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Tax Court sheds light on its protective order and third party intervenor rules

Amazon.com, Inc., TC Memo 2016-131

The Tax Court has held in abeyance a motion by a major newspaper to unseal certain components of the trial record of Amazon.com’s Tax Court suit involving Code Sec. 482 transfer pricing issues; those components had been sealed pursuant to a protective order. In so doing, the Court shed light on how it deals with protective orders and with intervention by third parties.

Background—protective orders. Except as provided in the next sentence, all reports of the Tax Court, and all evidence received by the court and its divisions, including transcripts of the stenographic reports, are public records open to public inspection. (Code Sec. 7461(a)) Under the exception to this rule, the Tax Court may make any provision that is necessary to prevent the disclosure of trade secrets or other confidential information, including a provision that any document or information be placed under seal to be opened only as directed by the Court. (Code Sec. 7461(b)(1))

A Tax Court Rule (Rule) implements these statutory provisions. It provides that, upon motion supported by good cause, “the Court may make any orders” to ensure that “a trade secret or other information not be disclosed or be disclosed only in a designated way.” (Rule 103(a)(7)) Such an order may include directions that the parties file “specified documents or information enclosed in sealed envelopes” and that “written materials, after being sealed, be opened only by order of the Court.” (Rule 103(a)(6), Rule 103(a)(8))

Background—intervention. Intervention is the procedure under which a third party may join an ongoing lawsuit.

Facts. Amazon.com, Inc. (Amazon) brought suit in Tax Court regarding Code Sec. 482 transfer pricing issues involving its decision to move certain business operations to Luxembourg. That case is currently “under advisement.”

In that case, the Tax Court received into evidence voluminous information bearing on the value of the transferred property, including Amazon’s technology, customer information, and non-public financial data. With a view to protecting such sensitive information from public disclosure, Amazon moved for a pre-trial protective order. IRS opposed entry of that order. Following instructions from the Court about such an order, the parties proposed, and the Court adopted, a protective order implementing procedures to protect Amazon’s trade secrets, etc. (Confidential Information) during the pretrial phase of the case.

Thereafter, Amazon moved for a protective order covering the trial and posts-trial phases of the case, which the Court issued.

Trial testimony that did not elicit Confidential Information was heard in open court; transcripts of that testimony were made available for public inspection. Trial testimony that elicited Confidential Information was heard in closed court; at the time of the current case, the parties were working toward finalizing redacted versions of those transcripts to be submitted to the Court for approval.

In the current case, Guardian, a major British newspaper, sought to intervene for the purpose of urging the Court to unseal, or to make available in unredacted form, certain components of the trial record that have been sealed pursuant to the protective orders.

Court hold’s Guardian’s motion in abeyance. The Court held Guardian’s motion in abeyance until the parties exercise their rights under the protective order, with a view to determining which portions of the trial record will have the seal removed and which portions contain Confidential Information that must be sealed permanently.

Court also shed light on Tax Court protective orders and intervention. In the process of deciding to hold Guardian’s motion in abeyance, the Court shed light on how the Court deals with protective orders and with intervention by third parties.

Protective orders in the Tax Court. The Court noted that Rule 103(a) resembles rule 26(c)(1) of the Federal Rules of Civil Procedure (Civil Rules) and that the Tax Court generally follows decisions interpreting Civil Rule 26 when considering requests for protective orders. Citing several cases decided under Civil Rule 26, the Court said that a protective order is appropriate where the material is the type of information that courts will protect and the requesting party shows good cause for protecting it.

These longstanding protections for sensitive business and financial information are fully consistent with Guardian’s qualified right of access, which is the same interest held by the public at large. “It has generally been held that the First Amendment does not guarantee the press a constitutional right of special access to information not available to the public generally.”

Intervention in the Tax Court. The Court then looked to the issue of whether Guardian should be permitted to intervene in this case. With limited exceptions inapplicable here, the Tax Court Rules make no provision for third-party intervention. However, in the absence of an express Rule, the Court “may prescribe the procedure, giving particular weight to the Federal Rules of Civil Procedure to the extent that they are suitably adaptable to govern the matter at hand.” (Rule 1(b))

Civil Rule 24(a) governs intervention as a matter of right. It provides that a court must permit intervention where the movant is given “an unconditional right to intervene by a federal statute” or “claims an interest relating to the property or transaction that is the subject of the action, and is so situated that disposing of the action may as a practical matter impair or impede the movant’s ability to protect its interest.” The Court said that Guardian did not contend, and it could not plausibly contend, that it was entitled under these standards to intervention as a matter of right.

Civil Rule 24(b)(1) governs permissive intervention. The Court of Appeals for the Ninth Circuit has ruled that an applicant for permissive intervention must generally meet certain threshold requirements, including a showing that his “claim or defense, and the main action, have a question of law or a question of fact in common.” (Perry v. Proposition 9 Official Proponents, (CA 9 2009) 587 F.3d 947) However, “such a strong nexus of fact or law” is generally not required “when a party seeks to intervene only for the purpose of modifying a protective order.” ( Beckman Indus., Inc. v. Int’l Ins. Co., (9th Cir. 1992) 966 F.2d 470 )

The Court noted that the Tax Court has, in the past, allowed permissive intervention where “the moving party has a stake in the outcome of the litigation” that “cannot be adequately protected by the parties currently before the Court” and where “permitting the intervention will lead to a more complete presentation of the legal issues to be decided.” (Estate of Smith, (1981) 77 TC 32677 TC 326) It has denied motions to intervene where the movant failed to show that a party was taking a position that was contrary to the moving party’s interests in the litigation. If a party is adequately representing the interests the movant seeks to advance, the Court may deny intervention.

The Court said that the public interest that Guardian sought to advance has been, and continues to be, powerfully represented by IRS. IRS has objected to the issuance of a protective order at every stage of this litigation. When the Court indicated its intention to issue a protective order of some kind, IRS worked assiduously to narrow the scope of protection and to ensure itself the ability to challenge Amazon’s designation of information as “confidential.” In so doing, IRS’s attorneys faithfully adhered to the policy set forth in the Internal Revenue Manual (IRM). The IRM instructs IRS lawyers to oppose most requests for protective orders because “the Office of Chief Counsel, in representing the public interest, has an obligation to protect the integrity of the tax litigation process by encouraging transparency in the judicial workings of the Tax Court.” (IRM pt. 35.4.6.5(10) (Aug. 16, 2010)) The Court said that it was confident that IRS will continue to assert its rights, and those of the public, under the protective order.

The Court said that Guardian did not cite, and the Court’s own research did not discover, any instance in which the Tax Court, or any other court, had been asked to decide whether a media organization should be allowed to intervene in a pending Federal tax controversy. It said that Guardian’s motion presented novel questions, both as to the proper standards for intervention in the absence of any Rule governing the subject, and as to whether IRS, as an agency of the U.S., adequately represents Guardian’s interest in public disclosure. But, it said that there is an assumption of adequacy when the government is acting on behalf of a constituency that it represents. In the absence of a very compelling showing to the contrary, it will be presumed that a state adequately represents its citizens when the intervention applicant shares the same interest.

References: For confidentiality of Tax Court proceedings, see FTC 2d/FIN ¶  U-2008; United States Tax Reporter ¶  74,614.

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