The Impact of Discovery Limitations and Cost-Sharing on the Corporate Class Action Defendant after Zubulake

Corporate defendants today are faced with numerous discovery dilemmas stemming from the increasing use of electronic information storage. The exponential growth of computer use in both the business and private sector has led to an explosion of information stored on hard drives, floppy disks, and back-up storage devices. Data can be in the obvious form raw data, or the less obvious cookie and cache files, metadata or other embedded data. Even data believed deleted may still be retrievable from file servers. Data maintained by corporations in the normal course of business, which might not have been saved in the old world of paper and filing cabinets, is now saved electronically because it can be done in a cost-efficient manner.

"Information is retained not because it is expected to be used, but because there is no compelling reason to discard it." Rowe Entertainment, Inc. v. The William Morris Agency, Inc., 205 F.R.D. 421, 429, aff'd, 2002 U.S. Dist. LEXIS 8308 (S.D. N.Y. 2002). Where phone conversations, meetings and correspondence used to occur in the normal course of business, e-mails, which often contain unedited, unchecked, sometimes thoughtless and often informal language, have become the accepted method of communication. Increasingly, the duty to preserve these materials is being mandated. See e.g., 15 U.S.C. ยง 7201, et seq. (Sarbanes-Oxley Act)(compels mandatory retention of electronic documents for certain accounting records); 17 C.F.R. 240.17a-4(b) (Securities Exchange Act of 1934)(compels mandatory retention of communications with and by brokers and dealers relating to business). Attorneys are increasingly expanding the scope of discovery requests to include requests for such electronic information, in the hope of finding the proverbial "smoking gun." The question now facing the corporate defendant is how much of this information is discoverable and who should bear the cost of any ultimate discovery? Just because electronic information is retained, must it always be produced?

Needle in a Data Haystack

Corporate defendants faced with broad discovery requests, or "fishing expeditions," face the dilemma of how to provide responsive data from amongst the seemingly endless morass of stored electronic data, while keeping the costs of the retrieval, restoration and production of this data to a minimum. Guidance on these issues can be found in the Federal Rules of Civil Procedure and recent case law in the area of e-discovery.

Theoretically, federal courts do have the power to limit the scope of electronic discovery production and protect against unreasonable burdens on the provider. While Federal Rule of Civil Procedure 26(b) does not directly reference e-mail or other forms of electronic evidence, the notes following the Rule iterate the common understanding that "information subject to discovery is based on the nature of that information, not on the form in which it may be stored, recorded, or otherwise preserved. Therefore, the general rules of discovery apply equally to computer-based information . . . ." F.R.C.P. 26, Notes. Thus, the protections afforded by Rule 26(b)(2) are available to corporate defendants besieged by burdensome electronic discovery requests. Courts, however, have applied the rule to differing extent and with differing results. Compare Fennell v. First Step Designs, Ltd., 83 F.3d 526 (1st Cir. 1996)(broad discovery request for entire contents of defendant's hard drive denied since no showing of "particularized likelihood of discovering appropriate material") with Simon Prop. Grp. v. mySimon, Inc., 194 F.R.D. 639 (S.D. Ind. 2000)(discovery request for retrieval of files which were deleted from defendant employees' computers allowed). When faced with a request for electronic discovery, a corporate defendant may, where appropriate, lodge objections including that the requests are:

  1. not relevant;
  2. overly broad and unduly burdensome, given the onerous task and cost associated with retrieval, restoration, review and production of the requested data;
  3. seeking trade secrets or proprietary information; and
  4. unreasonably cumulative or duplicative or subject to some privilege precluding production. Necessarily intertwined with the goal of limiting the scope of requested electronic discovery under the federal rules is the goal of limiting the often costly expense associated with responding to the electronic discovery request.

In a case with far-reaching implications in the realm of e-discovery, Judge Shira Sheindlin of the Southern District of New York determined that cost-shifting might be appropriate, in certain circumstances, to put some of the burden and expense of retrieving electronically stored information on the discovery requestor. Zubulake v. UBS Warburg LLC, 2003 U.S. Dist. LEXIS 7939 (S.D.N.Y. May 13, 2003). Despite imposition of cost-shifting in Zubulake, the decision raised several issues impacting corporate defendants, including who bears the cost of searching and producing accessible data and back-up or more inaccessible media, in addition to the cost of the review and production itself. These issues are of significant concern to corporate defendants in class action suits, where documents can be voluminous and, in today's corporate age, are increasingly stored electronically, rather than on traditional media.

In Zubulake, the plaintiff sued her former employer, alleging gender discrimination and illegal retaliation. The plaintiff claimed that vital evidence in support of her claim could be found in the form of inter-office e-mails now located on back-up tapes and other archived media. She sought an order compelling the corporate defendant to search for, restore and produce the requested documents at its expense. Judge Sheindlin, acknowledging the necessity of balancing the need for broad discovery in notice pleading jurisdictions with the need to contain the sometimes prohibitive costs of such production, developed a modified test for analyzing e-discovery disputes. Under this model, adapted from both Rowe v. William Morris, 205 F.D.R. 421 (S.D.N.Y. 2002)(previously controlling eight factor test for determining extent to which each party should bear substantial cost of e-discovery) and the general discovery limitations of F.R.C.P. 26(b)(2), the court is to undertake a three-part analysis to determine whether cost-shifting is appropriate.

Three Part Analysis

First, the requested materials must be classified as either "accessible" (such as active online data or near-line data housed on optical disks or magnetic tape) or "inaccessible" (such as information stored on back-up tapes, or erased, fragmented or damaged data). If "accessible," the responding party should bear the expense of producing responsive data, consistent with the presumption under the federal rules that the responding party pay the expense of complying with the discovery request unless it can show "undue burden or expense" sufficient to invoke protection under Rule 26(c). Under Zubulake, "[a] court should consider cost-shifting only when electronic data is relatively inaccessible..." 2003 U.S. Dist. LEXIS 7939 at *49-50.

Second, the court should undertake a factual analysis to determine the type of information that might be found on the "inaccessible" media. For example, in Zubulake, the responding party was required to restore and produce responsive documents from a smaller sample of the requested documents located on the "inaccessible" media.

Finally, the court set forth seven factors (in order of importance) to determine whether the requestor's discovery needs are outweighed by the burdens of production (direct costs and indirect costs - special personnel, customized software, unallocated computer dedication and related negative impact business costs) imposed on the responding party. These factors are:

  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. Id. at *50.

Pursuant to this three-part analysis, the court ordered the corporate defendant in Zubulake to produce all responsive e-mails that existed on "accessible" active servers or optical disks, as well as responsive e-mails from a sampling (selected by the requestor) of the "inaccessible" back-up tapes at its own expense.

After reviewing the sampling contained on the back-up tapes, along with an affidavit of the corporate defendant as to the expense incurred with retrieving, restoring and producing the information, the court applied the seven-factor analysis and shifted 25% of the cost of retrieving and restoring the data to the requestor. Zubulake, 2003 U.S. Dist. LEXIS 12643 (S.D.N.Y. July 24, 2003). In reaching this decision, the court focused on two factors weighing in favor of cost-shifting: the resources available to each party and the relative benefits to each party in obtaining the information. While the plaintiff in Zubulake has been unemployed for two years and admittedly does not have the resources of the corporate defendant, the court nonetheless found that the potentially high value placed on the claim by the plaintiff showed her "financial wherewithal to cover at least some of the cost of restoration." Id. at *25. The court noted that "it is not unheard of for plaintiff's firms to front huge expenses when multi-million dollar recoveries are in sight." Id.

Furthermore, the court found that the plaintiff stood to benefit more from obtaining the information than the corporate defendant, stating, "there can be no question that [the plaintiff] stands to gain far more than does [the defendant], as will typically be the case. Certainly, absent an order, [the defendant] would not restore any of this data of its own volition." Id. at *29. The evidence produced during the sampling revealed information relevant to plaintiff's claim, but not "indispensable evidence," so that the remaining search would be somewhat speculative. Shifting the cost would ensure that the corporate defendant's expenses would not be unduly burdensome. The court implicitly suggested that equities would rarely make the requestor's share of the costs oppressive since "a share that is too costly may chill the rights of litigants to pursue meritorious claims." Id. at *31.

While shifting some of the costs of discovery on the requestor, the court found that the production costs, such as attorney review time and copying costs, did not qualify for cost-shifting. Id. at *31-36. This is of particular importance to corporate defendants since production costs, including attorney review, often significantly outweigh retrieval and restoration costs. The court offered two rationales for this decision. First, the producing party has the singular ability to contain review costs, including selecting counsel and review protocol. Second, once the "inaccessible" data is recovered and restored, it becomes "accessible," making the usual rules of discovery applicable. Id. at *35-6.

While Zubulake is a employment discrimination case, its principles are equally pertinent to the role of the corporate defendant in any mass litigation or class action suit, and perhaps more so, given the volumes of information which may be relevant to the numerous issues involved in complex cases. With the emergence of cases like Zubulake, Rowe Entertainment, and McPeek v. Ashcroft, 202 F.R.D. 31 (D. D.C. 2001)("McPeek I")(allowing restoration of sample of backup tapes to determine if relevant evidence contained therein), it is clear that courts will give a certain latitude to plaintiffs in requesting electronic discovery, so long as the request is reasonably focused (such as to e-mails or documents generated by or sent to select individuals during a select time frame). Cf. Medical Billing Consultants, Inc. v. Intelligent Med. Objects, Inc., 2003 U.S. Dist LEXIS 5606 (N.D. Ill. Apr. 4, 2003)(without showing that evidence is likely to be discovered in search of computer system and that prior discovery responses were inadequate, the discovery request to inspect company computers was denied); Wright v. AmSouth Bankcorp., 320 F.3d 1198, 1205 (11th Cir. 2003)(discovery request for "computer diskette or tape copy of all word processing files created, modified and/or accessed by or on behalf of" several corporate employees without limitation or reasonable showing of relevance held overly broad). However, the plaintiff may be required to bear some of the associated costs. Under these circumstances, the best defense may be a strong offense.

Corporations need to be forward looking and anticipatory of potential future litigation. Protocols need to be developed for the orderly management and retention/destruction of electronic information. Careful consideration must be given to the protocol for document retention, preservation, archiving and later retrieval of electronic data. With these systems in place, corporations can more readily and cost-efficiently retrieve electronically stored information and, with proper cataloguing (with content controls)can provide a better overview and analysis to the court in the throes of a discovery disputes as to just which information is discoverable (thereby potentially limiting the scope of requested discovery) and the nature of the retrieval costs to produce the information (showing the undue burden to retrieve the requested discovery). It will only be through intimate knowledge of the technology and proper planning of document and e-mail retention and production that discovery disputes and costs will be minimized for the corporate defendant.