E-discovery: An uncertain standard for cost shifting can restore a level playing field

When litigating in courts with few e-discovery rules, there’s something to be said for maintaining an aura of mystery

This is the sixth column in a series addressing the challenges and opportunities presented by litigating in forums with no e-discovery rules. Read parts one, two, three, four and five here. This column discusses how your company can use uncertain state court rules to your advantage to create a more level playing field. When neither party is certain whether the court may award e-discovery expenses as taxable costs for a prevailing party, both sides have an incentive to avoid unnecessary e-discovery expense.

In the federal courts, the question of whether Rule 54(d) allows a prevailing party to recover as taxable costs its e-discovery expenses is a hotly contested issue, with no clear consensus yet emerging. The competing policy considerations are not easily resolved. On the one hand, business entities who are repeat players in litigation against individual plaintiffs are eager to use cost-shifting as a deterrent against aggressive counsel who (at least according to the defense bar) use e-discovery expenses to inflate the settlement value of their clients’ claims. Even in relatively simple cases, plaintiff’s counsel may have numerous opportunities to increase the expense of discovery without crossing the line that places counsel at risk for sanctions.

On the other hand, a broad cost-shifting rule untethered from any finding of litigation misconduct could subvert the well-established American Rule that each party ordinarily should bear its own litigation fees and expenses. The substantial cost of e-discovery for even modest civil disputes could easily subvert this bedrock principle of American jurisprudence if the full costs of e-discovery were routinely awarded to prevailing corporate defendants.

While the federal courts now have a substantial, if discordant, body of precedents on this issue, most state court systems have yet to address it in any published authority or court rule, leaving the treatment of e-discovery fees as taxable costs an open question in many state courts. This uncertainty may actually play to the advantage of the defense bar so long as both sides are attuned to the risk of cost-shifting.

The principal benefit of cost-shifting is the risk that it imposes on the requesting party in discovery and the deterrent that risk offers to extravagant and burdensome discovery requests. A definitive cost-shifting rule is not necessary to create that risk; instead, skillful counsel can create the apprehension of cost-shifting even if the outcome is far from clear.

This strategy consists of three elements.

1. Your company’s trial counsel must educate opposing counselabout both the risk of cost-shifting under an uncertain state court rule and the potential magnitude of your company’s e-discovery costs. Particularly when litigating against counsel with a parochial state court practice, your company’s adversary may not consider the risk that your trial judge might follow the lead of some federal courts and award e-discovery fees as costs. You should consider sending a letter to opposing counsel at the commencement of discovery that puts them on notice that your company may seek recovery of e-discovery expenses as part of the company’s taxable costs.

Similarly, your company’s opposing counsel may not recognize the financial burden imposed by a particular discovery request. Your counsel should consider giving notice to the plaintiff’s counsel in writing of the cost to your company of responding to specific requests and reminding counsel that these fees may be taxable costs. A letter advising the plaintiff that your company expects to incur seven figures in e-discovery vendor charges and that your company reserves the right to seek recovery of these costs at the conclusion of the litigation may do much to restore a prudent sobriety to the plaintiff’s discovery strategy.

2. Inform and sensitize the court to the extent of e-discovery expenses for the litigation. The worst-case scenario for the defendant facing significant e-discovery expenses is for the court to pre-empt the possibility of cost-shifting with an ill-considered ruling or dictum from the bench early in the litigation. Alerting the court at the outset of discovery to the extent to which e-discovery expenses are a material issue for the litigation may persuade the court to consider carefully the issue of cost-shifting before issuing a precipitous ruling.

In case management conferences and hearings on discovery disputes, your counsel should explain for the court how the plaintiff’s specific discovery requests are imposing unnecessary costs on your company, laying the foundation for a persuasive argument at the conclusion of trial for an expansive definition of taxable costs.

3. Perpetuate the risk to the plaintiff by avoiding any ruling on this issue by the court before the conclusion of the litigation. Even in the most compelling case, the strong bias in favor of the American Rule may be difficult to overcome. Pressing this issue to decision prior to the conclusion of discovery and trial is likely to backfire on defendant. The defendants’ most persuasive case for an expansive definition of taxable costs will come at the conclusion of trial when the presiding judge has observed directly that the plaintiff’s expansive discovery bore little relationship to the evidence actually presented to the jury. At that point, the prevailing defendant’s taxable costs may become a material consideration in the plaintiff’s calculus for settlement and appeal.

Although this strategy requires patience and may deny trial counsel the benefit of a clear ruling from the court, preserving uncertainty for all parties may be the best litigation outcome.

For a few examples of the widely divergent outcomes over the past 36 months, see, for example: Tibble v. Edison Int’l, CV 07-5359 SVW AGRX, 2011 WL 3759927, at *7 (C.D. Cal. Aug. 22, 2011) (awarding over $500,000 in e-discovery expenses as taxable costs); Parrish v. Manatt, Phelps & Phillips, LLP, C 10-03200 WHA, 2011 WL 1362112, at *2 (N.D. Cal. Apr. 11, 2011) (expenses for collection and review are taxable costs); Hecker v. Deere & Co., 556 F.3d 575, 591 (7th Cir.2009) (expenses of “converting computer data into a readable format” are recoverable as costs); Race Tires Am., Inc. v. Hoosier Racing Tire Corp., 674 F.3d 158, 169-70 (3d Cir. 2012) (rejecting most e-discovery expenses as costs under Rule 54); In re Scientific–Atlanta, Inc. Securities Litigation, No. 1:01–cv–1950–RWS, 2011 WL 2671296, at *1 (N.D.Ga. July 6, 2011) (costs of keyword searching are not taxable); Fells v. Va. Dep’t of Transp., 605 F.Supp.2d 740, 743–44 (E.D.Va.2009) (refusing to tax the costs of file conversion, record processing, and data extraction); Fast Memory Erase, LLC v. Spansion, Inc., 3-10-CV-0481-M-BD, 2010 WL 5093945, at *4 (N.D. Tex. Nov. 10, 2010) (awarding costs for creating TIFF/OCR images but not for “collecting and processing”); Rawal v. United Air Lines, Inc., No. 07 C 5561, 2012 WL 581146, at *2–4 (N.D.Ill. Feb. 22, 2012) (electronic processing not taxable); Mann v. Heckler & Koch Defense, Inc., No. 1:08–cv–611, 2011 WL 1599580, at *9 (E.D.Va. Apr. 28, 2011) (searching and de-duping and creation of discovery database are not taxable costs).

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Matthew Prewitt

Matthew Prewitt is a partner in the Chicago office of Schiff Hardin, where he concentrates in complex litigation and also co-chairs the firm's Trade Secrets Client Services...

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