Official Publication of the Minnesota State Bar Association


Vol. 61, No. 11 | December 2004
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Thinking Outside the Box: Recent Developments in Electronic Discovery

The law governing electronic discovery is developing at a pace not much slower than electrons themselves. While standards for preserving electronic data are emerging, predicting what standards will apply remains out of reach in many cases.

by Michael C. McCarthy

Discovery of electronic documents in civil litigation is long past the point of being a novelty.  High profile disputes invariably involve discovery of indiscreet email.  Numerous vendors have sprung up to assist lawyers and paralegals in processing electronic documents.  The legal publishers have generated a number of single-volume treatises on the topic.1 And, in the last several years, a number of judicial and other organizations interested in civil litigation have formed committees or working groups to study the issues and recommend improved procedures.  The ABA’s Electronic Discovery Task Force of the Section of Litigation has issued its recommendations,2 as has the Sedona Conference.3 A number of federal district courts have adopted local rules governing electronic discovery, as have at least two states, although neither Minnesota state courts nor the U.S. District Court for the District of Minnesota have done so.4

While these developments may be of interest to many lawyers, the policy issues that these task forces, working groups, and treatise authors have attempted to address become of greatest interest when they move from the realm of policy preferences to implementation. Many courts have recently faced these issues, sometimes choosing to impose significant burdens on parties from whom electronic discovery is sought, but often acting without clear guidance either from the governing rules or from controlling precedent.5 And in August 2004, the Advisory Committee on the Federal Rules of Civil Procedure of the Judicial Conference of the United States promulgated proposed amendments to the Rules that, if adopted, will significantly change the requirements governing electronic discovery in federal court.  Given the frequency with which state courts (including Minnesota’s) enact nearly identical rules to those adopted by the federal courts, these proposed amendments are likely, if adopted, to become the standard governing most civil litigation.

The Developing Caselaw

Although various courts have had occasion to address the issues surrounding electronic discovery, the case that has generated the most widely followed decisions is Zubulake v. UBS Warburg LLC, which is before U.S. District Judge Shira A. Scheindlin in the Southern District of New York. In that case, which involves claims by an equities trader of gender-based employment discrimination and illegal retaliation, Judge Scheindlin has generated four opinions that address electronic discovery.6  Judge Scheindlin was particularly well-suited to this task, having previously authored a law review article on the topic of electronic discovery,7 and from her very first decision in May 2003, she has treated the case as an opportunity to explore the issues surrounding electronic discovery in detail.

The first Zubulake opinion addressed the question, “To what extent is inaccessible electronic data discoverable, and who should pay for its production?”  In answering that question, Judge Scheindlin concluded that courts should follow a “three-step analysis:

First, it is necessary to thoroughly understand the responding party’s computer system, both with respect to active and stored data.  For data that is kept in an accessible format, the usual rules of discovery apply: the responding party should pay the costs of producing responsive data.  A court should consider cost-shifting only when electronic data is relatively inaccessible, such as in backup tapes.

Second, because the cost-shifting analysis is fact-intensive, it is necessary to determine what data may be found on the inaccessible media.  Requiring the responding party to restore and produce responsive documents from a small sample of the requested backup tapes is a sensible approach in most cases.

Third, and finally, in conducting the cost-shifting analysis, the following factors should be considered, weighted in more-or-less the following order:

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.

In forming her seven-factor test, Judge Scheindlin reviewed what she considered the “most influential” decision on cost-shifting to that time, the ruling by U.S. Magistrate Judge James C. Francis IV, also of the Southern District of New York, in Rowe Entertainment, Inc. v. William Morris Agency, Inc.8  Judge Francis had enunciated an eight-part test to be applied when determining who should pay for restoration of otherwise inaccessible electronic data. Although the parties agreed that the Rowe test governed, Judge Scheindlin examined the test and found it wanting, rejecting two of Judge Francis’s factors and adding one of her own.9 Nonetheless, she cautioned that while seven factors should be considered, they are not to be weighed equally and the focus must always remain on the “central question”: “does the request impose an ‘undue burden or expense’ on the responding party?”

Judge Scheindlin then directed UBS Warburg to produce all of its “active” electronic data at its own expense, and to further produce (also at its own expense) responsive documents from five backup tapes selected by Zubulake.  That led to Zubulake III, in which Judge Scheindlin determined (based on her review of the data from the selected backup tapes) that some costs should be borne by Zubulake.  After acknowledging that cost-shifting “is a matter of judgment and fairness rather than a mathematical consequence of the seven factors,” she ruled that Zubulake should pay one-fourth of the estimated $166,000 cost of restoring all of the backup tapes, but that once the tapes were restored, the data should be treated as “active” data, and accordingly UBS Warburg should pay all of the estimated $108,000 cost of producing the requested emails from the restored data.

Allegations of spoliation and failure to retain backup tapes led to Zubulake IV, in which Judge Scheindlin ordered UBS Warburg “to pay for the re-deposition of several key UBS employees … so that Zubulake could inquire about the newly restored emails.”10  Those depositions led to Zubulake V, in which Zubulake “presented evidence that UBS personnel deleted relevant e-mails, some of which were subsequently recovered from backup tapes (or elsewhere) and thus produced to Zubulake long after her initial document requests, and some of which were lost altogether. Zubulake . . . also presented evidence that some UBS personnel did not produce responsive documents to counsel until recently, depriving Zubulake of the documents for almost two years.”

In response to Zubulake’s renewed motion for sanctions, Judge Scheindlin determined that UBS had failed to preserve and timely produce relevant information, which led her to focus on its culpability.  Judge Scheindlin had earlier ruled that once UBS Warburg reasonably anticipated litigation, it was obligated to suspend its document retention/destruction policy and put in place a “litigation hold” to ensure the preservation of relevant documents.  This obligation did not extend to backup tapes, unless such tapes are “actively used for information retrieval” or unless it is possible to identify where the documents of certain employees who are key to the anticipated litigation are located on backup tapes. Judge Scheindlin now expanded upon her earlier ruling and held that counsel must become familiar with the client’s document retention policies and its “data retention architecture.  This will invariably involve speaking with information technology personnel, who can explain system-wide backup procedures and the actual (as opposed to theoretical) implementation of the firm’s [backup tape] recycling policy.”  Counsel must also interview the key employees to determine their individual data storage practices (for example, where and how do they keep electronic files or do they keep only printed copies of electronic documents?).  A system-wide keyword search may also suffice, so long as all “hits” responsive to the search are then retained.  In the words of Judge Scheindlin, “it is not sufficient to notify all employees of a litigation hold and expect that the party will then retain and produce all relevant information.  Counsel must take affirmative steps to monitor compliance so that all sources of discoverable information are identified and searched.”  The issue is not whether counsel succeeds in preserving all relevant documents but that counsel and the client “take some reasonable steps to see that sources of relevant information are located.”

Applying these standards to UBS Warburg’s conduct, Judge Scheindlin concluded that counsel and the key witnesses had failed to communicate as required regarding the preservation of electronic documents.  In addition, she ruled that despite the issuance of a blanket litigation hold, UBS Warburg employees deleted relevant email.  Accordingly, Judge Scheindlin ruled the conduct willful and granted Zubulake (1) an adverse inference instruction to the jury,11 (2) payment by UBS Warburg of the costs of further depositions or re-depositions, and (3) payment by UBS Warburg of the costs incurred by Zubulake in bringing the motion.

The Zubulake decisions have been widely cited by other courts in the 18 months since Zubulake I.  At the close of Zubulake V, Judge Scheindlin notes that many developments have occurred in the area of electronic discovery since that case began and that “national standards are developing,” which place “parties and their counsel … fully on notice of their responsibility to preserve and produce electronically stored information.”  In light of these developments, Judge Scheindlin expresses hope that counsel will work to ensure the preservation of such documents so that the recurrence of such spoliation issues may be “limited, if not eliminated.”

Proposed Federal Rules

Based on the proposed amendments to the Federal Rules of Civil Procedure that were issued for public comment in August 2004,12 it appears that the Advisory Rules Committee (of which Judge Scheindlin is a member) shares Judge Scheindlin’s goal of reducing the existing confusion regarding one’s obligations in connection with electronic documents, but it does not fully share her understanding of the scope of those obligations.

The proposed amendments are the result of several years of work on the part of the advisory committee.  Just as it completed the last significant revisions to the discovery rules in 1999 — which made the previously optional initial disclosure requirements mandatory nationwide and narrowed the scope of generally permissible discovery to matters “relevant to the claim or defense of any party,” rather than relevant to the “subject matter” of the lawsuit — the committee started work on electronic discovery issues. Although it held several small conferences on the topic in 2000, the committee concluded that it was too early to propose rules on electronic discovery, and it wanted to see how the changes to Rule 26 were going to work in practice before it made further changes.  In 2002, the committee circulated proposed rule changes informally and solicited comments from a small group of academics and practitioners, a process that culminated in a conference held earlier this year at Fordham Law School and, eventually, the promulgation of the proposed amendments for public comment in August.13 The proposed amendments address the meet-and-confer process; the form of production of electronic “documents”; the distinction between readily available and inaccessible electronic data; the process of handling privilege issues; and sanctions for failure to preserve electronic data.  The committee will hold three public comment sessions in San Francisco, Dallas, and Washington in January and early February 2005.  Comments on the proposed amendments may also be made through the federal courts’ Web site (www.uscourts.gov) until February 15, 2005.  If the proposed rules would proceed in some fashion toward enactment on their current schedule, they would take effect on December 1, 2006.

Meet-and-Confer Requirements.  The committee proposes amending Rule 26(f), Rule 16(b), and Form 35 to require counsel to discuss, at the commencement of a lawsuit and in addition to the other discovery and scheduling matters already included in Rule 26(f), preservation of “discoverable information”; “issues relating to disclosure or discovery of electronically stored information, including the form in which it should be produced”; and “whether, on agreement of the parties, the court should enter an order protecting the right to assert privilege after production of privileged information.” In other words, the Rules would expressly authorize discussion and agreement of issues that, in appropriate cases, are already discussed by counsel under the existing Rules. Although these issues are not presently discussed in every case, and even under the proposed amendments they would not need to be discussed in cases in which electronic discovery is not anticipated, it is not uncommon for these issues to be discussed (and for agreements to be reached) currently, albeit often at a later stage in the discovery process than at the initial scheduling conference.

Production of Electronic “Documents.”  Rules 33 (governing interrogatories), 34 (document requests), and 45 (subpoenas) would be amended to include “electronically stored information.” Rule 34 would also be amended to refer to “sound recordings” instead of “phonorecords.”  While these amendments either update the language in the Rules or make explicit what has largely been understood, further amendments permit testing or sampling (in addition to inspection and copying) of such data, and dictate in what form electronic data must be produced.  Rules 34 and 45 would be amended to permit the requesting party to “specify the form in which electronically stored information is to be produced” and provide a default rule for the form of production in the event the request fails to specify the form of production. In that circumstance, absent an agreement by those involved, the responding party or non-party must produce the information either (but not both) in a form in which it is ordinarily maintained or in an electronically searchable form. 

From a technology standpoint, the significant development with respect to form of production is that image-based electronic formats (such as scanned PDF or TIFF documents) cannot be used unless that is the form in which the data is ordinarily maintained or the data is made electronically searchable.  The proposed amendments also fail to address what happens when data is ordinarily maintained in a proprietary format, review of which requires use of software not readily available to the opposing party.  As drafted, the rule would not appear to require a producing party to export the data to a standard data format (readable by many software packages), even if the proprietary software made such exporting of data relatively easy, unless the requesting party knows enough about the electronic data to specify in the request that it is to be produced in an exported nonproprietary format.  Uncertainty in that regard may militate in favor of interrogatories or a deposition on the responding party’s electronic information system prior to service of a request for production so that the request can be as specific as possible about the form of production.

“Reasonably Accessible” Data.  Consistent with the distinction in Fed. R. Civ. P. 26(b)(1) between discovery of information relevant to claims and defenses (which is freely discoverable) and discovery of information that is merely relevant to the subject matter involved in the action (which is discoverable only upon a showing of good cause), the committee proposes to distinguish between electronic data that is “reasonably accessible” and that which is not by adding the following language to Rule 26(b)(2):

A party need not provide discovery of electronically stored information that the party identifies as not reasonably accessible. On motion by the requesting party, the responding party must show that the information is not reasonably accessible. If that showing is made, the court may order discovery of the information for good cause and may specify the terms and conditions for such discovery.

Similar language is to be added to Rule 45, governing the duties of a non-party in responding to a subpoena.

This procedure for handling inaccessible data lacks the detail of Judge Scheindlin’s three-step analysis for determining when cost-shifting may be appropriate (one step of which involves the seven enumerated factors), but it is consistent in approach. By implication, “reasonably accessible” electronic data, if otherwise discoverable, must be produced in the ordinary course. In the first instance, it suffices for a producing party to label certain data “not reasonably accessible,” but if the requesting party brings a motion, the producing party must then substantiate its claim of inaccessibility, and the court may then (as with all discovery) specify the terms and conditions on which it may proceed, including, presumably, a provision for cost-shifting.

Privilege And Waiver.  Although not unique to the production of electronic data, the problem of inadvertent disclosure may be exacerbated when dealing with electronic data either because of the volume of data or because of the extent to which electronic “documents” contain data that is not visible on the surface (e.g., so-called “metadata” or “embedded edits”). The committee proposes an amendment to Rules 26 and 45 that authorizes what is already a common practice, sometimes referred to as a “claw back” agreement:  an agreement that a party or non-party that has produced information in response to a discovery request may, within a fixed period of time after the production, assert that a document was inadvertently produced and demand to have it returned.  The party that received the information must then “promptly return, sequester, or destroy the specified information and any copies.”  The proposed amendment contemplates disputes regarding privilege in this circumstance being presented to a court for resolution (as with any other privilege dispute) and requires the producing party or non-party to “preserve [the returned information] pending a ruling by the court.”

The proposed amendment also authorizes the less common “quick peek” agreements, in which the producing party discloses information and reserves the right, by agreement, to later assert privilege. While such agreements may be more efficient in that they permit the producing party to only review for privilege information that, after a “quick peek,” the requesting party has determined is responsive to its request, they also include substantial risk that third parties will argue such disclosure vitiated any claim of privilege. The committee has not, however, with respect to either “claw back” or “quick peek” agreements addressed the substantive privilege law that governs the effect of such agreements on the ultimate determination of whether privilege has been waived. The proposed amendment simply authorizes a procedure for implementing such agreements.

Sanctions and Duty of Preservation.  Finally, the committee recommends an amendment to Rule 37, which governs discovery sanctions, to address an issue that is unique to electronic discovery — the routine and automatic deletion of electronic data that occurs in the ordinary operation of computer systems.  This proposal was made in response to a concern that the filing of a lawsuit should not, in the usual case, require a defendant to “freeze” all activity on its computer system.  The committee proposes a new Rule 37(f):

Electronically stored information.  Unless a party violated an order in the action requiring it to preserve electronically stored information, a court may not impose sanctions under these rules on the party for failing to provide information if
(1) the party took reasonable steps to preserve the information after it knew or should have known the information was discoverable in the action; and
(2) the failure resulted from the loss of the information because of the routine operation of the party’s electronic information system.

The committee also proposed for comment an alternate formulation (representing a minority view on the committee) that would authorize sanctions only if a “party intentionally or recklessly failed to preserve the information.”

The proposed Rule 37(f) does not attempt to impose a duty of preservation nor does it speak to preservation prior to the commencement of a lawsuit.  The committee notes allude to duties of preservation that are imposed by other entities, and it appears that the committee correctly concluded that imposition of such duties generally, and prior to commencement of a lawsuit, fall outside its purview.14

The proposed Rule does use Judge Scheindlin’s formulation of having taken “reasonable steps,” and the committee notes speak of so-called “litigation holds” being issued. The Rule plainly does not go as far as Judge Scheindlin’s ruling in outlining the steps that she feels counsel are required to take to avoid sanctions relating to the “routine” deletion of electronic information after a lawsuit has commenced. To the extent the Rule permits sanctions only with respect to the preservation of information that a party “knew or should have known was discoverable,” it arguably excepts from its scope data that is “not reasonably accessible” under proposed rule 26(b)(2), for such data is presumptively not discoverable.

Interestingly, this is one area in which Minnesota courts have spoken.  In a suit for misappropriation of trade secrets, the plaintiff obtained an ex parte temporary restraining order before serving its complaint that both prevented the defendant from destroying or altering electronic data pertaining to the subject matter of the complaint and ordered expedited production of electronic data. The defendant unsuccessfully sought to have the TRO dissolved and then took the issue to the Minnesota Court of Appeals, which reversed the trial court, ruling that the TRO was defective in a number of ways and that the showing necessary for such a stark deviation from the governing rules had not been made.15

The 8th Circuit has also recently addressed the appropriate sanction for spoliation of evidence that occurs through implementation of a document retention/destruction policy.  Although earlier an 8th Circuit case had suggested that an adverse inference instruction to the jury would be appropriate if the party unable to produce requested documents “knew or should have known” that the document would be relevant to anticipated litigation, the court has rejected that statement as dictum and ruled that, before an adverse inference instruction may be given, “there must be a finding of intentional destruction indicating a desire to suppress the truth.”16  That ruling by its terms applies to prelitigation destruction, and proposed Rule 37(f) applies only after a lawsuit has commenced, suggesting that the standard for imposing sanctions for spoliation that occurs as a result of a document retention/destruction policy may differ significantly depending on whether the destruction occurs before or after a lawsuit has been commenced.  This approach differs somewhat from that suggested by Judge Scheindlin, who would draw the line at when a party reasonably anticipates litigation rather than at when a lawsuit has been commenced.

Conclusion

The law governing electronic discovery is rapidly developing.  For the lawyer advising a client about such matters, and particularly about the obligation to preserve electronic data, it is difficult to predict with any certainty what standards will ultimately apply when the issue is litigated. With luck, the multiyear process of amending the Federal Rules of Civil Procedure will result in standards that permit greater certainty in some areas, but it is also clear that the proposed Rules do not address all of the issues that may arise, and the governing standards in the areas that are not addressed by the Rules will continue to evolve on a case-by-case basis, almost certainly resulting in instances in which even the most careful and knowledgeable lawyers will be unable to predict how a given court will rule and what additional three-factor analyses or seven-part tests may yet be created.

Notes
1 See, e.g., Adam I. Cohen & David J. Lender, Electronic Discovery: Law and Practice (Aspen Publishers 2004); Joan E. Feldman, Essentials of Electronic Discovery: Finding and Using Cyber Evidence (Glasser LegalWorks 2003).

2 See www.abanet.org/litigation/taskforces/electronic/home.html.

3 See www.thesedonaconference.org/miscFiles/SedonaPrinciples200401.pdf.

4 See www.fjc.gov/newweb/jnetweb.nsf/pages/196 (listing state and local rules).

5 See www.krollontrack.com/legalresources/topic.pdf (summarizing court decisions on electronic discovery by topic).

6 The case has generated at least five opinions to date, but only four address electronic discovery.  See Zubulake v. UBS Warburg LLC, 217 F.R.D. 309 (S.D.N.Y. 2003) (“Zubulake I”); Zubulake v. UBS Warburg LLC, 216 F.R.D. 280 (S.D.N.Y. 2003) (“Zubulake III”); Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003) (“Zubulake IV”); Zubulake v. UBS Warburg LLC, No. 02 Civ. 1243 (SAS), 2004 WL 1620866 (S.D.N.Y. 07/20/04) (“Zubulake V”). The second Zubulake opinion did not address electronic discovery, and, curiously, the third opinion was published in Federal Rules Decisions prior to the first, even though the first preceded the third by two months.

7 See Shira A. Scheindlin & Jeffrey Rabkin, “Electronic Discovery in Federal Civil Litigation:  Is Rule 34 Up to the Task?” 41 B.C. L. Rev. 327 (2000).

8 205 F.R.D. 421 (S.D.N.Y. 2002), aff’d, 2002 WL 975713 (S.D.N.Y. 05/09/02).

9 In a later opinion, Judge Scheindlin explained that she modified the Rowe test in response to commentators’ concerns that Judge Francis’s test “‘tend[ed] to favor the responding party, and frequently result[ed] in shifting the costs of electronic discovery to the requesting party.’”  Zubulake III, 216 F.R.D. at 284 (quoting what was then an advance copy of Adam I. Cohen & David J. Lender, Electronic Discovery: Law and Practice §5.04(c) (Aspen Law & Business, publication forthcoming 2003)).

10 Zubulake V, 2004 WL 1620866, at *3.

11 An adverse inference instruction permits a jury to infer that documents that were destroyed or lost would have been unfavorable to the party who failed to produce them.  See id. at *15 (providing specific instruction that is to be given at trial).

12 A copy of the proposed amendments is currently available at www.uscourts.gov/rules/comment2005/CVAug04.pdf. Additional information can be found at www.uscourts.gov/rules/newrules1.html.

13 See Ken Withers, “Two Tiers and a Safe Harbor: Federal Rulemakers Grapple with E-Discovery,” The Federal Lawyer 29, 29-30 (Sept. 2004).

14 See id. at 32.

15 See The Gorgen Co. v. Brecht, No. C2-01-1715, 2002 WL 977467 (Minn. App. 05/14/02).

16 Stevenson v. Union Pac. R.R. Co., 354 F.3d 739, 746 (8th Cir. 2004).


MICHAEL MCCARTHY is a partner at Maslon Edelman Borman & Brand, LLP, where he practices appellate and complex business litigation.