balancing test used in Hampers be applied here to yield the same result, i.e. that the state need not disclose the tax records.
In this court's view, the approach utilized in Hampers is inappropriate in cases such as the present, in which a state's conflict with a Congressional mandate is so absolute. Unlike Hampers, this case presents a situation in which Congress has clearly announced the federal government's objective and prescribed specific means, the OIG's broad subpoena power, by which that objective must be fulfilled. Whereas in Hampers the court addressed a federal grand jury's interest-- not Congress's interest-- in reviewing various documents as part of a criminal investigation, here this court is faced with a clear Congressional mandate which the State seeks to inhibit. Since section 697(e) so clearly conflicts with the Congressional objective in promulgating the Act, such that "compliance with both federal and state regulations is a physical impossibility," Florida Lime & Avocado Growers, Inc., 373 U.S. at 142-43, Supreme Court precedent unambiguously dictates that the statute is preempted by the Act. Therefore, given the clear and dominating Congressional mandate underlying this case, the court declines to become entangled in a Hampers-type balancing.
The State also argues that section 697(e)(1) does not conflict with federal law because Fed. R. Evid. 501 (quoted supra p. 4), a federal law, directs that federal courts must respect state substantive laws governing privileges. A careful reading of Rule 501 shows that this argument is without merit. As a preliminary matter, the State has not convinced the court that section 697(e)(1) provides for a "privilege" within the meaning of that Rule. Rather, that statute speaks only in terms of confidentiality of records. Statutory guarantees of confidentiality, however, do not necessarily translate into evidentiary privileges within the meaning of Rule 501. Cf. Van Emrik v. Chemung Cty. Dep't of Social Servs., 121 F.R.D. 22, 25 (W.D.N.Y. 1988).
In Van Emrik, the Western District addressed an issue related to the instant question, in which a party sought to invoke N.Y. Soc. Serv. L. § 422, a confidentiality statute, as a privilege in civil rights litigation brought pursuant to 42 U.S.C. § 1983. While finding alternative grounds to reject reliance upon § 422, see Van Emrik, 121 F.R.D. at 26, the court expressed its concern over whether the § 422 confidentiality provision constitutes a "privilege" cognizable under Rule 501. The court explained, "merely asserting that a state statute declares that the records in question are 'confidential' does not make out a sufficient claim that the records are 'privileged' within the meaning of . . . Fed. R. Evid. 501." Van Emrik, 121 F.R.D. at 25 (citations omitted).
This court shares the Western District's concern. While section 697(e) of the Tax Law surely mandates confidentiality, that mandate does not perforce create an evidentiary privilege--a wholly different concept-- for Rule 501 purposes. This court, like the court in Van Emrik, need not resolve that issue today. Instead, for purposes of this discussion, the court may give the State the benefit of the doubt and treat section 697(e)(1) as a "privilege" within the meaning of Rule 501. See 121 F.R.D. at 25-26. Even assuming, without deciding, that section 697(e) constitutes an evidentiary privilege, that privilege is nonetheless not saved in this case by Rule 501.
Rule 501 contains a qualification that is fatal to the State's case. The qualification, "with respect to an element of a claim or defense as to which State law supplies the rule of the decision," limits application of Rule 501 to cases that are governed by state law. In cases in which federal law will provide the rules upon which the case will be decided, privilege founded in state law does not control. E.g. von Bulow v. von Bulow, 811 F.2d 136, 141 (2d Cir. 1987); In re Pebsworth, 705 F.2d 261, 262 (7th Cir. 1983). In other words, a party may invoke state-based privileges under Rule 501 only when state law will "supply the rule of the decision."
In the instant proceeding, the Department of Labor's OIG is conducting a federal audit into waste and abuse in the federal JTPA. The audit is being conducted pursuant to a Congressional mandate that the OIG purge federal programs of inefficiency and abuse. See S. Rep. No. 1071, 95th Cong., 2d Sess. 4 (1978); Campbell Decl. (10/7/92) PP 4, 6. Nothing in the investigation signifies that state law issue will provide the rule of decision in the audit or any subsequent, related proceeding. In short, the State has supplied no justification for its reliance upon that portion of Rule 501 which allows the court to consider state-based privileges in reviewing a subpoena.
Section § 697(e) of the New York Tax Law irreconcilably conflicts with the OIG's Congressionally-mandated duties and authority under the Act. Since it obstructs fulfillment of Congress's purposes and objectives under the Act, section 697(e) is preempted by the Act and the State cannot rely upon it to block the OIG's subpoena of records. The State is not saved by Fed. R. Evid. 501, since that Rule recognizes state privileges only when state law will provide the rule of decision, a condition which is not present here. Since the State's opposition to the OIG's subpoena is without merit and the State has provided no other basis for refusing to comply with the subpoena, the OIG's motion to compel compliance with the subpoena is granted.
Petitioner United States's petition for enforcement of its subpoena is granted. The respondent New York State Department of Taxation and Finance is hereby ordered to comply with the United States's subpoena, dated March 24, 1992, within sixty (60) days of this order, unless the parties mutually agree upon an alternative schedule.
IT IS SO ORDERED.
DATED: December 4, 1992
Syracuse, New York
Neal P. McCurn
Chief, U.S. District Judge