NO. 91-242
IN THE SUPREME COURT OF THE STATE OF MONTANA
1992
PACIFICOW, an Oregon Corporation,
Petitioner and Appellant,
-vs-
THE DEPARTMENT OF REVENUE OF THE STATE
OF MONTANA and THE STATE TAX APPEAL
BOARD OF THE STATE OF MONTANA,
Respondent and Cross-Appellant.
APPEAL FROM: District Court of the First Judicial District,
In and for the County of Lewis & Clark,
The Honorable Jeffrey Sherlock, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Terry B. Cosgrove argued, Luxan & Murfitt,
Helena, Montana
Milo E. Ormseth argued and Peter R. Jarvis, Stoel,
Rives, Boley, Jones & Grey, Portland, Oregon
For Respondent:
David Woodgerd argued, Legal Counsel, Dept. of
Revenue, Helena, Montana
For Amicus Curiae:
Benjamin Frederick Miller, California Franchise Tax
Board, Multistate Tax Affairs Bureau,
Sacramento, California
Paul1 Mines, Multistate Tax Commission,
Washington, D.C.
John L. Alke, Hughes, Kellner, Sullivan & Alke,
Montana Taxpayer's Association, Helena, Montana
Submitted: May 21, 1992
Decided: August 2 1 , 1992
Clerk
_I
Justice Terry N. Trieweiler delivered the opinion of the Court.
The Montana Department of Revenue (DOR), defendant and
respondent in this Court, pursuant to Rule 23(h), M.R.App.P.,
appeals from two final orders of the District Court of the First
Judicial District, Lewis & Clark County. The District Court
reversed the State Tax Appeal Board's (STAB) admission of eight
documents into evidence based on PacifiCorp's attorney-client
privilege, and remanded the case to STAB for a new hearing.
Appellant PacifiCorp cross-appealed from an order of the District
Court which upheld STAB'S denial of Pacificorp's motion to compel
the DOR to produce audit report documents generated by the
Multistate Tax Commission.
The Montana Taxpayers Association (MTA) filed an amicus curiae
brief supporting PacifiCorp's position. The Multistate Tax
Commission (MTC) and the California Franchise Tax Board (FTB)
submitted amicus curiae briefs in support of the DOR's position.
We affirm in part and reverse in part.
The issues on appeal are:
1. Did the District Court err in affirming STAB'S decision
that the audit reports performed by California for MTC at the
request of Petitioner are not subject to discovery?
2. Did the District Court err when it found that PacifiCorp
did not waive its attorney-client privilege by producing eight
documents during discovery?
2
3. Did the District Court err when it remanded this case to
STAB for a new trial, based on the finding that eight documents
were privileged and improperly admitted into evidence?
On October 6, 1986, the parties submitted an agreed statement
of facts, which is summarized as follows:
PacifiCorp is the parent of an affiliated group of
corporations engaged in business within Montana. The DOR conducted
an audit covering PacifiCorp's corporation license tax returns from
1974 to 1979. On November 5, 1982, PacifiCorp filed amended
returns for refunds for the years 1971 through 1979. In a letter
dated June 3, 1983, the DOR informed PacifiCorp of a proposed
additional tax assessment for the tax years 1974 to 1979, and also
denied PacifiCorp's refund claims.
On June 28, 1983, PacifiCorp protested the deficiencies
asserted in the DORIS June 3, 1983, letter. On June 29, 1983,
PacifiCorp also filed a complaint with STAB appealing the DORIS
denial of refunds. On August 2, 1983, pursuant to stipulation of
the parties, STAB ordered that the refund appeal be held in
abeyance pending a final decision on the tax deficiency protest.
The DOR obtained tax audit reports on PacifiCorp from tax
authorities in Oregon, Idaho, and California, and determined that
Montana was treating PacifiCorp's Montana operations differently
than the other states.
PacifiCorp contacted MTC and requested that it review the
proposed assessment of additional taxes by Montana. The MTC is an
association of about 20 states including Oregon, Idaho, California,
3
and Montana. The MTC's amicus curiae brief states that the purpose
of the Multistate Tax compact is to facilitate the following:
1. Equitable tax apportionment of multistate
businesses,
2. Uniformity among various state tax systems,
3. Avoidance of duplicative taxation,
4. Discussion of apportionment disputes,
5. Avoidance of state judicial procedures by
providing an informal forum for dispute resolution,
6. Taxpayer convenience,
7. Good relations between taxpayers and the state.
In response to the request, MTC requested California to
conduct a special audit of PacifiCorp and to provide reports to MTC
and its members.
Both Montana and California are signatories to an Agreement on
Exchange of Information between MTC members stating:
6. No information obtained pursuant to this Agreement
shall be disclosed to any person not authorized by the
laws of the undersigned states.
On May 3 , 1985, the DOR sent PacifiCorp its final notice of
additional tax due and denied all refund claims. On May 31, 1985,
PacifiCorp appealed to STAB the DORIS additional tax assessment.
This appeal was combined with the pending claim filed with STAB in
1983.
On July 15, 1985, PacifiCorp filed its first interrogatories
and request for production of documents. Included within the
request for production was a requirement that the DOR identify any
and all documents which were "used, reviewed, created or considered
4
by the Department which played any part in the Department's
decision that Western and Resource did not constitute a unitary
business with Pacific." The DOR identified and produced the audit
report which its staff produced. However, the DOR identified, but
refused to produce the Oregon and MTC audit reports.
On November 21, 1985, PacifiCorp filed with STAB a motion to
compel the DOR to produce the documents which it identified but
failed to produce. The DORIS brief of January 7, 1986, opposed the
motion to compel and directed PacifiCorp to request the documents
directly from the individual states. On May 14, 1986, STAB denied
the motion to compel.
PacifiCorp attempted to obtain copies directly from the
states. Oregon provided copies of its audit report. The FTB
provided certain portions ofthe requested information, but did not
release any portions from the first & second audit reports (1981
and 1982) which included the following:
1. Opinions, recommendations, judgments, or analysis in the
audit narrative;
2. Proprietary-type of information about the internal
decision making process which it thought the taxpayer could use to
manipulate the system (audit guidelines, audit criteria,
operational criteria, and memos);
3. Third-party information, unrelated to the taxpayer; or
4. Protest hearing reports.
The FTB also withheld the entire third report dated May 24,
1984, and state that a fourth report dated May 29, 1985, had not
5
been specifically requested by PacifiCorp. Its letter explained
that the undisclosed audit information was confidential under
California law and would not be given to the taxpayer (PacifiCorp).
The 1984 and 1985 reports from FTB were given to Oregon, Montana,
Idaho, and MTC.
The letter also stated that FTB was providing the following
information from the first and second reports (1981 & 1982):
1. Returns, reports, etc., that had been furnished to the
department by the taxpayer;
2. The factual data contained in audit narratives and
supporting workpapers; and
3. Authority relied upon to make adjustments.
PacifiCorp also attempted to obtain audit reports directly
from MTC, but MTC refused to provide copies.
On June 12, 1986, PacifiCorp filed a petition for judicial
review. It sought an order reversing STAB and allowing discovery
of the audit reports. The District Court found that it lacked
jurisdiction and that a review would have to await final agency
action. STAB entered judgment for the DOR on February 28, 1989.
On November 22 , 1989, the District Court reversed and remanded this
decision due to unlawful ex parte procedures on the part of STAB
and the DOR. On March 15, 1990, STAB once again entered judgment
for the DOR. PacifiCorp appealed to the District Court, and the
parties agreed to resolve the discovery and evidentiary issues
before reviewing the merits. The District Court found the
information in the audit was privileged under 5 15-1-601, MCA, and
6
affirmed STAB'S ruling. This is the basis of Pacificorp's
cross-appeal.
During discovery, PacifiCorp inadvertently produced eight
documents in response to the DORIS request. PacifiCorp moved to
exclude the documents under the attorney-client privilege, but STAB
admitted the documents, finding that PacifiCorp had waived its
privilege. The District Court found that the eight documents were
protected by the attorney-client privilege and remanded the case
back to STAB for consideration without benefit of the information
found in the documents.
I.
Did the District Court err in affirming STAB'S decision that
the audit reports performed by California for MTC at the request of
Petitioner are not subject to discovery?
There is no dispute that the availability of the MTC audit
report is governed by Article VIII, 5 6, of the Multistate Tax
Compact. Section 6 is adopted by and set forth in § 15-1-601, MCA:
Information obtained by any audit pursuant to this
article shall be confidential and available only for tax
purposes to party states, their subdivisions, or the
United States. Availability of information shall be in
accordance with the laws of the states or subdivisions on
whose account the commission performs the audit and only
through the appropriate agencies or officers of such
states or subdivisions.
The dispute concerns the interpretation of the above statute,
particularly the meaning of the second sentence. The District
Court found that the first sentence precludes a party state from
distributing the MTC audit report to the taxpayer.
7
The DOR maintains that the first sentence authorizes
dissemination of MTC audit information to the member states, their
subdivisions, or the United States for tax purposes only. The DOR
contends that such disseminated information must remain
confidential because the first sentence establishes a statutory
privilege for information obtained during an MTC audit. The DOR
argues that the second sentence, regarding availability, does not
defeat the privilege because it refers to dissemination to a
state's taxing authority for tax purposes only. We disagree.
We conclude that the first sentence does not preclude the
state from distributing the audit to the taxpayer. Although the
first sentence of the statute provides that the audit information
is confidential, the second sentence provides that it will be
available according to state law. The second sentence states that
the laws of each state or subdivision "on whose account the audit
is performed" govern the availability of the audits. Montana was
provided the report as a state Iton whose account" the audit was
performed, thus, the MTC audit is a Montana audit. The second
sentence allows discovery of the audit report pursuant to Montana
law. SeeMuItistate Tr Comgn v. Merck& Co., Inc. (Or. 1980), 617 P.2d 1371,
a
1375, where the Oregon Supreme Court held that an MTC audit is
essentially an Oregon audit performed under Oregon law by its
agent, MTC. Montana disclosure laws apply. California privilege
laws are not applicable, except in tax litigation arising in
California.
8
The DOR contends that public disclosure would undermine MTC's
ability to function as an informal forum for issue resolution. The
DORIS inconsistent disclosure practices belie this argument. The
DOR admitted during oral argument that MTC audits suuuortinq
Montana tax assessments are often released to the taxpayer. There
is no logical basis for releasing the information in some cases,
but not in others. Given the inexplicable disparate treatment,
arguments that disclosure will undermine MTC or Montana's
participation are not persuasive.
Because MTC derives powers from and on behalf of its member
states, it exercises no more power than the states already possess.
Kinnear v. Hertz Cop. (Wash. 1976), 545 P.2d 1186. The MTC's audit
information is not subject to any greater burden of confidentiality
than Montana law commonly imposes on tax information gathered by
the DOR. Any further "confidentiality" violates Montana's
constitutional right to know provision.'
Constitutional Considerations
The District Court did not discuss PacifiCorp's right to know
under Article 11, 5 9, of the Montana Constitution, nor did it
' Article 11, 5 9 , of the Montana Constitution, provides:
Risht to Know: No person shall be deprived of the right to
examine documents or to observe the deliberations of all public
bodies or agencies of state government and its subdivisions, except
in cases in which the demand of individual privacy clearly exceeds
the merits of public disclosure.
9
address the right to privacy asserted by the DOR under Article 11,
5 10 of the Montana constitution.'
Article 11, 5 9, of the Montana Constitution is the law of
this State and gives PacifiCorp the right to examine these public
documents unless some individual privacy interest is threatened.
The DOR compares its refusal to disclose information obtained
from MTC with the refusal of the state auditor in Belth v Bennett
.
(1987), 227 Mont. 341, 740 P.2d 638, to provide information
received from a multistate insurance regulation association on the
basis that the information was privileged under Montana statute.
In Belth, a newspaper was trying to obtain information about an
insurance company. We held in Belth that a state agency can assert
the privacy interest of another. In Belth, the statute allowed the
state auditor to withhold information because the insurance
company's right to privacy outweighed the public's right to know.
The instant case, however, is not a situation where a citizen is
attempting to obtain a file about another taxpayer; here, the
taxpayer is requesting its own file. The privacy exception within
the right to know clause only applies when a member of the public
is requesting information about someone else. The State cannot
assert the privacy right of the person requesting the disclosure.
If so, the State could circumvent the individual's right to know.
Article 11, 5 10, provides:
Riaht to Privacv. The right of individual privacy is
essential to the well-being of a free society and shall not be
infringed without the showing of a compelling state interest.
10
The DOR also contends that it is claiming the right to privacy
for MTC and its members. It asserts that because California and
MTC have not waived their privilege, Montana cannot disclose the
information. The DOR points out that in Belth we held that
corporations may assert the right of privacy because the right is
not limited to individuals. The DOR explains that the MTC is
analogous to a corporation, not a government agency, because it is
an organization comprised of members. However, MTC's amicus brief
supporting the DOR contradicts the DOR by stating that the MTC is
"properly classified as an instrumentality of state government,
and in this capacity "represents the executive branch of member
states.If
PacifiCorp's right to know prevails because no individual or
corporate privacy is involved. Montana, California, and MTC cannot
assert the right to privacy. They are not v1individualsf8
under
Montana law--they are government entities. The only privacy
interest implicated here is the taxpayer's. We hold that MTC audit
reports are subject to discovery under 5 15-1-601, MCA, consistent
with PacifiCorp's constitutional right to examine public documents.
11.
Did the District Court err when it found that PacifiCorp did
not waive its attorney-client privilege by producing eight
documents during discovery?
PacifiCorp invoked the attorney-client privilege pursuant to
5 26-1-803(2), MCA, for eight documents produced during discovery.
Rule 503, M.R.Evid., provides that waiver of a privilege occurs if
11
"the holder of the privilege voluntarily discloses or consents to
disclosure of any significant part of the privileged matter,"
unless the disclosure itself is privileged.
PacifiCorp's production of eight attorney-client documents was
in response to a voluminous document request covering thousands of
documents. Montana law has not yet addressed whether inadvertent
production in large document cases constitutes waiver. Application
of the test for waiver of the attorney-client privilege outlined in
State v Statczar
. (1987), 228 Mont. 446, 743 P.2d 606, requires
consideration of two elements: (1) the element of implied
intention: and (2) the element of fairness and consistency. Statczar
743 P.2d at 610. We will consider the element of implied intention
first .
In Statczar, we defined waiver as "the intentional or voluntary
relinquishment of a known right or conduct which implies
relinquishment of a known right." This is consistent with the
Commission Comments to Rule 503, M.R.Evid., which provide that
subjective intent is not the only factor for determining waiver--
conduct can also constitute waiver. The Comments also state that
knowledge is not a required element for waiver. Here, it is clear
that PacifiCorp did not have knowledge of the inadvertent
production of the documents until later. However, we still must
determine whether PacifiCorpls conduct at any time implied
relinquishment of a known right.
12
In Kuiperv. D&rictCourt (1981), 193 Mont. 452, 460, 632 P.2d 694,
698, we stated that if no legal action is taken to protect against
wide dissemination of the materials, voluntary relinquishment of
the right could be found.3 Here, wide dissemination did not occur,
and PacifiCorp immediately requested the return of the documents as
soon as it became aware of the production. PacifiCorp took prompt
reasonable steps to protect its privilege. PacifiCorp objected to
any use being made of these documents and refused to permit
questions to be asked about them as soon as the issue arose during
depositions. Voluntary relinquishment was not established by lack
of legal action in this case.
Moreover, the mere inadvertent production itself is not enough
to establish voluntary relinquishment of a known right. Mendenhall
v. Barber-Greene Co. (N.D.111. 1982), 531 F. supp. 951, 954.
We are taught from first year law school that waiver
imports the "intentional relinquishment or abandonment of
a known right. Inadvertent production is the antithesis
of that concept.
Mendenhall at 955. Seeaho, Unitedstatesv. Z o h (9th Cir. 1987), 809 F.2d
1411, 1417 (secretary's delivery of tapes under the mistaken
impression that they were blank did not waive privilege because the
disclosure was Irsufficiently involuntary and inadvertent as to be
inconsistent with a theory of waiver"), a f l d in relevantpart and vacated in
SeealsoInreGrandJuiyProceedings (4th Cir. 1984), 727 F.2d 1352,
1356 (efforts taken to rectify error and extent of disclosure are
factors in determining waiver) ; FDIC v. E m t & Whinney (E.D.Tenn.
1991), 137 F.R.D. 14 (prompt objection and request for return of
documents).
13
part (1989), 491 U.S. 554, 109 S. Ct. 2619, 105 L. Ed. 2d 469.
Because PacifiCorp did not voluntarily relinquish a known right, an
implied intention to waive the privilege cannot be found.
In addition to considering the element of implied intention,
we must also consider the element of fairness and consistency.
Statczar 743 P.2d at 610. In this case, PacifiCorp objected to use
of the documents from the first time they were referred to during
discovery. The DOR knew well in advance of trial that use of the
documents was an issue, and therefore, should not be surprised or
unprepared because of their exclusion. Fairness and consistency
are served by the exclusion of the privileged documents.
Accordingly, we affirm the District Court's conclusion that
PacifiCorp did not waive its attorney-client privilege when it
inadvertently produced eight documents during discovery.
111.
Did the District Court err when it remanded this case to STAB
for a new trial, based on the finding that eight documents were
privileged and improperly admitted into evidence?
When reviewing conclusions of law by an agency, Workers'
Compensation Court, or a trial court the standard of review is
whether the tribunal 's conclusions are correct. "The reasoning for
simply determining if the court's conclusions are correct is that
no discretion is involved when a tribunal arrives at a conclusion
of law -- the tribunal either correctly or incorrectly applies the
14
law." Steerv. Dept.ofRevenue (1990), 245 Mont. 470, 474, 803 P.2d 601,
603. We find that the District Court correctly applied the law.
The District Court's review of STAB'S agency findings is
governed by 5 2-4-704(2), MCA. The District Court properly noted
that the statute allows reversal of an agency decision "where such
decision violates constitutional or statutory provisions or is
affected by other error of 1 w I
a.' See § 2-4-704(2) (a) (i) and (iv),
MCA. The District Court found that the admission of the eight
documents violated PacifiCorp's statutory right to claim the
attorney client privilege pursuant to 5 26-1-803, MCA.
We must determine whether the above statutory violation
prejudiced substantial rights of the appellant. Section
2-4-704(2), MCA. If substantial rights were prejudiced, then
reversal is appropriate. See Frasceli v. State Dept. of Revenue (1988), 235
Mont. 152, 766 P.2d 850.
The test of prejudicial error requiring reversal is
whether there is a reasonable possibility the
inadmissible evidence might have contributed to the
verdict.
Brodniakv. State (1989), 239 Mont. 110, 779 ~ . 2 d (quoting Statev. Gray
71
(1983) 207 Mont. 261, 268, 673 P.2d 1262, 1266).
After reviewing the record, we conclude that there is a
reasonable possibility that the eight privileged documents
contributed to STAB'S decision. We hold that admission of the
eight documents prejudiced substantial rights of PacifiCorp, and
did not constitute harmless error.
15
We affirm the District Court's conclusions that PacifiCorp did
not waive its attorney-client privilege and that remand to STAB was
necessary. We reverse the District Court's conclusion that the MTC
audit was not discoverable under Montana law.
This case is remanded to the State Tax Appeal Board for
further proceedings consistent with this opinion.
We concur:
_r
'Chief'Justice
16
Justice John Conway Harrison dissenting.
I totally disagree with the majority's reasoning in this
opinion and therefore dissent to its holding herein.
17