We are pleased to present this discussion of proposed amendments to the Federal Rules of Civil Procedure (FRCP), which represent great progress toward addressing issues that have contributed to the onerous burdens and high costs related to e-discovery, such as over-preservation, failure to apply proportionality, and lack of clarity with respect to the application of sanctions. The discussion also includes areas of concern with the proposed amendments that need to be addressed.
Editor: The Advisory Committee on Civil Rules (“Advisory Committee”) recently published a proposal to amend the Federal Rules of Civil Procedure in order to address the costs and burdens of modern discovery practice. Why is there a need to amend the discovery rules?
Palmer: We have traditionally broad discovery rules in the United States. When you combine that with the immense growth of electronically stored information (ESI), it is a kind of perfect storm. Discovery is imposing enormous burdens on entities that produce large amounts of ESI as they preserve, collect and produce information. If you have similar disputes litigated in the United States and Europe, the costs are going to be orders of magnitude greater in the United States.
Levy: Our e-discovery system has become tremendously inefficient. It is not achieving its purpose of enabling parties to obtain information that’s going to help the fact finder - whether judge or jury - decide the issues in dispute. Unfortunately, parties are giving up their right to access the courts because the costs of discovery are just too high.This includes parties who have legitimate claims and can’t afford to prosecute their suit to conclusion, and defendants who have meritorious defenses. Litigants frequently settle to avoid the cost regardless of the merits. Although settlements can be a positive, parties should not be kept out of court because of the costs of the litigation system.
Preservation is a key part of litigation costs. The current system encourages significant over-preservation because the rules don’t define a party’s duty to preserve information. Instead, individual judges are defining the rules for preservation for their specific courts.
This has created massive uncertainty with disparate standards around the country. Companies that periodically experience litigation therefore must create preservation protocols designed to address what might be called the “lowest common denominator” or the most restrictive and extreme approach as to what needs to be preserved. The result is preservation of documents at great expense that are very unlikely to be used in litigation.
These costs and inefficiencies have a far-reaching impact. The cost of U.S. litigation – of e-discovery – has become an important factor that companies consider in deciding to start or expand a business in the U.S. A survey that Lawyers for Civil Justice conducted in 2010 revealed that Fortune 200 corporations found that the costs associated with e-discovery in U.S. cases were vastly greater than in non-U.S. cases.
Palmer: That’s certainly consistent with my experience litigating cases involving Microsoft both inside and outside the United States. Discovery – and e-discovery in particular – is a major factor in that cost differential.
Editor: Is the sharp escalation of costs associated with discovery part of the motivation behind the Advisory Committee’s efforts to amend the Federal Rules of Civil Procedure?
Dahl: Yes. There is widespread agreement among many of the participants in our legal system that the cost burdens of e-discovery are affecting the outcome of cases. This led the Advisory Committee to convene the 2010 Duke Conference to undertake a review of the federal rules governing discovery with an eye towards bringing the costs and burdens of e-discovery under control while still allowing the parties to have access to the information necessary to present and defend claims. The Advisory Committee has done a tremendous amount of work reviewing the rules and entertaining a number of different ideas, resulting in the package of proposed rules (proposed rules) published for public comment on August 15.
Editor: Let’s turn to the proposed rules, How would the proposed rule changes help the situation with preservation and sanctions?
Palmer: The Advisory Committee has proposed a completely rewritten Rule 37(e), which for the first time will define the standards for sanctions for failing to preserve information. The proposed rule would create a “safe harbor” by prohibiting sanctions unless the loss of information was “willful or in bad faith” and caused “substantial prejudice.” This will allow companies to have some certainty that they can avoid sanctions by operating document preservation procedures in good faith and not willfully destroying information that is potentially relevant to litigation. This proposal holds great promise to establish a much-needed uniform national standard that would curtail costly over-preservation and ancillary litigation over allegations of spoliation.
Levy: I agree with Jon. The proposed rules will give companies the assurance that, if there is no finding of bad faith or willfulness in their actions, they will not be subject to sanctions if it turns out that information that in retrospect should have been preserved was in fact deleted or lost. Keep in mind that the U.S. Supreme Court has confirmed that it is appropriate to get rid of information as part of a records retention policy. The challenge is that the preservation issues are typically part of ancillary litigation proceedings that second guess decisions made both in designing litigation hold protocols and when litigation matters are first initiated. LCJ’s argument is not based on a desire to hide information, but rather to facilitate normal business processes that are not going to be subject to the “gotcha” game that often arises in litigation.
Dahl: It’s important that this new standard would be uniform across the country. That alone will significantly curtail the perceived need for over-preservation. And by the way, unlike the current Rule 37(e), the proposed rule would not be limited to ESI, but would apply to all discoverable information.
Editor: Are there any deficiencies in the proposed Rule 37(e) that you would like to see the Advisory Committee change before finalizing the rule?
Levy: Unfortunately, the Advisory Committee’s draft Rule 37(e) contains an exception that I think could swallow the rule. It would allow sanctions - even without a finding of willfulness or bad faith - if the loss of information “irreparably deprives” a party of its ability to prosecute or defend the action. The Advisory Committee put this in the rule draft to address a very rare situation, but it seems likely to me that courts could use the exception as a back door vehicle to impose sanctions if it is unhappy with the failure to preserve even if there is no indication of a deliberate effort to destroy information. Additionally, the irreparable deprivation exception is not needed because the rule draft otherwise gives the trial judge the power to avoid an unfair result by imposing curative measures. Therefore, LCJ is urging the Advisory Committee to remove the exception.
Palmer: Another change we’d like to see is a clarification to the standard for sanctions. The draft rule says “willful or in bad faith” conduct, which is problematic because some courts define “willfulness” as intentional – without any showing of a culpable state of mind. Under that definition, setting up a standard auto-delete function could be willful because it is intentional, even though it is not done in bad faith. So the rule should say “willful and in bad faith” to make clear that sanctions apply only to conduct that is both.
Dahl: The draft rule also contains a list of factors for courts to look at when deciding whether to impose sanctions. But the list is provided only as guidance, so it seems strange to incorporate the list into the rule text. Maybe it should go into the Advisory Committee Note instead. Even more interesting is that none of the factors goes to the central point of the proposed rule, which is whether a loss of information was “willful or in bad faith” and resulted in “substantial prejudice.” The list seems to focus on reasonableness of the party’s preservation decisions, which could lead to a situation like the status quo, where different courts impose different standards.
Editor: In addition to these preservation issues, do the Advisory Committee’s proposals also affect the volume of information subject to production?
Dahl: Yes, the proposed amendment to Rule 26(b)(1) would redefine the scope of discovery to focus on information that is relevant to the parties’ claims and defenses and is proportional to the needs of the case. This would be a very positive change because it would reduce over-broad discovery while still ensuring that parties obtain the information they need.
Levy: Proportionality has been in the FRCP for many years. However it is not effectively applied to limit discovery. The Advisory Committee’s proposal emphasizes proportionality by moving it into the rule section defining permissible discovery. This is an appropriate way to let parties and judges know that they should keep the proportionality of the case in mind when they undertake discovery. This change is not only important to discovery overall, but also will narrow the scope of preservation obligations.
Palmer: The amendment would get rid of the line that so many lawyers erroneously think is the scope of discovery: “reasonably calculated to lead to the discovery of admissible evidence.” That was never meant to define the scope of discovery, but rather that certain types of information, such as hearsay, are within the scope even though they are not admissible in court. It will be very helpful to remove that language.
Editor: We’ve talked about preservation and the scope of discovery. What other rules is the Advisory Committee proposing to amend?
Palmer: The Advisory Committee’s other proposals include reducing the default numerical limits in several categories of discovery. The number of depositions goes from 10 per party to 5, the number of Rule 33 interrogatories goes from 25 to 15, and there’s a limit of 25 for Rule 36 requests to admit. All of this makes sense in the climate we’re in of over-broad discovery that can be completely disproportionate to the case. Parties will still be able to get what they need.
Levy: Another proposal is to amend Rule 1, which sets forth the aspirational goal to “secure the just, speedy and inexpensive determination of every action,” to include the word “parties.” The point of doing this is to point out that the parties as well as the court have a stake in the efficient outcome of the justice system. The Advisory Committee Note however discusses the importance of cooperation between the parties. Even though cooperation is of course a very important aspect of any case, I am concerned that putting this language into the comments could create an unintended negative consequence of this comment and Rule 1 being used as a weapon in ancillary discovery battles.
Editor: Overall, how do you view the Advisory Committee’s package of proposed amendments?
Levy: The proposed rules are a very important step forward and I am grateful to the Advisory Committee for its efforts. As we have discussed, there are areas of uncertainty that remain that do need to be addressed. But we’re in a situation where the discovery process has become a tactical weapon by parties, using the cost of discovery to force the opposing party into settlement notwithstanding the merits of the case. The amendments proposed by the Advisory Committee are a major step in making our judicial system more efficient and effective in administering justice for all.
Palmer: I agree. We have a big problem that the proposed rules address, and that is that companies throughout the U.S. are over-preserving on a daily basis. And they are over-preserving because of the tactical issues - the “gotcha” game arising from the fact that there is no national standard. The proposed Rule 37(e) and the other proposals are important to inoculate companies against baseless spoliation charges and protect them from abusive practices that impose huge costs and burdens while not leading to fair decisions on the merits.
Editor : Why is the rules initiative now under consideration by the Federal Judicial Conference of such paramount interest to LCJ?
Williams: LCJ is committed to achieving meaningful reform of the civil justice system by advocating amendments to the Federal Rules of Civil Procedure that govern preservation, discovery and cost allocation. And as Robert and Jon have made clear, this initiative is extremely important not only to the business community but to the public generally. For the first time in many years, the Advisory Committee and the Standing Committee on Rules of Practice and Procedure (Standing Committee) are poised to move forward with significant changes, which, if enacted will deliver real relief to LCJ members from some of the extraordinary costs and burdens of discovery. Overall we are pleased that the Advisory Committee is, itself, proposing meaningful changes to the Civil Rules governing discovery, preservation/sanctions, and cost allocation. These developments present great opportunities.
Editor: But why do you think the proposed rules seem to have gained such traction with the bench and the bar?
Williams: The current initiative has gained momentum as business leaders, the bar, and the judiciary have become more aware of the interplay between the nation’s suffering economy and the potential for this type of litigation reform to boost America’s competitiveness in a global economy. Today’s economy demands that we make a vigorous, concerted effort to achieve new rule changes that minimize the costs of litigation, especially in view of the adverse impact that litigation is having on the competitiveness of American companies. Adopting meaningful amendments to the Federal Rules of Civil Procedure that govern pleadings, discovery, preservation and cost allocation could provide real relief from the costly and inefficient administration of justice that has come to characterize the civil justice system.