Introduction: This is the seventh article in a series of short informational pieces relating to one of the hottest topics in litigation over the past five years - electronic discovery. The purpose of these articles is to provide your business entity with some guidelines on how to most efficiently organize to deal with electronic discovery. The articles will continue to be emailed regularly over the next few months. If you are new to our distribution, or if you would like to view previous articles in this series relating to ESI, visit our website.

 

I) Overview: The Explosion of ESI - The Server has replaced the Banker's Box

We have all read about it. We discuss it all the time. Over the past decade or more, there has been an explosion of electronic information. And, Electronically Stored Information (ESI) continues to grow at an astounding pace. A standard compact disc contains 650 megabytes of data and translates to 325,000 typewritten pages or about 153 banker's boxes of paper. One gigabyte is the equivalent of 500,000 typewritten pages. (See Source 1, p.77)

Businesses that once thought in terms of gigabytes, now use terms such as terabytes (1,000 gigabytes), petabytes (1,000 terabytes) and exabytes (1,000 petabytes - 10 with 18 zeros.) According to a 2003 study conducted by the School of Information Management and Sciences (SIMS) at the University of California at Berkeley, five exabytes of new data was produced in the single year of 2002. (See Source 2)

"Even a small backup tape, such as a four-millimeter digital audio tape (DAT), can hold between 20 and 40 gigabytes of information. If you printed out even 120 gigabytes of textual documents on paper, it would be as tall as the Sears Tower...you can literally wipe-out a building of paper in 15 minutes," Thom Wisniski, Chief Knowledge Officer, Haynes and Boone, Dallas. (See Source 3)

North American businesses create in excess of 3.25 trillion emails per year and create more than 90% of their information in digital form. (See Source 4)

As a result, computerized data has become commonplace in litigation. The sheer volume of such data, when compared with conventional paper documentation, can be staggering. Large corporate computer networks create backup data measured in terabytes, or 1,000,000 megabytes; each terabyte represents the equivalent of 500 billion typewritten pages of plain text. Digital or electronic information can be stored in any of the following: mainframe computers, network servers, personal computers, hand-held devices, automobiles, or household appliances; or it can be accessible via the Internet, from private networks, or from third parties. Any discovery plan must address issues relating to such information, including the search for it and its location, retrieval, form of production, inspection, preservation and use at trial. (See Source 1)

Emails have replaced other forms of communication aside from just paper-based communication. Many informal messages that were previously relayed by telephone or at the water cooler are now sent via email. Additionally, computers have the ability to capture several copies of (or drafts) of the same email, thus multiplying the volume of documents. All of these emails must be scanned for both relevance and privilege. Also, unlike most paper-based discovery, archived emails typically lack a coherent filing system. Moreover, dated archival systems commonly store information on magnetic tapes which have become obsolete. Thus, parties incur additional costs in translating the data from the tapes into useable form. (See Source 5)

All of these facts underlie the current reality that litigation involving electronic discovery is incredibly costly. Who is to bear the huge costs associated with electronic discovery?

II) The Party Producing Discovery Pays its Own Costs Unless....

The traditional rule is that the party producing discovery at the request of another party pays its own costs associated with the discovery. This general rule will usually be applied in the ESI context: "Normal and reasonable translation of electronic data into form usable by discovering party should be ordinary and foreseeable burden of respondent." (See Source 6)

ESI is often less burdensome to produce than paper documents because ESI can be searched more easily and can be downloaded to appropriate media, thus avoiding the cost of paper reproduction. However, there are circumstances where the searching and reproduction of certain types of ESI are quite a bit more costly and burdensome; and, in these situations the courts may modify the traditional rule by shifting costs. For example, courts are often willing to modify the rule and make the requesting party pay when ESI is contained in that are most reasonably accessible, such as backup tapes. Refer to earlier ESI Alert #6 re Accessibility

And, the general rule is most often inapplicable where a non-party is served with a subpoena seeking ESI. In that situation, courts are even more likely to compensate the subpoenaed party for the costs of production, especially if the subpoena requires an extensive response or the use of information technology professionals. (See Source 7)

Sedona Principle #13 acknowledges these principles: "Absent a specific objection, party agreement or court order, the reasonable costs of retrieving and reviewing electronically stored information should be borne by the responding party, unless the information sought is not reasonably available to the responding party in the ordinary course of business. If the information sought is not reasonably available to the responding party in the ordinary course of business, then, absent special circumstances, the costs of retrieving and reviewing such electronic information may be shared by or shifted to the requesting party."

California and Texas have statutes or court rules that impose some of the costs of discovering ESI on the requesting party. (See Source 8)

The party responding to the request for ESI has the burden of proving that cost shifting is warranted. (See Source 9). Because the cost-shifting analysis is so fact-intensive, it is necessary to determine what ESI may be found on the inaccessible media. This raises a point that we have made in other contexts: in determining whether cost shifting may be appropriate, it is necessary for the court (and, therefore, the lawyers) to thoroughly understand the party's computer system, both with respect to active and stored data.

III) Zubulake Opinions and Other Cases

Judge Shira A. Scheindlin of the United States District Court for the Southern District of New York has issued a series of opinions relating to cost shifting that are recognized by the legal community (both judges and lawyers) as establishing the principles by which all are governed. These are known as the Zubulake opinions; there are five of them, three of which will be discussed here.

Zubulake I - Zubulake v.UBS Warburg LLC, 217 F.R.D. 309 (S.D.N.Y. 2003)

Plaintiff sued UBS for employment discrimination. Plaintiff alleged damages in the range of $15-19 million. UBS contested liability, but admitted damages could be as high as $1.3 million. Plaintiff sought, among other things, emails relating to her that were sent to or from 5 UBS employees. The emails were stored on some 74 backup tapes. The Court's opinion discusses the "reasonably accessible ESI" concept as the key stone in any cost shifting analysis. The Court concluded that on line, near line and off line data are reasonably accessible and, therefore, not eligible for cost shifting. However, legacy data such as disaster recovery back-up tapes or fragmented or damaged data are not reasonably accessible and, thus, may be eligible for cost shifting. The Court summarized the inquiry by stating that the real question is "...how important is the sought-after evidence in comparison to the cost of production." (217 F.R.D. at 322-23)

To answer that question the Court devised a 7-factor test cost-shifting analysis: 

  • The extent to which the request is specifically tailored to discover relevant information (the most significant factor);
  • 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 ESI to the issues at stake in the litigation; and
  • The relative benefits to the parties of obtaining the information.


(Note: The Federal Court Civil Discovery Standards, August 2004, § 29 (b) (iv), pp 59-61 lists 16 factors to be applied to the allocation of cost analysis.)

Zubulake II - Zubulake v. UBS Warburg, LLC, 216 F.R.D. 280 (S.D.N.Y. 2003)

To assist is in applying the seven factor test set out in Zubulake I ordered a "test run" ("sampling") to determine the likelihood of discovering relevant information in the inaccessible back-up tapes. Plaintiff was allowed to select 5 tapes to be restored. The restoration of these tapes provided the Court with actual results regarding the existence of relevant information in the requested ESI, so that the analysis was not theoretical or speculative.

UBS hired an outside forensic ESI firm, Pinkerton, to perform the restoration. Pinkerton extracted some 6200 emails from 1 of the 5 employees' servers, then ran word searches for Plaintiff's name, initials, etc. This yielded 1075 original emails. UBS's legal counsel reviewed these, and deemed approximately 600 to be responsive. The total cost of this process was $19,000. Pinkerton charged $11,500, and UBS's counsel charged $7,500. Extrapolating this cost to all 74 requested tapes would amount to $274,000 - $166,000 in restoration/search costs and $108,000 in attorney and paralegal review costs. UBS asked that all future costs (i.e., the estimated $274,000) be shifted to Plaintiff.

Zubulake III - Zubulake v. UBS Warburg LLC, 216 F.R.D. 280 (S.D.N.Y. 2003)

The Court held that the responding party should always bear the cost of reviewing and producing the electronic data after it has been retrieved. Thus, Plaintiff would not bear any of UBS's attorney/paralegal review costs. But, the Court held that Plaintiff would bear 25% of restoration/search costs.

Peskoff v. Faber, 251 F.R.D. 59 (D. DC 2008) is another case where the Court discussed the concept of reasonable accessibility and shifting of costs. The opinion was drafted by Magistrate Judge John M. Facciola of the DC District, one of the most respected jurists in the field of e-discovery.

Initially, the Court ordered bids for forensic testing of computers and servers to determine whether cost was justified in light of the amount at issue in the litigation, damages allegedly exceeded a million dollars. The lowest bid for the forensic testing was $33,000. The Court concluded that "anticipated cost of doing forensic search will [not] dwarf the final recovery."

The Court refused to depart from the traditional approach that the producing party will bear the costs of the search, noting the following factors: 

  • Cost shifting is appropriate only where electronic discovery imposes an undue burden or expense.
  • There was no undue burden or expense because the responding party was responsible for need to do forensic examination. He failed to take his obligations seriously. "A party should not be entitled to shift the costs of restoring and searching data that it converted into an inaccessible format when it should have anticipated litigation."

Another case where the Court declined to shift costs is Omnicare, Inc., v. Mariner Healthcare Management Company, 2009 WL 1515609 (Del Ch. 5/29/09). This case involved a suit by a large nursing home operator against a large pharmaceutical supplier relating to the pricing of products and services. Given the nature of the entities and the operations, the amount of information sought in discovery was "complex and voluminous". A discovery dispute arose out of the plaintiff's request for various types of ESI, including backup tapes. It was estimated that the cost of restoring the backup tapes was between $22,000 and $40,000, and the defendant refused to bear that burden.

The Delaware Chancery Court, departing from the approach used in many courts, held that the fact that ESI may be in backup tapes instead of active storage does not necessarily render it not reasonably accessible, especially in light of other considerations. The Court was influenced by the fact that the estimated cost of restoring the backup tapes was minimal in light of the amount in controversy- tens of millions of dollars.

An example of a case where the court agreed to shift the costs to the requesting party is OpenTV v. Liberate Technologies, 219 F.R.D. 474 (N.D. Cal. 2003). The Court ruled that cost shifting was warranted where digital data in the form of source code was stored in an inaccessible format for purposes of discovery, where process of extracting search code from its database took between 1.25 and 1.5 hours per source code, amounting to between 125-150 hours of work to complete extraction process for the approximately 100 versions of source code requested by the requesting party.

Similarly, in Genworth Financial Wealth Management, Inc. v. McMullan, 2010 U.S. Dist. LEXIS 57870 (D. Conn. June 10, 2010), the Court ordered that defendant former employees who left the plaintiff to start up a competing company must, pursuant to Plaintiff's discovery request, allow forensic imaging of their computers' hard drives by a neutral expert. The Court further ordered cost shifting that required the Defendants, the responding parties, to pay 80% of the cost of the hard drive examination, meaning that the Court shifted 20% of the cost to the requesting party. The Court would have likely shifted more of the costs to the requesting Plaintiff but for some egregious conduct by the Defendants relating to electronic discovery issues.

Lessons

Discovery of ESI can be very costly. However, with a thorough knowledge of discovery rules and cases interpreting them, costs can be made more manageable. Make sure you consult with your lawyer on these ESI issues.

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In the next Legal Watch Series: Preparing for E-Discovery newsletter, we will be discussing issues relating to employee's personal use of company computers and social networking

About the Author
For more information or questions regarding E-Discovery and the Rules for Electronically Stored Information Management, contact Michael R. Palumbo.

Michael R. Palumbo focuses his practice on commercial and real estate litigation. Particular areas of experience include banking (UCC Articles 3 & 4) litigation; title insurance, escrow agent and Deed of Trust litigation; and quiet title, adverse possession, homeowners' associations and real estate agent disputes. He has participated in more than 50 trials in the Superior Courts of Arizona and District Court of Arizona, in most of which he was lead counsel. Mr. Palumbo can be reached at 602.262.5931 or mpalumbo@jsslaw.com.

Resources Used for This Legal Watch

  1. Manual for Complex Litigation § 11.446, Discovery of Computerized Data, (4th Ed. 2004)
  2. See http://www2.sims.berkeley.edu/research/projects/how-much-info-2003/
  3. Electronic Evidence, - a special report from Corporate Legal times, August 2003
  4. Bradford S. Babbitt and Kori E. Termine, The New Reasonable Accessibility Standard- What's so Reasonable about it? E-Discovery, ABA Section of Litigation, 2007
  5. The "Sheer Volume" of discovery of ESI: Byers v. Illinois State Police, 2002 WL 1264004 (N.D. Ill. June 3,2002)
  6. Daewoo Electronics Co., Ltd. v. U.S., 650 F. Supp 1003, 1006 (----1986)
  7. Federal Rule of Civil Procedure 45 (c) (1) and 45 (c) (2) (B); In re Automotive Refinishing Paint, 229 F.R.D. 482 (E.D. Pa. 2005)
  8. Cal. Code Civ. P. § 20031 (g) (1) and Texas R. Civ. P. 196.4
  9. Mikron Industries, Inc. v. Hurd Windows & Doors, Inc., 2008 WL 1805727 (W.D. Wash. 2008)