Quigley v. American Claims Services, Inc., et al.

Filing 57

ORDER signed by Magistrate Judge Edmund F. Brennan on 11/5/14 ORDERING that defendant's MOTION for PROTECTIVE ORDER 31 is GRANTED in part and DENIED in part. (Mena-Sanchez, L)

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UNITED STATES DISTRICT COURT

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FOR THE EASTERN DISTRICT OF CALIFORNIA

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CAROL QUIGLEY, aka CAROL DIANE
EUWEMA,
Plaintiff,

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No. 2:13-cv-1766-KJM-EFB

ORDER
v.
AMERICAN CLAIMS SERVICES, INC.,
JOHN BANNON, BILL T. JOHNSON,
and SUSAN B. JOHNSON,
Defendants.

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This case was before the court for hearing on defendants’ motion for a protective order.

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ECF No. 31. Attorney Stephen Castronova appeared on behalf of plaintiff; attorneys Anthony

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Modareli and Adrienne Cohen appeared on behalf of defendants. Defendants’ motion for a

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protective order seeks to prevent responses to discovery concerning six distinct issues.

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Specifically, defendants seek to prevent responses to the following requests: (1) Plaintiff’s

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Request for Production of Documents, Set One to American Claims Services (“ACSI”), No. 8; (2)

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Plaintiff’s Interrogatories, Set One to ACSI, Nos. 1 through 6; (3) Plaintiff’s Interrogatories, Set

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One to John Bannon, Bill Johnson, and Susan Johnson, Nos. 1 through 13, and Plaintiff’s

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Interrogatories, Set Two, Nos. 7 through 13; (4) Plaintiff’s Request for Production of Documents,
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Set Five to ACSI, No. 19; (5) Plaintiff’s Request for Production of Documents, Set Five to ACSI,

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Nos. 20-25; (6) Plaintiff’s Interrogatories, Set Two to John Bannon, Nos. 8 through 13.

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For the reasons stated at the hearing, the court denied defendants’ motion for a protective

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order as to plaintiff’s Request for Production of Documents, Set One, No. 8 and plaintiff’s

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Interrogatories, Set One, Nos. 1 through 6. As for the remaining discovery requests, the parties

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raised new arguments that were not briefed in their joint statement. Accordingly, the court

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directed the parties to file supplemental briefs, which have now been submitted. See ECF Nos.

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34, 35.

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After considering the parties’ joint statement, the oral arguments at the hearing, and the

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parties’ supplemental briefs, the court grants defendants’ motion for a protective order as to

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plaintiff’s Interrogatories, Set One, Nos. 1 through 13, served on John Bannon, Bill Johnson, and

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Susan Johnson; plaintiff’s Interrogatories, Set Two, Nos. 7 through 13 served on ACSI; and

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plaintiff’s Interrogatories, Set Two Nos. 8 through 13 served on John Bannon. The motion in all

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other respects is denied.

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I.

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Standard
“The court may, for good cause, issue an order to protect a party or person from

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annoyance, embarrassment, oppression, or undue burden or expense, including . . . (A) forbidding

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the disclosure or discovery.” Fed. R. Civ. P. 26(c)(1). Federal Rule of Civil Procedure 26(b)(1)

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provides that the scope of discovery includes “any nonprivileged matter that is relevant to any

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party’s claim or defense.” Further, relevant information need not be admissible if the discovery

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appears reasonably calculated to lead to the discovery of admissible evidence. Fed. R. Civ. P.

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26(b). Relevant information encompasses “any matter that bears on, or that reasonably could lead

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to other matter that could bear on, any issue that is or may be in the case.” Ibanez v. Miller, No.

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CIV S-06-2668 JAM EFB P, 2009 WL 1706665, at *1 (E.D. Cal. Oct. 22, 2009) (quoting

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Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351 (1978)). Moreover, “[t]he question of

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relevancy should be construed ‘liberally and with common sense’ and discovery should be

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allowed unless the information sought has no conceivable bearing on the case.” Id. (quoting Soto

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v. City of Concord, 162 F.R.D. 603, 610 (N.D. Cal. 1995)).
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Additionally, Rule 26(b)(2)(C) provides that “[o]n motion or on its own, the court must

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limit the frequency or extent of discovery otherwise allowed by these rules or by local rule if it

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determines that: (i) the discovery sought is unreasonably cumulative or duplicative, or can be

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obtained from some other source that is more convenient, less burdensome, or less expensive; (ii)

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the party seeking discovery has had ample opportunity to obtain the information by discovery in

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the action; or (iii) the burden or expense of the proposed discovery outweighs its likely benefit,

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considering the needs of the case, the amount in controversy, the parties’ resources, the

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importance of the issues at stake in the action, and the importance of the discovery in resolving

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the issues.”

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II.

Discussion
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Plaintiff’s Interrogatories, Set One, Nos. 1-13, served on John Bannon, Bill
Johnson, and Susan Johnson and Plaintiff’s Interrogatories, Set Two, Nos. 7-13,
served on ACSI.

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Plaintiff’s Interrogatories, Set One, Nos. 1 through 13, and Set Two, Nos. 7 through 13,

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seeks to discover whether defendants paid to the California Franchise Tax Board income taxes on

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income earned from ACSI’s insurance adjusting business conducted in California during the

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calendar years of 2006-2012. Defendants object, arguing that whether they paid state taxes

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during these years is not relevant to this case. ECF No. 32 at 3. Plaintiff argues that the

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information is relevant to her unfair business practices claim pursuant to Bus. & Prof. Code

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§§ 17200 et seq. (“the UCL”) because it might show that defendant gained an unfair business

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advantage by not paying their taxes. However, plaintiff’s complaint contains no allegations that

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defendants gained unfair business advantage in violation of the UCL by not paying taxes. ECF

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No. 14 at 7-8. Rather, plaintiff’s claims all center on her core allegation that defendants

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improperly used her name, license and signature to obtain a business advantage.

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Plaintiff asserts in her second amended complaint that she is a licensed insurance adjuster,

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that defendant ACSI is an insurance claims management company, that defendant John Bannon is

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a manager at ACSI, that defendant Bill Johnson is the CEO of ACSI, and that defendant Susan

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Johnson is the CFO of ACSI. ECF No. 14 ¶¶ 1-5. According to the complaint, ACSI and
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Bannon began using plaintiff as an independent adjuster in May 2005. Id. ¶ 9. In February 2006,

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Bannon advised plaintiff that ACSI needed to use her California adjuster’s license for its

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California claims operations. Id. ¶ 10. It is alleged that the parties agreed plaintiff would

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become the manager for ACSI in California, and would manage its California claims operations,

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and that ACSI would use plaintiff’s name and insurance adjuster’s license in order to operate an

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insurance claims operation in California as required under California Insurance Code §§ 14000,

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et seq. Id. ¶ 11. It is further alleged that ACSI represented to plaintiff, in writing, that she would

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serve as ACSI’s qualified manager and that plaintiff’s name and license would be used for a short

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period of time. Id. According to plaintiff, ACSI did not perform as promised and continued to

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use her name, license, and signature from March 2006, until January 2013. Id. ¶ 17. Plaintiff

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claims that the use of her name, license, and signature gave defendants an unfair business

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advantage at plaintiff’s expense. Id. ¶ 28.

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In short, plaintiff’s claims are based solely on the use of her license and name and do not

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concern whether defendants paid their state taxes. Furthermore, as discussed at the hearing, it is

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unclear how plaintiff would have standing to bring a claim under the UCL based on defendants’

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failure to pay taxes. California Business and Professions code section 17204 unambiguously

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states that for a private person to have standing to prosecute a UCL violation she must have

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“suffered injury in fact and . . . lost money or property as a result of the unfair competition.”

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Plaintiff conceded at the hearing that she is not in direct competition with defendants. It is

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therefore unclear how plaintiff would have lost money or property based on any failure by

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defendants to pay their state taxes.

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Lastly, plaintiff argues in her supplemental brief that the UCL authorizes disgorgement of

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profits as a remedy for defendants’ alleged unauthorized use of her name and license. ECF No.

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35 at 3-4. She contends that her “ability to prove the amount of profits to be disgorged is

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dependent upon obtaining defendants’ financial records . . . .” The argument fails to establish any

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relevance of the tax information. Her Interrogatories, Set One, Nos. 1 through 13, and Set Two,

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Nos. 7 through 13, seeks only to discover whether defendants paid to the California Franchise

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Tax Board income taxes on income earned from ACSI’s insurance adjusting business conducted
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in California during the calendar years of 2006-2012. They seek only a “yes” or “no” response.

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They do not seek financial documents indicating what profits were realized by defendants.

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Accordingly, these interrogatories are irrelevant and defendants’ motion for a protective order as

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to these interrogatories is granted. Therefore, defendants’ motion is granted as to plaintiff’s

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Interrogatories, Set One, Nos. 1 through 13 served on John Bannon, Bill Johnson, and Susan

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Johnson.1

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B.

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Plaintiff’s request for Production of Documents, Set Five, No. 19, requests that ACSI

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Plaintiff’s Request for Production of Documents, Set Five, No. 19

produce copies of its corporate tax returns filed with the State of California for the years of 2007

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through 2012. Unlike the state tax returns discussed above, ACSI’s corporate tax returns are

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relevant to plaintiff’s claim for misappropriation. Plaintiff seeks to recover all profits defendant

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ACSI gained on account of using her license without her consent. See Cal. Civ. Code § 3344(a)

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(providing that damages for misappropriation of a person’s name, signature, or likeness includes

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“any profits from the unauthorized use that are attributable to the use and are not taken into

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account in computing the actual damages.”). The Corporate tax returns likely contain information

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needed to calculate any such profits.

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ACSI argues that the tax returns are privileged under California law and therefore not

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discoverable. Webb v. Standard Oil Co., 49 Cal.2d 509, 513 (1957). In a federal action based on

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diversity of citizenship, as in this case, state privilege law governs. Fed. R. Evid. 501. The

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California Supreme Court has held that the California Revenue and Taxation Code implicitly

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creates a privilege against the disclosure of income tax returns. Webb v. Standard Oil Co., 49

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Cal.2d 509, 513 (1957). The purpose of the tax return privilege is to promote full and honest

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disclosure when filing taxes. Id. at 513.

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As explained herein, the court finds that plaintiff is entitled to ACSI’s corporate tax
returns for the years of 2007 through 2012. Plaintiff’s Interrogatories, Set Two, Nos. 7 through
13, simply asks whether ACSI paid taxes to the state of California during these calendar years,
with the exception of 2006. ECF No. 32-2, Ex. 5. As the tax returns cover the relevant time at
issue, the court finds that ACSI need not provide a response to plaintiff’s Interrogatories, Set
Two, Nos. 7 through 13
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Plaintiff argues that defendants waived the privilege by intentionally relinquishing the tax

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returns to a third party during an asset sale. ECF No. 35 at 5-6. Defendants admit that ACSI

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provided York Risk Services Group (“York”) its tax returns as a part of a confidential asset

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purchase agreement. ECF No. 34 at 5. They argue, however, that disclosing the tax returns to

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York in connection with the asset sale did not constitute a waiver.

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The burden is on the party asserting the privilege to prove the underlying facts that a

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privilege exits. See Seahus La Jolla Owners Association v. Superior Court, 224 Cal.App.4th 754.

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Once proven, the burden shifts to the party opposing the privilege to show either the claimed

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privilege does not apply, an exception exists, or there has been an express or implied waiver. See

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Venture Law Group v. Superior Court, 118 Cal.App.4th 96 (2004). “[The tax return] privilege is

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waived or does not apply in three situations: (1) there is an intentional relinquishment, (2) the

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gravamen of [the] lawsuit is so inconsistent with the continued assertion for the taxpayer’s

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privilege as to compel a conclusion that the privilege has in fact been waived, or (3) a public

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policy greater than that of confidentiality of tax returns is involved.” Schnabel v. Superior Court,

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5 Cal.4th, 704, 721 (internal quotations and citations omitted). The waiver of a privilege “must

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be narrowly rather than expansively construed,” in order to protect the privilege. Fortunato, 114

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Cal.App.4th 475, 482 (2nd Dist. 2003) (citing Britt v. Superior Court, 20 Cal.3d at 859.)

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Defendants rely on Fortunato for their argument that the disclosure of ACSI’s corporate

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tax returns in the course of the asset sale does not constitute an intentional relinquishment. In

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Fortunato, a proponent of a will in a probate dispute provided his tax returns to a bank as a part of

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a loan application. 114 Cal.App.4th at 487. The will’s contestant sought the tax returns directly

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from the bank. Id. The proponent moved for a protective order claiming that the returns were

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privileged. Id. The probate court denied the motion. Id. at 478-479. On appeal, the California

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Court of Appeal, Second Appellate District, held that providing tax returns to a bank as part of a

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loan application does not effect a waiver of the tax return privilege. Id. at 482.

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The court reasoned that the purpose of the privilege does not support a waiver when tax

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returns are relinquished as part of a loan application. Fortunato, 114 Cal.App.4th at 482. The

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court provided two connected reasons for why the purpose of the privilege does not support a
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waiver under such circumstances. Id. First, a bank customer reasonably expects the bank to

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maintain the confidentiality of their tax returns. Id at 480; see also Burrows v Superior Court, 13

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Cal.3d 238, 243 (1974). The constitutional right to privacy creates a “reasonable belief” that tax

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returns provided to a bank will remain confidential. Id. at 480. The court recognized that the will

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proponent did not assert his privacy right as a part of his motion for a protective order and

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therefore did not review the issue specifically in that case. But, the court concluded that “the

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constitutional right of privacy in financial documents in a bank’s possession has bearing upon the

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question of whether the tax-return privilege was waived in this case.” Id. at 482. Accordingly,

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the court held that the privilege was not waived, in part, because the tax returns were provided to

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a third party that the will proponent had a “reasonable belief” would keep them confidential. See

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id. at 480-481.

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The court also found that providing a bank with tax returns as part of a loan application is

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not entirely voluntary. Fortunato, 114 Cal.App.4th at 481. “[T]he disclosure by individuals or

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business firms of their financial affairs to a bank is not entirely volitional, since it is impossible to

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participate in the economic life of contemporary society without maintaining a bank account.” Id.

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The court observed that bank customers are regularly required to transmit their tax returns to

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banks in order to obtain a loan, “a necessary aspect of economic life,” but they do so with the

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confidence that those returns will remain confidential. Id. at 480-482. The court observed that

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this creates a reality where banks regularly have their customers’ tax returns. It reasoned that if a

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litigant was able to obtain the tax returns of every opponent who had provided their bank with a

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tax return, the purpose of the privilege would be defeated. Taxpayers would no longer have

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confidence that their returns would remain confidential if litigation arose; their opponents would

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be able to obtain their tax returns despite the privilege because they were forced to waive the

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privilege by providing their returns to a bank. Id. Essentially, finding a waiver under such

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circumstances would swallow the privilege.

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Defendants argue that the holding in Fortunato should be extended to the circumstance

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presented here. ECF No. 34 at 5. They argue that the practice of providing tax returns to

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potential purchasing companies is analogous to providing tax returns to a bank for purposes of a
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loan. They argue that the agreement was confidential and was consistent with a regular business

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practice in the industry of companies providing tax returns to purchasing companies as a part of

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an asset sale. ECF No. 34 at 5-6. The question, however, is not whether the disclosure was

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pursuant to a regular business practice. As explained in Fortunato, for the relinquishment of a tax

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return to not be a waiver, the party claiming the privilege must have had both (1) a “reasonable

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belief” that the information would be kept confidential,2 and (2) the relinquishment must not have

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been “entirely voluntary.” See Fortunato, 114 Cal.App.4th at 481-482.

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ACSI argues that it had a reasonable belief that the tax returns would remain confidential.

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ECF No. 34 at 5-6. ACSI explains that it entered into a confidential agreement with York as part

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of an asset sale before providing them the tax returns, ECF No. 34 at 1-2, and argues that the

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agreement gave ACSI confidence that the information they provided to York, including the tax

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returns, would remain confidential. ACSI argues that its “reasonable belief” that the tax returns

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would remain confidential is akin to that of a bank customer who believes their financial

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information will remain confidential. ACSI also argues that participation in an asset sale is an

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economic reality for businesses the same way participating in the banking system is an economic

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fact of life. ECF No. 34 at 5-6.

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While it does appear that ACSI had a reasonable expectation that York would keep its tax

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returns confidential, the court is not convinced that disclosure was involuntary. There is little

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reason to doubt that participating in asset sales is a common act for a business, but such

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participation is voluntary—it is not fundamental to economically functioning as a business. A

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business can still be profitable and still survive without participating in take overs. While it may

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often be an easy choice for a business to participate in a purchase agreement given the significant

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profits they may receive, it is still a choice. Participating in the banking system is not a “choice”

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in the same sense. A business or individual has to participate in the credit system in order to

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It is clear that under California law an expectation that information will remain
confidential is not alone sufficient to retain a privilege. See McKesson HBOC, Inc. v. Superior
Court, 115 Cal.App.4th, 1229 (Reciting attorney client communication to federal government as
part of confidential agreement in criminal investigation effected a waiver of the privilege).
However, the reasonable belief of confidentiality is only an aspect of the analysis, more is
required for a waiver not to have been effectuated. Fortuanto, 114 Cal.App.4th at 481-482.
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realize the basic benefits of modern life. (e.g. owning a home, purchasing a car, capitalizing a

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business, meeting payroll, funding an education.) Businesses may participate in asset sales to

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obtain healthier profits, but this is not the only means for generating profits.

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Furthermore, negotiations with a bank are not at arm’s length in the sense of parties

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negotiating over the sale of assets. Individuals attempting to obtain a loan must comply with the

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banks requirements, including providing tax returns. ACSI, however, could have arranged for an

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alternative to delivering their tax returns to York if they wanted to protect their privilege. The

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same is not true for a home loan applicant. Although ASCI had what it viewed as strong business

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reasons to do so, it voluntarily relinquished its tax returns and thereby waived their privilege

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status. Therefore, defendants’ motion for a protective order as to plaintiff’s Request for

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Production of Documents, Set Five, No. 19, is denied.

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C.

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Plaintiff’s Request for Production of Documents, Set Five, Nos. 20 through 25, request

Plaintiff’s Request for Production of Documents, Set Five, No. 20-25

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copies of documents relied on by defendants to calculate gross revenue for the calendar years of

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2007-2012 generated by their California claims operations. Defendants argue that plaintiff’s

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attempt to discover defendants’ financial information is based solely on California Civil Code

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section 3344, which does not apply in this case. ECF No. 34 at 1. Defendants contend that

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section 3344 only applies to commercial misappropriation. Id. at 1-2. However, plaintiff’s fifth

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cause of action is for misappropriation and specifically seeks damages pursuant to California

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Civil Code Section 3344, ECF No. 14 at 11-12, which provides that damages for

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misappropriation of a person’s name, signature, or likeness include “any profits from the

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unauthorized use that are attributable to the use and are not taken into account in computing the

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actual damages.” Cal. Civ. Code § 3344(a). Thus, the complaint specifically pleads a violation

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of section 3344. 3

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While defendants suggest a problem with the sufficiency of the allegations in the
complaint as to this claim, such a concern is appropriately addressed in a Rule 12(b)(6) motion,
not an objection to plaintiff’s discovery requests.
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As the complaint alleges that plaintiff is entitled to damages pursuant to section 3344,

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plaintiff is entitled to documents relied on by defendants to calculate gross revenue for the

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calendar years of 2007-2012 generated by their California claims operations. Accordingly,

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defendants’ motion for a protective order as to plaintiff’s Request for Production of Documents,

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Set Five, Nos. 20 through 25 is denied.

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D.

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Plaintiff’s Interrogatory, Set Two, Nos. 8-13, requests defendant John Bannon to provide

Plaintiff’s Interrogatories, Set Two, Nos. 8-13

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the amount of gross revenue that he realized for the calendar years of 2007-2012. Defendant

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Bannon argues that his gross salary is not relevant to the instant dispute. There are no allegations

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in the complaint that Bannon used plaintiff’s license independently of ACSI’s use. Furthermore,

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defendant Bannon has provided a declaration that he was a salary employee with ACSI.

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Accordingly, there is no indication that Bannon personally realized any profit by ACSI’s use of

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plaintiff’s name and license. Therefore, Bannon’s gross revenue is not relevant to the instant

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dispute. Accordingly, defendants’ motion for a protective order as to plaintiff’s Interrogatories,

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Set Two, Nos. 8-13 is granted.

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III.

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Conclusion
Accordingly, IT IS HEREBY ORDERED that defendant’s motion for a protective order

(ECF No. 31) is granted in part and denied in part as follows:

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1. The motion is denied as to plaintiff’s Request for Production of Documents, Set One, No.

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8; plaintiff’s Interrogatories, Set One, Nos. 1 through 6; plaintiff’s Request for production

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of Documents, Set Five, No. 19; and plaintiff’s Request for Production of Documents, Set

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Five, Nos. 20-25 is denied. Defendants shall file and serve responses to these discovery

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requests within 7 days of the date of this order.

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2. The motion is granted as to plaintiff’s Interrogatories, Set One, Nos. 1 through 13 served

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on defendants John Bannon, Bill Johnson, and Susan Johnson; and plaintiff’s

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Interrogatories, Set Two, Nos. 8-13 served on defendant Bannon.

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DATED: November 5, 2014.ECF

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