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Bloomberg L.P. v. Comm'r of Internal Revenue

United States Tax Court
Nov 21, 2022
No. 3755-17 (U.S.T.C. Nov. 21, 2022)

Opinion

3755-17 3756-17

11-21-2022

Bloomberg L.P., Bloomberg, Inc., Tax Matters Partner, ET AL Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent


ORDER

Joseph Robert Goeke, Judge.

On October 21, 2022, respondent filed a Motion in Limine to Exclude Secondary Evidence and Testimony relating to the functionality of software underlying the Bloomberg Professional Services (BPS software). Petitioner filed an Objection on November 4, 2022. Respondent filed a Reply to Objection on November 10, 2022, and petitioner filed a Sur-Reply on November 15, 2022.

In his Motion, respondent seeks to exclude screenshots of function codes from the BPS software, manuals, guides, and fact and expert testimony describing and comparing the features, purpose, and functional result of BPS and third-party software (secondary evidence). Petitioner seeks to use this evidence to establish the functionality of the BPS software for purposes of the third-party comparable exception and the application of Treas. Reg. § 1.199-3(i)(6) in lieu of a demonstration of the software because Bloomberg L.P.'s (Bloomberg) did not preserve a functioning version of the software as it existed during the years at issue (functioning version).

Respondent argues that the secondary evidence should be excluded under the best evidence rule of Fed.R.Evid. (Rule) 1002 as misleading, unfairly prejudicial, causing undue delay and confusion, and wasting time under Rule 403. He further argues that the screenshots should be excluded under Rule 901(a) for failure to be authenticated properly.

Legal Standards for Motion in Limine

The Court has broad discretion over the admission of evidence. Healey v. Chelsea Res., Ltd., 947 F.2d 611, 619 (2d Cir. 1991). The purpose of a motion in limine is to allow the Court to rule on the admissibility and relevance of evidence before trial. Luce v. United States, 469 U.S. 38, 40 n.2 (1984). The Court will exclude evidence only when it is clearly inadmissible on all potential grounds. United States v. Paredes, 176 F.Supp.2d 179, 181 (S.D.N.Y. 2001). Denial of a motion in limine does not necessarily mean that the evidence will be admitted at trial; the Court may reserve judgment until trial so that the issue may be considered in the appropriate context. See Luce, 469 U.S. at 41; United States v. Connelly, 874 F.2d 412, 416 (7thCir. 1989); Walker v. Schult, 365 F.Supp.3d 266, 275 (N.D.N.Y. 2019).

Background

The following background is derived from the parties' filings and is stated solely for purposes of ruling on respondent's Motion.

A functioning version of the BPS software does not exist. The BPS software was not a discrete product offering as it was updated on a daily basis. Bloomberg did not preserve any version of the software as it existed at any one time during the years at issue. During the years at issue, it retained snapshots of the software on a monthly basis for disaster recovery purposes. The snapshots no longer exist, and even if they did exist, it is not practical or possible to recreate a functioning version from the snapshots. The operating systems, server hardware, complier, and network infrastructure required to run a functioning version no longer exist.

The screenshots represent a small fraction of the available functions of the BPS software and provide an incomplete picture of its functionality. Some of the screenshots relate to problems with and suggested improvements for the software. Others relate to general questions about using the software. The screenshots were generated by Bloomberg personnel and customers. They have not been indexed or organized in a systematic manner and were not created or maintained for the purpose of demonstrating the software's functionality.

Best Evidence Rule: Rule 1002

Respondent argues that the secondary evidence should be excluded under Rule 1002, known as the best evidence rule, which requires an original writing to prove its content. Rule 1002 has been applied to require an original computer program to prove the program's contents and "typically applies in copyright infringement cases." McEnroe v. Mantissa Corp., 2016 WL 7799636, at *4 (D. Mass. 2016); Lynchval Sys. Inc. v. Chicago Consulting Actuaries, 1998 WL 151814, at *6 (N.D. Ill. 1998) (best evidence rule applied in a case involving a competitor's alleged misappropriation of trade secrets contained in a computer program).

In Lynchval Sys., the contents of the computer program were clearly at issue. The court granted a pre-trial motion to exclude expert testimony about the trade secrets allegedly contained in the computer program.

One issue before the Court is the functionality of the BPS software, which does not involve proof of the BPS software's contents. Treas. Reg. § 1.199-3(i)(6), which addresses the lease, rental, license, sale, or other disposition (collectively, disposition) of computer software, if applicable, would require the Court to consider whether another person derives gross receipts from the disposition of "substantially identical software" to its customers, which the regulations define, in part, as "[f]rom a customer's perspective, has the same functional result" and "has a significant overlap of features or purpose". Id. subdiv. (iv). The parties refer to this part of the regulations as the third-party comparable exception.

Under the statutory and regulatory requirements of I.R.C. section 199, petitioner does not need to establish the contents of the BPS software. Evidence showing how the BPS software functioned and how customers used it is not the content of the software. Accordingly, Rule 1002 is not a basis to exclude the secondary evidence. See Wilson v. Pope, 1997 WL 403684, at *11 (N.D. Ill. 1997) (best evidence rule did not exclude witness testimony about how software operates); see also United States v. Diaz-Lopez, 625 F.3d 1198, 1202-03 (9th Cir. 2010) (best evidence rule did not require exclusion of testimony about database search that witness conducted and did not require printout of search results); United States v. Bennett, 363 F.3d 947, 954 (9th Cir. 2004) (best evidence rule applied to exclude law enforcement testimony about the GPS map that he saw because the testimony is about the content of the GPS map and not based on the personal observations of the defendant's actions); Needleman v. Golden 1 Credit Union, 474 F.Supp.3d 1097, 1100 n. 1 (N.D. Cal. 2020) (best evidence rule did not apply where issue was how webpage looked); Cordas v. Uber Techs., Inc., 228 F.Supp.3d 985, 989 (N.D. Cal. 2017) (best evidence rule did not apply to screenshots of what a user would see on app); Lynchval Sys., 1998 WL 151814 (best evidence rule applied where issue was whether trade secrets were incorporated into software code, and thus, contents of software was at issue).

Wilson involved claims of destruction and unlawful acquisition of intellectual property that was part of software. The court denied a pre-trial motion in limine to exclude witness testimony that a software problem existed and how different versions of the software operated on the basis of the witness's personal observation. The Court rejected a best evidence argument because the witness was not testifying about the contents of the software. He had not reviewed the software code.

1. Exception for Lost or Destroyed Originals: Rule 1004

Even if Rule 1002 were to apply, the secondary evidence would be admissible under Rule 1004, which provides an exception to Rule 1002 where the original is lost or destroyed and not in bad faith. See McEnroe, 2016 WL 779963 (D. Mass. 2016) (no bad faith found where source code had degraded, rendering it incapable of retrieval).Respondent suggests that Bloomberg's failure to retain a functioning version was in bad faith. However, the Court is satisfied with petitioner's explanation for its inability to produce a functioning version. The lack of a functioning version is the result of the ordinary course of business, Bloomberg's business practice of daily updates to the software. Petitioner has explained to the satisfaction of the Court the reasons that a functioning version of the BPS software is not available and the loss of the original does not rise to the level of bad faith. Bloomberg's record retention policies have little significance.

In McEnroe, a copyright infringement case, the copyrighted computer program had been lost (one copy had been stored on floppy disks that had degraded over intervening 22 years and the U.S. copyright office had destroyed its copy). The defendant argued, on summary judgment, that copyright infringement could not be proved because no evidence existed. The court ruled Rule 1004 could allow secondary evidence because a reasonable person could view the loss of the two copies as not in bad faith. Thus, the court denied summary judgment.

Prejudice, Delay, Waste of Time: Rule 403

Respondent argues that the Court should exclude the secondary evidence under Rule 403, which grants the Court discretion to exclude relevant evidence if its probative value is substantially outweighed by the danger of unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence. See Sundstrand Corp. & Subs. v. Commissioner, 89 T.C. 810, 814 (1987). Absent a "powerful and compelling reason", the Court is reluctant to exclude relevant evidence and "will be more likely to exclude evidence whose probative value is extremely low." Id. at 814-15; see George v. Celotex Corp., 914 F.2d 26, 30-31 (2d Cir. 1990) (calling Rule 403 "an extraordinary remedy that must be used sparingly"); Chamilco v. Wild Edibles, Inc., 2017 WL 11567936, at *3 (S.D.N.Y. 2017) (excluding evidence under Rule 403 is a "drastic remedy").

We have carefully weighed the probative value of the secondary evidence against the potential for undue prejudice, delay, confusion, and waste of trial time and find that the required balancing weighs in favor of admission. There is no powerful or compelling reason to exclude any of the secondary evidence. Petitioner informed respondent that there was no functioning version of the BPS software as early as February 2019, with sufficient time to prepare for trial. Without a functioning version of the software, the secondary evidence has significant probative value.

Authentication: Rule 901

Respondent objects to the screenshots for lack of authentication under Rule 901(a), which requires sufficient evidence to support a finding that the item of evidence is what its proponent claims it is. Authentication requires there to be rational basis on which to conclude that the evidence is what it is claimed to be. Axelrod & Cherveny, Architects, P.C. v. T&S Builders, Inc., 943 F.Supp.2d 357, 363 (E.D.N.Y. 2013). Evidence can be authenticated by providing testimony from a witness with knowledge of the item. Rule 901(b)(1). Evidence that relates to a process or system may be authenticated by evidence describing the process or system and showing that the process or system produces an accurate result. Rule 901(b)(9).

We find that respondent's objections as to authentication are premature and not grounds to exclude the screenshots. Petitioner asserts, and we tend to agree, that it has provided a rational basis for authentication during respondent's informal interview of a Bloomberg employee and a declaration. Accordingly, we will not exclude the screenshots in a pre-trial motion. The Court encourages the parties to stipulate to the screenshots whereby respondent may reserve his objection on the grounds of authentication if he so chooses.

Respondent raises legitimate concerns about the screenshots that seem to relate to their probative value, which the Court can better assess after the presentation of evidence at trial. However, it is unlikely that we will exclude them from evidence as they reflect contemporaneous information about the functionality of the BPS software and tend to prove functionality to some extent.

Upon due consideration, it is ORDERED that respondent's Motion in Limine, filed October 21, 2022, is denied.


Summaries of

Bloomberg L.P. v. Comm'r of Internal Revenue

United States Tax Court
Nov 21, 2022
No. 3755-17 (U.S.T.C. Nov. 21, 2022)
Case details for

Bloomberg L.P. v. Comm'r of Internal Revenue

Case Details

Full title:Bloomberg L.P., Bloomberg, Inc., Tax Matters Partner, ET AL Petitioner v…

Court:United States Tax Court

Date published: Nov 21, 2022

Citations

No. 3755-17 (U.S.T.C. Nov. 21, 2022)