This is the second in a series of articles exploring how e-discovery costs can be contained by limiting discovery with mutually agreed-upon terms in commercial contracts. In the first article, we outlined the potential for corporate counsel to avoid the black hole of e-discovery costs by using model terms ahead of time to:
- clarify that the duty to preserve attaches only upon notice of a claim;
- limit the amount of discovery allowed;
- establish mechanisms that govern preservation and production decisions in a predictable framework;
- establish procedures allocating the costs for discovery; and
- outline restrictions on sanctions for purported discovery failures.
The most well-drafted contract terms, however, will be for naught if they aren’t enforceable. In this article, we will lay out some practical tips to maximize the chances that those carefully negotiated clauses will govern any dispute arising under your contract. In general, the best rule is the golden rule: Do unto others as you would have them do unto you.
Courts enforce contractual limitations on litigation when the parties are sophisticated and the terms are reasonable
Just like other parts of the civil litigation process, the scope of e-discovery is not constitutionally mandated and can be waived by a party’s consent. Courts have long upheld contractual limitations on various rights of litigants, such as choice of law, jury waiver, and choice of venue provisions. Based on these examples, and as explained further below, it is likely that contractual discovery limits will be enforced when:
- the parties in a commercial contract are each of sufficient sophistication;
- the parties have relatively equal bargaining power;
- the terms are fair and in accord with reasonable business practices;
- there is no fraud or duress in the negotiation; and
- they do not contravene any state or federal public policies.
Courts have declined to enforce contractual limits on litigation rights in some circumstances. For example, courts have assessed whether contractual limitations to the litigation process are enforceable based on whether or not they violate public policy, are unconscionable, shield parties from tort liability, waive the rights of third parties, or usurp judicial authority or procedural rules. Following the steps above will maximize the chance that these concerns do not undercut your contract agreements.
Public policy is not likely to bar enforcing contract agreements that have the goal of reducing the cost and contentiousness of discovery and only apply to sufficiently sophisticated commercial parties. While there is a public policy in favor of ensuring parties have full discovery to support their claims, other public policies also support reasonable limitations. Courts recently have been increasingly emphasizing the public policy in favor of limiting or tailoring discovery. Further, one of the main objectives of contract law is to protect the justified expectations of the parties and increase the predictability of future results. Without unique circumstances, it is unlikely that a challenge on public policy grounds would succeed.
Unconscionability, a finding that a contractual term is too unfair or unreasonable to be allowed, generally boils down to whether there is a “gross inequality” in bargaining power. While cases analyze potential inequalities in comparative language, in the commercial setting a contract will generally be enforced if each party meets a minimum floor of sophistication. A clause that is an extreme outlier from reasonable business practices may be evidence that such baseline sophistication was lacking. “Contracts of adhesion” between large corporations and consumers remain the gold standard for finding unconscionability. Contracts between businesses, as contemplated here, are unlikely to meet this standard, both because the parties are likely to be (or be presumed to be) sophisticated, and the limitations would apply equally to both parties at the time they were drafted. In order to maximize the applicability of your dispute clauses, it’s best to focus your efforts on business to business contracts with relatively sophisticated parties on the other side.
Clauses that impact the treatment of tort claims or third party claims have received some additional scrutiny from courts. Discovery-limiting clauses may be viewed differently by courts when fraud, intellectual property theft, unfair business practices, or the rights of third parties are at issue. You should be aware that such limiting agreements will not affect preservation duties with regard to the rights of non-parties to the contact.
Courts may also reject such limiting clauses if the terms unduly restrict the court’s inherent powers or procedural rules. To guard against this, we recommend that parties include language stating the parties’ intention that the limiting provisions should be effective even if found to be procedural rather than substantive. Parties may also consider indemnifying each other for the expenses of any effort to dispute the agreement’s enforceability. That would remove much of the incentive to mount such an effort.
When drafting the substance of your discovery clause, it’s best to do so with an eye towards what is reasonable under the circumstances, as well as what is objectively reasonable in most cases. If the process you agree upon is relatively similar to best practices being promulgated elsewhere, the probability that it will be enforceable is increased.
Two model discovery orders can give you a good idea of the current thinking on what is reasonable for electronic discovery. The first is by Judge Paul W. Grimm. Judge Grimm, a long-time federal magistrate judge recently appointed as a federal district court judge for the United States District Court for the District of Maryland, has long been a leader in e-discovery matters. Well worth reading in full, Judge Grimm’s order is based on proportionality and cooperation. On e-discovery specifically, the order prohibits requests for ESI from more than ten custodians, documents created more than five years prior to filing of the lawsuit, or that require undue burden or retrieval costs. The order also limits ESI search and review tasks to 160 hours. The second is the Federal Circuit’s model e-discovery order that presumptively limits parties to five custodians and five search terms per custodian for email requests while shifting costs for additional discovery.
It is possible to draft straight-forward discovery limiting terms in a commercial contract. By limiting your initial efforts to contracts with relatively sophisticated counterparties and making sure the terms are fair, reasonable, and apply equally to both of you, you can give yourself the best chance of having those terms enforced if and when they are challenged in litigation. Remember: When in doubt, follow the golden rule.
Next in this series: language to include in your contracts to specify exactly when a party has a duty to preserve potentially relevant materials.
A more academic treatment of this subject: “Using Contract Terms to Get Ahead of Prospective e-discovery Costs and Burdens in Commercial Litigation” by Jay Brudz and Jonathan M. Redgrave, XVIII Rich. J. L. & Tech. 13