4-7 DAMAGES DISCOVERY 4.03[1]

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1 4-7 DAMAGES DISCOVERY 4.03[1] 4.03 The Growth of Electronically Stored Information (ESI) and Related E-Discovery [1] Locating Key Information in Electronic Sources By 2007, the evidence in most cases had become electronically generated and maintained, with more than ninety percent of all information... created and stored in an electronic format. 1 The Federal Rules Advisory Committee noted that the growth in electronically stored information and in the variety of systems for creating and storing such information has been dramatic. 2 Although the volume of information available in litigation has grown because advancing technologies allow the ability to create, duplicate, and store information with ease, a significant percentage of electronically stored information ( ESI ) will never actually be printed. Information is retained not because it is expected to be used, but because there is no compelling reason to discard it. 3 Many forms of electronically stored information contain both primary data and secondary data called metadata. There are different types of metadata; for example, document metadata travels with and describes a word processing document (e.g., author, date created, or date last printed) and metadata describes the recipients and the sent and received dates of a particular . Metadata may or may not be relevant to a given case, but in the case of damages, a party should be aware of the possibility that information that may be helpful in interpreting data may be embedded in a document s metadata and therefore not readily apparent to a reviewer. As discussed more fully below, the form in which a document is produced, including whether and how metadata is produced with the document, may affect whether the document is usable for a particular purpose. These developments have caused new complexities for the litigant. How ESI is preserved, collected, processed, and produced will determine not only what information may be available to support or attack a damage case, but how costly it will be to litigate the question of damages. 1 The Sedona Conference, Best Practices Recommendations & Principles for Addressing Electronic Document Production, in The Sedona Principles, at p. 1 (2d ed. June 2007) (hereafter, The Sedona Principles). 2 Fed. R. Civ. P. 34 Advisory Committee Notes (2006). 3 Rowe Entertainment, Inc. v. William Morris Agency, Inc., 205 F.R.D. 421, 429 (S.D.N.Y. 2002). See also, Byers v. Illinois State Police, 2002 U.S. Dist. LEXIS 9861, at *32 (N.D. Ill. June 3, 2002) (commenting on the sheer volume of electronic information ).

2 4.03[2] CALCULATING AND PROVING DAMAGES 4-8 [2] E-Discovery Rules On December 1, 2006, the Federal Rules of Civil Procedure were explicitly amended to address the discovery of ESI. 4 The rules confirm that the basic principles applicable to paper discovery also apply to ESI. But the rules go further, given the complexities of computerized information storage and the desire of the Rules Committee flexibly to cover the continuing evolution of methods and tools for the generation, storage, retrieval, and retirement of information. The most relevant portions of the ESI amendments to the Federal Rules cover the following damages issues: (1) the discoverability of ESI; (2) early attention to ESI; (3) ESI that is not reasonably accessible ; (4) the form in which ESI will be produced; and (5) sanctions. 5 4 Although this chapter focuses on the Federal Rules of Civil Procedure, many states have e-discovery rules that are identical or at least similar to the Federal Rules. See, e.g.: Arizona: Ariz. R. Civ. P. 16, 26, 26.1, 33, 34, 37, and 45 (amended January 1, 2008) (rules govern the preservation, disclosure, and discovery of electronically stored information). California: Cal. Code Civ. P., amended , , ; see also: and Indiana: Ind. R. Trial P. 26, 34, 37 (January 1, 2008) (largely mirroring Federal Rules amendments). Louisiana: La. Code Civ. P. Articles 1424, 1460, 1461, and 1462 (June 25, 2007) (allowing discovery of electronically stored information). Minnesota: Minn. R. Civ. P. 16, 26, 33, 34, 37, 45 (July 1, 2007). Montana: Mont. R. Civ. P. 16, 26, 33, 34, 37, 45 (February 28, 2007). New Hampshire: N.H. Superior Ct. R. 62 (March 1, 2007) (provision (c)(4) requires the parties to meet, confer, and try to reach agreement on the scope of discovery, including particularly with respect to information stored electronically or in any other medium, with special attention to accessibility, cost, form of production, and preservation). New Jersey: New Jersey Rules Governing Civil Practice in the Superior Court, Tax Court and Surrogate s Court, Rules 1:9, 4:5B, 4:10, 4:17, 4:18, 4:23 (September 1, 2006) (governing discovery of electronically stored information ). New York: New York Uniform Civil Rules of the Supreme and County Courts, , Commercial Div. of the Sup. Ct., Rule 8(b) (January 17, 2006) (requiring counsel to confer with regard to anticipated electronic discovery issues enumerated in the rule). North Carolina: Local Rules of N.C. Bus. Ct., Rules 17.1 and 18.6 (procedures for the preservation and discovery of electronic documents). Utah: Utah R. Civ. P. 26, 33, 34, 37, 45 (November 1, 2007).

3 4-9 DAMAGES DISCOVERY 4.03[2] [a] Discoverability of ESI Although judicial recognition that ESI is discoverable predates the amendments to the Federal Rules, 6 Rule 34 expressly allows parties to seek discovery of electronically stored information. 7 The Rules Committee decided against a specific definition of ESI because [t]he wide variety of computer systems currently in use, and the rapidity of technological change, counsel against a limiting or precise definition of electronically stored information. Nevertheless, the Committee noted that ESI includes all current types of computer-based information. 8 In the context of damages discovery, the parties to a case must consider the potential sources and types of ESI that may relate to proof of damages. Even though some classic types of ESI such as and documents created using office software applications (e.g., word processing documents and spreadsheets) may be relevant to both the liability and damage phases of a case, a damage case may also involve other sources such as complex, structured databases containing accounting, financial, and other transactional data. Moreover, in some cases, hidden data and metadata (for example, hidden formulas in spreadsheets, discussed below) may be relevant. Any of these types of information, if relevant and accessible, is discoverable. Rule 34(a) clarifies that a party may request an opportunity to test or sample ESI, rather than merely inspect or copy such information. 5 Additional changes, not discussed here, involve questions of privilege waiver that arise out of the burdens and risks of privilege review involving voluminous ESI. See Fed. R. Civ. P. 26(b)(5)(B). 6 See, e.g.: Second Circuit: Rowe Entertainment, Inc. v. William Morris Agency, Inc., 205 F.R.D. 421, 428 (S.D.N.Y. 2002) ( [e]lectronic documents are no less subject to disclosure than paper records ); Santiago v. Miles, 121 F.R.D. 636, 640 (W.D.N.Y. 1998) (a request for raw information in computer banks is proper and the information is obtainable under the discovery rules ). Seventh Circuit: Crown Life Insurance Co. v. Craig, 995 F.2d 1376 (7th Cir. 1993) (computer data is discoverable); Simon Property Group L.P. v. mysimon, Inc., 194 F.R.D. 639, 640 (S.D. Ind. 2000) ( computer records, including records that have been deleted, are documents [that are] discoverable under Fed. R. Civ. P. 34 ). Eighth Circuit: Antioch Co. v. Scrapbook Borders, Inc., 210 F.R.D. 645, 652 (D. Minn. 2002) (deleted information on a computer may well be both relevant and discoverable ). District of Columbia Circuit: McPeek v. Ashcroft, 202 F.R.D. 31, 32 (D.D.C. 2001) ( the producing party has an obligation to search available electronic systems for information demanded ). 7 Fed. R. Civ. P Fed. R. Civ. P. 34(a), advisory committee s note.

4 4.03[2] CALCULATING AND PROVING DAMAGES 4-10 In other words, a requesting party may seek to directly access the responding party s electronic information systems. This intrusive tool raises questions of burden, confidentiality, and privilege. 9 And, naturally enough, it is not without limits. The Rules Advisory Committee recognized that, [a]s with any other form of discovery, issues of burden and intrusiveness raised by requests to test or sample can be addressed under Rules 26(b)(2) and 26(c). The Advisory Committee also observed that [c]ourts should guard against undue intrusiveness resulting from inspecting or testing such systems. 10 This issue is likely to arise during the production of database evidence. For example, in In re Ford Motor Co., decided prior to the promulgation of the amended rules but instructive nonetheless, a party sought direct access to a Ford database, arguing that Rule 34(a) gave it the right to search the database directly. Ford objected that Rule 34 did not grant such unbridled access, especially where there was no discovery abuse by Ford and no finding that Ford had failed to adequately search and produce its own data. Ford also expressed concerns over access to the databases regardless of relevance, privilege, or confidentiality. 11 The Eleventh Circuit court observed that: Like the other discovery rules, Rule 34(a) allows the responding party to search his records to produce the required, relevant data. Rule 34(a) does not give the requesting party the right to conduct the actual search. While at times perhaps due to improper conduct on the part of the responding party the requesting party itself may need to check the data compilation, the district court must protect respondent with respect to preservation of his records, confidentiality of nondiscoverable matters, and costs. 12 In general, direct access to a party s data sources is the exception rather than the rule. And court orders allowing direct access must be narrowly tailored Id. 10 Id. 11 In re Ford Motor Co., 345 F.3d 1315, 1317 (11th Cir. 2003). 12 Id. (quoting Rule 34(a) advisory committee s note, 1970 amendment). 13 Southern Diagnostic Associates v. Bencosme, 833 So.2d 801, 802 (Fla. Dist. App. 2002) (quashing lower court order allowing the requesting party access to the responding party s computer system on the grounds that the order lacked appropriate parameters linked to the purposes of the discovery requests).

5 4-11 DAMAGES DISCOVERY 4.03[2] [b] Early Attention to ESI and Damages: What the Rules Require [i] Fundamental Provisions A common theme runs through all ESI-related changes to the Federal Rules: Parties must focus on discovery early in a case so that issues especially those issues that are related to the preservation and production of ESI will be identified and resolved early in the case, either through cooperative efforts of the parties, or court involvement. This early substantive focus on electronic discovery is incorporated into Rules 16(b), 26(a), and 26(f) and Form 35. In addition, the new e-discovery disclosure requirements of Rule 26(a) complement that Rule s pre-amendment requirement to disclose damage calculations and theories. 14 Under Rule 16(b), a scheduling order may include [provisions] for disclosure or discovery of electronically stored information and any agreements the parties reach for asserting claims of privilege or of protection as trial-preparation material after [production]. 15 The rules envision that the Rule 16(b) discovery planning conference will be enhanced by a conference of the parties under Rule 26(f), which we shall discuss below. Rather than allow potential electronic discovery issues to linger and fester, Rule 16(b) is intended to alert the court to the possible need to address the handling of discovery of electronically stored information early in the litigation to help avoid difficulties that might otherwise arise. 16 Rule 26(a)(1) requires initial disclosures of key information relating to the claims and defenses at issue in a case. Rule 26(a) is an automatic disclosure provision, which obligates the parties, within 14 days of the Rule 26(f) conference, to disclose all information relevant to its claims or defenses. 17 Rule 26(a)(1) s initial disclosure requirements contain two provisions that are significant vis-à-vis damages. First, Rule 26(a)(1)(ii) requires that a party share with its opponent a copy or a description by category and location of, all documents, electronically stored information, and tangible things that the dis- 14 Fed. R. Civ. P. 26(a)(1)(iii). 15 Fed. R. Civ. P. 16(b). 16 Fed. R. Civ. P. 16(b)(6), advisory committee s note (2006). 17 Hipsaver Co. v. J. T. Posey Co., 497 F. Supp.2d 96, 103 (D. Mass. 2007).

6 4.03[2] CALCULATING AND PROVING DAMAGES 4-12 closing party has in its possession, custody, or control and may use to support its claims or defenses, unless solely for impeachment. Although this general provision applies to more than damages, the provision clearly encompasses information that may be used to support or rebut a damages case. Second, Rule 26(a)(1)(A)(iii), which predates the recent e-discovery amendments, directly addresses additional disclosures required on the issue of damages. It states that a party that is claiming damages must provide to all other parties a computation of each category of damages claimed by the disclosing party who must also make available for inspection and copying as under Rule 34 the documents of other evidentiary material, unless privileged or protected from disclosure, on which each computation is based, including materials bearing on the nature and extent of injuries suffered. 18 This provision requires a party to disclose both damage calculations and the bases for those theories. 19 Given the early stage at which Rule 26(a) disclosures are required, it can be difficult to make comprehensive disclosures, especially in the case of damages. Consider that damage theories are often developed by the experts who sponsor them. And a choice of one damage theory over another could well result in different discovery needs. This concern raises the question of how extensive initial damage disclosures must be. Rule 26(a)(1)(E) provides some help, making clear that initial disclosures must be based on the information then reasonably available to the party. But Rule 26(a) envisions that a party will make a reasonable investigation into the facts: A party is not excused from making its disclosures because it has not fully investigated the case or because it challenges the sufficiency of another party s disclosures or because another party has not made its disclosures Fed. R. Civ. P. 26(a)(1)(iii). 19 Green Edge Enterprises, LLC v. Rubber Mulch Etc. LLC, 2009 U.S. Dist. LEXIS 41302, at *11 (E.D. Mo. May 14, 2009) ( Rule 26(a) does not merely require a calculation of damages, but also requires counsel to disclose the theory of damages. ). 20 Fed. R. Civ. P. 26(a)(1)(E).

7 4-13 DAMAGES DISCOVERY 4.03[2] The Rules Committee advisory notes provide additional detail, noting that: A party claiming damages or other monetary relief must, in addition to disclosing the calculation of such damages, make available the supporting documents for inspection and copying as if a request for such materials had been made under Rule 34. This obligation applies only with respect to documents then reasonably available to it and not privileged or protected as work product. Likewise, a party would not be expected to provide a calculation of damages which, as in many patent infringement actions, depends on information in the possession of another party or person. 21 In any event, initial disclosures do not mark the end of a party s disclosure duty. Rule 26(e) imposes a general obligation to supplement or correct disclosures or discovery responses to reflect accurate information. 22 [ii] Practical Application of the Rules How does this work in practice? The case law focuses on the reasonableness of a party s efforts to investigate and disclose information given the circumstances. For example, in Henry s Marine Services v. Fireman s Fund Insurance Co., 23 the Fifth Circuit considered an insurer s argument that the plaintiff-insured s evidence of damages should have been excluded for failure to provide a computation of damages in the plaintiff s initial disclosures. The court agreed with the district court s ruling that the initial disclosure was not perfect but it was not a failure to disclose. 24 The Fifth Circuit s analysis suggests the following practice pointers: First, because disclosures must be based on information reasonably available to a party, where circumstances prevent a full or exact computation of damages, it is not reasonable to require such computation. Second, Rule 26 does not require a party to physically provide documents or evidentiary materials supporting damage claims, merely to make the materials available to the other party. A key factor 21 Fed. R. Civ. P. 26(a)(1)(C), 1993 advisory committee notes. 22 Hipsaver Co. v. J. T. Posey Co., 497 F. Supp.2d 96, 103 (D. Mass. 2007). 23 Henry s Marine Services v. Fireman s Fund Insurance Co., 193 Fed. Appx. 267, 278 (5th Cir. 2006). 24 Id.

8 4.03[2] CALCULATING AND PROVING DAMAGES 4-14 mitigating against an exclusion order in Henry s Marine was that there was nothing to indicate that Henry s Marine did not make this evidence available to Fireman s Fund. On the contrary[,] the district court noted that Fireman s Fund never attempted to inspect or copy Henry s damages documents. 25 Third, initial disclosures that defer the damage issue to a later date, but are not supplemented in a timely manner, present a high risk for a party seeking damages. Consider the following damage disclosure in a Lanham Act case: Defendant seeks damages as proven at trial as well as its reasonable attorneys fees and costs, and any other reasonable relief that the Court deems appropriate. Defendant cannot calculate this amount at the present time but will supplement this disclosure as soon as reasonably possible. 26 The court found this disclosure insufficient, noting that the promised supplementation was never made. 27 The disclosure requirement of Rule 26(a)(1) is strengthened in several places, including Rule 37 which states that: If a party fails to provide information or identify a witness as required by Rule 26(a) or (e), the party is not allowed to use that information or witness to supply evidence on a motion, at a hearing or at a trial, unless the failure was substantially justified or other circumstances make an award of expenses unjust Id., 193 Fed. Appx. at Green Edge Enterprises, LLC v. Rubber Mulch Etc. LLC, 2009 U.S. Dist. LEXIS 41302, at *14-*15 (E.D. Mo. May 14, 2009). 27 Id. See also, Veritas Operating Corp. v. Microsoft Corp., 2008 U.S. Dist. LEXIS (W.D. Wash. Jan. 17, 2008) (finding similar disclosure in a patent case, coupled with failure to supplement over a year, to constitute failure to disclose, and recommending that the defendant be barred from submitting any evidence regarding computation of infringement of a specified patent). 28 Fed. R. Civ. P. 37(c)(1), Failure to Disclose or Supplement. See also, Hoffman v. Construction Protective Services, 541 F.3d 1175, 1178 (9th Cir. 2008) ( Rule 37(c)(1) gives teeth to these [disclosure] requirements by forbidding the use at trial of any information required to be disclosed by Rule 26(a) that is not properly disclosed. ). And cf., Yeti by Molly, Ltd. v. Deckers Outdoor Corp., 259 F.3d 1101, 1106 (9th Cir. 2001) (same).

9 4-15 DAMAGES DISCOVERY 4.03[2] Rule 37(b) gives a court broad discretion in fashioning discovery sanctions. 29 This sanction, although serious, is not exclusive. In lieu of, or in addition to, imposing the exclusionary sanction, a court may order payment of the reasonable expenses, including attorneys fees, caused by the failure, inform the jury of the party s failure, and impose a range of other sanctions, including adverse inference instructions, striking of pleadings, and termination sanctions (e.g., dismissing the claim of the party that failed to make disclosure). 30 In practice, these sanctions apply to ongoing failures to meet disclosure obligations that impact the parties adversely. For example, in a wrongful termination lawsuit, where the plaintiff did not claim economic damages or disclose information to support an economic damage claims based on lost wages, and where disclosures were not supplemented after economic damages were discussed in deposition testimony, a district court excluded evidence of economic damages at trial, and the First Circuit agreed in a de novo review. 31 In another matter, where plaintiff was warned that she must provide complete Federal Rule of Civil Procedure 26(a) disclosures relating to her damages or suffer dismissal and not only failed to provide additional information, but testified at deposition that she had provided enough information about her damages, the appellate court affirmed the district court s dismissal of the action. 32 And in a false advertising case, where the plaintiff failed to produce sales data relevant to damages until the week before the scheduled trial, the court excluded the use of the sales data and ordered the defendant to pay attorney s fees and expenses tied to the discovery violation. 33 There are numerous additional examples of the exclusion of damage evidence for non-disclosure or untimely disclosure Krieger v. Texaco, Inc., 373 F. Supp. 108, 111 (W.D.N.Y. 1972) ( The flexibility of the Rule gives the court a broad discretion with regard to sanctions, and in exercising its discretion the court should take into account the full record of the case before it. ). 30 Fed. R. Civ. P. 37(c)(1)(A) to 37(c)(1)(C). 31 Soto-Lebron v. Federal Express Corp., 538 F.3d 45, 54 (1st Cir. 2008). 32 Hudson v. Pinnacle Teleservices, 241 Fed. Appx. 340, 341 (8th Cir. 2006). 33 Hipsaver Co. v. J. T. Posey Co., 497 F. Supp.2d 96, 104 (D. Mass. 2007). 34 See, e.g.: Second Circuit: 24/7 Records, Inc. v. Sony Music Entertainment, Inc., 566 F. Supp.2d 305, 317 (S.D.N.Y. 2008) (court rejected damage theory that did not appear in initial or supplemental disclosures).

10 4.03[2] CALCULATING AND PROVING DAMAGES 4-16 Still, it should be noted that serious sanctions, such as a default judgment of exclusion of evidence, are typically imposed only where there is willful misconduct. 35 A party who wishes to eventually obtain an order for more severe discovery sanctions should first exhaust all attempts to compel production of information. 36 Even so, some courts recognize that a failure to make initial disclosures may be cured by subsequent disclosures in the discovery process. 37 Rule 26(f) builds on the Rule 26(a)(1)(ii) disclosure requirement by requiring litigants to develop a proposed discovery plan covering, among other things, any issues about disclosure or discovery of electronically stored information, including the form or forms in which it should be produced. 38 Third Circuit: Nicholas v. Pennsylvania State University, 277 F.3d 133, 148 (3d Cir. 2000) (excluding evidence of lost future wages where plaintiff waited seven months to disclose the elimination of his job). Ninth Circuit: United States v. Sumitomo Marine & Fire Insurance Co., 617 F.2d 1365, 1368 (9th Cir. 1980) (entering preclusionary sanctions against the government based on eighteen-month delay in providing statement of damages). 35 See, e.g.: Fifth Circuit: Dorsey v. Academy Moving & Storage, Inc., 423 F.2d 858, 860 (5th Cir. 1970) ( The sanctions available under Rule 37(b) for [failing to provide evidence supporting plaintiff s damage claims] are predicated upon the presence of such factors as willful disobedience, gross indifference to the right of the adverse party, deliberate callousness, or gross negligence. ). Seventh Circuit: Lakeside Bridge & Steel Co. v. Mountain State Construction Co., 400 F. Supp. 273, 279 (E.D. Wis. 1975) (failure to timely answer damage interrogatories is not a sufficient reason for entering a default judgment or an order excluding evidence in light of the fact that defendant has filed supplemental answers which have not been objected to by plaintiff ). But see, e.g.: Ninth Circuit: Hoffman v. Construction Protective Services, 541 F.3d 1175, 1180 (9th Cir. 2008) ( we reject the notion that the district court was required to make a finding of willfulness or bad faith to exclude the damages evidence. To the contrary, the portion of Rule 37 relied on by the district court has been described as a selfexecuting, automatic sanction to provide a strong inducement for disclosure of material. ). (Citation omitted.) 36 Pioneer Hi-Bred International, Inc. v. Ottawa Plant Food, Inc., 219 F.R.D. 135, 148 (N.D. Iowa 2003) ( these sanctions depend upon a party seeking to compel discovery first moving the court for an order compelling discovery and the party opposing discovery refusing to comply with the court s order ). 37 See Reyes v. City of Glendale, 2009 U.S. Dist. LEXIS (C.D. Cal. Aug. 19, 2009) (there was no sanction for failure to disclose under Fed. R. Civ. P. 26(a)(1)(A)(iii) where damage calculations and supporting information were subsequently disclosed through deposition testimony, interrogatory answers, and document production). 38 Fed. R. Civ. P. 26(f).

11 4-17 DAMAGES DISCOVERY 4.03[2] [c] ESI That Is Not Reasonably Accessible Relevant and responsive ESI that is reasonably accessible must be produced in discovery. But Rule 26(b)(2)(B) provides that [a] party need not provide discovery of electronically stored information from sources that the party identifies as not reasonably accessible because of undue burden or cost. 39 This provision recognizes that certain sources of ESI can be accessed only with substantial burden and costs. 40 A party that does not produce information based on a claim of inaccessibility must identify, by category or type the source of the inaccessible information and provide enough detail to enable the requesting party to evaluate the burdens and costs of providing the discovery and the likelihood of finding responsive information on the identified sources. 41 Claims of inaccessibility may themselves be subject to discovery and dispute. When parties and courts evaluate such claims, they should consider whether information claimed to be inaccessible is, in fact, accessed either occasionally or regularly. In addition, information may be retained strictly for disaster recovery purposes. That is, some disaster recovery backups are designed using backup systems that stripe or maximize distribution of data (making it more difficult to access). Inaccessibility may also be a problem where data is in an obsolete or legacy format that cannot be read easily with more recent software or hardware Fed. R. Civ. P. 26(b)(2)(B). 40 Fed. R. Civ. P. 26(b)(2)(B), advisory committee s note. 41 Fed. R. Civ. P. 26(b)(2), advisory committee s note. 42 Id. See also: The Sedona Conference, Best Practices Recommendations & Principles for Addressing Electronic Document Production, in The Sedona Principles, at p. 18 (2d ed. June 2007): Examples of such sources may include, according to the Advisory Committee, backup tapes that are intended for disaster recovery purposes and are not indexed, organized, or susceptible to electronic searching; legacy data that remains from obsolete systems and is unintelligible on the successor systems; and data that was deleted but remains in fragmented form, requiring a modern version of forensics to restore and retrieve. See also: Second Circuit: Rowe Entertainment, Inc. v. William Morris Agency, Inc., 205 F.R.D. 421, 429 (S.D.N.Y. 2002). District of Columbia Circuit: McPeek v. Ashcroft, 202 F.R.D. 31, (D.D.C. 2001).

12 4.03[2] CALCULATING AND PROVING DAMAGES 4-18 Nevertheless, inaccessible information is discoverable where the requesting party shows good cause. Good cause exists when: (1) limited information is available from accessible sources, (2) the inaccessible information is believed to be important and useful to critical issues in a case, and/or (3) a responding party allowed accessible information to become inaccessible after he knew or reasonably believed that litigation had been or would be commenced. If the requesting party shows good cause for the production of inaccessible data, the court may specify conditions for discovery, including requiring the requesting party to pay part or all of the producing party s costs of obtaining information from sources that are not reasonably accessible. In the context of computing damages, inaccessibility claims may arise where key damages information goes back many years and is kept on legacy media that may be difficult to read or search. Before seeking production from such sources, the requesting party should seek information on whether there is duplicative information on current systems (e.g., because older ESI was copied, transferred, or warehoused on new or replacement systems). Moreover, whereas data may not be available across an entire time period, sufficient summary data (e.g., annual reports) may exist that might be sufficient for damage analyses. Note that, in assessing claims of inaccessibility, some courts have been critical of claims that costs of production should be shifted to the requesting party where the costs result from the responding party s choice of information management systems and processes. Some courts hold that the cost of translating data into a reasonably usable format is foreseeable and should be borne by the responding party See, e.g.: Fourth Circuit: Stout v. Wolff Shoe Co., 2007 U.S. Dist. LEXIS 24833, at *6 (D.S.C. March 31, 2007) ( translating information obtained from a computer database into a reasonably understandable form is a necessary and foreseeable burden on the responding party ). Seventh Circuit: In re Brand Name Prescription Drugs Antitrust Litigation, 1995 WL , at *2 (N.D. Ill. June 15, 1995) ( if a party chooses an electronic storage method, the necessity for a retrieval program or method is an ordinary and foreseeable risk ). Court of International Trade: Daewoo Electronics Co. v. United States, 650 F. Supp. 1003, 1006 (Ct. Int l Trade 1986) ( The normal and reasonable translation of electronic data into a form usable by the discovering party should be the ordinary and foreseeable burden of a respondent in the absence of a showing of extraordinary hardship. The government has made no such showing. ).

13 4-19 DAMAGES DISCOVERY 4.03[2] Others hold that electronic systems are typically not purchased for document production, but for the function they provide (e.g., disaster recovery backup and data management). 44 [d] Form of Production The form of an opponent s production can dramatically affect how usable that production is. The significance of usability is enhanced in the context of data derived from databases or spreadsheets. For example, an image of a spreadsheet may be more difficult to use in certain circumstances than a spreadsheet in its original electronic form (a native version). Rule 34(b) addresses this concern through procedures for requesting ESI in a particular form and for responding to such requests. Initially, a party who requests discovery of ESI may specify the form or forms in which electronically stored information is to be produced. 45 But that specification is not binding on the responding party, who may object to the requested form. Where such an objection is made, or where the request does not specify a form of production, the responding party must state the form or forms it intends to use. Note that the responding party is not given free reign regarding the form of production, but must produce the information in the form in which it is ordinarily maintained or in a reasonably usable form. 46 Counsel s challenge, therefore, is defining what is reasonably usable information that may be relevant to damages. As an example, we have focused on spreadsheets, which are often the subject of State Courts: Massachusetts: Linnen v. A. H. Robins Co., 10 Mass. L. Rep. 189, 1999 Mass. Super. LEXIS 240, at *17-*18 (Mass. Super. 1999) (The costs of back-up tape retrieval is one of the risks taken on by companies which have made the decision to avail themselves of the computer technology now available to the business world. ). 44 See: Second Circuit: Rowe Entertainment, Inc. v. William Morris Agency, Inc., 205 F.R.D. 421, 429 (S.D.N.Y. 2002) (the principle that a party should reasonably foresee, and, therefore, bear all the costs of searching and retrieving its electronic records, though unassailable in the context of paper records... does not translate well into the realm of electronic data ). District of Columbia Circuit: McPeek v. Ashcroft, 202 F.R.D. 31, (D.D.C. 2001) (because back-up tapes are principally deployed to protect against destruction of data if the network crashes, not to catalog information for business purposes; requiring a responding party to pay for the full expense of backup tape restoration may be unreasonable). 45 Fed. R. Civ. P. 34(b). 46 Id.

14 4.03[2] CALCULATING AND PROVING DAMAGES 4-20 negotiation and, increasingly, judicial opinions on form of production. Spreadsheets in their original format can be manipulated by virtue of their embedded formulae. As one court noted, relying heavily on the United States District Court for the District of Maryland s Suggested Protocol for Discovery of Electronically Stored Information 47 : Embedded metadata consists of text, numbers, content, data, or other information that is directly or indirectly inputted into a [n]ative [f]ile by a user and which is not typically visible to the user viewing the output display of the native file. Md. Protocol 27. Examples include spreadsheet formulas, hidden columns, externally or internally linked files (such as sound files), hyperlinks, references and fields, and database information. Id. This type of metadata is often crucial to understanding an electronic document. For instance, a complicated spreadsheet may be difficult to comprehend without the ability to view the formulas underlying the output on each cell. For this reason, the District of Maryland working group concluded that embedded metadata is generally discoverable and should be produced as a matter of course. 48 Formulas in native spreadsheets can be identified and applied. Some courts, therefore, take a different view on the need for production in native format, or the extent of metadata to be produced, in the case of regular documents versus spreadsheets. Of course, it may be that the metadata attached to a native file are not relevant to the issues in a particular case. As one trial court observed, emerging standards of electronic discovery appear to articulate a general presumption against production of metadata, but provide a clear caveat when the producing party is aware or should be reasonably aware that particular metadata is relevant to the dispute. 49 The definition of reasonably usable is still emerging in case law. Does reasonably usable mean the most easily usable format? This 47 United States District Court for the District of Maryland, Suggested Protocol for Discovery of Electronically Stored Information (2007), available online at Aguilar v. Immigration & Customs Enforcement Division, 255 F.R.D. 350, (S.D.N.Y. 2008). 49 Williams v. Sprint/United Management Co., 230 F.R.D. 640, 652 (D. Kan. 2005).

15 4-21 DAMAGES DISCOVERY 4.03[2] question arose in the case In re ClassicStar Mare Lease Litigation. 50 There, the defendant had general ledger financial information produced using proprietary software that was not generally available. Defendant produced this information in tagged image file format ( TIFF ) with a load file 51 that allowed the documents to be readily loaded into the parties Summation of Concordance (both litigation document management software) databases for ease of searching. 52 Plaintiffs objected that the data, as produced, was not reasonably usable. As an example, they cited a 509-page image of general ledger data containing 18,000 rows and thirteen columns of data, and some ninety separate monthly general ledgers in this format for the referenced subsidiary alone. 53 Interestingly, the court required production in native format because plaintiffs had purchased the proprietary software necessary to read the data and the defendant had previously agreed to provide the data in its native format if plaintiffs chose to buy the software. But the court did not agree that production in native format was necessary to make the production reasonably usable. The court explained: Plaintiffs do not directly address the issue of whether the data, as already produced is reasonably usable, arguing instead that the production of data in its native format would save them hundreds of hours. 54 The Plaintiffs West Hills Farms LLC argued that [i]n cases where the financial data is voluminous, [the] reporting feature is essential to the discovering party s ability to sort though the data. In other words, the West Hills Plaintiffs are not arguing 50 In re ClassicStar Mare Lease Litigation, 2009 U.S. Dist. LEXIS 9750, 72 Fed. R. Serv 3d (Callaghan) 922 (E.D. Ky. Feb. 2, 2009). The case concerned purported investment opportunities and tax deductions and/or tax refunds for wealthy individuals who leased the reproductive capacities of certain thoroughbred mares. On October 26, 2009, three operators of the alleged tax shelter pleaded guilty to conspiracy to defraud the United States. See DOJ, Utah-Based Tax Shelter Operators Plead Guilty in $200 Million Dollar Tax Fraud (Oct. 26, 2009), available online at tice.gov/opa/pr/2009/october/09-tax-1155.html (last visited February 7, 2011). 51 In such a production, a TIFF image of a document is produced along with a load file (linked to the image) that includes extracted text and, depending on the agreement of the parties or order of the court, some metadata fields. 52 In re ClassicStar Mare Lease Litigation, N. 50 supra, 2009 U.S. Dist. LEXIS 9750, at * Id., 2009 U.S. Dist. LEXIS 9750, at * Id., 2009 U.S. Dist. LEXIS 9750, at *21.

16 4.03[2] CALCULATING AND PROVING DAMAGES 4-22 that the data produced is not usable, only that it could be so much more usable in its native format. 55 The court ultimately concluded that the documents were produced in a format which was most likely to be usable to some extent by any of the parties to this lawsuit, none of whom had the necessary software for the native format data at the time of the production. 56 In Covad Communications Co. v. Revonet, Inc., 57 the defendant Revonet produced thousands of pages of spreadsheets in paper form. The plaintiff Covad complained that the paper production was useless because they were mostly paper printouts of spreadsheets that run horizontally across several sheets of paper, resulting in a sea of seemingly random numbers and data, with no effective labels, column headings or other identifying information. 58 Revonet suggested that Covad s counsel could paste these hundreds of pages together. 59 Magistrate Judge John M. Facciola rejected this suggestion, stating that taking an electronic document such as a spreadsheet, printing it, cutting it up, and telling one s opponent to paste it back together again, when the electronic document can be produced with a keystroke is madness in the world in which we live Id., 2009 U.S. Dist. LEXIS 9750, at *21-* Id., 2009 U.S. Dist. LEXIS 9750, at * Covad Communications Co. v. Revonet, Inc. ( Covad III ), 2009 U.S. Dist. LEXIS (D.D.C. Aug. 25, 2009): A communications company, providing integrated voice and data communications, including digital subscriber line (DSL) services, as [an] alternative to local phone companies, filed suit against [a] customer lead generation services provider, claiming breach of contract, misappropriation of trade secrets, breach of covenant of good faith and fair dealing, breach of fiduciary duty, and conversion by taking proprietary customer lead information for [a] voice over internet protocol (VoIP) marketing campaign and integrating such information into [the] provider s federated database and sharing it with competitors. See Jon Cavicchi, The Trade Secrets Vault (Feb. 2, 2009), available online at Id. (Covad Communications Co. v. Revonet, Inc.), 2009 U.S. Dist. LEXIS 75325, at *10. (Citation omitted.) 59 Id. 60 Id., 2009 U.S. Dist. LEXIS 75325, at *14.

17 4-23 DAMAGES DISCOVERY 4.03[2] Judge Facciola s concern, shared by other judges, 61 is that parties should not select a form of production that is designed to destroy or degrade a document s ability to be searched. 62 That is, like other forms of discovery, the production of ESI is subject to requirements to protect against deliberate or inadvertent production in ways that raise unnecessary obstacles for the requesting party. 63 That said, native documents can present issues of their own. Unlike images, native documents cannot be redacted or stamped (either with a Bates number or confidentiality notice). Native documents can be harder to authenticate and they could be changed, inadvertently or deliberately. Some parties provide for a tiered approach to native production, agreeing initially to image the first five or ten pages of a spreadsheet, but responding to reasonable requests to provide native copies of spreadsheets that are thought to be relevant. The issue of form of production is one that should be addressed early in a case. A party that responds to a discovery request by simply producing electronically stored information in a form of its choice, without identifying that form in advance of the production... runs a risk that the requesting party can show that the produced form is not reasonably usable and that it is entitled to production of some or all of the information in an additional form. 64 [e] Sanctions As we have indicated, potentially serious sanctions can result from a party s failure to meet Rule 26(a) disclosure requirements. But 61 See, e.g.: First Circuit: Dahl v. Bain Capital Partners, Inc., 2009 U.S. Dist. LEXIS (D. Mass. June 22, 2009) ( Native format means that the spreadsheets have certain capabilities and attributes, such as formulae. Therefore, Rule 34 requires that the PE Firms produce the spreadsheets in native format, keeping these attributes and search capabilities intact. ). Eleventh Circuit: Goodbys Creek, LLC v. Arch Insurance Co., 2008 U.S. Dist. LEXIS (M.D. Fla. Sept. 15, 2008) (defendant s decision to convert the documents to a format alleged to be much more difficult[,]... to search was impermissible ). 62 Covad Communications Co. v. Revonet, Inc. ( Covad III ), 2009 U.S. Dist. LEXIS (D.D.C. Aug. 25, 2009). 63 Id. 64 Id.

18 4.03[3] CALCULATING AND PROVING DAMAGES 4-24 sanctions, including monetary sanctions, adverse inferences, and caseending sanctions can also be imposed where information that was subject to a preservation duty is not preserved. The law of spoliation of evidence predates the amendments to the electronic discovery rules. But, given the unique risks of electronic information systems, which can routinely alter and delete data, Rule 36 creates a limited safe harbor : Absent exceptional circumstances, a court may not impose sanctions under these rules on a party for failing to provide [ESI] lost as a result of the routine, good-faith operation of an electronic storage system. 65 How deep and wide this safe harbor is remains to be seen. Good faith will be the key to a safe harbor analysis. Did a party take reasonable steps to prevent the loss of information, including steps to identify, early in a case, potentially relevant systems and to prevent loss of information from those systems? [3] Practical Effect of the New Rules The Federal Rules of Civil Procedure require the parties to litigation to focus on discovery and in particular, e-discovery early in the litigation process. This early focus regarding what information may be relevant, where relevant information may be located, and how it will be preserved, collected, and produced heightens the importance of understanding and sharing key information early in the litigation process. As noted above, such an early focus may not fit the subject of damages. However, given the requirements of the rules, and also the strategic advantage of identifying an opponent s relevant ESI early in litigation, parties may want to include early thinking about damages in the e-discovery planning phase. As a practical matter: (1) Parties must become familiar with their information systems in general (and relevant current and past sources of ESI). This is best done in advance of litigation, perhaps as part of an overall litigation response plan. 65 Fed. R. Civ. P. 37(f).

19 4-25 DAMAGES DISCOVERY 4.03[3] (2) A party should consider the following questions about damages: (a) What type of information may support your damage theory (or undercut your opponent s theory)? (b) Where is that information likely to be found? (i) Paper sources? (ii) Electronic sources? (A) Individual computers? (B) Shared network environments? (C) Database environments? (iii) Legacy electronic sources? (A) Are the sources accessible and readable? (B) Can the data be translated into reasonable usable format(s)? (iv) An opponent s data sources? (A) Has the opponent disclosed sufficient information about its sources of data? (B) Is discovery appropriate for potential sources of relevant damages information? (v) Third-party information sources? (A) Do you or your opponent subscribe to information services that may be relevant to damage issues? (B) Do you or your opponent have contractual control of information in the possession of third parties that may be relevant to damages?