David J. Kearney

February 26, 2013

One Small Step for Cost-Shifting, One Giant Leap for Ediscovery

Filed under: e-Discovery,Litigation Support — davidjkearney @ 8:36 pm

One Small Step for Cost-Shifting, One Giant Leap for Ediscovery

Each ediscovery development pushes the legal system farther into the digital frontier, and cost-shifting is the latest topic at the helm. As every lawyer in America knows, the default rule of attorneys’ fees is that each party must bear all of its own litigation costs regardless of the outcome of the case. But, in our expanding world of big data, and as judges begin to confront the increasing expense of producing electronically stored information (ESI), that rule is necessarily evolving towards a new paradigm based on cost-shifting.

To understand why cost-shifting has become an important topic in the legal world requires a bit of background. In today’s digital landscape, litigants must cope with seemingly limitless amounts of data during the discovery process, which can quickly dry up even the biggest of legal war chests.  One of the more visible and important decisions that helped begin to change the direction of the burden of costs for discovery was Zubulake. In that case, the court used its discretion, supported by Rule 26(c), to have the requesting party pay – at least in part – the cost of the discovery as it resulted in some level of “undue burden or expense” for the defendants.

According to research think tank IDC, over 99% of all documents are now created and stored electronically, and the ever-exploding data volume makes it more difficult and expensive for parties to manage massive amounts of data in a way that guarantees against the risk of sanctions. When hit with a complex discovery request, many corporations and law firms fall down the proverbial rabbit hole and find they simply cannot effectively manage large volumes of data. It is no longer uncommon for the amount in controversy to be trumped by ediscovery costs. That fact, on top of the massive burden associated with conducting ediscovery in a class action suit, recently compelled one Pennsylvania federal judge to defy convention by moving towards a more equitable allocation of discovery costs.

Vaughn v. LA Fitness International, a case of first impression nationally, explored the allocation of discovery costs before class certification. On this unique motion to compel, U.S. District Judge Michael Baylson of the Eastern District of Pennsylvania focused on the fiscal realities inherent in class action matters, stating that a class action “dramatically increases the economic pressure on the defendant.” The Judge further elaborated on the economic aspects of this particular case, taking special note of the asymmetry in the discovery process. He highlighted the fact that while some parties have relatively few electronic documents to handle, other parties – such as LA Fitness – must handle millions of electronic documents in a single discovery dispute, which significantly drives up discovery costs. When given a discovery request to obtain those many documents, the discovery process quickly becomes lopsided and often unfairly burdensome to the producing party.

Thus, upon the plaintiff’s motion to compel, and given the possibility for class certification and the extensive amount of material already produced by the defendant LA Fitness in discovery, Judge Baylson ruled that the cost of additional discovery would shift to the plaintiffs. Noting that the plaintiffs had plentiful financial resources at their disposal, the Judge wrote, “If the plaintiffs have confidence in their contention that the court should certify the class, then the plaintiffs should have no objection to making an investment [in the defendant’s discovery costs]”—a contention that flies in the face of the default rule of attorneys’ fees and traditional discovery practices. Moreover, the Judge indicated that “Where the burden of discovery expense is almost entirely on the defendant, principally because the plaintiffs seek class certification, then the plaintiffs should pay for that additional discovery.” In an interesting explanation of the mechanics at play, the order indicated that the plaintiffs must make a detailed request to LA Fitness for additional documents prior to motioning for class certification; then, LA Fitness will respond with cost estimates, to which the plaintiffs can reply as to whether they are willing to pay those costs.

The Vaughn case is certainly an interesting outlier. Until the burdens of ediscovery came along, courts have seldom taken advantage of Oppenheimer Fund v. Sanders, a 1978 case in which the U.S. Supreme Court authorized cost-shifting. Judge Baylson indeed acknowledged that it is because of increasing volumes of ESI and involved in discovery disputes, as well as the accompanying expense, that courts have taken a closer look at the issue. The Federal Rules, amended in 2006 specifically to address ediscovery, bolster this idea that the growth of ediscovery is a powerful engine behind the drive toward cost-shifting. Federal Rule of Civil Procedure 26 allows a judge to forego the production of responsive ESI if it is demonstrated that requested information is “not reasonably accessible because of undue burden or cost.”

More specifically, with the proportionality standard of Rule 26(b)(2)(C), the court balances “the burden or expense of the proposed discovery” with “its likely benefit, considering the needs of the case, the amount in controversy, the parties’ resources, the importance of the issues at stake in the action, and the importance of the discovery in resolving the issues.” Courts have wrestled with what constitutes “undue burden or cost,” and how to strike this balance. However, in the ediscovery era, an increasing number of courts, as in Vaughn, have sought to strike this balance by adopting the cost-shifting approach. While the fact alone that the defendant possesses more ESI will not automatically constitute cost-shifting, courts consider various factors in making the cost-shifting decision, such as fairness, the disparity of burden, budgeting of costs, and the level of appropriateness.

Interestingly, the move toward cost-shifting reduces the chance that malicious parties will use the ediscovery process as a weapon. In the midst of the recent dizzying onslaught of ESI, many litigants have buried opponents under expensive discovery requests in an attempt to abuse the preservation rule, using it to turn litigation into a “gotcha” discovery game, rather than focusing on the merits of a case. This trend has not gone unnoticed by scholars. For example, the Richmond Journal of Law & Technology recently pointed out that, along with the increase in e-discovery expenses, now in the billions of dollars annually, “e-discovery has become more than merely a discovery process; it has become an alternate method of trying a case.” Thus, using cost-shifting to reduce the ability for parties to heap on discovery requests without having to pay for them works to ensure that they will not take advantage of litigation loopholes. Cost-shifting, therefore, may be positive not only for litigants, but it may also be a remedy for the recent pandemic of exploding discovery costs that currently plagues the American court system.

Amidst the uncertainty about whether a court will join the cost-shifting “revolution,” parties in a class action case that face potentially burdensome discovery requests now not only have the proportionality standard of Rule 26 at hand, but they can also point to the Vaughn case as a way to calibrate a balance in costs.  While the Vaughn cost-shifting rule certainly does not yet apply in all jurisdictions, it is a critically important case that embodies the mammoth legal evolution that ediscovery is driving today and will continue to drive. It is imperative for all litigants in all types of cases to continue to operate as if the cost-shifting analysis will not be applied, and thus make a good faith effort to produce requested documents. However, legal practitioners must be aware of the changing tide on attorneys’ fees and litigation expenses and monitor this set of rules as that evolve in their jurisdictions. Only time will tell how hard this trend will shake the foundation of the American legal system.

The authors acknowledge Alicia J. Smith, law clerk at Kroll Ontrack, for her assistance in this article.
Dianne Humes serves as an account executive for Kroll Ontrack in Delaware, New Jersey and Pennsylvania. Her focus is providing clients with expert information management strategies and solutions to optimize cost efficiencies and ensure repeatable, defensible processes.
David Kearney is a technology and e-discovery professional with more than 15 years of experience managing technical staff throughout the U.S. and recommending and implementing hardware, software and workflow solutions and more than 10 years of experience in the litigation support arena, including ediscovery and project management.

 Reprinted with permission from the February 26, 2013 issue of The Legal Intelligencer.  (c)2013 ALM Media Properties, LLC.  Further duplication without permission is prohibited.  All rights reserved.

 

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