May Edition of Notable Cases and Events in E-Discovery

E-Discovery Update

This update addresses the following recent developments and court decisions involving e-discovery issues:

1. A Third Circuit ruling reversing a district court decision allowing electronic discovery expenses as taxable costs and severely limiting the scope of such costs that can be recovered by a prevailing party;
2. A New York state appellate decision adopting the rule in Zubulake v. UBS Warburg, LLC, that the producing party initially should bear the costs of document production;
3. A Kansas federal court ruling finding a law firm had to fulfill its discovery obligations and ordering the firm to issue a litigation hold to preserve its documents and to allow a third party forensic examiner to review the law firm’s computer systems to identify responsive documents; and
4. A decision by Magistrate Judge Facciola of the District of Columbia federal district court denying as premature a defendant’s sanctions claim that it was prejudiced in filing a motion for summary judgment by a co-defendant’s production of significant ESI after the discovery cutoff and defendant’s summary judgment filing.

1. In Race Tires America, Inc. v. Hoosier Racing Tire Corp., 2012 WL 887593 (3d Cir. Mar. 16, 2012), the Third Circuit Court of Appeals largely vacated a district court decision holding that electronic discovery expenses are taxable as costs. The Court of Appeals ruled that only the scanning of hard copy documents, the conversion of native files to the agreed-upon default format for the production of electronically stored information, and the transfer of tape formats involve “copying” that are taxable as costs under 28 U.S.C. § 1920(4).

In this antitrust action by Race Tires against Hoosier and others, the defendants, after prevailing on summary judgment, submitted a bill of costs for, among other things, “[f]ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case,” pursuant to 28 U.S.C. § 1920(4). 2012 WL 887593 at *2. The district court concluded that the entire amount charged by the electronic discovery vendors used by the parties was taxable because “‘the steps the third-party vendor(s) performed appeared to be the electronic equivalent of exemplification and copying.’” Id. at *3 (quoting district court decision). Moreover, the district court found that the charges were “‘necessarily incurred and reasonable.’” Id. (quoting district court decision). See Race Tires America, Inc. v. Hoosier Racing Tire Corp., 2011 WL 1748620 (W.D Pa. May 6, 2011).

The Court of Appeals disagreed. In contrast to the district court’s approach, the Court began its analysis with a close review of the statutory history of Section 1920. As Section 1920 defines the full extent of a court’s power to shift costs, the key question is whether an expense falls within its purview; for this reason, cost-shifting under this provision is an issue of statutory construction, reviewed de novo. 2012 WL 887593 at *5. Quoting the Supreme Court, the Court explained that the history of Section 1920 reveals that “‘Congress meant to impose rigid controls on cost-shifting in federal courts.’” Id. at *4 (quoting Crawford Fitting Co. v. J.T. Gibbons, Inc., 482 U.S. 437, 444 (1987)).

The Court closely parsed the text of Section 1920(4) to give effect to each of its words, separately considering “exemplification” and “making copies.” 2012 WL 887593 at *6. Because the work of the e-discovery vendors “did not produce illustrative evidence or the authentication of public records,” it did not qualify as “exemplification.” Id. Accordingly, the Court focused on the term “making copies.” As Section 1920(4) had been amended in 2008 to read “the costs of making copies of any materials,” the Court concluded that the statute’s allowance for making copies is not limited to paper copies, and thus ESI fell within its reach. Id. at *7.

Finally, the Court examined the bills of costs submitted by the parties. Sorting through the jargon-filled invoices submitted, the Court identified the following general categories of services: collecting/preserving ESI; processing/indexing ESI; keyword searching for responsiveness and privilege; converting native files to Tagged Image File Format (“TIFF”); and scanning paper documents to create electronic imagines. Id. Of these activities, however, only conversion to TIFF and scanning of documents to create digital duplicates – approximately $20,000 of the more than $365,000 in electronic discovery charges – qualified under Section 1920(4) as “making copies of materials.” Id. Additionally, the cost of transferring VHS recordings to DVD format also qualified as “making copies.” Id. at *8. In rejecting the other types of services billed, the Court emphasized that merely because they are “highly technical and beyond the expertise of the prevailing party’s own attorneys,” it does not bring them within Section 1920(4)’s purview. Id. at *9. While extensive “processing” of ESI may be essential to production, this does mean that “services leading up to the actual production” constitute “making copies.” Id. In short, the Court concluded, “gathering, preserving, processing, searching, culling, and extracting ESI simply do not amount to ‘making copies.’” Id. at *10.

The Court also noted that once statutory authority to tax costs has been established, the amount awarded should be reviewed only for abuse of discretion. Id. at *8. As such, for those categories within the reach of Section 1920(4), the Court did not disturb the amounts set by the district court. Id.

2. In U.S. Bank National Association v. GreenPoint Mortgage Funding, Inc., 2012 WL 612361 (N.Y. App. Div. 1st Dep’t Feb. 28, 2012), New York State’s First Department held that, consistent with the decision in Zubulake v. UBS Warburg, LLC, the producing party initially should bear the costs of production, subject to the court’s discretion to subsequently modify the allocation of costs.

Plaintiff U.S. Bank brought an action against GreenPoint Mortgage Funding, Inc., a mortgage loan company, for misrepresentations with respect to securitized mortgage loans. In addition to filing a complaint, U.S. Bank also served discovery requests on GreenPoint seeking documents. GreenPoint moved for a protective order that conditioned discovery on compliance with a protocol providing that each party would pay for its own discovery requests. The Motion Court denied GreenPoint’s request for a protective order but endorsed the rule that the requesting party bear the costs of production.

New York State’s First Department reversed the order of the Motion Court, holding that the producing party should bear the costs of production. Id. at *3. The Court stated that Zubulake v. UBS Warburg, LLC, 220 F.R.D. 309 (S.D.N.Y. 2003), “presents the most practical framework for allocating all costs in discovery, including document production and searching for, retrieving and producing ESI.” 2012 WL 612361 at *3. In Zubulake, the court ruled that the requesting party must bear the initial costs of production but that the court could order cost-shifting. The Court in U.S. Bank adopted the seven factors set forth in Zubulake in ruling on cost-shifting:

“(1) [t]he extent to which the request is specifically tailored to discover relevant information; (2)[t]he availability of such information from other sources; (3)[t]he total cost of production, compared to the amount in controversy; (4)[t]he total cost of production, compared to the resources available to each party; (5)[t]he relative ability of each party to control costs and its incentive to do so; (6)[t]he importance of the issues at stake in the litigation; and, (7)[t]he relative benefits to the parties of obtaining the information.” Id. at *4 (quoting Zubulake, 217 F.R.D. at 322).

These factors were not a “checklist” but a “guide,” noted the Court, to determine how to allocate the expense of production while taking into account fairness and undue burden. Id.

The Court gave three reasons for its adoption of the Zubulake rule. First, requiring the requester to pay may deter the filing of meritorious claims, especially by individuals, and is not consistent with “the strong public policy favoring resolving disputes on their merits.” Id. (quoting Zubulake, 217 F.R.D. at 318). Second, the Court called into question the underpinnings of the requestor pays rule. Id. Third, the Court noted the “long-standing rule in New York that the expenses incurred in connection with disclosure are to be paid by the respective producing parties.” Id. at *5 (citations omitted).

The Court stated that GreenPoint should have first requested to limit or strike specific discovery requests that were overbroad, burdensome, or irrelevant. Only then should a party file a motion to shift costs. Because GreenPoint did not follow this procedure, the Court stated that its motion to shift all costs to the plaintiff was premature.

The Court’s ruling follows shortly after another decision from the New York State’s First Department adopting Zubulake. The Court in Voom HD Holdings LLC v. EchoStar Satellite L.L.C., 2012 WL 265833 (N.Y. App. Div. 1st Dep’t Jan. 31, 2012), adopted the Zubulake standard for preservation and imposition of an adverse inference spoliation sanction for failure to suspend the routine deletion of relevant emails.

3. In Pouncil v. Branch Law Firm, 2012 WL 777500 (D. Kan. Mar. 7, 2012), Magistrate Judge David J. Waxse ordered the law firm defendants to respond more fully to plaintiff’s discovery requests, to allow a third party forensic examiner to review defendants’ computer systems to identify responsive documents, with the allocation of the cost of such review to determined at a later dated, to issue a litigation hold, and to pay the expenses associated with the preparation of plaintiff’s motion.

Defendants had represented plaintiff Alma Powell, the Administrator of the Estate of Willie Sue Clay, in a claim against Merck & Co., Inc. arising from Clay’s death while taking Vioxx, but a Vioxx settlement agreement barred the Estate’s claim. Plaintiff then brought malpractice and related claims against defendants regarding the Estate’s failed claim.

Plaintiff served interrogatories and requests for production to defendants requesting, inter alia, that defendants identify all persons who represented Clay’s estate and who played a role in the filing of the Vioxx claim forms. Defendants identified three individuals who worked on the claim forms and an additional person who assisted in representing Clay’s estate. Plaintiff served a “golden rule” letter addressing deficiencies in the responses, and defendants supplemented their responses, adding two more employees. Based on a review of defendants’ internal database and deposition testimony of defendants’ employees, plaintiff contended that the responses remained incomplete and filed a motion pursuant to Fed. R. Civ. P. 37(a) to compel a full response. Plaintiff also requested that defendants be sanctioned for failing to fulfill their discovery obligations and be ordered to pay for a third-party forensic examination to identify and produce all documents responsive to other requests, to issue a litigation hold, and to pay plaintiff’s expenses related to the motion.

The Magistrate Judge ordered defendants to serve supplemental responses to plaintiff’s interrogatories. Magistrate Judge Waxse stated that he was not persuaded by defendants’ argument that they provided only the names of those people who worked on the claim and Clay’s case, not those who “may have” or “were likely to have.” Id. at *3. Even if the names mentioned in the database and during the deposition fell into these latter categories, as the defendants argued, the defendants were still under an obligation to disclose them.

The Magistrate Judge further ordered defendants to produce documents responsive to plaintiff’s other requests. For instance, plaintiff’s request for all communications with respect to Clay’s representation had yielded only one email. Defendants’ deposition testimony indicated that there were responsive documents and spreadsheets, and defendants stated that they had developed a protocol with plaintiffs for the search of defendants’ computer systems by a forensic examiner pursuant to the protocol. The defendants asserted that the plaintiff should pay the cost of the forensic examination. Magistrate Judge Waxse stated that the parties had not estimated the cost of this review and that he would defer any ruling on the allocation of the review’s costs until after its completion, subject to the parties first seeking to resolve the cost allocation on their own.

The Magistrate Judge also ordered the Defendants to issue a litigation hold. One defendant had claimed during his deposition that “[w]e’re kind of new to the e-mail world,” id. at *6, but the Magistrate Judge rejected this justification as inadequate and required the defendants to issue a litigation hold, which Magistrate Judge Waxse stated was designed to ensure that evidence “is not lost, destroyed, inadvertently or negligently overwritten, or intentionally wiped out, and that it is available to be produced to the other side.” Id. at *5. The Magistrate Judge stated that if the forensic examination revealed that relevant evidence had not been preserved, the plaintiff could seek spoliation sanctions.

Finally, the Magistrate Judge ordered defendants to pay the expenses associated with the preparation of plaintiff’s motion. The Magistrate Judge determined that plaintiff had sought to confer with defendants to resolve defendants’ failure to fulfill the discovery requests but that defendants had been evasive and failed to substantially justify their failure to adequately respond to plaintiff’s requests.

4. In In the Matter of the Fort Totten Metrorail Cases Arising Out of the Events of June 22, 2009, 2011 WL 6355547 (D. D.C. Dec. 19, 2011), Magistrate Judge John Facciola denied as premature defendant ARINC’s claim that it was prejudiced in filing a motion for summary judgment without evidence that was subsequently produced by defendant Washington Metropolitan Transit Authority (WMATA) in an ongoing discovery production after the discovery cutoff. Magistrate Judge Facciola noted that no ruling had yet been made on the summary judgment motion, which ARINC could supplement with any new material, and even if the summary judgment motion were to be denied, ARINC could seek sanctions at that point.

On June 22, 2009, two WMATA trains collided. ARINC, a government contractor, installed the software used by WMATA to guide the trains. Plaintiffs filed an action against WMATA and later named ARINC as a defendant. The Court established a document production deadline of April 15, 2011, but WMATA continued to produce documents requested by Plaintiffs and ARINC well after the deadline.

Having filed a motion for summary judgment without key documents—only subsequently turned over by WMATA—relating to its immunity defense as a government contractor, ARINC claimed prejudice and sought sanctions. ARINC stated that it had raised the government contractor immunity issue as a defense in its answer and had identified WMATA individuals who had knowledge about that issue. Id. at *2. WMATA had responded by producing eight witnesses on that issue as well as documents relating to the issue, which WMATA supplemented over time, including after the September 29, 2011 discovery cutoff, and after ARINC filed for summary judgment on November 11, 2011. Id. at *3.

As sanctions, ARINC requested that WMATA not be allowed to use the late-produced documents, that the jury be permitted to draw an adverse inference from WMATA’s late production, and that WMATA pay ARINC’s attorney fees and costs associated with the preparation of this motion. ARINC also argued that sanctions should be imposed on WMATA for failing to provide initial disclosures pursuant to Fed. R. Civ. P. 26(a)(1). Id. at *2. WMATA responded that it was under an obligation to make simultaneous productions in response to multiple document requests from plaintiffs and co-defendants and that it had developed categories of discovery responses in accordance with an arrangement with plaintiffs while at the same time seeking to satisfy discovery requests from ARINC and other defendants. WMATA also noted that ARINC requested many of the documents at issue after the document production deadline and that WMATA had produced over 3 million pages of documents in this proceeding.

Magistrate Judge Facciola found that sanctions against WMATA were not appropriate under Rule 26(a)(1). Id. at *2-3. ARINC argued that WMATA had an obligation to make initial disclosures relating to ARINC’s claims and defenses, but Magistrate Judge Facciola stated that the requirement to provide initial disclosures attaches only to a disclosing party’s claims or defenses. Id. at *4. As WMATA had stated that it was not raising the governmental contractor immunity as a claim or defense in the litigation, WMATA had no obligation to make initial disclosures or discovery on that subject. The Magistrate Judge then noted that the only other basis for a sanction would be if WMATA had violated a court order or if the court were to exercise its inherent authority to impose a sanction based on a party’s bad faith during the proceeding. The Magistrate Judge found that WMATA had not violated a court order and indeed determined that the only violation was by ARINC in propounding additional discovery to WMATA after the deadline. Id. at *4. As there was also no evidence of bad faith by WMATA, Magistrate Judge Facciola found no basis to impose a sanction. Id. at *4-5.

The Magistrate Judge also found ARINC’s claim of prejudice to be premature. He pointed out that if ARINC’s summary judgment motion were to be granted, there would be no prejudice. Moreover, nothing was preventing ARINC from supplementing its motion for summary judgment with additional claims or evidence. Finally, even if its motion for summary judgment were to be denied, ARINC could subsequently move for the preclusion it now seeks. The Magistrate Judge concluded by noting that, at this point, “the prejudice is so hypothetical that I question whether the motion even presents a case or controversy rather than an improper request for an advisory opinion.” Id. at *5.

Please refer any questions on these important developments to Alan C. Geolot (+1.202.736.8250, ageolot@sidley.com), Colleen M. Kenney (+1.312.853.4166, ckenney@sidley.com), Joel M. Mitnick (+1.212.839.5871, jmitnick@sidley.com), or your regular Sidley contact.

Sidley Austin LLP E-Discovery Task Force Updates

The legal framework in litigation for addressing the explosion in electronic communications has been in flux for a number of years. Sidley Austin LLP has established an "E-Discovery Task Force" to stay abreast of and advise clients on this shifting legal landscape. An inter-disciplinary group of more than 25 lawyers across all our domestic offices, the Task Force monitors and examines issues and developments in the law regarding electronic discovery. The Task Force works seamlessly with our firm’s Litigators who regularly defend and prosecute all types of litigation matters in trial and appellate courts, federal and state agencies, arbitrations, and mediations throughout the country.

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