Cut Expenses: Shift Discovery Costs

Patrick J. Burke and Andrew Dumas
nMatrix, Inc.

Patrick J. Burke is an attorney in the federal litigation practice in the New York office of Linklaters, which advises leading companies, financial institutions and governments worldwide. Andrew Dumas is technology counsel and director of client development at nMatrix, Inc. in New York, which provides electronic discovery services and expertise to law firms and law departments engaged in litigation or antitrust review. This article was previously published in the February 2004 issue of New Jersey Lawyer Magazine, a publication of the New Jersey State Bar Association, and is reprinted here with permission.


Technological advances in the ability to recover and produce electronic records have brought an increased focus on discovery issues. The discovery process was tangled, contentious and costly enough before electronic data storage and the ability to search and retrieve even "deleted" documents became the norm in corporate America. The production of such documents raises questions about privacy, privilege, confidentiality and scope. It seems the only area of clarity is that electronic discovery is expensive. That's why cost allocation is one of the fastest growing areas in e-discovery jurisprudence. With a thorough understanding of it, companies potentially can shift a great deal of their discovery costs to their opponents and save millions of dollars.

The foundations of the law regarding cost allocation of electronic discovery are being laid down in a series of decisions in a federal employment discrimination case, Zubulake v. UBS Warburg, in U.S. District Court for the Southern District of New York. As e-mail and other electronic documents increasingly comprise the core of evidence in commercial cases, litigators are obliged to familiarize themselves with the groundbreaking opinions being written by U.S. District Judge Shira Scheindlin.

The Zubulake decisions focus on which party must bear the costs of retrieving and producing electronic discovery and the scope of a litigant's duty to preserve electronic documents that may be discoverable. On both issues, Scheindlin, who has published a law review article on the effects of technology and the discovery process, has taken a fresh look at how the existing discovery rules should be applied. It's apparent, then, that her Zubulake decisions were written with establishing precedents in mind.

In Zubulake I, Civ. 1243, U.S. Dist. Lexis 7939, Scheindlin propounded a new approach to deciding whether and to what extent the costs of producing electronic evidence should be shifted to the requesting party. She dispatched the analysis of Rowe Entertainment v. The William Morris Agency, 205 F.R.D. 421, which, according to Scheindlin, until then had "unquestionably become the gold standard for courts" in these disputes. The Rowe decision by U.S. Magistrate Judge James C. Francis IV of the Southern District of New York sought to counteract a perceived bias in prior case law, which was in favor of making producing parties bear all the cost of producing electronic documents. (See In Re Brand Name Prescription Drugs Antitrust Litigation, MDL No. 997, which denied a responding party's cost-shifting request for production of e-mail from backup tapes. The court held that the extra expense resulted from the producing party's choice to use a backup software system for e-mail.) Francis held "it is not enough to say that because a party retained electronic information, it should necessarily bear the cost of producing it" and ordered the Rowe plaintiffs to pay for producing the e-mail. Specifically, Francis employed an eight-point analysis that many believe favors findings that costs be shifted to the requesting parties.

Scheindlin took issue with this skewing. In arguing for a closer adherence under the Federal Rules of Civil Procedure to the traditional presumption that responding parties bear the costs of production, she wrote, "Many courts have automatically assumed that an undue burden or expense may arise simply because electronic evidence is involved. This makes no sense ... whether production of documents is unduly burdensome or expensive turns primarily on whether it is kept in an accessible or inaccessible format (a distinction that corresponds closely to the expense of production)."

She established a seven-factor cost-shifting analysis:

• The extent to which the request is specifically tailored to discover relevant information;

• The availability of such information from other sources;

• The total cost of production compared to the amount in controversy;

• The total cost of production compared to the resources available to each party;

• The relative ability of each party to control costs and its incentive to do so;

• The importance of the issues at stake in the litigation; and

• The relative benefits to the parties of obtaining the information.

Scheindlin said cost-shifting should be considered only in cases where the data to be searched is maintained in an inaccessible format. Where data is in relatively accessible formats (including offline archived data on optical disks or magnetic tapes), she contended courts should not even entertain cost-shifting applications by producing parties. In litigated discovery disputes under Zubulake, therefore, courts first must determine whether the data falls into the accessible or inaccessible category; if deemed accessible, the producing party will not even be able to seek to reverse the burden. The likely result is a dramatic expansion of the number of cases in which far-reaching electronic discovery is ordered that is to be paid by the producing party.

Determining Factors

In the case before the court, Scheindlin relied mostly on the third and fourth factors. In Zubulake II she found that since the amount in controversy could easily reach millions and since UBS Warburg has many more resources than plaintiff Laura Zubulake, the defendant should pay the lion's share of the costs.

After setting the criteria in Zubulake I and II, Scheindlin assigned UBS to select any five of the 94 available backup tapes and report to the court on the time and expense required to restore and produce the requested e-mail. UBS reported spending $19,003 on restoration of the five backup tapes, yielding 8,344 e-mail messages (some of which were duplicates since the tapes capture a new copy of e-mail during each monthly backup). Based on this test, UBS estimated restoring and producing the remaining requested e-mail would cost $273,649. Of that, $107,694 was to review for relevance and privilege.

The court ruled July 24 in Zubulake III that UBS pay 75 percent and the plaintiff 25 percent. Scheindlin applied its seven-factor test, noting the responding party has the burden of proof on a motion for cost-shifting. Her analysis found a plurality of factors favoring it - and those that did not, did so only slightly, therefore leaving only the question of how much of the cost to shift.

Scheindlin's explanation for settling on shifting 25 percent went like this: "It is beyond cavil that the precise allocation is a matter of judgment and fairness rather than a mathematical consequence of the seven factors discussed above," she wrote. "[T]he analysis of those factors does inform the exercise of discretion. Because the seven-factor test requires that UBS pay the lion's share, the percentage assigned to Zubulake must be less than 50 percent. A share that is too costly may chill the rights of litigants to pursue meritorious claims. However, because the success of this search is somewhat speculative, any cost that fairly can be assigned to Zubulake is appropriate and ensures that UBS's expenses will not be unduly burdensome. A 25 percent assignment to Zubulake meets these goals."

That left the question of whether the 25 percent should apply to the entire cost of production or only to the cost of restoring the backup tapes. "As a general rule," Scheindlin wrote, "where cost-shifting is appropriate, only the costs of restoration and searching should be shifted ...However, the responding party should always bear the cost of reviewing and producing electronic data once it has been converted to an accessible form."

Thus Scheindlin carved out the costs to review the e-mail, setting a general rule that responding parties must pay "for any costs incurred in reviewing the restored documents for privilege."

These decisions have increased the likelihood the producing party will have to foot the bill for searches and retrievals of archived electronic data during discovery, especially when these parties happen to be corporate defendants who maintain their archived documents in a relatively accessible format.

Duty To Preserve

In the most recent order, Zubulake IV, the court considered the scope of a litigant's duty to preserve electronic documents along with the consequences of a failure to do so.

This is how the court summarized a party's preservation obligations for electronic data and backup tapes: "Once a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a 'litigation hold' to ensure the preservation of relevant documents. As a general rule, that litigation hold does not apply to inaccessible backup tapes (e.g., those typically maintained solely for the purpose of disaster recovery), which may continue to be recycled on the schedule set forth in the company's policy. On the other hand, if backup tapes are accessible (i.e., actively used for information retrieval), then such tapes would likely be subject to the litigation hold."

In considering the consequences of a failure to preserve this data, the court examined two factors: "(1), the establishment of a duty to preserve the information at issue, and (2), the culpable state of mind. The latter was proven so far as UBS's actions were negligent with regard to most of the missing data, and were found to be grossly negligent, even reckless, with regard to data from a key witness. The second factor of the test was proven: Because the company's state of mind did not rise to the level of 'willful,' it was up to Zubulake to prove the relevance of the lost information, and its favorability to her claims."

In this case, Scheindlin was not convinced the peculiarly unfavorable evidence resides solely on the missing tape(s) and declined all but one of Zubulake's sanction requests, ordering UBS Warburg to pay only the costs of re-deposing certain witnesses.

Time will tell how these developments affect how companies choose to deal with data retention issues. In turn, those I.T. decisions will shape how electronic discovery battles play out in the courtroom. Because the Zubulake approach considers cost-shifting only when electronic documents are produced from "inaccessible formats," it could very well have the unintended affect of giving corporations an incentive to sock away electronic documents in such formats.

If anything can be learned from the Zubulake decisions, it is that companies are not likely to be responsible for the high cost of retrieving discovery documents from inaccessible formats, such as backup tapes designed for disaster recovery. Companies in such a situation should by all means apply to the court for relief. Hiding behind Zubulake, however, is not the best way for companies to curb discovery costs over the long term. It's better to first use electronic discovery tools efficiently and put a proper records management system into place. Both are in the long term much less costly than hoping the court will grant relief.