LAW REVIEW 1129
Tax Records in USERRA Cases: How Both Parties May
Obtain Each Other's Private Financial Records
Thomas G. Jarrard, JD., MBA.
6.0--Military Service and Tax Laws
I represent a veteran in a USERRA case where the defendant is requesting
discovery of my client’s tax returns. I
understand having to provide pay stubs to support the claim for damages, but
are tax returns discoverable? Can I
assert a privilege to protect the veteran’s private financial records? Even if those are discoverable, does that
mean I can request the same records from the defendant?
A: The short answers are:
Yes, tax returns and other private financial record can be discoverable. Yes, you could assert a privilege, but it is
not an absolute privilege. And, for the same reasons, plus a few more,
yes, you actually could obtain defendant’s financial records too.
the sake of other readers: A plaintiff’s
financial records are often discoverable under the rules that govern federal
cases. The Federal Rules of Civil
Procedure permit broad discovery of information "reasonably calculated to
lead to the discovery of admissible evidence." Fed. R. Civ. P.
26(b)(1). Under the rule, a “party may
obtain discovery regarding any non-privileged matter that is relevant to any
party’s claim or defense […] including any documents or other tangible things.”
Id. Fed.R.Civ.P. 33 authorizes a
party to serve any party a written interrogatory relating to “any matter that
may be inquired into under Rule 26.” Ibid.
Likewise, Fed.R.Civ.P. 34 provides that a party may, within the
scope of Rule 26(b) serve on any party a request to produce copies of relevant
documents that are in the responding party’s “possession, custody or control.” Ibid.
Q: Can I assert a privilege to protect the veteran’s private
though financial records are somewhat private, copies of corporate financial
records and tax returns held by the taxpayer are relevant and discoverable in
private civil litigation. St. Regis
Paper Co. V. United States, 368 U.S. 208, 218, 82 S. Ct. 289, 7 L. Ed. 2d
240 (1961); Young v. United States, 149 F.R.D. 199, 201 (S.D. Cal
1993). "Tax returns do not enjoy an
absolute privilege from discovery" in the Ninth Circuit. Premium Service Corp. v. Sperry &
Hutchinson Co., 511 F.2d 225, 229 (9th Cir. 1975). Tax returns are subject to discovery when
they are relevant and there is a compelling need for the returns because their
information is not otherwise readily attainable from an alternative source. Sneller v. City of Bainbridge Island,
No. 07-05338 RBL, 2008 U.S. Dist. LEXIS 83573 (W.D. Wash. Oct. 7, 2008). The party seeking discovery has the burden of
showing relevancy, while the party resisting discovery has the burden of
identifying the alternative source of information. Melendez v. Gulf Vessel
Mgmt., 2010 U.S. Dist. LEXIS 80713 (W.D. Wash. July
In a typical USERRA case, both the
plaintiff and defendant will attempt to use a plaintiff’s financial records as
evidence of damages because it is very likely that only the plaintiff (as well
as a defendant) will have possession or custody of their own financial records.
A plaintiff uses the records in support of their expert’s report on damages. On the other hand, the defendant would obtain
the records in an effort to show that the plaintiff failed to mitigate damages,
or to undermine the amount that the plaintiff claims. Thus, a
plaintiff’s financial records would be discoverable because they are relevant
Q: What about the defendant’s financial records?
A: The answer is not as straight forward as it
would be for a plaintiff’s financial records.
However, a defendant’s wealth is relevant to the issue of the amount of
liquidated damages for willful violation of USERRA.
A discrimination claim under USERRA, 38 U.S.C. §
4311 is a federal tort. Staub v.
Proctor Hosp., 131 S. Ct. 1186 (U.S. 2011)(Describing a USERRA discrimination
claim under 38 U.S.C. § 4311 as a federal tort); When Congress creates a federal tort it
adopts the background of general tort law.
Id.; See also Safeco Ins. Co. of America v. Burr,
551 U.S. Further, a damage action for
willful violations of USERRA is analogous to any number of tort actions
recognized at common law, and "more important, liquidated damages is the
traditional form of relief offered in the courts of law." Maher v. City of Chicago, 463 F. Supp.
2d 837, 844 (N.D. Ill. 2006) (citation omitted).
In tort law, evidence of a tortfeasor’s wealth
is traditionally admissible as a measure of the amount of punitive damages that
should be awarded. City of Newport v.
Fact Concerts, Inc., 453 U.S. 270, 101 S.Ct. 2748
(1981); see also Restatement (Second) of Torts § 908 (1978). The Supreme Court has consistently held that
broad discretion is accorded to juries in assessing the amount of punitive
damages. Electrical Workers v. Foust,
442 U.S. 42, 50-51 (1979); Gertz
v. Robert Welch, Inc., 418 U.S. 323, 349-350
Right now you might be saying, “but liquidated
damages are not punitive damages.”
Liquidated damages under USERRA 38 U.S.C. § 4323 are punitive. Maher, 463 F. Supp. 2d at 844; cf.
Burlington Industries, Inc. v. Ellerth, 524 U.S. 742, 764, 118 S. Ct. 2257, 141 L. Ed. 2d 633
(1998). Punitive damages are intended to
punish the wrongdoer in such a manner that they would be hesitant to engage in
the wrongful conduct ever again. See
City of Newport, 453 U.S. at 270. A jury is permitted to assess punitive
damages in an action when it involves reckless or callous indifference to the
federally protected rights of others. Smith
v. Wade, 461 U.S. 30, 56 (U.S. 1983). Accordingly, when a USERRA plaintiff is
seeking liquidated damages for a willful violation of the USERRA, they have
just as much right to the defendant’s financial records as the defendant would
have to the plaintiff’s.
There are a couple catches though. First, USERRA liquidated damages are limited
to the amount the plaintiff is awarded for lost wages and benefits. So, if a plaintiff proves liability and a
willful violation, the sum of the damages that they can receive is capped at
two (2x) times the value of their lost wages and benefits. Second, the court has discretion in awarding
liquidated damages. 38 U.S.C.
§4323(d)(1)(C) states “the court may require the employer to […] pay
liquidated damages.” Ibid. That
discretion allows the court to award partial or full liquidated damages. In other words, there is some wiggle room,
and the plaintiff must be prepared to persuade the court why full liquidated
damages are needed.
Although the USERRA limits liquidated damages
and grants the court some discretion, this does not mean that a wrongdoer’s
wealth is not relevant to the court’s consideration of liquidated damages. C.f. City of Newport, 453 U.S. 270. In fact, a court considering whether punitive
damages are appropriate in a particular case may consider many factors which
necessarily require disclosure of the defendant’s financial records, including:
the profitability to the defendant of the wrongful conduct; the desirability of
removing that profit and of having the defendant also sustain a loss; and the
financial position of the defendant. See
Martinez v. Tully, 1994 U.S. Dist. LEXIS 20935,
36-37 (E.D. Cal. Sept. 23, 1994).
Using these factors to assess liquidated damages
makes sense because, if liquidated damages are intended to curb future
behavior, then there needs to be some sting associated with them. For example, if the profitability of a
defendant’s wrongful conduct is high, then full liquidated damages would help
remove that profit. Similarly, if the
financial position of the defendant really is not going to change under
straight compensatory damages, then an award of full liquidated damages may
cause the defendant to sustain a loss, and thereby serve as an incentive not to
violate the USERRA in the future.
In sum, you know that the
defendant’s attorney is not going to just hand those records over without a
fight. If you really want the
defendant’s private financial records then you are probably going to have to
show the court why those records fit within the scope of discovery. Those records would be relevant, admissible,
and helpful to the determination of willful/liquidated damages. But, plan on having to get over a couple
hurdles; showing why liquidated damages under the USERRA are punitive, and how
the principles of tort law apply
equally in USERRA cases.
Thomas G. Jarrard
is a Marine Corps Reserve officer and a member of ROA. He practices law
in Spokane, Washington and takes on USERRA
cases around the country. He also wrote, along with Captain Wright
(Director of the Service Members Law Center), ROA’s amicus curiae brief in the
Supreme Court, in the case of Staub v. Proctor Hospital. His e-mail is firstname.lastname@example.org.
A privilege is
special legal right that exempts a person from being compelled to do
something. For example, the
attorney-client privilege protects the client (and attorney) from being
compelled to disclose information shared between them.
 If you are involved in a wrongful
termination lawsuit, you should expect that the defendant will demand
copies of your tax returns. When you file your income
tax return, you have a legal duty to report ALL the income. If a defendant
learns that you received income and did not report it on your taxes, you can be
sure that they will try to use that information against you in the case. These are just a couple reasons why working
off the books, or not reporting income, is not wise.
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