The Federal Judicial Conference's recent Conference on Civil Litigation at Duke Law School has afforded us a once-in-a-lifetime opportunity to make fundamental changes in the Federal Rules of Civil Procedure that should significantly reduce the costs and burdens of the current civil justice system. Unfortunately, America, once known as the land of freedom, is now known as the land of litigation.
Today's economy demands that we make a vigorous, concerted effort to change the Rules to minimize litigation costs while furthering the goals of Rule 1 - the just, speedy, and inexpensive resolution of disputes. Such effort is essential in view of the adverse impact litigation is having on the competitiveness of companies in the United States and the economy as a whole.
Seizing this opportunity to adopt meaningful amendments to the Rules on pleadings, discovery, preservation, and cost allocation is the best way to obtain real relief from the excessive costs and inefficiencies that have come to characterize the current civil justice system.
Urging policymakers to adopt a fundamentally new course is never easy. We can advance major revisions to the Federal Rules of Civil Procedure by building support for the reasonable proposals presented at the Conference by a broad and diverse coalition of corporate and defense interests.
The work of more than 100 corporate and defense counsel is embodied in the White Paper, Reshaping the Rules of Civil Procedure for the 21st Century, and the Comment Supplementing the White Paper, which offer a compelling rationale for opting for major changes rather than continuing to tinker at the edges of the Rules.
The White Paper and Comment focus on four central proposals that would:
redefine and balance the relationship between pleading and discovery,
reevaluate the premises, scope, and focus of all discovery and further refine the treatment of e-discovery,
develop clear document preservation standards, and
deter runaway litigation costs by reasonable cost allocation rules.
These proposals are especially important in the context of today's modern practice, which has undermined Rule 1's promise of just, speedy, and inexpensive litigation and created questions about the ability of the procedural system to further the substantive goals of the law.
Empirical Data Shows The Litigation System Is Costly And Inefficient
Data from Various Studies
U.S. litigation transaction costs are a significant cost of doing business. A recent litigation cost survey of Fortune 200 companies developed by three business organizations found that in 2008, the 36 companies responding spent an aggregate $4.1 billion on U.S. litigation - not including judgments and settlements or internal costs such as information technology to store and retrieve information for litigation and employee time spent attending depositions and responding to discovery requests. On average, for each dollar of profit earned, companies spent 16 to 24 cents on U.S. litigation in 2008, according to a subsequent analysis of the survey data by the Searle Center on Law, Regulation and Economic Growth at the Northwestern University School of Law.
Moreover, U.S. outside litigation costs have increased rapidly, at an average rate of 9 percent each year between 2000 and 2008. Despite its high price tag, the U.S. legal system is extremely inefficient. Various studies have found that roughly 60 percent of U.S. tort costs are consumed in transaction costs, with only 40 percent benefiting the actual claimant.
As commentators A. Mitchell Polinsky and Steven Shavell recently wrote in the Harvard Law Review , these studies suggest that for each dollar awarded in settlement or judgment, "it is reasonable to assume that a dollar of legal and administrative expenses is incurred. In other words, for society to use the tort system to transfer money to claimants is analogous to a person using an ATM at which a withdrawal of $100 results in a service fee of $100."
Overbroad and expensive discovery procedures appear to contribute significantly to the problem. For example, the survey of Fortune 200 companies found that resources spent on extensive discovery do little to aid the fact finder, as the ratio of pages discovered to pages entered as exhibits at trial is as high as 1000/1. In 2008, on average, 4,980,441 pages of documents were produced in discovery in major cases that went to trial - but only 4,772 exhibit pages were actually marked.
Whatever marginal utility may exist in undertaking such broad discovery is overwhelmed by its costs. For the years 2006-2008, the average company paid an average per case discovery cost of $621,880 to $2,993,567 . Companies at the high ends during the same years reported average discovery costs ranging from $2,354,868 to $9,759,900 per case . Despite these costs and the limited marginal utility of the amounts of information recovered, courts almost never allocate costs to equalize the burden of discovery or as an incentive for seeking only discovery that is anticipated to yield value. Impact on the Economy
Large companies are frequently assumed to be deep-pocket defendants that can readily absorb litigation expenses (and the corollary assumption is often that since corporate defendants can supposedly "afford it," there is no reason to change the system). With U.S. litigation expenses representing an average 16 cents to 24 cents of each dollar of profit earned, it is perverse public policy to waste that money by allowing systemic inefficiencies to go unaddressed.
Fixing the problems to truly facilitate the "just, speedy and inexpensive" resolution of actions would free up a significant amount of corporate revenues that could be used productively to create jobs, to lower prices of products and services, to invest in research and development of new products and services, to contribute to partnerships with local communities, and to increase shareholder returns, among other uses.
More importantly, corporate defendants are not the only ones on which these excessive litigation costs fall. Inevitably, many of these costs will be passed on to consumers and taxpayers in the form of higher prices and decisions to forego promising areas of research, to withdraw products and services from the market, and to relocate jobs and other corporate investments to jurisdictions with more efficient and cost-effective civil justice systems.
This is of particular concern in the 21st century global economy. As a percent of revenue, multinational company respondents to the Fortune 200 survey spend a disproportionate amount on litigation in the United States compared with their expenditures in foreign jurisdictions. Quite simply, if U.S. litigation costs are significantly higher than other countries, and the situation is left unchecked as economic differences between countries narrow, the United States will be unable to compete effectively in the global marketplace.
Prior Incremental Attempts to Solve Systemic Federal Litigation Problems Have Been Unsuccessful
Almost 30 years ago, the use of disproportionate, excessive, and costly discovery was flagged as a concern by the Advisory Committee on the 1983 amendments to Rule 26. Since the 1983 amendments, one set of additional amendments has followed another at an unprecedented pace. This Committee has recommended substantial revisions to the Rules four times since then to prevent the scope and cost of modern litigation from outstripping the federal system's ability to deliver on the fundamental premise of the Federal Rules - the "just, speedy, and inexpensive determination of every action."
One of the common themes through nearly thirty years of Rule revisions has been increased judicial management of discovery by the federal courts. This Committee has relied on judicial management to address the growing inability of courts and litigants to reach and resolve cases on their merits.
Rule 16, for example, was amended in 1983, 1993, and 2006 to increase judicial supervision and control discovery. The 1983 amendments included express references to proportionality to focus the federal courts' efforts. Both this change and the 2000 amendment changing the scope of attorney-managed discovery from "relevant to the subject matter involved in the pending action" to "relevant to the claim or defense of any party" were seen at the time as controversial and revolutionary.
Judicial Management Alone Cannot Solve the Problems Facing the Federal Civil Justice System
Despite these many rounds of Rules amendments, the U.S. Supreme Court declared in Bell Atlantic Corp. v. Twombly that it is a "common lament that the success of judicial supervision in checking discovery abuse has been on the modest side." Past amendments and increasing reliance upon judicial management have not resulted in the fundamental improvements to the federal judicial system that are needed to allow the courts to once again decide cases on their merits, for several reasons:
The current Rules permit unnecessarily broad discovery. The breadth of discovery is underscored by allowing, "for good cause," the discovery of "any matter relevant to the subject matter involved in the action."
Equally important, judicial management is problematic because it is difficult for the trial judge to know at the outset that requested discovery is abusive, harassing, irrelevant, or too burdensome and expensive. When the court balances these concerns against the policy set forth in Rule 26, more often than not, the balance is deemed to weigh in favor of broad discovery.
The problems created by the broad scope of discovery are accentuated by Rule 8, which has been interpreted as permitting a litigant to proceed with only the barest of allegations. Absent some factual allegations to set the context of the case, the trial judge may struggle to understand the limits of relevant discovery. Although trial judges are empowered to manage litigation, and to limit discovery, the Rules do not offer clear, workable standards for doing so.
Practical and institutional limitations impede the federal courts' ability to effectively manage discovery at the trial court level. Judicial resources are spread thin and getting thinner. Meanwhile, litigation is growing more and more complex. E-discovery has added a whole new level of complexity to large as well as run-of-the-mill cases.
Decisions regarding discovery are interlocutory rulings and rarely subject to appellate review. When they are reviewed, the standard of review is highly discretionary. Routine decisions regarding the timing and limits of discovery typically do not make their way through the appellate courts for decision and the appellate decisions that are issued do not give trial courts the real guidance they need. As a result, without a change in the Rules, the available judicial management tools may continue to be used far less often than necessary to achieve the goals of Rule 1.
Ad hoc judicial management via case-by-case resolution inexorably forces litigants to approach cases from the "lowest common denominator" perspective. Private litigants, unable to predict which decisional rule might apply to their case, must conform their discovery responses to the broadest rule.
Litigants' incentives are fundamentally misaligned in a system where all of the costs of discovery are borne by the responding party. Requesting parties gain tactical advantage from broad requests. This is especially true in the era of electronic discovery.
The Need to Reevaluate Key Federal Civil Procedural Rules
The Rules Committee has wrestled with the systemic problems posed by the explosion in the amount and complexity of civil litigation for almost thirty years. It has amended the Rules repeatedly and attempted to finely balance the scales. It has looked to judges to get more involved and for litigants to shoulder more of the burdens of making the system work. But the concerns of the Advisory Committee from 27 years ago remain and, indeed, are more pronounced and compelling than ever. It is time to recognize the limitations of judicial management, cooperation, and good intentions.
White Paper Recommendations: Solving Systemic Problems Codified by the Current Federal Civil Rules
1. The Rules Should Implement the Pleading Standard of Twombly and Iqbal
Pleading should not allow litigants to defer identification of issues and even claims until after discovery, allowing frivolous cases to impose unwarranted and costly burdens on the courts and litigants. While the U.S. Supreme Court rulings in Bell Atlantic v. Twombly and Ashcroft v. Iqbal provide good clarification of the pleading standard set forth in Rule 8, federal legislation is pending to undo those rulings. Moreover, some courts are still failing to apply the Twombly/Iqbal standard, which otherwise would provide a meaningful mechanism for preventing the automatic imposition of tremendous burdens on defendants to preserve massive amounts of information in the face of claims sketched out only in the broadest of allegations.
Discovery often proceeds without any judicial determination about the sufficiency of the claims asserted, and thus without any tether to constrain the substantial consumption of time and resources discovery entails. In complex litigation, the consensus has been to require more particular pleading standards so that cases do not proceed to discovery unless the allegations meet a certain manageable threshold of particularity and plausibility.
The White Paper proposes amendments primarily to Rule 8, 9, 12, and 65 to implement the pleading standards currently in successful and non-controversial use in many categories of cases and apply them to all civil actions. This proposal also includes a stay of discovery, pending resolution of, for example, a motion to dismiss. The essence of the proposed amendment set forth in the White Paper would implement the Twombly - Iqbal standard to require: " a short and plain statement, made with particularity, of all material facts known to the pleading party that support the claim , creating a reasonable inference that the pleader is plausibly entitled to relief " and would define "material fact" as " one that is necessary to the claim and without which it could not be supported." ( See White Paper at 8-10.)
2. Clear, Concise and Limited Discovery Rule Amendments are Required
With the expansion of the scope of discovery and elimination of good cause for document requests in 1970, discovery has expanded exponentially. The discovery rules alone have been amended at least seven times since 1970, but these amendments have not kept pace with the explosion of information sources and litigation.
Abuse, misuse, costs, and burdens of discovery have reached new heights. There are a number of reasons for these excesses, including the breadth of permitted discovery coupled with the lack of specific guidance on discovery limits in the Rules themselves; unrealistic reliance on judicial intervention to control discovery; and a failure to recognize and enforce the principle of proportionality in discovery.
Judicial intervention, a long-favored mechanism for limiting discovery, has proved insufficient under the current rules, and no matter how well intentioned, competent, and hard working judges may be, judicial management alone cannot fix the problem. The existing Rules lack sufficient clarity, thereby failing to define adequately the reasonable borders of discovery in general and electronic discovery in particular. The scope of discovery should be limited to non-privileged, proportional information that would support proof of a claim or defense.
Rule 34, on the other hand, is a rule without limits, at least those necessary to adequately control increasingly severe discovery problems. Parties make all manner (and number) of broad and disproportionately burdensome requests, leaving the producing party with limited recourse, namely seeking expensive and often delayed judicial intervention subject to the interpretation and application of ambiguous and unhelpful standards. The Rules need concrete, self-executing standards and limitations to require parties to efficiently (and inexpensively) resolve common issues themselves. Proposed limits include: limiting document requests to 25 in number, to 10 custodial or information sources, and to two years prior to the complaint in time.
The Rules fail to highlight the value of proportionality and its purpose, namely to "guard against redundant or disproportionate discovery." The Committee must seriously consider the specific incorporation of proportionality into the Civil Rules.
3. The Rules Must Address Preservation of Information
The failure of the Rules (and particularly the 2006 e-discovery amendments) to define a litigant's duty to preserve electronically stored information (ESI) creates uncertainty that often results in satellite litigation unrelated to the merits of the underlying case. Absent a clear Rules-based standard, a risk-averse litigant may incur extraordinary expenses in an attempt to meet the most stringent requirements articulated by the handful of federal judges who take admirable care to articulate their view of the proper scope of a litigant's preservation obligations. The perceived alternative is to face costly sanctions for failing to preserve ESI. Indeed, the mere allegation that a litigant has failed to comply with ad hoc preservation obligations imposes substantial burdens - including reputational harm. There is no logical reason to continue to impose this burden on companies in the United States.
Providing rules directly addressing preservation will permit courts to approach the effects of any willful failure to preserve information in a more structured and uniform procedural environment. The White Paper proposes amendments to Rule 37(c) to permit spoliation sanctions only where willful conduct for the purpose of depriving another party of the use of the destroyed evidence results in actual prejudice to the other party. A clear rule is needed to counteract the inconsistency of requirements established by various courts, some of which even have imposed sanctions for negligent preservation.
Preservation should also be directly addressed in Rule 26. Ultimately battles related to "litigation holds" are a product of an alleged failure to preserve ESI that would have been subject to disclosure in litigation. Proposed Rule 26(h) and related amendments will restore uniform national procedures that are designed to introduce certainty into preservation decisions by parties and consistency in analyses and decisions by courts.
4. The Rules Must Confront Runaway Discovery Costs
Discovery costs continue to spiral upward because past amendments to Rule 26 have not tackled a core design flaw of the Federal Discovery Rules: unless the parties share discovery burdens (including costs), incentives to conduct targeted and efficient discovery are absent; the Rules provide none. The current Rules allow discovery to be used as a weapon in the requesting party's arsenal to impact the outcome of a case irrespective of the merits.
Therefore, the White Paper proposes an amendment to Rule 26 that would require that each party pay the costs of the discovery it seeks. A requester-pays rule will encourage parties to focus the scope of their discovery requests on evidence that is reasonably calculated to provide relevant information from the most cost-effective source. Such an amendment would eliminate the illegitimate use of discovery requests to force settlements without regard to the merits of a case, as a party that pays for discovery will have greatly reduced incentives to make overly broad requests.
Overall these significant yet reasonable proposals offer the hope of a fundamental shift in the procedural rules underpinning the civil justice system. They deserve our strong support.
Underlined items refer to links on our website, www.metrocorpcounsel.com.