This article was originally published in the New York Law Journal.
By Victor M. Metsch
A newly-enacted amendment to the CPLR, coupled with a recent decision applying the new statute, brings to mind the old proverb – “Be careful what you wish for; you are apt to get it”. And the amendment also implicates a modern adage – “The law of unintended consequences: an effect contrary to what was originally intended”.
CPLR § 3119 became law on January 1, 2011 and applies to “requests for discovery in cases pending on or after [the] effective date”. The statute was enacted to simplify and expedite the process for the issuance of subpoenas in connection with out-of-state judicial proceedings. CPLR § 3119,, a version of the Uniform Interstate Deposition and Discovery Act, permits a subpoena to be served without the need for either a legal proceeding and/or a court order in New York.
Before § CPLR 3119 was available, a party to a litigation elsewhere who sought to subpoena a witness or documents in New York had (and still has the choice) to “run the [procedural] gauntlet” of CPLR § 3102(e). Step one: obtain a commission from the out-of-state court where the action was pending. Step two: commence a special proceeding in New York based upon the commission. Step three: establish the nature of, and the need for, the discovery sought. And step four: obtain an order in the special proceeding permitting the issuance of the subpoena.
CPLR § 3119 “cuts to the chase” by eliminating the last three steps. And, in place of the first step, CPLR established two options. Option one: A subpoena issued by the out-of-state court may be submitted to the clerk of the court in the county where the discovery is sought. And the clerk “shall promptly” issue a reciprocal New York subpoena for service upon the person to whom it is addressed. Or option two: engage a New York attorney; and provide local counsel with “the original or a true copy” of the out-of-state subpoena. The New York attorney may then issue and serve a “mirror image” subpoena.
The Plot Thickens
So far so good. CPLR § 3119 seems almost too good to be true!!!
Here the key word is “almost”. A subpoena issued by the clerk of the court or a New York attorney still has to be properly served. Compliance must be compelled (by a court proceeding) if the witness does not appear. And a motion to quash may be made or a protective order may be sought (in a court proceeding) if there is an objection to the necessity for, or the scope of, the subpoena. Thus, the facial “simplicity” of CPLR § 3119 may have to yield to the “complexity” of CPLR § 2304 (“Motion to quash, fix conditions or modify.”) and CPLR § 2308 (“Disobedience of subpoena.”).
Recent case on point: In the Matter of Out-of-state subpoenas issued by the New York Counsel for State of California Franchise Tax Board for depositions and production of documents from the Custodian of Records for U.S. Philips Corporation, from Jack Haken, and from Algy Tamoshunas, for use in an administrative tax appeal pending before the California State Board of Equalization entitled In the Matter of Appeal of Gilbert P. Hyatt, California Board of Equalization, Case Nos. 435770 and 446509, 2011 NY Slip Op 21306 (Sup. Ct. West. Co. July 29, 2011) [Lefkowitz, J.] (published by OCA on September 1, 2011)
The lengthy, ominous and tongue-tying caption of the California Franchise Tax Board case, standing alone, is a harbinger of the numerous issues that can arise–and, in this case actually arose – when a New York Court is confronted with a subpoena relating to an out-of-state proceeding. [Remarkably, Justice Lefkowitz issued a comprehensive, meticulous and thoughtful decision on July 29, 2011, just two days after proceedings held on July 27th!!!]
The “taxing” saga began in 1996 and 1997 when the California Franchise Tax Board (the “FTB”) issued assessments of taxes, penalties and interest against a non-resident, Gilbert P. Hyatt (“Hyatt”), for the underpayment of taxes in 1991 and 1992. Hyatt claimed that he became a resident of Nevada on, and did not owe California taxes on income received subsequent to, September 26, 1991. After further investigation and discovery, on November 1, 2007 the FTB’s Protest Division issued a final determination that adhered to the initial assessments. Hyatt appealed to the California State Board of Equalization.
On March 11, 2011, while Hyatt’s appeal was pending, the California State Controller issued subpoenas duces tecum. The subpoenas were addressed to the custodian of records of three non-parties: U.S. Philips Corporation (“U.S. Philips”), Jack Haken (“Haken”) and Algy Tamoshunas (“Tamoshunas”). U.S. Philips held a license from Hyatt, effective in July 1991, for a group of patents. And Haken and Tamoshunas were in-house counsel for U.S. Philips who worked on the licensing of the patents to other companies.
The Attorney General of California petitioned the California Superior Court for the out-of-state depositions of U.S. Philips, Haken and Tamoshunas and to compel compliance with the subpoenas. On April 14, 2011, without judicial review (as permitted under California law), the Clerk of the Superior Court issued the requested commissions for the issuance of subpoenas.
The New York subpoenas were issued by counsel pursuant to CPLR § 3119(e). Hyatt moved by Order to Show Cause to quash the subpoenas.
Enter Justice Lefkowitz
Initially, the Court noted that, because the subpoenas were issued by counsel, “no judicial review of the subpoenas has been conducted” in New York – as would have been the case pre-CPLR § 3119. California law permitted the issuance of a commission for a subpoena by the clerk of the court without judicial review. As a result, “the new statute has unwittingly shifted the burden of determining the propriety and scope of the subpoena [that originated in California with respect to a proceeding in that state] to the court in New York.”
Justice Lefkowitz then proceeded to determine seven difficult and distinct issues (with apologies to the Court for the brevity of the following summary of the detailed analysis of each matter in the opinion):
First, the Court rejected the FTB’s claim that issuance of the subpoenas was covered by the Full Faith and Credit Clause of the United States Constitution. The clause applies only to judgments; and thus was “inapplicable to the enforcement of the California Superior Court’s commission.”
Second, Justice Lefkowitz rejected the FTB’s claim that enforcement of the commission without modification was required under the principles of comity, and that the New York Supreme Court was required to give deference to the decision of the California Superior Court regarding discovery. The commission was issued by the Clerk of the California court without judicial review. And, in any event, “CPLR 3119 specifically authorizes applications for protective orders and to quash or modify an out-of-state subpoena served in New York under the statute.”
Third, as to the FTB’s claim that Hyatt lacked standing to seek an order quashing the subpoenas, Justice Lefkowitz found that Hyatt had standing to sue. “As a party to the administrative tax appeals for which discovery is sought by the FTB, Hyatt has statutory standing under CPLR § 2304 [and] has demonstrated that he has a proprietary interest in certain confidential information contained in documents in U.S. Philip’s possession regarding the prosecution and defense of his patents.”
Fourth, as to Hyatt’s claim that the FTB lacked authority to issue the subpoenas, the Court found that the FTB had such authority “to the extent that the defense of Hyatt’s administrative tax appeal is in the furtherance of FTB’s duties to collect income tax.”
Fifth, Justice Lefkowitz granted Hyatt’s request for a protective order limiting the scope of the subpoenas “to the issues in the underlying administrative proceedings and to the years 1991 and 1992”. The FTB “failed to meet its burden of demonstrating the relevancy of the materials sought in the subpoenas duces tecum for the years other than 1991 and 1992, and the relevancy of the materials regarding the prosecution of Hyatt’s patents[.]”
Sixth, the Court addressed Hyatt’s choice of law issue relating to Hyatt’s contention “that he and U.S. Philips share a common interest privilege over certain matters encompassed by the subpoenas.” Hyatt also asserted that he should be permitted “to inspect documents U.S. Philips intends to produce to prevent privileged documents from being disclosed.” Justice Lefkowitz found that New York law, not Nevada law, “is applicable in the present matter to the issue of whether a common interest privilege attached to the subpoenaed documents in U.S. Philips’ possession.” The Court made that determination based upon, inter alia, the following: (i) CPLR § 3119 “provides that a motion to quash a subpoena served pursuant to the statute is subject to the rules and statutes of New York”; (ii) “the subpoenas seek documents located in New York and seek to take depositions in New York”; and (iii) “New York has a greater interest and relationship [than Nevada] to the discovery issue[.]”
And seventh, the Court held that, under New York law, the common interest privilege did not apply. The privilege was inapplicable because “[f]or a document to be privileged as an attorney-client communication pursuant to CPLR 4503(a), the document must be primarily or predominantly a communication of a legal character, for the purpose of obtaining or rendering legal advice or services, and intended to be confidential”[.] “In the absence of attorney-client privilege, the common interest exception cannot apply'[.] And “Hyatt has not demonstrated the existence of an attorney-client relationship between himself and U.S. Philips’ counsel.”
What is the lesson of California Franchise Tax Board? CPLR § 3119 may have created “front end” simplicity and expediency in the issuance of subpoenas relating to out-of-state judicial proceedings only to create “back end” issues and complications relating to the enforcement of those subpoenas. Complications may arise especially where, as was the case with the FTB, there is no pre-service judicial scrutiny of the subpoena either out-of-state or in New York.
CPLR § 3102(e) may be invoked to obtain a subpoena ex parte (although the Court may require notice to the witness or her attorney) and does not require a showing of special circumstances. In marked contrast, as California Franchise Tax Board demonstrates, a subpoena issued under CPLR § 3119 may trigger a full-blown adversarial special proceeding encompassing issues of procedural, substantive and foreign law.
In a word, before proceeding under CPLR § 3119, consider whether or not to proceed under § CPLR 3102(e). Will your client’s interests be better served by “up front” judicial consideration (where you represent the petitioner and can select the venue) or “after-the-fact” judicial review (where you represent the respondent and may not be in control)?
Victor M. Metsch, a regular contributor to the Law Journal, is a Senior Litigation/ADR Partner at Hartman & Craven LLP