H.R. 4115: A Class Action Nightmare

Monday, August 2, 2010 - 01:00

Editor: Are your corporate counsel clients concerned about litigation costs?

Sacks: Absolutely. I defend consumer and employment class actions. Merely by adding the words "class action" to a complaint, plaintiffs drive up litigation costs dramatically and without any rational relationship to the actual merits of their claims. Discovery is focused on class certification issues, which can mean documents and information for millions of people, rather than on the merits of the claim asserted by the one or more individuals who actually filed the lawsuit.

Gordon: Yes. Particularly given the current state of the economy, our clients are feeling pressure to defend litigation in the most cost-effective manner possible. While generally one can anticipate the necessary budget to defend a particular matter, e-discovery costs have become the wild card. They have been growing exponentially to the point where they can overwhelm the ability effectively to budget accurately for litigation costs.

Editor: To what extent is this attributed to e-discovery costs resulting from notice pleading as opposed to fact-based pleading?

Sacks: Notice pleading permits a plaintiff to get e-discovery without first being required to make some showing to the court that there are actually facts to support it. Plaintiffs' lawyers now ask for discovery about all of the putative class members supposedly because it is necessary to their motion for class certification. This expands e-discovery costs dramatically.

Gordon: We have been successful recently in explaining to courts why the court should bifurcate class and merits discovery, with an initial focus solely on class issues. This results in limited, focused discovery specific to the certification issues and thus reduces e-discovery costs.

In securities class actions, under the PSLRA, discovery is stayed pending a decision on a motion to dismiss, with a concurrent requirement that documents be preserved in the interim. This construct should be applied in other settings. Before you impose millions of dollars of e-discovery costs on a company, it is reasonable first to require a plaintiff to articulate the basis for his or her claim and for the court to determine that a claim actually is pled.

Editor: Do you feel that e-discovery costs and disclosures of confidential data as a result of e-discovery intimidate corporations into settlement of otherwise meritorious cases?

Sacks: It certainly can - remember that there are three separate categories of e-discovery cost - first, the efforts associated with capturing relevant responsive data; second, the enormous task of reviewing that to cull out matters that are privileged and identify contents that are confidential - which can include both the company's proprietary and trade secret information as well as privacy rights of the consumers, employees or policyholders on whose behalf the lawsuit was allegedly filed; and third, performing the electronic redactions necessary to protect this confidential data and preparing the related privilege log. Plaintiffs' class action counsel are well-aware that the cost associated with this process, coupled with the potential risk of inadvertent disclosure of confidential information, can sometimes be leveraged to drive up the settlement value of a case.

Gordon: Our clients generally are large corporations that have the financial resources to fight back, and they don't like being bullied into potentially setting what may be a bad precedent. Having said that, the risk is certainly present. As a result, there needs to be an allocation of the costs of expansive e-discovery to plaintiffs, who, because they do not bear its costs, otherwise have no incentive to focus discovery.

Sacks: In litigation between two companies, if one party makes massive overbroad e-discovery requests, they can expect that a reciprocal request will be directed to them. In the class action context, there is no such intrinsic check on such abuse because the plaintiffs typically have little or nothing to produce.

Editor: Is the amount of new information uncovered by e-discovery sufficient to justify its cost?

Gordon: No. In every litigation there is a finite set of facts that the case revolves around, and those finite facts will have a finite universe of pertinent documents. E-discovery collects that finite set of documents, plus an inordinately large set of duplicative and irrelevant material, which increases your cost of collecting the data, reviewing the data, redacting the data and putting the data on a privilege log for very little, if any, additional benefit.

Sacks: E-discovery very often adds little if anything of substance in consumer product class actions, but that doesn't mean that a company will be relieved of the cost and effort of producing it. Often all customer service records are sought in cases involving supposed product failures, and rarely do we see anything from those records offered in support of a class certification motion. At times, it is readily apparent that plaintiffs' counsel never bothered to review the massive e-discovery production that it demanded, likely because the cost of doing so would be substantial. And this is because there is no downside to the plaintiff or his counsel of demanding mountains of e-discovery from a defendant - rarely does a court actually require a plaintiff to present a legitimate justification for the scope of the information request and virtually never do courts require a plaintiff to pay some or all of the cost of obtaining the information. Editor: Have the U.S. Supreme Court decisions in Twombly and Iqbal ( Twiqbal ) actually changed the outcome of most cases in the federal courts?

Sacks: The plausibility standard enunciated in Twiqbal is similar in many respects to the requirement of Rule 9(b) that fraud must be pleaded with specificity, which is often a pleading challenge available in consumer class actions. The Rule 9(b) standard is well established and rather non-controversial, notwithstanding it is in effect an analog to the Twiqbal plausibility standard, and it makes absolutely rational sense to require more than rote factually unsupported allegations to satisfy Rule 8.

Gordon: We were pretty successful in getting motions to dismiss granted before Twiqbal, and we continue to be successful in getting motions to dismiss granted. In practice, the Conley standard was not applied literally. Most federal judges look critically at a complaint, and they dismiss those that consist of legal conclusions unsupported by facts.

Editor: What has been the effect of Twiqbal 's requirement that e-discovery not take place until after a motion to dismiss has been decided?

Sacks: In my experience it depends upon how the Twiqbal motion to dismiss issue is teed up. Twiqbal increase the likelihood that a case will be dismissed if plaintiffs' counsel responds to a motion to dismiss by asking the court to allow discovery prior to amendment of the defectively pled complaint. If a plaintiff takes the motion to dismiss arguments head on and doesn't invoke the need for discovery to provide factual support for her claims, federal courts have often required that discovery proceed while the pleadings remain unsettled.

Gordon: Given its attendant enormous cost, e-discovery should not begin unless a plaintiff has proven that he or she can meet the Twiqbal standard. Unfortunately, outside the PSLRA context, federal courts have not been as receptive lately to motions to stay discovery pending a motion to dismiss.

Editor: To what extent do Twiqbal limit the scope of litigation holds and preservation obligations?

Sacks: I have not seen any actual limitation because in our jurisdictions, the federal courts have been clear that your duty to preserve is extremely broad in its scope.

Gordon: I agree. The precedent in the Southern District of New York requires that the client preserve documents broadly, and that remains the safest course.

Editor: Do you attribute any reduced costs of e-discovery to Twiqbal ?

Sacks: In cases involving a clearly defective complaint challenged by a motion to dismiss, Twiqbal afford defendant with an opportunity to argue that discovery should be stayed pending a decision on that motion, and in some instances, courts grant that request, but it is not universal certainly. Gordon: I don't want to imply that Twiqbal have not heightened the pleading standard. They have. But, as a practical matter, the federal courts in which we practice historically have applied a fairly rigorous standard.

Editor: My impression is that you practice in very sophisticated courts and that Twiqbal have not made a huge difference in the procedures there because basically rules very similar to Twiqbal had been followed in the past.

Sacks: I think that is a fair statement. Federal courts tend to more closely scrutinize claims alleged on behalf of a class, often applying a standard that seems quite similar to the Twiqbal plausibility standard. The court knows that it may well have to conduct a complicated and time-consuming class certification analysis sometime soon, and so if the plaintiff cannot even allege facts that, if true, would support certification, it makes no sense to allow the litigation to continue with the attendant expense and burden to the court and the defendant. Thus, many federal courts require plaintiffs to set forth facts that would support not only liability but also certification requirements and will dismiss a case or class allegations where plaintiffs fail to do so.

Editor: H.R. 4115 would overturn Twiqbal and prohibit a federal judge from dismissing a case unless "it appears beyond doubt that the plaintiff can prove no set of facts in support of the claim which would entitle the plaintiff to relief." How would passage of this legislation affect the scope of e-discovery?

Sacks: The proposed language would not return us to a pre- Twiqbal pleading standard under Rule 8. It would take us where no man has gone before. Effectively, it would require a defendant to anticipate and identify every possible set of facts a plaintiff might cobble together in an effort to prove vague and amorphous allegations and then even worse, require the defendant in effect to disprove them in a pleading challenge. Such a standard could transmute even the most meritless claims into bet-the-company lawsuits, particularly for smaller and middle-market companies. It would unleash virtually unlimited e-discovery in the hope that the fishing expedition might uncover some fact that could keep the case alive through summary judgment. It invites meritless suits brought for nothing other than extortion. You will see the number of class actions dramatically increase, which is something I can't imagine that would be endorsed by our federal courts. They are already overburdened, even more so under the Class Action Fairness Act, which enables removal of many more state court class actions. I doubt that most federal judges would favor legislation that prevents them from clearing meritless cases from their already congested dockets.

Gordon: I agree. Imposing this standard could result in numerous cases with absolutely no merit getting past the checkpoint of a motion to dismiss. If a plaintiff is suing a company and seeking millions of dollars, why shouldn't we require that plaintiff to prove that he or she can state a claim before the company spends millions of dollars collecting and producing e-mail?

Please email the interviewees at keara.gordon@dlapiper.com or luanne.sacks@dlapiper.com with questions about this interview.