Pinero v. Jackson Hewitt Tax Service Inc. et al

Filing 80

TRANSCRIPT of Motion Hearing held on December 3, 2008 before Judge Sarah S. Vance. Court Reporter/Recorder Toni Tusa, Telephone number [phone]. Transcript may be viewed at the court public terminal or purchased through the Court Reporter/Recorder before the deadline for Release of Transcript Restriction. After that date it may be obtained through PACER. Parties have 21 days from the filing of this transcript to file with the Court a Redaction Request. Release of Transcript Restriction set for 6/2/2009. (clu, )

Pinero v. Jackson Hewitt Tax Service Inc. et al

Doc. 80

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 APPEARANCES:

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF LOUISIANA

* * versus * * JACKSON HEWITT TAX SERVICE, * INC., et al * ****************

VICKI L. PINERO

Docket 08-CV-3535-R New Orleans, Louisiana December 3, 2008

ORAL ARGUMENT BEFORE THE HONORABLE SARAH S. VANCE UNITED STATES DISTRICT JUDGE

For the Plaintiff:

Sessions Fishman Nathan & Israel BY: BRYAN C. SHARTLE, ESQ. JUSTIN H. HOMES, ESQ. 3850 N. Causeway Blvd., Suite 200 Metairie, Louisiana 70002 Kelley Drye & Warren BY: DONNA L. WILSON, ESQ. ANDREW S. WEIN, ESQ. 3050 K Street, N.W., Suite 400 Washington, DC 20007 Kean Miller BY: GLENN M. FARNET, ESQ. One American Place, 18th Floor Post Office Box 3513 Baton Rouge, Louisiana 70821

For Jackson Hewitt Tax Service, Inc. and Jackson Hewitt, Inc.:

For Jackson Hewitt Tax Service, Inc. and Jackson Hewitt, Inc.:

Dockets.Justia.com

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APPEARANCES: For Crescent City Tax Service, Inc.: Blue Williams BY: THOMAS G. BUCK, ESQ. 3421 N. Causeway Blvd., Suiste 900 Metairie, Louisiana 70002 Toni Doyle Tusa, CCR, FCRR 500 Poydras Street, Room HB-406 New Orleans, Louisiana 70130 [phone]

Official Court Reporter:

Proceedings recorded by mechanical stenography, transcript produced by computer.

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Service. THE COURT: Jackson. MR. BUCK: Jackson. MR. WEIN:

PROCEEDINGS (December 3, 2008) THE DEPUTY CLERK: All rise. Please be seated. First

Court is in session. up on the Court's civil docket: versus Jackson Hewitt. for the record. MR. SHARTLE:

Civil Action 08-3535, Pinero

Counsel, please make your appearances

Bryan Shartle on behalf of the

plaintiff, Vicki Pinero. MR. HOMES: THE COURT: MR. FARNET: Hewitt, defendant. MS. WILSON: Donna Wilson on behalf of defendant Justin Homes on behalf of the plaintiff. Good morning. Glenn Farnet on behalf of Jackson

Andrew Wein on behalf of defendant

Tom Buck on behalf of Crescent City Tax

Good morning everyone.

We are here on a

motion to dismiss and class certification. the motion to dismiss. MR. SHARTLE:

Let's start with

Your Honor, if I may, we have presented We strenuously object to the

this argument in our briefs.

Court hearing the motion to dismiss.

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 our papers.

I'm sorry.

We have briefed this ad nauseam in

We strenuously object to the Court hearing the We believe that it's very clear, under

motion to dismiss now.

Fifth Circuit law and even this Court's rulings, that it's improper to rule on a motion to dismiss before ruling on the motion for class certification. THE COURT: Have you read the Federal Rules of Civil

Procedure lately on class certification? MR. SHARTLE: Yes, Your Honor, and I know that there

are a few decisions out there where courts have ruled on motions to dismiss before ruling on a motion for class certification, but that is a disfavored procedure. you want the -THE COURT: The rule used to say that you had to do It Generally,

it at the earliest possible time or some practical time. doesn't say that anymore.

It was changed -- I know this -- to

permit courts to take up issues like motions to dismiss before class certification so you can figure out what you're certifying. I don't think that that argument is correct. I

hear you, but I don't think that that argument is correct, so let's not spend a lot of time on that. to dismiss. MR. SHARTLE: MS. WILSON: Okay, Your Honor. Good morning, Your Honor. Donna Wilson Let's go to the motion

on behalf of defendants Jackson Hewitt Tax Service, Inc. and

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Jackson Hewitt, Inc.

With me is my colleague Andrew Wein, from In addition,

my firm, as well as my co-counsel Glenn Farnet.

counsel for CCTS, our independent franchisee, Tom Buck, is here. I'm going to be taking the lead in the argument,

Your Honor, but Mr. Buck may at the end of the argument have some comments or is available for questions. THE COURT: Okay. There's a lot of claims in this I'm going to give

and we are not going to be here all morning. you about 15 minutes. MS. WILSON: brief.

That's fine, Your Honor.

I intend to be

I think we have adequately covered everything in the

papers, but I would just like to highlight some issues. First of all, Your Honor, this case, as presented and argued by plaintiff, invokes the famous line: "Full of sound and fury, signifying nothing." The fact of the

matter is that plaintiff throws around a lot of terms and relies on a lot of loaded terms like treachery and deceit, but at the end of the day, when you strip out these sort of aspersions, what you are left with is the fact that plaintiff is relying on a legally unsupportable and attenuated damages theory; relying on facts that don't appear in the complaint and, indeed, which appear for the first time in her briefs, and which are inconsistent with allegations in the complaint; and basically urging this Court to disregard the plain language of statutes and to basically disregard an amount of case law that

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cuts in our favor and supports our arguments.

For these

reasons, Your Honor, the complaint should be dismissed and our motion to dismiss should be granted. The first one I want to look at is our overarching argument in our motion to dismiss that the plaintiff has failed to allege legally cognizable damages with respect to most of her claims or injury in fact. First, as set forth in the brief, regardless of how the legal claim itself is styled -- whether it's negligence, breach of fiduciary duty, breach of complaint -courts across the country have held that the type of damages that plaintiff is alleging here -- that is, emotional damages based on a fear or a speculation that there might be some risk of identity theft in the future arising from an allegedly improper handling of documents or information -- simply is not injury in fact. It's too speculative. It doesn't constitute

damages under any legal theory. law is in accord with this.

Most importantly, Louisiana

I want to take the three categories of claims here, Your Honor. First is the negligence claim and the

Louisiana database breach notification statute claim. The first claim, negligence, damages have to be established as a matter of law with respect to a negligence claim. Again, courts across the country have said these very

same damages that are alleged, these emotional damages, are not

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sufficient to establish this required element.

But more

importantly, in Louisiana two federal courts have already ruled on this and have reached the same holding, and that is these kinds of damages are not cognizable under a negligence claim. THE COURT: Louisiana law. MS. WILSON: great. Then with respect to the database breach notification act, Ponder speaks directly to this. that expressly on point. It addressed I'm on a roll, Your Honor. That's I'm all right with you on negligence with

More importantly, plaintiff only

raises two arguments with respect to Ponder and the database breach notification act. First is it's wrongly decided, and

the basis for plaintiff's contention is that if you interpret it the way that the Ponder court has, to require damages for there to be an action under the statute, if you require that, then it frustrates the purposes of the statute because there's no penalty if you don't give notice. What plaintiff doesn't point out to the Court, although plaintiff cites to this regulation in her brief, is that the attorney general, pursuant to regulations promulgated by the attorney general's office, has the authority to issue and is to issue substantial fines if there's no notice given. So that argument is gone. THE COURT: But clearly the allegation is there was

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no notice here; right? MS. WILSON: Well, actually, she was notified, and That

there is no allegation that she wasn't given notice.

assertion is made in the briefs, Your Honor, but not in the complaint. As we understand it from the complaint, she knew

about this before we did because the TV reporter had given the material back to her. THE COURT: Yes, but the notice had to come from you,

not from somebody on the street. MS. WILSON: about it. Yes, Your Honor, but we didn't know

In fact, we have just filed a supplemental brief, I

believe, on Monday setting forth the notice that we sent out. So notice has been sent, but she has not alleged in her complaint that it wasn't timely. was no notice given. THE COURT: merge in my mind. MS. WILSON: THE COURT: too? MS. WILSON: Yes. Your Honor, not only did she fail I understand, Your Honor. Is this the one that involves computers Some of these statutes are starting to She hasn't alleged that there

to plead and allege actual damages, as required by the statute and as required by Ponder, but the whole purpose of the statute and the entire statute speaks in terms of data on a data system, not paper documents. The only thing that the complaint

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alleges is a disposal of paper documents.

It doesn't mention So for that

anything about a loss of computerized data.

reason, too, Your Honor, that claim should not stand. THE COURT: MS. WILSON: All right. Then, with respect to the breach of

contract, fraudulent inducement, and LUTPA claims, all of those claims basically rest on, one, emotional damages and, two, on the circular argument -THE COURT: MS. WILSON: THE COURT: pecuniary loss. The contract claim does. Pardon me? The contract claim is alleging a

They're alleging fraud in the inducement and

they get their money back or, alternatively, a breach of contract because the policy was -- the allegation is was part of the contract and that you didn't perform that portion of the contract, therefore, a breach of contract entitles them to damages, which they contend is fees and other things. They are I

also claiming emotional distress under 1998, in addition. don't think this is just a purely emotional claim. MS. WILSON: Your Honor. No.

I was actually about to say that, One was based on emotional

There were two issues.

damages and two was based on, basically, the circular damages argument, which is that rescission equals damages equals rescission; that is, if damages always would constitute the amount you paid for the contract, well, then the damages

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requirement of a breach of contract claim would be written out. THE COURT: Rescission, you put the parties back to So that's

where they were and you give them their money back.

monetary loss, which is not emotional loss; it's a financial loss. MS. WILSON: Your Honor, we would argue that the

rescission part of this is the remedy, but you have to prove they actually were damaged by the breach, and here there is no damage caused by the breach. THE COURT: If they prove that they were fraudulently

induced to enter a contract and they allege fraud and misrepresentation they relied on in the contract and that this was a material term and it wasn't performed, then I think that they would get their money back. When you rescind a contract,

you put the parties back to where they were. MS. WILSON: Right. Even under the fraudulent

inducement claim, Your Honor, there was a requirement that you show actual damages or a probability of damages. damages here? What are the

Again, how was she injured by the breach? Where are you getting that? That would be 1953. Which says what? I believe it's actual -- I can find the

THE COURT: MS. WILSON: THE COURT: MS. WILSON:

cases, Your Honor, but basically you have -- it's cited also in the plaintiff's briefs, I believe -- actual or probability of

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damages. THE COURT: context. Wait a minute. That's completely out of

What are you talking about? MS. WILSON: THE COURT: You have to establish -I understand that, but tell me what

you're citing and what does it say. MS. WILSON: With the Court's indulgence.

As cited in the plaintiff's brief actually on pages 26 and 27, "...the plaintiff need only show the strong possibility of damages, or damages are probable," and it's citing Golden Rule Ins. Co. v. Strauss, 1997 WL 119854, *3 (5th Cir. 1997). The parenthetical there is "actual loss or

damage or strong possibility thereof." THE COURT: cited? MS. WILSON: The fact that they have got to show that For there to be a For what? In what context is that being

there's damages is an element of the claim.

breach of contract -- if I breach a contract and you're not injured, you have suffered no injury. For example, Your Honor,

if this was an identity theft case, if she came in and said, "My identity was stolen," absolutely was stolen -- I'm not speculating about a risk of identity theft, it was actually stolen -- well, then they have established a breach of contract claim, perhaps. I don't want to concede that. If you promise to marry me and tell me

THE COURT:

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that you have never been married before or you are not currently married and that's not true and we rescind that contract, then I don't have a financial loss by virtue of the fact that you lied to me and induced me to enter a marriage on the grounds that you're married to somebody else, but you can rescind the contract. My point is, on a rescissionary basis, I think that getting your money back is your damages because you did not get what you bargained for. dismiss. I think this is on a motion to

Let's just move on to the 1998 portion of this. MS. WILSON: Sure, Your Honor. Then under LUTPA,

Your Honor -THE COURT: No. Let's talk about Civil Code Article They are arguing

1998 because they're arguing two things:

fraudulent inducement, contract fraud, 1958; and they are arguing breach of contract, which would entitle them to compensatory damages -- I think they want their fees -- and then they say emotional distress under 1998. MS. WILSON: Actually, Your Honor, if you look at the

complaint and you look at their brief, with respect to Article 1998, in the complaint they don't argue, as they are required to, that the nonpecuniary interest here was a significant component of the contract to prepare tax returns. That's the first thing. The second thing is, in their opposition brief,

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they don't address the cases and they don't address the argument on nonpecuniary loss. All they address is the

pecuniary portion of it, and they appear to have abandoned that argument, Your Honor. THE COURT: No. What they are arguing and what you The first

misread in this article is that it has two parts.

part of it is that the contract has to be of a nature that addresses a nonpecuniary interest. I would agree with you that

a contract to get your tax returns is not a contract like that. The second part says, regardless of the nature of the contract, these damages may be recovered also when the obligor intended, through his failure, to aggrieve the feelings of the obligee. This is a motion to dismiss a complaint. argument is that you intentionally breached this privacy provision, which has the natural effect of aggrieving the feelings of the obligee. They are arguing the second part and The

you haven't addressed that, so tell me what's wrong with that argument. MS. WILSON: I think, Your Honor, that with any

breach of contract -- when I contract with someone, I usually contract with someone to make sure I don't have to worry about X and I don't have to worry about Y and I don't have to worry about Z. If the standard is mere worry about whether a

contract has been complied with satisfies this, then every contract would fall under that category.

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Your Honor, frankly, the reason we didn't look at that section, we weren't trying to misread it, but we actually -- plaintiff had made no attempt to fit the claim into that, and we just thought facially it didn't apply here. They

haven't really pled facts that say this is something different. THE COURT: They said you intended to put the stuff

in the garbage can, that that was a breach of contract, an intentional breach, and that that amounted to the obligor intending to aggrieve the feelings of the obligee by virtue of that contract. MS. WILSON: actually alleges that. argument. One, I don't think the complaint They don't make that causation

It doesn't make that causation tie. Secondly, I think that -- again, I think it

converts every contract -- it shoehorns everything into this exception, this narrow exception. THE COURT: What else? MS. WILSON: Your Honor, then we have the LUTPA Okay. I understand your argument on

claim, which again is based on -- it's brought only individually, not on a class-wide basis. The LUTPA claim,

again, is based on an emotional damages argument. THE COURT: I think they are arguing that they get I think the LUTPA claim I just

their money back under LUTPA too. looks okay.

LUTPA let's you get emotional distress.

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don't know if the claim for emotional distress is concrete enough, but the Louisiana cases let people get emotional distress under LUTPA. MS. WILSON: It's not a prohibited form of damages. Right, but it's a very narrow exception.

I think, too, that under those cases you always have a situation where -- for example, the Bank of New Orleans case, the court emphasizes this is about harm, not speculation. THE COURT: I agree with you that the cases that

awarded emotional damages had a much more immediate cause of emotional damages. I would agree with you on that. All I'm

saying is that, as construed by the Louisiana courts, it doesn't forbid the recovery of emotional distress if you have got it and you can show it, A; and that, B, under the claim as pled, they're claiming a monetary relief. MS. WILSON: Again, Your Honor, just to get back on

it, with respect to those three claims, all of those elements require an injury that's not talking about the relief. end of the day, what is the damage here? At the

The damage here is a

speculative risk of identity theft and because of that speculative risk of identity theft I want my money back, but the speculative risk of identity theft, that's where this claim fails. Regardless of how the claim is styled, Your Honor, you have to have it. Otherwise, what you would

have is any time there is a speculative risk of damage arising

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from a breach of contract and I say, "I get rescission," you know, "I get my money back. I was damaged because I paid money

for the contract," every breach of contract claim would withstand a motion to dismiss. Your Honor. THE COURT: MS. WILSON: THE COURT: dumpster? Talk about the privacy claim. Well, the privacy claim, Your Honor -Let me ask you this. Where was this It's a necessary predicate,

How big was it? MS. WILSON: The office which the plaintiff alleges She alleges that, as a matter of

she went to was in Kenner.

practice across the country, I guess, Jackson Hewitt has a practice of dumping this information into public dumpsters. was in a dumpster behind an apartment complex is my understanding. It was a construction dumpster. I don't know. It

MR. BUCK:

According to Mr. Angelico's report and our

finding of the dumpster, it was located at a set of duplexes on the West Bank. It was a construction dumpster for a duplex

that was under construction and all the material -- which included a lot more than just tax returns. It included

promotional materials, some of our proprietary tax manuals, and things like that. West Bank. THE COURT: I was just wondering, for a privacy It was all in a construction dumpster on the

claim, the issue -- go ahead.

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MS. WILSON:

Sure.

The issue is that Jackson Hewitt

must have publicized this information to the public generally, for example, a newspaper ad, let's say, which is so many people -- I will read that, Your Honor, because it's important. I think the wording alone takes care of this claim. THE COURT: MS. WILSON: Your Honor. THE COURT: Restatements in Louisiana are not the The wording of what? Of the restatement with respect to this,

strongest authority in the world. MS. WILSON: Okay, Your Honor. I will note that the

plaintiff agreed that this applied. THE COURT: Agreeing on the wrong law doesn't help

MS. WILSON:

Okay, Your Honor.

With respect to the

breach of privacy claim, it's required that it be publicized, and that is defined as communicating it to the public at large or communicating it to so many persons that the matter must be regarded as substantially certain to become one of public knowledge. So here, Your Honor, yes, it was placed in a dumpster, but the only allegation here is that someone might have been able to jump in the dumpster and look at the documents. With respect to the complaint itself, the only

allegation as to who viewed the documents was Mr. Angelico and

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Ms. Walker, who discovered the documents. THE COURT: I thought under Louisiana law that one of

the elements was unreasonable public disclosure of private facts. I know, also, there are Supreme Court cases in the

context of lawyers or people ferreting around and whether or not there's an expectation of privacy in the garbage. The

Supreme Court has used all this language that this stuff is public. If you put something in a garbage can, you have no

expectation of privacy because everybody knows this is public. Well, by analogy, that could apply to a dumpster. MS. WILSON: Sure, but it also could apply to turn

virtually any disclosure of information into a breach of privacy claim. For example, if I have documents on a desk and

members of the public go by, have I breached someone's privacy by the fact that someone may have looked at it? THE COURT: Putting them on your desk and putting

them outside in a place that anybody has access to are two different things. MS. WILSON: Your Honor, I would contend that you

still have to show that it was likely or substantially certain that people would see the materials, and in this case that just wasn't the case. THE COURT: MR. BUCK: THE COURT: Did the dumpster have a top? No, ma'am. It was just an open dumpster?

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MR. BUCK: 20 feet long. THE COURT:

It's big.

It's six, seven feet tall and

How did this woman get this stuff out of

MS. WILSON:

As I understand it, Your Honor --

And, Tom, correct me if I'm wrong. THE COURT: MS. WILSON: This is not all in the complaint. As I understand it, again, second or

thirdhand, basically, Ms. Walker was in her apartment building or duplex and could see it; looked down and said, "Well, this looks sort of funny because all the rest of it is construction debris," I assume, but then basically people had to jump in -MR. SHARTLE: She jumped in and retrieved the

documents, some of the documents, and turned them over to Channel 6. THE COURT: Okay. I think I've got your argument.

Let me hear from your opponent. MR. BUCK: THE COURT: MR. BUCK: Could I add just very briefly -Okay. -- I think the last discussion that we

have been having has to do with the whole issue that was brought up first as to whether or not there's a potential for disclosure as opposed to a real, actual disclosure to the public. We do know for a fact that the documents were

collected and appear to be in the same form that they were

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taken from our facility.

If somebody was really going to

gather that information, it doesn't make a lot of sense they would take it from the dumpster, make copies, put it back in the dumpster. It would have been gone. So the fact it was

still there I think indicates there hasn't been an actual disclosure. I also wanted to address your 1998 question regarding paragraph 2. If you go to the revision comments

under 1998, talking about the nature of the contract being irrelevant, Comment D goes on to say that you can get nonpecuniary loss which the obligee sustains -- so there has to be an actual nonpecuniary loss sustained -- when the obligor fails to perform in circumstances that give rise to the presumption that the obligee's embarrassment or humiliation was intended by the obligor. I don't think you have those circumstances that would give rise to that presumption. It references Section C,

if the nature of the contract itself is one that is intended to satisfy an interest of a spiritual order such as to create a work of art or -THE COURT: of A. MR. BUCK: That's A, if it's intended, or if it's Wait. That goes back to the first part

done under circumstances where you have to assume that it was done intentionally, with the intent, and I don't think that

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assumption is reasonable under the circumstances, even as pled, no matter how unlikely the facts are that this stuff was intentionally dumped. Then you go to Comment E and it goes on

to say that the jurisprudence has held that mere worry or vexation is not a compensable nonpecuniary loss. So they have

a big hurdle there, too, if they are just worried. I think you may realize already that Richard Angelico calling my client and saying, "I have a bunch of your tax returns," was the first notice that we had that this was even there. If you look at the TV report, it's obvious this I

woman was shocked that her things had been stolen from her. truly believe that her status as a victim here -THE COURT: MR. BUCK: Who is she? Barbara Hirsch. She's the local

franchisee doing business as Crescent City Tax Service, Inc. She had no idea that any of this stuff had been thrown in the dumpster by her former employee. had. As far as notice, you will note from the record that we had to get a court order to allow Jefferson Parish -Mr. Angelico told me he was going to shred the material, and I told him I would get an order preventing him from that or he could turn it over to the sheriff. He turned it over to the sheriff. while to get. It took us a It was the first notice she

We finally ended up getting a joint court order

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to get it. people.

We got it last week.

We mailed notices to the

The number of inquiries we had after he

sensationalized this three times on television -- three different reports -- we got three phone calls from the thousands of Jackson Hewitt customers. For her to be victimized by the former employee that stole the things, three times with this sensational journalism, and now by one single person who claims to be a class representative of a group of people who haven't even suffered any damages I don't think is fair to Crescent City Tax Service. THE COURT: opponent. MR. SHARTLE: Your Honor, a few points here. First, Thank you. Let me hear from your

as you have correctly noted, we are dealing with a motion to dismiss, and the Court is well aware of the standard. I want

to advise the Court of some facts that are not in the record, that are not in the pleadings I have only recently learned. They continue to allege that they are the victims of some kind of theft. It's simply not true. No office was They are

not the victims of any theft or crime. burglarized here.

What happened is one of their own high-level

employees, who is known around the office as "the file cabinet," was responsible for intentionally throwing these documents in the dumpster. Why was she known around the office

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as "the file cabinet"?

Because if anything was missing from

the office, any file or any tax return, it was always in this lady's car. So they are not the victims of any theft. This lady also, very interestingly, was the director of compliance for the local franchise and was also the general manager. dealing with. So this isn't some low-level employee we are

We are dealing with a high-level employee who

Crescent City reported to the police department -- and I'm going to quote this -MS. WILSON: THE COURT: Your Honor, I can -Wait. -- "had a position of authority with

MR. SHARTLE: access."

So this isn't a situation where there was some This was an intentional act by a

accident or some breach.

senior-level member of management who threw the documents in the trash. THE COURT: As we all know, none of this is germane

to the motion to dismiss. MR. BUCK: THE COURT: right now. MR. SHARTLE: Right, but I thought it was important It's a former employee. I am just considering what is alleged

for me to raise those issues. THE COURT: I understand. I'm not going to bore the Court anymore

MR. SHARTLE:

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with details, but there are five police reports that we have obtained over the past few years. They have had numerous

security issues involving their own employees. THE COURT: Okay. I hear you.

MR. SHARTLE:

To respond to some of the arguments

that they have raised, they say, "Well, with respect to the security breach statute, the AG has the power to impose some kind of civil penalty." Well, if the AG doesn't know about the

disclosure, how can they impose a penalty? Again -- and we have briefed this issue -- the Ponder decision is backwards. If you don't permit the claim to

be brought until after there has been some use of the information to the detriment of the consumer, then you haven't furthered the purpose of the statute in any way. The purpose

should be to require the defendant to give notice so that the consumer can take necessary measures to protect himself or herself. action. If the notice is given timely, there's no cause of So the decision is just backwards, in my mind, and I

respectfully request that the Court not follow that decision. As to the Melancon decision regarding the negligence claim and whether or not emotional distress damages is sufficient, that case is distinguishable for a number of reasons. First, the Supreme Court has been very clear that

when you have a special relationship -- and here we are dealing with a fiduciary relationship.

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THE COURT:

How does it get to be a fiduciary -Well, because, remember, these

MR. SHARTLE:

individuals are responsible for handling the most sensitive information. The IRS and a tax return preparer has more

information about you than any other government entity or any other entity that I could possibly think of, any employer. They have Social Security numbers, dates of birth, driver's licenses, bank accounts, employer tax ID numbers, the most confidential information about your life. Here, they put that

information on the street, so it's just mind-boggling to me. We are dealing with a special relationship where these individuals entrusted Jackson Hewitt to protect that information and they did not. So that rule that generally you

can't recover emotional distress damages absent some type of physical trauma simply doesn't apply according to the Louisiana precedent. THE COURT: to this one. MR. SHARTLE: Well, I would generally agree, but they I haven't seen any cases that are close

have on numerous occasions said that that exception does exist, and the court has repeatedly reminded the courts that Louisiana law is very unique. There are no clear lines. Judges are

required to take into consideration the principles in the Civil Code and apply those in each case. So we are dealing

with a situation here where these individuals entrusted Jackson

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Hewitt and that trust was violated. The Melancon decision is also distinguishable -and we have briefed this, Your Honor -- because in that case the disclosure was accidental. They really were the victims.

Here, this isn't a situation where Jackson Hewitt's office was broken into and someone stole their materials and they're the victims. They created this problem through their employee. So

you have an intentional act, not just negligence.

So I think

that is an important factor for the Court to consider. THE COURT: You pled negligence. We have pled both. We have pled a I don't know

MR. SHARTLE:

negligence claim, but the conduct is intentional. how that works out, Your Honor.

I haven't figured out I

conceptually where that gets me, but I agree with the Court. agree with you, Your Honor, that it's a negligence claim, but the conduct was intentional here. THE COURT: intentional conduct. A lot of negligence claims involve I intentionally put my foot on the

accelerator that hits another car, but I'm not deciding to crash into them. It's an accident. Well, every act begins with a intent to

MR. SHARTLE:

commit some -- but here we are dealing with something more than just the initial act of opening the business and inviting individuals -THE COURT: Tell me how your client was harmed by all

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of this. MR. SHARTLE: Interestingly, Your Honor -- and I'm

going to answer that question, but I want to tell you -THE COURT: No, "interestingly" answer my question. She has been harmed in numerous ways.

MR. SHARTLE:

First of all, she has had to take necessary measures to protect herself and make sure that she is not going to be the victim, but she suffered emotional distress. This lady is worried

about the fact her identity is going to be stolen and used by someone. I think anyone, when they hear what happened here -- many individuals only recently learned about this. Opposing counsel has represented that these individuals recently got notice. I will talk about that in a second. But

when you get that letter and you learn that your information was put in the dumpster, I think everyone's natural reaction is going to be, "Gosh. THE COURT: That concerns me. I'm very alarmed."

How long ago did it happen? I'm sorry?

MR. SHARTLE: THE COURT:

How long ago did it happen? How long ago did what happen?

MR. SHARTLE: THE COURT:

Did they put it in the dumpster. About six months ago, but no one knew

MR. SHARTLE:

whose information was put in the dumpster until about a week ago, when they sent the letter.

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THE COURT:

Usually, when you have identity fraud,

they start using your stuff right away. MR. SHARTLE: For all we know, there may be hundreds I doubt that. I

of individuals whose identities were stolen.

doubt that seriously, but we don't know that yet.

I have not

had the opportunity to speak with each one of these individuals, but their letter that they sent, they give a laundry list of things these individuals need to do -- which, by the way, several of the things they recommend the individuals do, it's going to cost them something. So you not only are dealing with the emotional distress and the anxiety, the sleeplessness of having to deal with this nonsense, but you are going to have to incur some hard costs to make sure you are protected. THE COURT: Did she incur costs? Did she incur costs?

MR. SHARTLE: THE COURT:

Yes. I have spoken with my client. My I

MR. SHARTLE:

client has told me that she has undertaken these measures. haven't specifically asked her, "How much, by way of dollar amount, have you spent in protecting yourself?" has emotional distress damages. We have other claims in the case.

Clearly, she

So when we

are speaking about the damages issue, as Your Honor did, you have to analyze it with respect to each claim. So with respect

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to the negligence claim, which it sounds like we are focusing on now, those damages are going to primarily relate to emotional distress damages and any costs or expenses that related to these actions they needed to take to protect themself. If any of the class members have been the victims of

some kind of identity theft, then you're going to have costs associated with that also. Going back to this notice issue, they have filed a motion to supplement the record and provided a copy of the letter. I am uncertain as to how they determined who to send They don't explain it in their brief. They I

this letter to.

represent to the Court that they have given everyone notice. am uncertain as to whether that's true.

I have concerns because if you look at these tax returns, we are not just talking about the individual who filed the return. We are talking about information relating to these

individuals' children, their social security numbers, their dates of birth, their addresses. You really have to review the

document to understand the scope of the information that is put in these documents. So there are a number of individuals that

are just identified on the documents, which it's our belief they need to be notified that their personal information has been put on the street. THE COURT: Let's get back to the discussion of

whether or not you stated a claim.

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MR. SHARTLE: action, Your Honor? THE COURT: your pick. MR. SHARTLE:

Stated a claim for which cause of

They have moved on all of them, so take

Sure.

Well, as to the security breach

statute, again, I have addressed the fact that I think the Ponder decision is incorrect. We have stated a cause of We have alleged they

action, brought a motion to dismiss.

haven't given notice timely because they only gave it last week according to their testimony. THE COURT: But you haven't alleged anything about a

compromise of the computer system. MR. SHARTLE: Their interpretation of the statute is You don't have to have any

incorrect on that point.

compromising of the system; all you have to have is computerized data which has been disclosed. THE COURT: You haven't alleged that either. Well, I disagree. To the extent we

MR. SHARTLE:

haven't, Your Honor, then I would ask for leave to -THE COURT: How can you disagree and "to the extent"?

Tell me where you allege -MR. SHARTLE: Because these are documents which are These returns, the information on

generated from a computer.

there is typed into a computer and the data is spit out on these documents.

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THE COURT:

There's so many documents in this world

that are on paper that at one time were printed by a computer. I'm not sure that that's what that statute is talking about. The statute is talking about getting into a computer and getting the information, not some generation of documents that came off of a computer. MR. SHARTLE: Well, Your Honor, I understand your You

point and I agree there's got to be a line somewhere.

can't say that, for example, every Word document that any individual maintains that is printed could fall within the scope of this statute. We are dealing with something more We are dealing with a

complex than just some Word document.

program that they utilize where they input this information and it spits out data which creates a hard document. It's other documents, Your Honor. tax returns either. It's not just

They mentioned they had manuals in there. There are many other confidential

It is a host of materials.

documents in addition to the tax returns, lists of -- God, I don't know, Justin -- thousands of local businesses, tax ID numbers, and addresses. It's more than just tax returns. I

understand there has to be a line somewhere.

It's our position

that these type of documents would fall within the framework of the statute. THE COURT: Okay. I hear you.

MR. SHARTLE:

I want to address an issue that

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Your Honor raised regarding 1958, and this might clear up some of the discussion earlier. Your Honor is correct that under

1958 you get rescission, and we are seeking rescission of the contract. But you also, in addition to getting rescission, can So if the fraud vitiates the consent, you get

recover damages.

back whatever you paid to enter into the contract, but you're also entitled to any damages that flow from the fraud. So it's our position that they misrepresented what their policy and practice was, so we get our money back based upon rescission, and their actions have caused damages: Emotional distress; these other items that we discussed regarding how they have to take the protective measures; and to the extent there are any other proveable damages. The unfair trade practice claim, the deceptive act that's at issue is the misrepresentation, so we are not dealing with just some fear. We are dealing with a

misrepresentation, a deception, which resulted in them entering into the contract. So the contract gets undone under the

unfair trade practice claim, we get our money back we paid for the contract, and also any resulting damages that, again, flow from the deceptive act, the misrepresentation. The invasion of privacy -- and you touched on this, Your Honor. the restatement. First of all, they are not relying upon just They are relying upon a comment in the I don't know of

restatement, so I want to clarify that point.

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any Louisiana case -- they certainly didn't cite one, and I haven't been able to find one, whether federal or Louisiana state court decision -- that cites or relies upon this comment, but the Louisiana Supreme Court has been very clear on the scope of an invasion of privacy claim. The court has said the

determination of whether a person's conduct constitutes the tort of invasion of privacy depends on the facts and circumstances of each case. So we think this is a case where there has certainly been damages. There certainly has been sufficient Not only did

publicity and publication of this material.

Ms. Walker, who retrieved the documents from the dumpster, see the documents, Channel 6 saw the documents, staff members at Channel 6 saw the documents, the Jefferson Parish Sheriff's Office saw the documents, opposing counsel has seen the documents -THE COURT: documents? MR. SHARTLE: What happened is there's a criminal How did Jefferson Parish get the

investigation that's ongoing right now, so Channel 6 was approached by the Jefferson Parish Sheriff's Office and they requested that the documents be produced to the Jefferson Parish Sheriff's Office. The one claim that you didn't discuss with opposing counsel that I think is due some discussion is the tax

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claim.

26 U.S.C. §6103 generally prohibits the unauthorized

disclosure of returns and return information, so there are two questions. Who is subject to the statute? The answer is in

§6103(a)(3) and Subsection (n). Subsection (n) extends the reach of the statute to persons beyond the IRS. Generally, the statute was passed

to prohibit the IRS from disclosing tax returns and tax return information, but it's been extended to others beyond the IRS. It also applies to companies processing, storing, and transmitting returns or return information or providing other services for purposes of tax administration. Jackson Hewitt is

not only a tax preparer; they are a government-contracted e-filer. They are transmitting tax returns to the IRS. They

are a covered entity. The next question is: documents are subject to the statute? What information and I mentioned that the Those terms

statute regulates returns and return information. are defined in the statute.

A return means any tax or These tax returns

information return, generally a tax return. were thrown in the dumpster. THE COURT:

Doesn't Subsection (c) indicate that the

statute only applies to persons who have been granted access to returns or return information by the IRS? MR. SHARTLE: THE COURT: Subsection (c)?

Yes.

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MR. SHARTLE: Your Honor. to that now. subsection.

I don't have that in front of me, I can't respond

I don't have that in front of me.

I don't know of any limitations in any Subsection (n) is what extends the statute to

other entities besides the IRS. THE COURT: from the IRS. MR. SHARTLE: That's their contention. I don't see I think they have to get the information

that and, again, I don't have Subsection (c) in front of me right now. I don't know of any limitation in the statute -The statute establishes a comprehensive

THE COURT:

scheme -- this is citing a Ninth Circuit case -- for controlling the release by the IRS of information received from taxpayers to discrete identified parties. MR. SHARTLE: I acknowledge there is at least one

case -- I think the Hrubec case -- which says that, but that's not stated anywhere in the statute. That is a summary as to Even

what the Ninth Circuit believes the law is on this issue.

if that is the law -- and I don't believe it is, Your Honor, because if you are dealing with a remedial statute here, which has to be applied very broadly, again you have two questions. Who is a covered entity? at the statute itself. THE COURT: The statute was designed to get at the The question is answered by looking

IRS and to stop the IRS from spreading tax information.

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MR. SHARTLE:

Or to stop government contractors or

other covered entities from disclosing information that is provided to them -THE COURT: From the IRS. Well, I don't think so, Your Honor,

MR. SHARTLE:

because how, then, do you respond to the statute which says companies transmitting returns? e-filers. Remember, these are IRS

A taxpayer goes to Jackson Hewitt to get his or her Jackson Hewitt takes that information as an

tax returns done. IRS e-filer.

They transmit that information to the IRS. To some extent they are acting on behalf of the

IRS by facilitating the transfer of the information, so the question becomes: Where do you want to start the protection?

Do you want to start it at where the IRS approved e-filer transmits the information to the IRS or only after the IRS receives the information and then transmits information back to the IRS approved e-filer? I think the statute is written in such a way that it requires that entities who transmit the information to the IRS -- again, the only entities that are going to be doing that are IRS approved e-filers. Even if that's the rule,

Your Honor -- and I don't believe it is, and there's certainly no statutory authority which would support that position. understand there's a case that mentions that. THE COURT: Do you have any cases applying this to I

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commercial tax -MR. SHARTLE: There are none. There are no cases at So

all except for one case that discuss Subsection (n) at all. we are dealing with a new issue, and I understand that. But

even if that interpretation is correct, Your Honor, many of these documents contain information -- when I get to the second definition, the definition of return information, many of these documents contain return information, information received from the IRS. Once the return is transmitted to the IRS for filing, then information is sent back to Jackson Hewitt and that information is contained on some of those documents. we have just begun discovery and we have already had some issues with discovery, but we believe that there's going to be more on that during the discovery process. THE COURT: Okay. I have your argument. Thank you. Now,

MR. SHARTLE: MS. WILSON: points? THE COURT: MS. WILSON:

Thank you, Your Honor. Your Honor, if I can make three quick

Okay. First, with respect to the §6103 claim,

most of the facts that were just stated just don't appear in the complaint. In any event, had Congress wanted to mention or

have the statute apply to tax preparers -- this is about a one-inch thick statute, 20, 25 different categories -- they

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simply would have said so.

It doesn't say that.

Also, in the Hrubec case in the Seventh Circuit, Judge Easterbrook did look at the situation and said, look, if your accountant at a cocktail party discloses some tax information of yours, it is inappropriate, but it doesn't constitute a violation of §6103. THE COURT: MS. WILSON: MR. SHARTLE: Which case is that? Hrubec. I have to object. That case did not The

involve a tax return preparer. school -MS. WILSON: THE COURT: MS. WILSON:

It involved a school.

Your Honor -Wait. Let her finish.

Let me get you the citation, Your Honor.

I didn't actually say that the case involved that, but I did say that the court looked at specifically this example and spent a great deal of time saying this does not constitute a claim. THE COURT: What if this stuff contains information

from the IRS instead of just information that the tax preparer got from the customer? MS. WILSON: We still don't fall within the narrow

definition of the categories of people who are subject to §6103. In fact, Your Honor, we cited this in our briefs, but I Subsection (n) refers

want to pay special attention to this.

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to and is basically caveated with references to the IRS regulations. this. It's 26 C.F.R. §301.6103(n)-1. What it does What the IRS regulation does -- let me give you

is -- and, again, Subsection (n) is subject to this in this regulation and it's captioned: "Disclosure of returns and

return information in connection with written contracts or agreements for the acquisition of property or taxes for tax administration purposes." When you look at this regulation, Your Honor, it's clear. This is about -Wait. Read that again. "Disclosure of returns

THE COURT: MS. WILSON:

It is captioned:

and return information in connection with written contracts or agreements for the acquisition of property or services for tax administration purposes." When you look at the different categories, there's nothing about tax preparers in here. In fact, when you

look at this, all it's really talking about is third-party vendors that IRS may use. In fact, Your Honor, Subsection (n) Under their If I utilize

refers to reproductive services, copy services. interpretation Kinko's could be subject to this.

Kinko's to copy my tax return, it's involved in -THE COURT: MS. WILSON: Okay. Then, with respect, Your Honor, to the

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restatement with respect to the breach of privacy claim, we do have a citation -- let me back up. With respect to 1958 and talking about the need to show damages apart from rescissionary damages, this is a case that was not in our briefs but we gave to opposing counsel before the hearing. It's called C&B Sales & Services. It's a

Fifth Circuit case, 95 F.3d 1308.

In that case it states:

"According to the Louisiana Supreme Court, 'Two elements are essential to constitute legal fraud'" -- and that's under 1958 -- "'the intention to defraud and loss or damage or a strong probability of loss or damage. It is well

settled that one who alleges fraud has the burden of establishing it by legal and convincing evidence since fraud is never presumed, and that to establish fraud exceptionally strong proof must be adduced.' C&B is wrong that fraud follows

merely from demonstrating a material omission and intent to obtain an unjust advantage. showing actual damage: C&B still bears a heavy burden of

'Because charges of fraud carry an

almost criminal connotation in Louisiana, the jurisprudence has interpreted the language of 1953 with great strictness. There

must be an intention to defraud causing damage to the victim. Both elements must be proved by clear and convincing evidence.'" THE COURT: MS. WILSON: Okay. That's all I have, Your Honor.

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THE COURT:

Thank you.

Is there one thing you want

MR. SHARTLE:

I do, Your Honor.

This scare tactic

that if we apply the statute here to an IRS approved e-filer that it's going to apply to everyone is meritless. very specifically says who it applies to. The statute

It's not going to

apply to Kinko's because it only applies to companies processing, storing, and transmitting returns or return information. It's not going to apply to the Postal Service.

They are not involved in storing, processing, or transmitting returns. This is the statute as to how you become an IRS approved e-filer, which by the way contains a provision regarding the obligation of all IRS approved e-filers to maintain the security of information they are transmitting during the e-filing process. There's only one decision out

there that I know of which addresses Subsection (n) and it's the Hrubec case. case. I think I kept saying it was a Ninth Circuit

It's a Seventh Circuit decision. That case involved an employer who disclosed --

I think it was a tax return of an employee, and the court said the employer is not a covered entity. That makes sense because

they're not involved in the transmitting, storing, or processing of a return or return information. So there's no question, from my view, that

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Jackson Hewitt is a covered entity.

The question becomes

whether or not, as Your Honor has pointed out, the information that is disclosed has to come from the IRS or if the information can merely come from the taxpayer and be involved in the transmission. I think, if you read the statute, there's

no requirement in the statute that that information come directly from the IRS, but I acknowledge there is a Seventh Circuit decision which suggests that it does have to come from the IRS. Thank you, Your Honor. THE COURT: All right. That's it. I'm not going to

Thank you.

hear argument on class certification because I think it is premature to take that up until we determine what the claims are going to be, if any, that are left in the case because some of them are going to get dismissed. how many and which. So I think rather than taking up class certification now, it is really premature. out ruling on the motion to dismiss. I will get an order I just haven't determined

Then, once that's out, we

will issue an order to you to come up with a schedule for class certification, to brief that and do whatever discovery you need to do on that, and then we will take up class certification after that. Okay? Thank you, Your Honor. Thank you, Your Honor.

MS. WILSON: MR. SHARTLE:

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THE DEPUTY CLERK: THE COURT:

All rise, please.

Very good job on your arguments.

(WHEREUPON the Court was in recess.) *** CERTIFICATE I, Toni Doyle Tusa, CCR, FCRR, Official Court Reporter for the United States District Court, Eastern District of Louisiana, do hereby certify that the foregoing is a true and correct transcript, to the best of my ability and understanding, from the record of the proceedings in the above-entitled and numbered matter.

s/ Toni Doyle Tusa Toni Doyle Tusa, CCR, FCRR Official Court Reporter