supra, 5 Cal.4^th at 721; see also Weingarten, supra, 102 Cal.App.4^th at 274 [“The privilege will not be upheld when (1) the circumstances indicate an intentional waiver of the privilege; (2) the gravamen of the lawsuit is inconsistent with the privilege; or (2) a public policy greater than that of the confidentiality of tax returns is involved.”].)

JLI does not claim Plaintiffs intentionally relinquished the taxpayer privilege.

As explained in the “waiver” section, JLI establishes waiver relative to Plaintiffs’ lost income claims.

Regardless, the Court finds JLI’s burden unsatisfied as to the “public policy” exception because JLI makes no effort to identify a public policy greater than the confidentiality of Plaintiffs’ tax returns. (See Reply, p. 6 [declaring that JLI is not invoking the “public policy” exception].)

[1] The 567 Plaintiffs are identified in Bethany Kristovich’s declaration, Exhibit E.

[2] The Court agrees with JLI that, “[i]n the event any Plaintiffs seeking economic losses who reside out of state filed California tax returns during the applicable period, such Plaintiffs can be dealt with on a case-by-case basis.” (Motion, p. 10 n.6.)

[3] The “public policy” exception provides that the taxpayer privilege “is subject to disclosure where a public policy greater than that of confidentiality of tax returns is involved.” (Wegner, supra, at ¶ 8:2585, emphasis in original.)