When a corporation is a litigant, the adverse party will often seek to increase pressure for settlement by demanding the deposition of the corporation’s CEO or other senior officer. The federal courts have developed a substantial body of case law that limits the right these “apex” depositions because they are so often used to harass and burden the individuals at the top of the corporate pyramid. Although no New Jersey court had squarely ruled on an apex deposition issue, any uncertainty has now been resolved by a recent decision from the New Jersey Tax Court, which adopts the federal approach. HD Supply WaterWorks Group, Inc. v Director, Division of Taxation, Docket No. 3035-2015 (released for publication Jan. 27, 2016).
The plaintiffs in HD Supply challenged New Jersey’s denial of their claims for a refund of the corporate business tax (CBT) on the grounds that they were Delaware corporations that were limited partners in Florida limited partnerships and lacked the necessary nexus with New Jersey to be subject to the CBT. The Division of Taxation (“Division”) sought the deposition of Joseph J. DeAngelo, who served as plaintiffs’ President and as Chairman and CEO of HD Supply Holdings, Inc., a publicly traded Fortune 500 industrial distribution company with sales of over $7 billion. HD Supply Holdings was the parent of the company that, in turn, owned the plaintiff corporations. The Division claimed to need DeAngelo’s deposition because he was the only remaining officer to hold overlapping positions with plaintiffs and with the limited partnerships during the tax years in question. Plaintiffs moved for a protective order to block the deposition. Plaintiffs submitted an affidavit from DeAngelo stating that he relied on a team of subordinates and lacked any personal knowledge of the details, structure or activities of every entity within the HD Supply corporate structure, and did not have any specific knowledge of plaintiffs’ day-to-day operations or personal knowledge of the claims and issues relevant to the litigation. DeAngelo also stated that, given his responsibility to oversee the entire business enterprise, it would be an extreme hardship for him to set aside the time to prepare and attend a deposition.
The Tax Court noted that there was no per se rule exempting senior executives from depositions, and that even the most senior officers may need to give testimony when they have relevant, first-hand information. However, a request for a deposition must be evaluated against the opposing party’s right to seek a protective order against “annoyance, embarrassment, oppression, or undue burden or expense,” language that was virtually identical under both the Federal Rules of Civil Procedure and the New Jersey Rules of Court. The Tax Court adopted two considerations used in recent federal cases: “(1) whether the deponent has unique first-hand, non-repetitive knowledge of the facts at issues in the case; and (2) whether the party seeking the deposition has exhausted other less intrusive discovery methods.” Slip op. at 12. Here, the court noted that DeAngelo’s affidavit disclaimed any personal knowledge and other corporate officer witnesses had already testified (or could have testified) to the same facts that the Division sought to establish through DeAngelo. Accordingly, the court granted HD Supply’s motion to prevent the deposition of its CEO. The court did, however, allow the Division to require DeAngelo to respond to 15 interrogatories and, if warranted by his responses, the Division could renew its request for his deposition.
Apex depositions will continue to pose a risk to corporate parties but HD Supply provides a road map for controlling that risk by asking a few key questions:
- How far removed is the officer from the business activity at issue in the lawsuit? A CEO of a Fortune 500 company is likely not to have personal knowledge of activities several levels below that others in the corporate structure would not also have.
- How many other sources of the information exist? Are other witnesses available to provide the information sought by the deposition? If those persons are scheduled to give testimony, they can usually provide those facts.
- How much of a hardship would the deposition be for the corporate officer? The larger the corporate enterprise and the more demanding the executive’s responsibilities, the more likely a court will be to protect against an apex deposition.