WHOSE NEEDLE? WHOSE HAYSTACK?: COST ALLOCATION IN ELECTRONIC DISCOVERY. Stephen F. McKinney, Esq. Haynsworth Sinkler Boyd, P.A.

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1 WHOSE NEEDLE? WHOSE HAYSTACK?: COST ALLOCATION IN ELECTRONIC DISCOVERY Stephen F. McKinney, Esq. Haynsworth Sinkler Boyd, P.A. Introduction By now, most all of us have been on the receiving end of a request that a client produce each and every electronic record in its possession, however stored and in whatever format, related to or touching in any way upon the [product, transaction, incident ] at issue in this litigation. Ahead lies the daunting prospect of time, money, manpower and general business disruption associated with responding to a broad request for electronic information. Fortunately, some trial and even appellate courts have developed a framework in which Rule 26 and other similar procedural rules can be made relevant and effective in redressing the inequities that can be associated with overbroad hunting for frequently less than meaningful needles. This paper addresses those judicial efforts specifically associated with equitably shifting the cost of production. The Digital Explosion Digital information is no longer a marginal curiosity or extravagance for our clients it is now their life s blood. traffic has surpassed telephone and postal communications in volume many times over, with American businesses generating 3.5 billion messages per day. A small company of 10 employees will create 250,000 pages (125 boxes) of annually. A University of California study concluded that 93% of all information generated/created annually in the United States is originally produced in digital form.

2 Unfortunately, as digital information has made businesses more efficient and cheaper to operate, the primary corporate management tool for such information has become redundancy: duplicate, duplicate, duplicate. This problem is compounded by the fact that the primary disaster recovery tool for most application software (e.g. Microsoft Word) is also redundancy. As a result, the document production challenge for litigators has increased dramatically as increasing amounts of information are stored exclusively in digital media, in various formats and various locations. In order to assert effective, appropriate objections and manage discovery costs, litigators need to be prepared to urge upon the courts before which they practice strategies to allocate the cost burden of electronic production based upon a fair evaluation of the production requests made. Electronic Discovery and Rule 26: Old Dog, New Tricks Electronic data is subject to the same disclosure rules as paper records. Rowe Entm't, Inc. v. William Morris Agency, Inc., 205 F.R.D. 421, 428 (S.D.N.Y. 2002) (citations omitted), see also Fed. R. Civ. P. 34. It is presumed that the responding party will bear the expense or burden of complying with a discovery request, but the responding party may request an order under Rule 26(c) conditioning discovery on the requesting party s partial or full payment of the costs of discovery. Oppenheimer Fund, Inc., v. Sanders, 437 U.S. 340, 358 (1978). Cost-shifting from the responding party to the requesting party should be considered only when the burden or expense of electronic discovery outweighs the likely benefit. Fed. R. Civ. P. 26(b)(2)(iii). By focusing on the Rule 26(b)(2) balancing factors a court should be able to reach a fair result when determining the scope of discovery of electronic records. Thompson v. HUD, 219 F.R.D. 93, 98, (D.Md. 2003). A court is required, sua sponte, or upon receipt of a Rule 26(c) motion, to evaluate the costs and benefits related to a potentially burdensome discovery request. Id. -2-

3 When considering electronic discovery a court should consider the factors laid out in Rule 26(b)(2). The factors to be considered are: (1) whether the discovery sought is unreasonably cumulative or duplicative; (2) whether the information sought is obtainable from some other more convenient, less burdensome or inexpensive source; (3) whether the party seeking the information already has had adequate opportunity to obtain the information; and (4) whether the burden or expense of the proposed discovery outweighs its likely benefit. Fed. R. Civ. P. 26(b)(2). In determining if a burden outweighs the benefit a court is to take into consideration the needs of the case, the amount in controversy, the resources of the parties, the importance of the issues at stake in the litigation, and of the discovery sought to the resolution of the issues. Id. The Marginal Utility Approach The court in McPeek v. Ashcroft, 202 F.R.D. 31 (D.D.C. 2001), borrowed the economic principle of marginal utility to help determine which party should bear the cost of producing electronic data. Id. at 34. The court stated that the more likely it is that the medium contains information that is relevant to the suit, the fairer it is that the responding party bear the expense. Id. The less likely it is, the more unjust it would be to make the responding party bear the expense. Id. The difference is at the margin. Id. Using the marginal utility approach, courts may order the responding party to produce a sample, and document the time and money spent performing the sample run. Id. at The company, after completing the sample, then files a sworn statement of the expenses incurred and the results achieved. Id. at 35. Courts then often permit the parties to argue why the results and the expenses do or do not justify a further search. Id. The Marginal Utility Approach has been subsumed by both Rowe, 205 F.R.D. 421, and Zubulake v. UBS Warburg LLC, 217 F.R.D. 309, 320 (S.D.N.Y. May 13, 2003) ( Zubulake I ). -3-

4 The Rowe Test In Rowe Entm't, Inc. v. William Morris Agency, Inc., Magistrate James C. Francis devised a new formula to determine if, and when, costs should be shifted to the requesting party. 205 F.R.D The Rowe test considers eight factors: (1) the specificity of the discovery request; (2) the likelihood of discovering critical information; (3) the availability of such information from other sources; (4) the purposes for which the responding party maintains the requested data; (5) the relative benefit to the parties of obtaining the information; (6) the total cost associated with production; (7) the relative ability of each party to control costs and its incentive to do so; and (8) the resources available to each party. Id. at 429. The eight factors are equally relevant, and none is given greater weight than the other. Id. at 429. The court went on to explain some of the factors in greater detail and apply the factors to the facts of the case. The court found that for the first factor the more specific the requesting party s discovery demands, the less appropriate it is to shift the cost of production. Rowe, 205 F.R.D. at 429. For factor three the court stated that prior production of discovery in one form does not preclude a request for discovery in another form, however, it is justifiable to shift the cost of producing the discovery in the different form to the requesting party. Id. at 430. When the court examined the purposes for which the responding party maintained the data, the court decided that data that is stored and accessible in everyday, ordinary use does not warrant cost shifting; however, data with no current business use back-up tapes or data deleted but not yet completely destroyed may warrant cost shifting. Id. at 431. The court reasoned that when the responding party benefits from the information produced there is less support for shifting costs. Id. Benefits to the responding party may come as a collateral benefit to the responding party s business computer programs or hardware or it may help the responding party in the litigation itself. Id. When -4-

5 considering the costs of production, the court examined cases in which sums as low as $1,680 have warranted cost shifting, even an expense of $16,000 has met the threshold for a defendant with assets exceeding one-half billion dollars. Id. Finally, the court found that where discovery will be incremental, it is more appropriate to place the cost burden on the party that will ultimately decide how expansive the discovery will be. Id. at 432. Since being handed down, the Rowe test has been the gold standard for deciding costshifting of electronic discovery. Zubulake I, 217 F.R.D. at 320. However, not all courts have used the Rowe test because it has been perceived as too easily permitting cost-shifting to the requesting party. Thompson, 219 F.R.D. at 98. In published decisions, federal district courts in New York, Louisiana, Tennessee, Illinois, and Minnesota have used the Rowe test in considering cost-shifting of electronic discovery. Zubulake I and III In 2003, in the same New York District Court, Magistrate Shira A. Scheindlin reconsidered the cost-shifting factors in two opinions in the Zubulake v. UBS Warburg LLC 1 cases. As an initial question the court found it must determine if cost-shifting should be considered at all? Following Rule 26(c), the court found that cost-shifting is appropriate only when the discovery request is unduly burdensome or cost prohibitive; this determination turns on if the data is kept in an accessible or inaccessible form. Zubulake I, 217 F.R.D. at 318. A court must have a thorough understanding of the responding party's computer system. Id. at 324. For data kept in an accessible format, the usual rules of discovery apply and cost-shifting is not appropriate. Id. The court should 1 Of concern in this presentation are Zubulake v. UBS Warburg LLC, 217 F.R.D. 309 (S.D.N.Y. May 13, 2003) ( Zubulake I ) and its follow up case Zubulake v. UBS Warburg LLC, 216 F.R.D. 280 (S.D.N.Y. July 24, 2003) ( Zubulake III ). Zubulake II (Zubulake v. UBS Warburg LLC, 2003 U.S Dist. LEXIS 7940 (S.D.N.Y. May 13, 2003)) dealt with Zubulake s request to report the contents of a confidential deposition to the SEC, NASD, and the NYSE. Zubulake IV (Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. October 22, 2003)) dealt with Zubulake s request for sanctions against USB for its failure to preserve missing backup tapes and for deleting s. -5-

6 consider cost-shifting only when inaccessible data is requested. Id. The expense of producing or time required to produce the data may be a significant factor in determining what is considered accessible and inaccessible. See OpenTV v. Liberate Techs., 219 F.R.D. 474, 477 (N.D.Cal. 2003) (following the Zubulake test). The Zubulake court laid out three types of accessible electronic data data that does not need to be manipulated to be used: active, online data such as hard drives, near-line data such as optical disks, and offline storage/archives such as floppy disks, often referred to as JBOD ("Just a Bunch Of Disks"). Zubulake I, 217 F.R.D. at The court determined that there are often two types of inaccessible electronic data data that must be restored or retrieved out of the ordinary course of business at an expense to the producing party: backup tapes, and erased, fragmented or damaged data. Id. at 319. The disadvantage of backup tapes is that to read any particular block of data, you need to read all the preceding blocks. Id. As a result, the data on a backup tape are not organized for retrieval of individual data. Id. factors are: The Zubulake court revised the Rowe test into seven factors for a court to consider, the (1) the extent to which the request is specifically tailored to discover relevant information; (2) the availability of such information from other sources; (3) the total cost of production, compared to the amount in controversy; (4) the total cost of production, compared to the resources available to each party; (5) the relative ability of each party to control costs and its incentive to do so; (6) The importance of the issues at stake in the litigation; and (7) the relative benefits to the parties of obtaining the information. Zubulake I, 217 F.R.D. at 322. The first 6 factors correspond to the three explicit considerations of Rule 26(b)(2)(iii). Id. at 323. The Zubulake court declared that the seven factors should not be just added up but that they should be weighed in descending order of importance. Zubulake I, 217 F.R.D. at 323. The first two -6-

7 factors together constitute the marginal utility test and indicate how useful the discovery will be to deciding the issues in the case. Id. These two factors are weighed the most heavily. Id. The second group of factors (factors 3, 4, and 5) to be weighed address the cost issues: How expensive will this production be? and Who can handle that expense? Id. Factor number 6 stands alone as the third group, and will rarely come into play. Id. Factor number 7 is the least important because it is fair to presume that the response to a discovery request generally benefits the requesting party. Id. Once a court has determined that cost-shifting is appropriate, there is a failure to fully delineate the weight of each factor in determining the extent to which costs should be shifted. [P]recise allocation is a matter of judgment and fairness rather than a mathematical consequence of the seven factors.... Zubulake v. UBS Warburg LLC, 216 F.R.D. 280, 289 (S.D.N.Y. July 24, 2003) ( Zubulake III ). Finally, the court followed the McPeek court s lead in finding that the court needs a factual basis to determine if cost-shifting is warranted. Zubulake I, 217 F.R.D. at 323. Courts will need the responding party to restore and produce responsive documents from a small sample of backup tapes so that the court will have the information needed to perform the cost-shifting analysis. Id. at 324. The responding party should keep complete and accurate records of the costs associated with producing the sample records. Id. (quoting McPeek, 202 F.R.D. at 34-35). In published decisions, federal district courts in New York and California have used the Zubulake test in considering cost-shifting of electronic discovery. Practice Tips 1. Initially, request only forms of accessible data, for which cost-shifting is inappropriate. Use the data obtained from the initial request to help demonstrate the relevance and importance of obtaining inaccessible data. -7-

8 2. The better the requesting party can show that the electronic data contains relevant information, the less likely that a court will shift the cost of production. 3. Privileged documents pose a problem for responding parties seeking cost-shifting. Cost-shifting is generally appropriate only for the cost of restoration and searching, however, the responding party should always bear the cost of reviewing and producing the data once is has been converted into an accessible form. Zubulake III, 216 F.R.D. at 290. a. Cost-shifting is appropriate for restoration only due to the fact that the producing party can control the cost of reviewing the documents and that once the data is restored to accessible format cost-shifting is no longer appropriate. Id. b. Devices to differentiate privileged documents from discoverable documents may become important cost-savers in the future, so long as, the devices are effective and are followed. 4. Once data has been restored to accessible format cost-shifting, it is inappropriate to request costshifting. Request the protective order prior to production. 5. Responding party tips: a. Argue lack of relevance and that the data is available in hard copy. b. Always request a sampling first to help show lack of relevance and extreme cost. c. Under the Zubulake test, if any of the factors show cost-shifting argue some percentage of the cost should be shifted. The court in Zubulake found that only one factor favoring cost shifting (Factor 7) was enough to shift 25% of the cost of production to the requesting party. Zubulake III, 216 F.R.D. at 289. In a case in which factors 1, 2, 3, and 5 weighed against cost-shifting, factors 4 and 7 weighed in favor, and factor 6 was -8-

9 neutral, the court ruled that the two parties were to split the cost evenly. OpenTV, 219 F.R.D. at State amendments to their Civil Procedure Rules. Both Texas (Tex. R. Civ. P ) and Mississippi (Miss. R. Civ. P. 26(b)(5)) have amended their rules to guide parties and the courts in considering cost-shifting of electronic discovery. a. A requesting party must specifically request production of electronic or magnetic information and specify the form in which they want it produced. Tex. R. Civ. P b. The responding party must produce the requested information that is reasonably available in the ordinary course of business and that is responsive to the request. Id. c. If, through reasonable efforts, the responding party cannot retrieve the information requested or produce it in the form requested, the responding party must file an objection with the court. Id. d. If the court orders the responding party to comply with the request, the court must also order that the requesting party pay the reasonable expenses of any extraordinary steps required to retrieve and produce the information. Id. (emphasis added) e. Mississippi s rule is identical except that it is left to the court s discretion on whether to shift the costs of electronic discovery. See Miss. R. Civ. P. 26(b)(5). Conclusion The challenge for litigation counsel in protecting their clients from abusive and/or simply unfair requests for electronic discovery is to convince the courts before which they practice that existing discovery rules, rigorously applied, are robust enough to create an equitable field of battle for discovery. -9-

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