Friday, November 1, 2013

Are a Principal's Tax Returns Relevant In a Vicarious Copyright and Trademark Case?

Yes.  Coach sued a flea market and its owner for trademark, trade dress, and copyright infringement related to alleged sales of counterfeit Coach products.  Coach seeks statutory damages under both the Copyright Act and Lanham Act.  The defendant flea market and its owner refused to provide their tax returns, arguing they were not relevant.  Coach responded that the defendants
are facilitating and contributing the promotion and sale of the counterfeit and infringing products ... and [they] have made substantial profits from the infringing activity they have allowed to occur.
In addressing Coach's motion to compel, the Court was initially concerned with a split in the Southern District of Florida's analysis of this issue, where some courts required a heightened level of protection because of public policy issues:
Using the procedure in Rule 34(a), parties can request the production of documents and other things within the scope of FED. R. CIV. P. 26(b). However, when a party asks for tax returns, most courts acknowledge that the request raises public policy concerns. Camp v. Correctional Medical Services, No. 2:08cv227-WKW(WO), 2009 WL 424723 * 2 (M.D. Ala. Feb. 17, 2009); Platypus Wear, Inc. v. Clarke Modet & Co., Inc., No. 06-20976-CIV, 2008 WL 728540 * 3 (S.D. Fla. Mar. 17, 2008). Federal courts are split on the question whether income tax returns are entitled to enhanced protection from discovery. United States v. Certain Real Property, 444 F. Supp. 2d 1258, 1262-64 (S.D. Fla. 2006) (collecting cases). For example, some courts in the Southern District of Florida hold that a party seeking the production of tax returns must show a compelling need, in addition to relevance, while other courts in the same district find that ordinary relevance is all that is required. Id. And, even courts which hold that relevancy is the sole issue have taken steps to protect the confidentiality of tax returns. See EEOC v. Dimare Ruskin, Inc., No. 2:11-cv-158-FtM-36SPC, 2011 WL 3715067 * 4 (M.D. Fla. Aug. 24, 2011); Platypus Wear, Inc. v. Clarke Modet & Co., Inc., 2008 WL 728540 at *3. The Eleventh Circuit has not explicitly addressed the issue or recognized a special privilege for tax records. But, in Maddow v. Proctor & Gamble Co., Inc., 107 F.3d 846, 853 (11th Cir. 1997), the court found that the district court did not abuse its discretion in compelling tax records because they were “arguably relevant to the case.” 
The Court followed Maddow, recognizing that a vicariously liable trademark and copyright defendant's finances are relevant for discovery purposes, particularly where the plaintiff seeks statutory damages.  [For instance, in the Copyright context, the plaintiff will be required to produce the defendant's gross revenues in order to satisfy its statutory obligations for receiving statutory damages.  To do so, the plaintiff must first gather evidence.]:
“A party infringes vicariously by ‘profiting from direct infringement while declining to exercise a right to stop or limit it.’” Pegasus Imaging Corp. v. Northrop Grumman Corp., 8:07-cv-1937-T-27EAJ, 2008 WL 5099691 * 2 (M.D. Fla. Nov. 25, 2008) (quoting Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., 545 U.S. 913, 930, 125 S.Ct. 2764, 162 L.Ed.2d 781 (2005)). Coach alleges that Josephs and Visitors reaped profits from turning a blind eye to the sale of counterfeit and infringing merchandise at the flea market.  If true, then their tax returns may contain information relevant to prove that they benefitted financially from the flea market vendors activities.  
Coach has invoked its right to recover statutory damages. In at least three infringement cases courts have found that a defendant’s tax returns are relevant when the plaintiff asks for statutory damages. See, Coach, Inc. v. Swap Shop, Inc., No. 12-60400-CIV, 2013 WL 4407064 * 3 holding that “‘Defendant’s corporate federal income tax returns are relevant to the issue of statutory damages under section 504(c)(1) in a copyright infringement action.’” (quoting Quackenbush Music, Ltd. v. Alana, Inc., No. 92-10687-S, 1992 WL 439746 * 2 (D. Mass. Nov. 2, 1992)); Coach, Inc. v. Hubert Keller, Inc., Case No. CV411-285, 911 F.Supp.2d 1303, 1310 (S.D. Ga. 2012) (recognizing that if plaintiff had invoked its right to statutory damages it would be entitled to the defendant’s tax returns.).
Motion to Compel, granted.
Coach, Inc. v. Visitors Flea Market, LLC, Case No. 6:11-CV-1905 (M.D. Fla. Oct. 24, 2013) (Mag. Smith)