Publications & Articles
By: Timothy Q. Delaney
The Corporate Counsellor
Discovery of electronic evidence can be extremely expensive. Faced with these enormous costs, courts have been wrestling with the question of who pays. See, e.g., Murphy Oil Inc. v. Fluor Daniel Inc., 2002 WL 246439, at *3 (E.D. La. 2002) (“it would cost $6.2 million and take more than six months, excluding attorney time, to place the email in a form where it can be produced”); Rowe Entertainment Inc. v. The William Morris Agency Inc., 2002 U.S. Dist. LEXIS 8308, at *26-27 n.4 (S.D.N.Y. May 9, 2002) (finding costs for e-mail restoration for discovery substantial where producing party estimated potential expense at $9.75 million).
Traditionally, the courts presumed that the producing party would bear the cost of retrieving and producing relevant materials. See Oppenheimer Fund Inc. v. Sanders, 437 U.S. 340, 358 (1978). Recently, the courts have turned away from this approach and have been considering a number of discrete factors before allocating the cost of production. To avoid being stuck bearing onerous discovery costs, companies need to intelligently manage their electronic data before litigation and carefully craft their discovery strategy during litigation. A little planning based on the factors being considered by the courts can result in your opponent, instead of you, footing the electronic discovery bill.
‘Undue Burden or Expense’
Rule 26(c), Fed. R. Civ. P., has long permitted the courts to protect a party from “undue burden and expense” created by another party’s discovery requests. Nevertheless, even when production costs were large, the producing party typically had to pay them. For example, in In re Brand Name Prescription Drugs Antitrust Litigation, 1995 WL 360526 (N.D. Ill. 1995), the court ordered the producing party to bear a $50,000 to $70,000 cost in retrieving documents. When the party objected to the burden, the court held that the requesting party shouldn’t have to bear the burden when the costliness of the discovery is a product of the producing party’s record-keeping scheme over which the requesting party has no control. Similarly, in Rhone-Poulenc Rorer Inc. v. Home Indemnity Co., 1991 WL 111040 (E.D. Pa. 1991), the court held that an unwieldy computerized recordkeeping system, which required heavy expenditures in money and time to produce relevant records, simply was not an adequate excuse to frustrate discovery.
Thus, in the past, while a party might seek protection from the burden of electronic discovery costs, protection typically was not forthcoming. The only way to minimize potential discovery costs was to put in place, and actively manage, an aggressive document retention policy.
A case involving Procter & Gamble highlights the unfairness of always requiring the producing party to pay. During litigation, P&G deleted e-mail that it knew was relevant and was sanctioned $10,000. See P&G v. Haugen, 179 F.R.D. 672 (D. Utah 1998). Another party in the same case dutifully saved its e-mail and then spent over $58,000 to recover and produce it to P&G. Nevertheless, the court refused to shift the cost to P&G. See P&G v. Haugen, No. 95-NC-94K, slip op. at 2-3 (D. Utah 1998). In effect, it made more economic sense to destroy relevant electronic evidence than to produce it.
New Standard Emerges
Gradually, the courts began to appreciate that electronic discovery should not be treated the same as traditional document discovery. One court noted that requiring a party to restore and produce relevant electronic discovery at its expense in every case would provide the plaintiff with a “gigantic club with which to beat his opponent into settlement.” McPeek v. Ashcroft, 202 F.R.D. 31, 34 (D.D.C. 2001) (“No corporate president in her right mind would fail to settle a lawsuit for $100,000 if the restoration of backup tapes would cost $300,000.”)
Earlier this year, a New York district court fashioned a balancing test to evaluate whether to shift the costs of discovery of electronic data to the requesting party. See Rowe Entertainment, supra. It listed eight factors to consider: (1) the specificity of the request; (2) the likelihood of discovery of critical information; (3) whether alternative sources of discovery existed; (4) the reason the material was retained; (5) the benefits to each party; (6) cost; (7) the ability and incentive of each party to control costs; and (8) the resources of each party. One, court already has followed the New York court’s lead, Murphy Oil Inc. v. Fluor Daniel, 2002 WL 246439 (E.D. La. 2002). More courts are expected to follow.
Ostensibly, the new approach of Rowe Entertainment permits a court to objectively determine when a discovery request placed an “undue burden or expense” on a producing party to justify a shifting of costs. With some foresight and planning, a company can posture itself to increase its likelihood of being the nonpaying party in litigation. Some recommendations in view of each of the eight factors are set forth below. See Rowe Entertainment Inc. v. The William Morris Agency Inc., supra, at *430-32 and Murphy Oil Inc. v. Fluor Daniel Inc., supra, at *5-6 (E.D. La. 2002).
· Specificity of the Requests
In Rowe Entertainment, the requesting party made “sweeping” demands for discovery. The court held that as a result this factor favored the requesting party paying the costs. In contrast, in Murphy Oil, the requesting party made targeted requests and the court held that this favored the producing party paying.
To avoid paying as a requester, one should ask for only the critical items needed. For example, don’t ask for everyone’s e-mail, just the key players’. In addition, you should target particular narrowly crafted topics. As a producer, be prepared to explain to the court the volume of the material that is embraced by the requests. Get your opponent to admit the breadth of its request by negotiating the scope of the search prior to court involvement.
· Likelihood of Discovery of Critical Information
In Rowe Entertainment and Murphy Oil, the courts noted a lack of evidence that the electronic data sought was likely to be a “gold mine” and therefore noted that this factor favored the requesting party paying the search cost.
As the producing party, make sure your witnesses are prepared to testify so that they do not exaggerate the importance of electronic data. Prior to litigation, enact and enforce a retention policy that minimizes retention. As the requesting party, craft discovery and deposition questions to obtain admissions on the opposing party’s reliance on e-mail or other electronic data to operate its business.
· Alternative Sources of Discovery
In Rowe Entertainment and Murphy Oil, the courts both noted a lack of evidence that the e-mails sought were generally available in hard copy form or could be located and produced other than through a search of backup tapes and hard drives. Therefore, the courts held that this factor favored the producing party paying the search cost.
To avoid this result, a producing party should provide evidence of the electronic data it already produced prior to any comprehensive search of computer databases. It should rely on evidence that all personnel searched their individual files, including electronic files, to provide responsive discovery. On the other hand, the requesting party should take discovery to show the deficiencies of the individual searches.
· Reason for Document Retention
If the reason for the existence of the electronic data is merely for disaster recovery or because the party simply neglected to discard it, the cost of searching it likely will fall to the requesting party. However, if a party accesses the electronic data for ongoing business purposes, it will be required to produce it in the same manner as it would traditional items of discovery.
Thus, it behooves the requesting party to obtain testimony and documents showing that the requesting party accesses the backup tapes or other electronic data on a regular, ongoing basis. It also should look for any evidence discussing the importance of retaining the material. The producing party must establish the inadvertence of the retention or the disaster recovery purposes.
· Benefits to Each Party
The courts in Rowe Entertainment and Murphy Oil both concluded that the production would benefit primarily the requesting party and thus favored it paying the cost.
This factor doesn’t require much analysis. Obviously if the party with the material felt that it benefited its case, it likely would recover the data on its own, as its own expense, without the need for a discovery request. When it is resisting the discovery, it is difficult to imagine any circumstance where this factor would support the producing party paying the costs.
In Rowe Entertainment and Murphy Oil, both courts noted that if the cost is not substantial, it favors not shifting the cost to the requesting party. In both cases, however, the producing parties presented evidence that the cost would be large and the factor favored shifting the cost to the requester.
The producing party typically resists electronic discovery based on its cost. As it is most knowledgeable about its own systems, it is relatively easy to estimate the time and expense of recovery and production. The requesting party should not simply accept its representations at face value. It may make sense to hire an expert to pike holes in the production party’s evidence and to provide an independent estimate of cost. It also may help to compare the cost to the other cost of discovery to show its reasonableness. The cost may be large but no larger on a per page basis than ordinary hard copy document discovery. The more like traditional discovery, the more likely the producing party will bear the cost.
· Ability and Incentive to Reduce Costs
As the requesting party is the master of the items it is seeking, it controls the scope and extent of the search. Thus, this factor usually will favor the requesting party paying.
One way a requesting party could get the factor to favor the producing party paying is for it to show that it proposed a reasonable search protocol that the producer rejected. If the producer then estimated costs of a search in order to resist the discovery by using a more extensive search protocol, this factor might favor the requester.
· Resources of Each Party
In litigation between two companies, as was the case in Rowe Entertainment and Murphy Oil, this is a neutral factor. Unless a party simply cannot afford the expense, this factor will not be helpful to either party.
The expense of electronic discovery can be overwhelming. To avoid being stuck with a huge bill, companies would be wise to plan in view of the cost allocation factors being applied by the courts. Steps should be taken prior to litigation, and targeted discovery should be taken to gather evidence in advance of electronic data discovery to support shifting the discovery costs to the opposite side.
Reprinted with permission from the July 2002 edition of The Corporate Counsellor, © 2002 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.