Rule 26(b)(2)(c)’s proportionality standard triggers protective order

High Voltage Beverages LLC v. The Coca-Cola Company, 2009 WL 2915026 (W.D.N.C. Sept. 8, 2009) [Link to decision via Google Scholar]

Several of our prior blog posts [e.g., here and here] have addressed how Rule 26’s proportionality principles can be used to control a party’s ediscovery costs. As we explained in one of those posts, because Rule 26(b)(2)(c) applies to all discovery requests, its proportionality standard potentially can be applied even to sources of electronic information that are reasonably accessible, so long as the burden or expense of the proposed discovery outweighs its likely benefit. And with the ABA reporting “Electronic discovery should be proportionate to [the] controversy,” we thought today would be a good time to post about a decision that applied Rule 26’s proportionality standard to a source of electronic information that was “reasonably accessible.” Addressing what it characterized as “a novel question,” the court in High Voltage Beverages granted the defendant’s request for a protective order under Rule to 26(b)(2)(c).

After the defendant produced 1.7 million pages of documents, plaintiff demanded that it search for alternative sources of documents relating to defendant’s investigation and selection of its VAULT mark. In response, defendant identified an additional 17 gigabytes (1.5 million pages) of documents from a senior executive which had been retained under litigation holds issued in unrelated lawsuits. Defendant did not object to producing that data, but because defendant believed it produced every document related to the clearance of its VAULT mark, defendant objected to incurring the cost of reviewing the documents. Defendant offered plaintiff the opportunity to key-word search the documents and plaintiff refused. In its request for a protective order, defendant explained that a de novo review of the 17 gigabytes of data would not result in the discovery of any documents that have not already been produced.

The court in High Voltage Beverages accepted the defendant’s representation that it had produced all documents in its possession concerning the VAULT mark and concluded the time and expense of reviewing the documents would be extraordinary. Thus, the court concluded that the burden and expense of the requested discovery outweighed its likely benefit and held the defendant did not have to review the data before producing it to the plaintiff. Therefore, the court denied plaintiff’s motion to compel and granted defendant’s motion for a Rule 26 protective order. It did require that defendant to again extend the opportunity to key-word search the documents prior to their production.

So the moral of the story is do not overlook Rule 26(b)(2)(c) cost-shifting arguments where appropriate. With the growing chorus that ediscovery costs are harming our civil justice system, courts are more likely to favorably consider Rule 26 cost-shifting arguments. Rule 26(b)(2)(c)’s proportionality standard can provide an effective tool to control your ediscovery costs.

Photo courtesy Flickr user Capt Kodak via this Creative Commons license.

Seventh Circuit’s Electronic Discovery Pilot Program

Recently, the Seventh Circuit announced its Electronic Discovery Pilot Program. The program was developed in response to continuing comments by the business community and practicing attorneys about the need to reform the civil pretrial discovery process. It is an attempt to reduce the cost and burden of ediscovery in litigation. What makes the Seventh Circuit’s pilot program unique is that its results will be reviewed and analyzed during the program’s phases.

A series of Principles Relating to the Discovery of Electronically Stored Information (“ESI”) were developed and codified in a standing order. These principles are intended to serve as supplemental procedural ediscovery guidelines for the parties in selected cases. Individual district court, magistrate, and bankruptcy judges in the Seventh Circuit have agreed to adopt the principles and implement them in selected cases during Phase I of the program, which runs through May 1, 2010.

Kenneth J. Winters, the Managing Director of the Sedona Conference®, and former Colorado Supreme Court Judge Rebecca Kourlis, the Executive Director of the Institute for Advancement of the American Legal System (“IAALS”) at the University of Denver, assisted in the development and review of these principles.

IAALS is developing questionnaires to assess the efficacy of the principles. The questionnaires will be completed by the judges and lawyers participating in Phase I of the program. The results of the IAALS’ questionnaires will be presented to the Seventh Circuit at its annual meeting in May, 2010. At that time, the program’s ediscovery principles will be reviewed and refined as needed. Phase II of the program is scheduled to proceed from June, 2010 through May, 2011. It is contemplated that in May, 2011, Phase II findings will be presented and the Seventh Circuit’s final ediscovery principles announced.

Among other things, the principles require in the event of a dispute during the meet and confer process, the appointment of an ediscovery liaison who should be prepared to participate in ediscovery dispute resolution. These principles also recognize that that Rule 26(b)(2)(C)’s proportionality principles should be applied when formulating a discovery plan; provide that sanctions can be imposed for the failure to cooperate and participate in good faith in the meet and confer process; identify categories of ESI, which are generally not discoverable in most cases; and provides that if a party intends to request the preservation or production of these categories of ESI, that such a request be discussed at the parties’ initial meet and confer session or as soon thereafter as practicable.

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Failing to take prompt reasonable steps once notified of an inadvertent production results in privilege waiver – you’ve now entered the Twilight Zone

United States v. Sensient Colors, Inc., 2009 WL 2905474 (D.N.J. Sept. 9, 2009)

“You’re traveling through another dimension, a dimension not only of sight and sound, but of mind; a journey into a wondrous land whose boundaries are that of imagination – Next stop, the Twilight Zone.”

Any lawyer who inadvertently produces privileged information steps into a legal twilight zone. However, that legal twilight zone is not a “wondrous land,” but one filled with sleepless nights and many questions. How did it happen? When and how do I tell the client? How do I get the materials back? Will I lose the client, my job, my career? With ediscovery, the risk that privileged or confidential information will be inadvertently produced geometrically increases. While the use of clawback or nonwaiver agreements and FRE 502(b) lessen that risk, they do not eliminate it. Sensient Colors establishes that point.

Sensient Colors involved the electronic production of 45,000 documents totaling 135,000 pages or 450 boxes of records by the United States (“government”). Several months after that production was completed, the defendant initially returned a group of documents that were privileged. Over the ensuing months, the defendant continued to identify additional documents that the government had produced but were privileged. Ultimately, the defendant sought a ruling that the government had waived its right to assert privilege over the documents it had produced.

The court in Sensient Colors concluded the privileged documents were inadvertently produced by the government and that the requirements of FRE 502(b) were met as to the first group of documents the defendant returned. However, as to the subsequently identified privileged documents, the court ruled that the government waived its right to assert privilege under Rule 502(b) as to those documents because it had failed to promptly take reasonable steps to rectify its error after being notified of the initial inadvertent production.

The explanatory note to FRE 502 provides: “The Rule does not require the producing party to engage in a post-production review to determine whether any protected communication or information has been produced by mistake.” However, the court in Sensient Colors concluded that once a party has been put on notice that privileged information has been inadvertently produced, Rule 502(b)(3) requires the producing party take “prompt and reasonable steps to reassess its document production.” The court in Sensient Colors concluded the government failed to act reasonably and diligently to correct its error and waived its privilege and work-product protection as a result.

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Defendant’s ESI self-collection inexperience rejected by the court in its undue burden analysis

Spieker v. Quest Cherokee LLC, 2009 WL 2168892 (D.Kan. July 21, 2009)

In Spieker, plaintiffs were current or former owners of mineral interests in lands burdened by the defendant’s oil and gas leases who claimed that defendant failed to properly pay them royalties. Plaintiffs sought to certify a class of owners of mineral and royalty interests subject to the defendant’s leases.

After defendants made written materials available for inspection and copying in discovery, a dispute arose over production of emails which prompted a motion to compel by the plaintiffs. The district court initially denied the motion without prejudice because the defendant estimated the cost of the requested ediscovery at between $82,000 and $375,000, and because the plaintiffs failed to explain how the disputed ESI was relevant to the issue of class certification. In denying the motion, the court noted that Fed. R. Evid. 502 had been recently enacted, and directed the parties to consider conducting computer searches using defendant’s in-house IT staff as well as Rule 502 in any future cost discussions. The parties again met and conferred, but could not resolve their disputes which prompted the filing of a renewed motion to compel.

Opposing the renewed motion to compel, the defendant argued that its in-house IT staff “had no internal experience in producing ESI in litigation,” and that the search and production process would “have to completed on nights and weekends.” Defendant argued that as a result, the cost and burden of in-house production of the requested ESI “would be even greater than using an outside vendor.” The court summarily rejected the defendant’s undue burden argument, finding its cost estimate “greatly exaggerated.” The court observed that it was “aware of no case where a party was excused from producing discovery because its employees ‘have not previously been asked to search for and/or produce discovery materials’”

Given the notable sanctions that can be imposed for the loss, mishandling or untimely production of ediscovery, the court’s decision in Spieker unfortunately appears to have given short shrift to the capabilities of the defendant’s in-house IT staff as well as the risks and burdens associated with ediscovery self-collection. The remainder of this post will discuss potential strategies and approaches to consider should you be confronted with this issue.

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Requesting party permitted to see only metadata and not substance of documents

Kravetz v. Paul Revere Life Insurance Co., 2009 WL 1639736 (D.Ariz. June 11, 2009)

Plaintiff sought disability benefits from defendant insurance companies, but the insurance companies denied the claim. So plaintiff sued. The insurance companies sought discovery of the hard drives and storage media plaintiff had used for business purposes.

After plaintiff objected to this discovery, defendants moved to compel. The court granted the motion, but added an unusual twist — it allowed the defendants to see the metadata from documents the plaintiff had worked on but prohibited review of the documents themselves.

The court found that the insurance companies “need not and may not review the substance of documents on plaintiffs’ hard drives and media devices.” Accordingly, the order permitted a third party consultant “only [to] extract metadata and other necessary electronic information regarding the amount of time spent on documents.”

While metadata may often be irrelevant to the claims or defenses in a matter, the court in this case recognized a limited purpose for which it may properly be discovered. The insurance company sought the information merely to ascertain how much time the plaintiff spent working on the computer. The actual content of the documents was apparently unrelated to the disability claims.

The plaintiff had challenged the metadata’s ability to show the number of hours he worked on the computer. But siding with the notion of broad discovery, the court advised that the plaintiff would be free to challenge the weight the information should be given at trial.

Electronic discovery costs recoverable by a prevailing party under 28 U.S.C. §1920

Kellogg Brown & Root, Intern., Inc. v. Altanmia Commercial Mktg. Co. W.L.L., 2009 WL 1457632 (S.D. Tex. May 26, 2009)

In one of our prior posts, we discussed the types of ediscovery costs that a prevailing party can recover under Fed. R. Civ. P. 54. The Kellogg Brown & Root (“KBR”) decision addresses that issue. Much of the ediscovery costs which the prevailing party in KBR sought to recover were incurred either before the opposing party issued its discovery requests or after the court entered summary judgment for the prevailing party. Thus, Kellogg Brown, as the prevailing party, could not demonstrate that those ediscovery costs were “necessarily obtained for use in the case.”

The KBR decision was written by the highly respected Judge Lee Rosenthal, who chairs the Judicial Conference Committee on Rules of Practice and Procedure. In KBR, Judge Rosenthal comprehensively reviews the relevant decisions which have addressed the recovery of ediscovery costs under 28 U.S.C. §1920, and identifies a “circuit split” on one point directly relevant to the types of costs that may be recovered under §1920(4). Accordingly, KBR is a decision well worth your time to review when addressing the issue of recoverable ediscovery costs.

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Failure to timely object to production format constitutes a waiver

Ford Motor Co. v. Edgewood Properties, Inc., 2009 WL 1416223 (D.N.J. May 19, 2009)

This lawsuit arose out of the distribution of contaminated concrete following the demolition of a Ford assembly plant in Edison, New Jersey. Edgewood entered into a contract with Ford to haul 50,000 cubic yards of concrete from that site which turned out to be contaminated. Ford then brought a claim against Edgewood under CERCLA and the New Jersey Spill Act for contribution and indemnification of all costs as provided under the contract.

In discovery, Edgewood demanded that Ford produce documents in their native format with accompanying metadata. Ford objected and affirmatively indicated that it would produce documents in a tagged image file format (“TIFF”) with accompanying searchable text. Apparently, the parties never agreed on a production format, and Edgewood waited approximately eight months before objecting to Ford’s production. It then waited two additional months to bring their objection to the court’s attention. This delay led the court to conclude that Edgewood had waived any objection to Ford’s production format.

Because the production of electronically stored information (ESI) can occur in various formats, Rule 34 sets up a process through which parties are supposed to resolve disputes over production. Rule 34 requires the parties to dance with one another – the requesting party specifies the format to produce the ESI, the producing party can agree or object and must then indicate the format in which it will produce the ESI, and where the parties cannot agree on a production format they are to let the court decide. We refer to it as Rule 34’s “cha-cha.” Rule 34’s dance is supposed to occur before any production occurs, and Edgewood Properties demonstrates that any misstep with Rule 34’s requirements can result in you stepping on your partner’s toes. The rule is not difficult to follow, but like high school freshmen, many parties appear reluctant to get involved in the dance.

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Default judgment entered as a sanction for spoliation and deliberate withholding of ESI

MeccaTech, Inc. v. Kiser, 2008 WL 6010937 (D. Neb. April 2, 2008)

You know things are bad when the lawyers withdraw. In MeccaTech (MTI), the magistrate judge observed: “Misconduct of this magnitude is a rare occurrence.” It was determined through discovery that one of the defendants employed a consultant to intentionally erase items from his computer before he left MTI’s employment in attempt to shield his activities from discovery. Another instructed his co-defendants to make sure that all emails were on a platform to which MTI did not have access. The defendants, in response to MTI’s discovery requests, also claimed that there was no responsive information prior to February of 2005. However, ESI recovered from a discarded hard drive of one of the defendant’s computers established that the defendants were actively working on strategies to transfer business from MTI during that time frame.

The magistrate judge concluded that the failure to impose severe sanctions on the defendants “would only serve to reward their obvious disrespect for the judicial process and encourage others to engage in the same conduct.” Therefore, the magistrate recommended the entry of a default judgment against one defendant, that three other defendants should be precluded from defending the plaintiff’s claims of breach of duty and fraud, that the documents recovered from one of the defendant’s hard drives should be admissible in evidence, and that the facts contained therein should be considered established for purposes of the pending action. On April 23, 2009, the district court adopted the magistrate’s report and recommendations, and entered the proposed sanctions except as to one defendant, who in the interim had reached a settlement with MTI.

While MTI is notable for the sanctions that were imposed, the decision brings into focus the reality that where a client refuses to follow an attorney’s advice on the preservation or production of ESI, that attorney should carefully evaluate whether to withdraw from the engagement, and the potential for adversity that can occur when the attorney and client disagree on preservation and production issues.

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Conundrum of preserving backup tapes and inaccessible sources of information

Forest Laboratories, Inc. v. Caraco Pharmaceutical Laboratories, Ltd., 2009 WL 998 402 (E.D. Mich. April 14, 2009)

By now, any attorney worth his or her salt knows that the federal rules have set up a two-tier system for the discovery of electronically stored information (“ESI”). Under Rule 26(b)(2)(B), a party need not produce ESI from sources that it “identifies as not reasonably accessible because of undue burden or cost.” The federal rules themselves do not provide any guidance as to what “sources” of ESI should be considered “inaccessible.” Indeed, the Advisory Committee Notes explain: “it is not possible to define in a rule the different types of technological features that may affect the burdens and costs of accessing electronically stored information.”

One of the conundrums created by the federal ediscovery rules is whether there is any duty to preserve ESI from a source that a party has designated as “inaccessible.” The Advisory Committee Notes to Rule 26(b)(2) explain that the identification of a source as inaccessible “does not relieve the party of its common law or statutory duties to preserve evidence.” The Advisory Committee Notes furnish no guidance for counsel in this scenario. The Notes to Rule 26(b)(2) state that whether a party is required to preserve ESI from an inaccessible source “depends on the circumstances of each case.” The Note then observes, “[i]t is often useful for the parties if you discuss this issue early in discovery.”

In Forest Labs, the defendants filed a spoliation motion claiming the plaintiff failed to preserve backup tapes concerning the drug it manufactured which was the focus of the litigation. The district court concluded that the backup tapes in question were inaccessible because they were used solely for disaster recovery purposes. Nonetheless, the court ordered that a hearing be held on the defendant’s spoliation motion. The court also noted that if ESI is destroyed intentionally or willfully, “that fact alone is sufficient to demonstrate [the] relevance” of the lost evidence, and would be sufficient to warrant the entry of sanctions. However, as our last post indicated, the Fifth Amendment’s Due Process Clause can limit the type of sanctions which may be imposed for the loss of ESI, and requires a nexus be demonstrated between the information destroyed, and the plaintiff’s claim or the defendant’s defense.

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Court acknowledges the Fifth Amendment’s Due Process Clause may limit the sanctions that can be imposed for destroying electronic documents

Preferred Care Partners Holding Corp. v. Humana, Inc., 2009 WL 982460 (S.D. Fla. April 9, 2009)

It is every trial lawyer’s worst nightmare. You are one month away from trial, drafting motions in limine, and preparing jury instructions when your client calls to advise that they just found over 10,000 pages of potentially responsive electronic documents and emails in folders that were never searched. And to make matters worse, you learn that those electronic documents may support the claim you are defending that your client improperly used proprietary information which was obtained from your opponent pursuant to a confidentiality agreement. What do you do? Do you immediately contact opposing counsel about the additional records? Do you notify the court and seek its guidance as to how best to approach the problem that has now arisen? Or, as occurred in Preferred Care Partners, do you simply destroy the electronic documents while preserving paper copies without first notifying opposing counsel or the court?

It should come as no surprise that in Preferred Care Partners, the court entered sanctions for the “clearly egregious manner in which the defendant carried out its discovery obligations.” The fact that the electronic documents in question should have been destroyed long before the suit was filed pursuant to the terms of the confidentiality agreement under which they were obtained did not change the analysis. The defendant’s “print and purge” strategy was clearly inappropriate. However, the court ultimately concluded that the defendant’s discovery “shortcomings were neither intentional nor done in bad faith, but rather resulted from the grossly negligent oversights of counsel.”

What makes Preferred Care Partners notable is the district court’s acknowledgment that in light of Insurance Corp. of Ireland v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 707 (1982), the Fifth Amendment’s Due Process Clause may limit the sanctions imposed for the loss of ESI. The court in Preferred Care Partners recognized that the Due Process Clause requires that discovery sanctions must not only be just, but also specifically related to the particular claim or defense affected by the misconduct. Therefore, due process requires a nexus between the lost or destroyed ESI, and either the plaintiff’s claim or the defendant’s defense.

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