Data's "intimate" encounter with Tasha Yar came in the first season episode "The Naked Now", when she was under the influence of an inhibition destroying infection.
Picard is alarmed to realise that Maddox wants to conduct what is essentially exploratory surgery on Data's positronic net in order to help him find out how it works. Even more alarming, Maddox is rather vague on the details, and can offer no real assurance that he will be able to avoid severely damaging Data in the process. Data declines the procedure, with Picard's blessing, only to find himself summarily transferred off the Enterprise and put under Maddox's command. Concerned at what might happen to him, Data resigns from Starfleet rather than undergo the transfer. When his right to resign is challenged, Captain Louvois is forced to convene a hearing to assess just what rights Data does have. Unfortunately her incomplete staff means that she hasn't enough officers to hold the hearing, so she deputises Picard as Data's defence, and assigns Commander Riker to prosecute. When Riker resists, Louvois flatly declares that if he refuses the task, or attempts to throw the case on purpose, she will summarily rule against Data.
The hearing commences with Riker making a devastating showing of Data's machine nature, including shutting him off whilst he is on the witness stand. That night Picard mopes on the Enterprise, worrying to Guinan that there is no way he can win. Guinan casually points out that sooner or later Data's technology will be replicated by somebody, and that if Picard does fail then the Federation will find itself in possession of what is essentially a cybernetic slave species.
With this realisation Picard returns to the hearing. He dismisses Data's mechanical nature as irrelevant since Humans are machines too, merely biological ones. Bringing Data back to the stand Picard exposes his more Human qualities, including the true nature of his relationship with Tasha Yar. Bringing Commander Maddox to the stand Picard pushes him to define sentience, and goes on to show that Data easily meets most if not all of the criteria - intelligence, self awareness, consciousness. Reducing Maddox to a state of confusion, Picard points out that Data is essentially the very thing Starfleet searches for - new life - and that they will be judged according to their treatment of him.
In her summation Louvoir confesses her own confusion as to Data's precise nature and states that whilst she can't say what he is, he does have a right to find out for himself. With Data formally recognised as a sentient being, Maddox withdraws the transfer and Data returns to the Enterprise.
Afterward Data finds a morose Riker avoiding the celebration his shipmates are throwing, still guilty over being the prosecutor in the hearing. Data points out that in allowing the hearing to continue Riker gave him his chance to win, and did so at the cost of pain to himself; something Data values as an act of friendship. A relieved Riker joins the celebration as the episode ends.
Not until the aftermath of Riker's presentation do we see a deeper resonance to what is going on here. Picard feels hopeless, beaten - an unusual sight in and of itself! His scene with Guinan is an absolute classic. He's still in the mindset that the problem is that Maddox might fail and so damage or even kill his friend. Guinan gently points out that the true problem is what will happen if - when - Maddox or somebody like him succeeds. You can hear the irony dripping from her words as she talks about how marvelous it will be for the Federation to have millions of Datas, all property, with no care for their feelings, their welfare. "Whole generations of disposable people," as she puts it. It's a wonderful moment because it reframes the entire episode, takes it to a much deeper, more profound place. Picard's examination of Data and Maddox the next day is truly amazing; convincing as Riker seemed at first pass, Picard absolutely wipes the floor with him by cutting through to the heart of what it means to be a person at all. As Louvoir said, "We have all been dancing around the basic issue. Does Data have a soul?" The episode doesn't give us an answer, of course. But as Louvoir rightly points out, it's a question that he has a right to explore himself.
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