United States District Court, E.D. Missouri, Eastern Division
MEMORANDUM & ORDER
RONNIE L. WHITE, District Judge.
This matter is before the Court on Plaintiff Scottrade, Inc.'s Second Motion to Compel (ECF No. 63), Motion for Sanctions for Defendants' Failure to Comply with this Court's Order of May 15, 2014 (ECF No. 65) and Motion for Leave to File its First Amended Complaint (ECF No. 64). The Court held a hearing on the motions on October 29, 2014 and took the motions under submission. Upon review of the motions and related memoranda and exhibits, and upon consideration of the oral arguments advanced at the hearing, the Court will deny Plaintiff's Motion to Compel and Motion for Sanctions and grant Plaintiff leave to file a First Amended Complaint.
This case stems from an alleged contract between Plaintiff Scottrade, Inc. and Defendants Variant Holdings. Defendant Stephen Wren is the inventor of certain new and useful improvements in a system for electronically communicating between remote facilities and for facilitating transactions between central and remote facilities. (Compl. ¶ 8, ECF No. 1) These inventions are the subject of three patents ('514, '044, and '900). ( Id. ) In November of 2000, Wren assigned his intellectual property rights in the Inventions to Variant Holdings, LLC. ( Id. at ¶ 9) Also in November 2000, Scottrade entered into a license agreement with Variant Holdings to form a company for the purpose of exploiting patent rights and know how associated with the Inventions. ( Id. at ¶ 10)
According to Plaintiff, however, Wren secretly formed a corporation in 2008 called Variant, Inc., in order to avoid his contractual obligations under the license agreement and keep the financial value in the Intellectual Property Rights to himself. (Compl. ¶¶ 22-23, ECF No. 1) Wren granted an exclusive license for the Intellectual Property Rights to Variant, Inc., which then became the exclusive licensee of patents '044 and '900 with rights to enforce the patent and sue alleged infringers. ( Id. at ¶¶ 24-26) Shortly thereafter, Variant, Inc. began filing numerous lawsuits against a variety of entities for infringement of the '044 and '900 patents. ( Id. at ¶ 28) Plaintiff maintains that Variant, Inc. obtained in excess of a million dollars in settlement payments, which Plaintiff was entitled to. ( Id. at ¶ 29) Plaintiff learned of the lawsuits when a defendant in one of the infringement actions subpoenaed Plaintiff Scottrade. ( Id. at ¶ 30) Defendants contend that the licensing agreement between Plaintiff and Variant Holdings, LLC terminated in 2005.
On August 30, 2013, Plaintiff filed a Complaint alleging Breach of Contract against Variant Holdings, LLC (Count I) and Tortious Interference with Contract against Wren and Variant, Inc. (Count II). The Court dismissed without prejudice Defendant Variant Holdings, LLC, on November 25, 2013, pursuant to Plaintiff's notice of voluntary dismissal.
On April 11, 2014, Plaintiff filed a motion to compel responses to its Second Request for Production, which sought settlement agreements and financial documents pertaining to the settlement of infringement suits. (Pl.'s Mot. to Compel ¶ 5, ECF No. 45; Pl.'s Second Mot. to Compel ¶ 13, ECF No. 63) On May 15, 2014, after a hearing, Judge Autrey issued an order from the bench and accompanying docket text order requiring Defendants to comply with the discovery requests within 20 days. (ECF Nos. 49, 50) On August 15, 2014, Plaintiff filed a Second Motion to Compel, seeking responses to its Fourth Request for Production. These discovery requests seek copies of Variant, Inc.'s and Wren's tax returns from 2008 to present. Plaintiff asserts that Variant has failed to produce at least 19 settlement agreements with alleged infringers and that copies of the tax returns would allow Plaintiff to confirm whether Variant has complied with the Court's prior discovery order or whether Variant is concealing additional settlement proceeds. (Pl.'s Second Mot. to Compel ¶¶ 15-16, ECF No. 63)
Also on August 15, Plaintiff filed a Motion for Sanctions for Defendants' Failure to Comply with this Court's Order of May 15, 2014, alleging that Defendants failed to produce settlement agreements from 19 defendants. Plaintiff requests that Defendants comply with its discovery requests; pay an amount sufficient to pay Plaintiff's costs, including attorney's fees, of issuing and enforcing subpoenas directed to the settling defendants; or prohibiting Defendants from offering at trial any evidence regarding Plaintiff's damages or contesting estimated settlement amounts from the 19 entities. (ECF No. 65) Additionally, Plaintiff seeks to file an Amended Complaint, adding new counts and facts. (ECF No. 64) The proposed Amended Complaint alleges Alter Ego Liability (Count I) between Wren, Variant Holdings, LLC, and Variant, Inc.; Tortious Interference with Contract (Count II); Unjust Enrichment (Count III); Constructive Trust (Count IV); and Action to Enforce Arbitration Award (Count V).
Plaintiff's Motion to Compel
Plaintiff's Fourth Request for Production asks for copies of all state and federal tax returns for Variant, Inc. and Stephen C. Wren from 2008 to present. Defendants have objected to the production of these documents because the request is burdensome, seeks information not relevant, and the documents are protected by privilege. Plaintiff, however, seeks the tax information to determine the settlement amounts disclosed on the tax returns that Defendants did not disclose in response to the Second Request for Production. Plaintiff contends that the information is relevant to the issue of damages. Defendants continue to maintain that they have already provided the information sought, and Plaintiff could obtain the information from other sources. Defendants argue that Plaintiff seeks the confidential tax information to annoy, embarrass, or oppress defendants and are thus protected by qualified privilege.
Courts in this district have held that tax returns are discoverable. A party seeking disclosure of tax returns must show: (1) the information is relevant; and (2) there is a compelling need for the disclosure because the information is not otherwise readily obtainable. Cooper v. Hallgarten & Co., 34 F.R.D. 482, 484 (S.D.N.Y. 1964); see also Sowers v. Gatehouse Media Missouri Holdings, Inc., No. 4:08CV633 TIA, 2009 WL 1106946, at *2 (E.D. Mo. April 23, 2009) (noting that most courts apply a two-part test in determining whether disclosure is appropriate). While the moving party has the initial burden of showing that the tax returns are relevant, the opposing party has the burden of proving that the tax returns are readily obtainable from another source. PSK, LLC v. Hicklin, No. C09-0105, 2010 WL 2710507, at *2 (N.D. Iowa July 8, 2010).
Here, Plaintiff has demonstrated that the information is relevant, as the returns would show the settlement amounts Defendants received and would bear on the issue of damages. Defendants assert that Plaintiff already has the settlement information in its possession and claims that the 19 additional cases resulted in dismissal without prejudice, as well as no payment to Defendants. Plaintiff notes that Wren refuses to confirm in writing that he complied with the order. During the hearing, however, counsel for Defendants indicated that Wren may be amenable to signing an affidavit regarding his compliance.
The Court notes that the information Plaintiff seeks is the amount of proceeds Defendants received through patent infringement litigation and, as raised during the hearing before the undersigned, demands made prior to pursuing litigation. While the tax returns would show these amounts, Plaintiff can obtain this information by less-intrusive means such as interrogatories and depositions. Indeed, Plaintiff acknowledged that it had not asked Defendants through interrogatories whether Wren received payments pursuant to demand letters threatening suit. "As a general rule, courts do not favor compelling production of tax returns. PSK, LLC v. Hicklin, 2010 WL 2710507, at *2. Because, at this point, the payments received through patent infringement settlements resulting from litigation and threats of litigation ...