March 01, 2013

Introduction

It’s no secret that responding to a discovery request for electronically stored information (ESI) during litigation can be costly. Employees create, use, and save copious amounts of discoverable ESI every day with little incentive to delete any of it, thanks to dramatic decreases in the cost of data storage and services like cloud computing. While it’s cheap to create, use, and store ESI, it can be very expensive to collect, process, review, and produce that same ESI to an adverse party or in response to a subpoena. Unlike some foreign jurisdictions, litigants in the United States (as well as non-parties) have historically paid their own costs to comply with discovery requests or respond to subpoenas.1 In recent years, however, some U.S. courts have become more sensitive to the rising costs of electronic discovery (E-Discovery) and have displayed a willingness to shift those costs in certain situations. The purpose of this article is to articulate when, why, and how litigants and their counsel might seek relief from the cost of E-Discovery compliance.

The Producing Party Pays

The history of the United States is filled with ambition, expansionism, and pioneers. We’ve blazed trails and explored vast wildernesses, built skyscrapers, developed nuclear weaponry capable of destroying entire cities, and sent men to the moon. In the States, one of our most time-tested themes has been “the bigger, the better.” The same holds true in American jurisprudence with respect to discovery. The Federal Rules of Civil Procedure broadly define the scope of discovery in civil litigation to include “any nonprivileged matter that is relevant to any party’s claim or defense,” and clarify that “[r]elevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.”2 Despite this expansive standard, state and federal courts, including the U.S. Supreme Court, have made it clear that when it comes to discovery compliance costs, the presumption is that the producing party pays.3

Expanding Data Volumes

The volume of potentially relevant, discoverable information that companies create every day continues to increase exponentially as the years pass. The number of bits4 in our digital universe is nearly as many as the number of stars in our physical universe, and in 2010 we created and replicated more than a zettabyte (one trillion gigabytes) of information.5

Within a large company or organization, the same ESI may be located in a dozen or more digital repositories. When an employee sends an e-mail, that e-mail is typically stored in the e-mail accounts of the sender and the recipients on a corporate server. That same e-mail may also be captured on the smartphones of the sender and recipients. It can be archived by employees to their local hard drive, or archived to a shared drive location. And, that same e-mail will likely be housed on one or more backup tapes. Collecting, processing, reviewing, and producing data from one or more of these sources remains the biggest cost-component of civil litigation.

Changing Viewpoints

Fed. R. Civ. P. 26(b)(2)(C) and Fed R. Civ. P. 26(c) provide federal courts with the ability to limit discovery if its burden or expense outweighs its likely benefit, or if the court determines that it needs to protect a party or person from undue burden or expense. Yet, courts have historically been reluctant to sway from the presumption that the producing party bears the cost of complying with discovery requests, even in the context of E-Discovery.6 So, as the song says, what can a poor boy (or a savvy litigant) do?7 As reflected herein, courts have been more open to shifting E-Discovery costs from the producing party or person to the requesting party in certain circumstances.

Nonparty Subpoenas

One instance where courts have found cause to shift E-Discovery costs to the requesting party in recent years is when the responding person or entity is not a party to the underlying litigation. In United States v. Blue Cross Blue Shield of Michigan, the U.S. Department of Justice (DOJ) filed suit against Blue Cross alleging violations of federal antitrust laws.8 The DOJ issued nonparty subpoenas to two hospitals pursuant to Fed. R. Civ. P. 45. The hospitals objected to producing documents, in part on grounds that the production would impose an undue burden on them. Addressing a motion to compel by the DOJ, Magistrate Judge Mona Majzoub of the Eastern District of Michigan ordered the documents to be produced, but acknowledged that under Rule 45, the court had an obligation to “protect a person who is neither a party nor a party’s officer from significant expense resulting from compliance.

Given the absence of Sixth Circuit precedent on the topic, the court looked to cases from other jurisdictions to evaluate whether cost-shifting is mandatory under Rule 45. The court determined that when a nonparty is subject to an undue burden, “the court must determine (1) if compliance with the subpoena imposes an expense on the nonparty, and (2) if so, whether that expense is “significant.” Linder v. Calero-Portocarrero, 251 F.3d 178, 182 (D.C. Cir. 2001).” If that expense is indeed “significant,” the court found that it must shift at least enough of the expense to the requesting party to render the remainder “non-significant.” Finding that the production would cause the hospitals to incur costs that might be “significant,” the court ordered the hospitals to submit cost estimates for complying with the subpoenas.10

After reviewing the hospitals’ compliance cost estimates, which averaged out to approximately $15,000, the court in a separate opinion examined several cases from other jurisdictions, in which costs ranging from $9,000 to $200,000 were found to be “significant.”11 Based on these cases, the court concluded that the hospitals’ costs of compliance were significant. The court went on to balance the equities and concluded that a percentage of the hospitals’ costs should be shifted to the United States.

Pre-Class Certification

Another situation where courts have found discovery cost-shifting appropriate in recent years is in the pre-certification stages of potential class-action litigation. In Boeynaems v. LA Fitness International, LLC, five plaintiffs who were former members of LA Fitness alleged that they had difficulty cancelling their gym memberships, and sought discovery from LA Fitness on whether class-certification was warranted (as well as on the merits).12 Disputes among the parties led the court to issue a memorandum ordering the plaintiffs to bear the costs associated with pre-class certification discovery. Using the guidepost that “[d]iscovery need not be perfect, but discovery must be fair,” the court established a two-part test to determine the appropriateness of shifting E-Discovery costs in a putative class action.

The court determined that E-Discovery costs should be shifted when the case involves (1) pending class certification, and (2) “very extensive discovery, compliance with which will be very expensive.”13 In fashioning the rule, the court noted the asymmetry in the discovery burden that typically disfavors defendants in class actions, and would disfavor LA Fitness in the underlying litigation against the five named plaintiffs. According to the court:

If the class action is denied, perhaps another small group of individuals will intervene to join them as named parties. Even in aggregate, these individuals have very few documents. Perhaps they have kept a copy of their membership contract, or copies of correspondence with LA Fitness. On the other hand, Defendant LA Fitness has millions of documents and millions of items of electronically stored information (“ESI”). Thus, the cost of production of these documents is a significant factor in the defense of the litigation.

In balancing the equities, the court also found it significant that the plaintiffs were represented by a well-known, highly successful law firm that had made hundreds of millions of dollars in prosecuting class actions for their clients over the years, and that a firm of that caliber surely had the resources to invest in discovery if it believed the case to be meritorious.15

Not Reasonably Accessible

Besides nonparty subpoenas and pre-class certification discovery, courts of late have also found good cause to shift the cost of discovery compliance to the requesting party if the source of the requested ESI is not reasonably accessible pursuant to Fed. R. Civ. P. 26(b)(2)(B). In Annex Books, Inc. v. City of Indianapolis, a discovery dispute arose over the production of the plaintiffs’ bookkeeping data, which was stored on a server called Platinum.16 The plaintiffs produced four discs of bookkeeping data to the City, which were apparently unreadable. In response to the City’s assertions, plaintiffs argued that they had done all that was reasonably required of them to produce the bookkeeping data, including hiring computer experts at a cost of over $9,500 and purchasing bookkeeping software suggested by the City (QuickBooks Pro). The court found that plaintiffs’ bookkeeping data was “relevant, important, and reasonably likely to lead to admissible evidence,” but also considered plaintiffs’ good faith attempts to comply with the City’s discovery requests and determined that the plaintiffs had demonstrated that the bookkeeping data was not reasonably accessible because of undue burden and costs, in light of the apparent incompatibility between Platinum and QuickBooks. The court ordered that the City pay all future costs associated with any additional efforts to compile the plaintiffs’ bookkeeping data.

Cost Recovery under 28 U.S.C. §1920(4)

In addition to “the bigger, the better,” another time-tested theme in American history is “if at first you don’t succeed, try, try again.” Prevailing parties who were denied cost-shifting relief during the discovery stage of litigation have an opportunity to seek fee awards for E-Discovery costs under 28 U.S.C. §1920(4). The statute provides, in part, that “[a] judge or clerk of any court of the United States may tax as costs the following: Fees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case.” Prior to 2008, §1920(4) had been limited to “[f]ees for exemplification and the costs of making copies of papers....” In light of the increasing importance of E-Discovery in the judicial process, the statute was amended and “papers” was changed to “any materials.” This change has paved the way for prevailing parties to seek awards for costs incurred during the process of producing electronically stored information, and for courts to award them. However, the circuits are divided on the question of how broadly to interpret the language in the statute, and what E-Discovery services may be taxed as costs.17

Conclusion

Given the amount of discoverable information created and stored at companies and organizations on a daily basis, and the sometimes shocking costs of producing that same information during litigation or in response to a subpoena, responding parties and their counsel should consider seeking judicial relief from discovery if it would impose an undue burden or expense. As a practical matter, a person or party arguing that compliance is a burden should be prepared to demonstrate to the court specifically and particularly what that burden is and why it should be shifted. conversely, parties contemplating a discovery request should consider whether the source of discovery is reasonably accessible, and whether they may be better served by attempting to obtain the same information from some other, less-costly means. As these cases demonstrate, courts are becoming more inclined to charge fishing expeditions to the fishermen, rather than the lake, if the circumstances warrant it.

Contributing authors:

Denise B. Bach

Phillip M. Shane, Esq.

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1 See Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 358 (1978).
2 Fed. R. Civ. P. 26(b)(1).
3 See Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 358 (1978) (“[t]he presumption is that the responding party must bear the expense of complying with discovery requests”); Toshiba Am. Electronic Components, Inc. v. Super. Ct., 21 Cal Rptr. 3d 532, 538 (2004) (“The general rule in both state and federal court is that the responding party bears the expense typically involved in responding to discovery requests, such as the expense of producing documents.”).
4 Eight bits equals a byte.
5 International Data Corporation and EMC, Extracting Value from Chaos (June 2011), available at http://idcdocserv.com/1142.
6 Ronni Solomon and Andrew H. Walcoff, E-Discovery Cost-Shifting, The Metropolitan Corporate Counsel, 23 (Oct. 2011) (citing Barrera v. Boughton, 2010 WL 3926070, at 3 (D. Conn. 2010)).
7 The Rolling Stones, Street Fighting Man, Beggars Banquet (1968).
8 2012 WL 4513600 (Oct. 1, 2012).
9 Id. at 7 (quoting Fed. R. Civ. P. 45(c)(2)(B)(ii)).
10 Id.
11 U.S. v. Blue Cross Blue Shield of Michigan, 2012 WL 4838987 *3 (Oct. 11, 2012).
12 2012 WL 3536306 (E.D. Pa. Aug. 16, 2012).
13 Id. at 11.
14 Id. at 3.
15 It is worth noting that at least one court has taken a critical view of the Boeynam’s decision. See Fleischer v. Phoenix Life Ins. Co., 2012 WL 6732905 (S.D.N.Y. Dec. 27, 2012) (“The presumption created by Boeynaems has never been adopted in this circuit, and, more importantly, it runs counter to the relevant principle announced by the Supreme Court[.]”). The Fleischer court also disagreed with the reasoning that the resources of a requesting party’s attorney(s) should be considered in cost-shifting analysis. Id. at *4 (“[I]f the assets of counsel were to be taken into consideration, the ability of clients to engage an attorney of their choice would likely be hampered.”).
16 2012 WL 892170 (S.D. Ind. March 14, 2012).
17 In the Ninth Circuit, courts have awarded considerable e-discovery costs to prevailing parties under §1920(4) in recent years. See Jardin v. DATAllegro, 2011 WL 4835742 (S.D.Cal. 2011); In re Online DVD Rental Antitrust Litigation, 2012 WL 1414111 (N.D.Cal. April 20, 2012). In contrast, a Third Circuit panel reduced an e-discovery cost award from the Western District of Pennsylvania by more than 90% last year. Race Tires America, Inc. v. Hoosier Racing Tire Corp., 674 F.3d 158 (3d Cir. 2012). The panel in Race Tires found that the lower court failed to distinguish between e-discovery charges that constitute “[f]ees for exemplification,” and charges that constitute “costs of making copies.” After taking a critical look at the language of the statute, the court concluded that none of the e-discovery vendor activities during the course of discovery could be regarded as “exemplification” of materials under §1920(4), and only scanning and file format conversion could be considered “making copies.” The court paid particular attention to the invoices from e-discovery vendors submitted by the prevailing parties in support of their Bill of Costs, noting a “lack of specificity and clarity as to the services actually performed,” and ultimately reduced an award of more than $365,000 to a little over $30,000. 674 F.3d at 166. Attorneys for Hoosier Racing and DMS filed a petition for a writ of certiorari to the U.S. Supreme Court seeking review of the Third Circuit’s decision in Race Tires, but the high court declined to hear the case. Race Tires America, Inc. v. Hoosier Racing Tire Corp., 674 F.3d 158 (3rd Cir. 2012), cert. denied, 133 S.Ct. 233 (Oct. 1, 2012). (No. 11- 1520). For now, it seems, the circuits will remain divided on this issue.

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