e-discovery 2.0

David Isom and I have collaborated a number of times over the years on a variety of electronic discovery presentations and articles.  So, when I saw that California was proposing new state electronic discovery rules that had some interesting variances vis-à-vis the FRCP, I thought David might be able to give us the benefit of his unique and sage perspective.

1. David, as the author of the definitive piece about inaccessibility under the Federal Rules of Civil Procedure (The Burden of Discovering Inaccessible Electronically Stored Information: Rules 26(b)(2)(B)& 45(d)(1)(D)), how many litigators do you think really understand and use these provisions?

I sense that litigators with a basic understanding of the new electronic discovery rules know that the inaccessibility rule exists and provides some protection for parties against unduly burdensome discovery.  Few seem to have noticed that Rule 45 contains an inaccessibility provision whose language is similar to the Rule 26(b)(2)(B) inaccessibility protection for parties, but whose protections as applied to subpoenaed nonparties are greater than the protections for parties.  Here are the three most basic and exciting (or excruciating, depending upon your side of the fence) impacts of the new inaccessibility rules:

(1) The inaccessibility rule has completely changed a nonparty’s leverage to narrow subpoenas seeking electronically stored information (ESI).  Subpoenaed nonparties now have protection against fishing expedition subpoenas that did not exist before — to narrow subpoenas, or to require the payment of costs and attorney fees in responding to broad subpoenas.

(2) Cost-shifting, for parties as well as nonparties, is now controlled by the inaccessibility rules.  Several federal courts have recently held that discovery cost-shifting is allowed only if these inaccessibility rules provide for cost-shifting under the circumstances.

(3)  The inaccessibility rules must be asserted and asserted timely if they are to provide protection.  For example, after counsel for nonparty Office of Federal Housing Enterprise Oversight spent $6 million of our money responding to a subpoena in In re Fannie Mae Securities Litigation, 552 F. 3d 814 (D.C. Cir. 2009), counsel tried to recover the money on an inaccessibility cost-shifting argument.  To which the United States District Court and the Court of Appeals for the District of Columbia said, in essence:  you might have had a good idea, and saved your client $6 million, had you raised the arguments before agreeing to produce the documents and spending all that money.  But you agreed to produce the ESI and cannot come back now and get any protection.  You should have studied the inaccessibility rule.

2. So, assuming we’re still early in the learning curve, do you think these FRCP provisions are really gaining traction either in practice or in the case law?

Judging by the number of reported decisions, the inaccessibility rules are receiving as much attention as the other new features of the federal electronic discovery rules.  Which, I suppose, is damnation by faint praise — a large percentage of the reported cases are about what should happen because lawyers didn’t understand or apply the rules properly. Cason-Merenda v. Detroit Medical Center, 2008 U.S. Dist. LEXIS 51962 (E.D. Mich. July 7, 2008) is a good example.  There, defendant’s counsel produced ESI without any objection and without pre-identifying the ESI as inaccessible.  After production, counsel tried to get their opponents to share the cost of producing the allegedly inaccessible ESI.  The court correctly held that the ESI must be identified as inaccessible in advance of the production to give the seeking party the option to decide whether the discovery is really worth the candle, especially given the prospect that the cost of production might be shifted to the seeking party.

3. What are your thoughts on the new California state provisions regarding “inaccessible” ESI where they’re proposing a different treatment and slightly different burden?  And, will this approach ultimately weaken responding parties abilities to make “inaccessible” claims successfully?

I am not an expert on California law, but am keenly interested in what the states are doing with electronic discovery.  As of this writing (May 2009), it appears that California Assembly Bill No. 5 has not yet been enacted.  Yet, here are some thoughts about how the inaccessibility provisions of this bill, if enacted, would compare to the federal rules of inaccessibility.  The bottom line is that the California bill is remarkably similar to the federal rules on inaccessibility issues.

Under the federal rules, a party seeking protection for inaccessibility initiates the process by “simply” (so far, the courts have tolerated fairly sparse identifications as satisfying this requirement) identifying the sources of information claimed to be not reasonably accessible because of undue burden or cost.  The subpoenaed nonparty seeking protecting can initiate by identifying the ESI sought as not reasonably accessible in an objection, motion to quash or motion for protective order.  In the federal system, either the seeking party or the protecting party or nonparty can move to test the issue (one by a motion to compel, the other by a motion for protective order).

The California bill is nearly identical to the federal process.  The bill provides that a person resisting a subpoena for ESI on inaccessibility grounds may “oppose” the subpoena.  If this means that such a person can either object or move to quash or move for a protective order, it appears to be the same as the federal rule.  The California bill specifies that a party resisting a production request on inaccessibility grounds initiates protection by identifying the types or categories of sources of electronically stored information that it asserts are not reasonably accessible.  This is similar to the federal rule, whose text requires identification of “sources”, but whose committee notes clarify that merely “types or categories of sources” of inaccessible, responsive ESI need be identified.  The California’s Legislative Counsel’s Digest indicates that the process for protecting inaccessible ESI, apparently for both parties and subpoenaed nonparties, can be initiated by moving for a protective order, or by opposing or objecting to the subpoena or request.

Even if there are any distinctions in the above processes, the two processes appear to merge thereafter.  In both systems, the motions to test inaccessibility must be preceded by a conference of counsel to attempt in good faith to resolve the issue, together with a certificate that such an attempt has been made.  In both, the person seeking protection has the burden of proving inaccessibility (this is even true in the federal system where the process is initiated by the seeker’s motion to compel).  In both systems, if the holding party proves inaccessibility, the burden shifts to the seeking party to show good cause for producing the ESI, despite its inaccessibility.

And in both, if good cause is shown, the court may still impose conditions upon production, including cost-shifting.  In both, the factors that the courts are to consider in determining good cause are similar — more accessible, less burdensome sources; cumulativeness of the discovery; whether the burden or expense of the discovery would outweigh the likely benefit of the discovery, considering such things as the importance of the issues, the amount in controversy and the resources of the parties.  One possible difference between the California bill and the federal rules on good cause is that the California bill requires the court to limit discovery if any of the listed factors exists, where the federal rules and committee notes seem to envision a pure balancing.

In sum, the California bill essentially adopts the federal approach.

Some confusion has arisen because California commentators have drawn a distinction between the California bill and a misinterpretation of the federal rules.  One commentator, for example, stated that “under the federal rules, if ESI is inaccessible, the responding party simply doesn’t need to produce such documents.”  This ignores the affirmative identification duty that I discussed above.

4. With the rapid advancements in ESI restoration technologies, which the Comments to the Rule anticipated, are backup tapes in your mind still “inaccessible”?

The rules make it clear that inaccessibility cannot be measured by technology category alone.  The test does not depend upon the type of technology involved, but upon the balancing of need, technology, importance, spoliation, relevance, alternative sources and potential benefit against overbreadth, burden and cost.  So, if backup tapes are the only source available for important, relevant information because more accessible relevant sources have been spoliated, backup tapes will not be deemed inaccessible.  Without spoliation, if relevant ESI is available on active sources, backup tapes may not be discoverable.

Perhaps the main reason that categories of technology cannot be deemed per se accessible or inaccessible is that the technology is changing so fast.  Many search tasks that were expensive and difficult five years ago are much more doable now.

5. Finally, what do you think the future holds for these FRCP sections?

The inaccessibility rules will continue to be the main battleground where the great debates about the value and cost of electronic discovery will be fought, since these rules are specifically tailored to balance all of the interests in that debate.

Some groups are claiming that electronic discovery is wasteful and expensive, and that the new rules exacerbate the problem.  Of course, the federal rules ought always to be analyzed for problems and need for improvement, but I haven’t heard informed, thoughtful, helpful suggestions for improvements to the federal rules in the recent debate.  Overall, I see the adoption of the federal rules as having helped reduce the cost of electronic discovery, not increased the cost.

In today’s economy, controlling electronic discovery costs has taken on a new urgency.  Because the financials of many companies have deteriorated so quickly, there is great interest in finding methods to reduce any costs in the short-term.  As  a result, anyone in a company’s IT or legal department that comes up with a plan to substantially reduce their company’s electronic discovery costs in the short-term is likely to become a hero in their company.  So, what’s the best way to reduce electronic discovery costs quickly?

A natural first step is to decide where to focus.  Which electronic discovery activities are the most costly today?  Which have the greatest room for cost reductions?  The EDRM model serves as a good guide for answering such questions by breaking electronic discovery activities into Information Management, Identification, Collection, Preservation, Processing, Analysis, Review, Production and Presentation.  One thing I have noticed when interacting with enterprises is that the IT and legal departments tend to focus on different stages within electronic discovery based on their perspective.  IT managers naturally concentrate on the information management, identification, collection and preservation activities because these are the activities in which they are most involved.  Similarly, legal managers naturally look to preservation, processing, production and review.

Given these different perspectives, it’s important to take an objective approach to calculating electronic discovery costs.  Doing so is not that easy.  Costs can vary significantly depending on each company, the nature of the case, nature of the data, which vendors/technologies that are used and a variety of other factors.  Costs also come in many different forms: direct hard dollar costs, such as spending on legal and electronic discovery fees delivered by third parties; indirect hard dollar costs, such as time spent by company employees; and soft dollar costs, such as increased risk that could lead to adverse judgments and sanctions.  Finally, electronic discovery costs are often buried across both legal operating budgets and IT budgets making it hard to separate these costs from the costs of other activities.

Undertaking an internal analysis to understand your company’s electronic discovery costs is a valuable activity if you want to better control these costs.  However, while costs do vary between companies, most companies will find that the same activities contribute the most direct hard dollar costs and that these are the costs that are easiest to control in the short-term.  To demonstrate this, let’s walk through a generic cost analysis of a typical case.  Fortunately, we don’t have to start from scratch in doing this.  Leonard Deutchman, an author of several excellent electronic discovery articles, has already done most of the work in a May 2007 article, “Get Ready for the Rules Changes, Part VIII“.  In this article, Mr. Deutchman walks the reader through a hypothetical litigation between an Investor and a Venture Capital firm.  He describes the typical electronic discovery activities and calculates the direct hard dollar costs for these activities including:

• Collection: Mr. Deutchman calculates that it costs $10k to collect 400GB from 8 hard drives and the data of 8 custodians on file and email servers using an outside vendor (doing it in-house can be less expensive).  Note that this excludes any collection from back-up tapes, which can be more costly.
• Culling & Processing: it costs $4k to reduce the 400GB to 90GB by removing non-relevant file types prior to processing.  Processing 90GB costs $90k at $1000/GB.  De-duplication and the application of search terms reduce the data to 25GB.
• Production: it costs $4k to produce the 4GB of data that is deemed responsive and not privileged to produce to the other side.

Mr. Deutchman doesn’t identify direct hard dollar costs for Information Management, Identification or Preservation.  These activities are typically not associated with direct hard dollar costs on a per matter basis.  Rather, they involve indirect hard dollar costs such as employee time and software licenses.  Mr. Deutchman also does not provide an estimate for the costs of review.  However, since review does contribute significant direct hard dollar costs for every matter, this gap needs to be filled in order to get a complete sense of the direct hard dollar costs.  The two big buckets of cost in review are: attorney review costs and review software costs.  In Mr. Deutchman’s hypothetical litigation one might imagine the following scenario for these costs:

• 25GB translates into 195,000 documents using the low end of the documents per GB email (9,000/GB) and documents per GB files (7,000/GB). Industry survey data that is available from EDRM.  This example assumes that 40% of the 25 GBs is email.
• The attorneys reviewing the data charge $75/hour and make 100 document decisions per hour.  This translates to approximately $146,000.
• The hosted review service costs $50/GB/month and, in this case, let’s assume we host it for 6 paid months.  This costs $7,500.

If we tabulate these costs and calculate the direct hard dollar cost shares for each stage, the clear take-away is that Processing and Review costs comprise the vast majority of direct hard dollar costs.  Collection and Production direct hard dollar costs are significantly smaller in comparison.

Now, it’s possible to come up with many arguments for why Mr. Deutchman or my estimates could be high including different assumptions for attorney hourly review costs, higher document decision rates, cheaper vendor pricing, etc.  Similarly, it’s possible to come up with many arguments for why the estimates could be low including the need to perform multiple review passes, slower document decision rates, more expensive vendor charges, etc.  In addition, each company will have their own unique circumstances that will change this picture.  However, this generic analysis strongly suggests that more customized analyses would come to the same conclusion: if you want to reduce electronic discovery costs quickly, then you need to focus on processing and review costs.  One can also imagine that even if you were to use some form of activity-based costing to allocate indirect hard dollar costs on a per matter basis, it would likely not change the importance of Processing and Review costs.

What does this mean for IT and legal managers in Corporations?  These kinds of analyses make it pretty clear that, even though they are more involved in the Information Management, Identification, and Collection phase of electronic discovery, IT managers need to focus more on helping the legal team optimize Processing and Review activities.  You are not going to get the biggest bang for your buck in the short-term by trying to reduce costs in Information Management, Identification, Preservation, and Collection.  Similarly, legal managers need to work more closely with IT in order to focus on how to reduce processing and review costs.

So, the obvious question coming out of such an analysis is what’s the best way to reduce Processing and Review costs?  We’ll discuss this issue in a future post.

In the meantime, tell me what you think by participating in our first e-discovery 2.0 poll.  See the sidebar here: Which Phase of Electronic Discovery Do You Think is the Most Costly?

There have been several recent press releases from enterprise software companies proclaiming FRCP “compliance,” which certainly sounds appealing.  But, the use of that term begs the question:  how does a litigation support software search technology (or methodology) become FRCP “compliant” and is that goal even possible?

IBM launched the first salvo:

“The software will allow companies to move from scattered, point-solution approaches to a disciplined approach that controls electronic information, helps support Federal Rules of Civil Procedure (FRCP) compliance,…”

And, Autonomy quickly followed suit:

“The Autonomy pan-enterprise search platform automates the retrieval, processing, and management of all information throughout a global organization irrespective of languages, operating systems, and file types, avoiding non-FRCP compliant search techniques.”

I’m more than tolerant of both puffery and marketing-speak (though woe to those who forward such releases to Monica Bay), but this notion of “FRCP compliance” seems to take advantage of an already bombarded buying public, who have likely grown weary of FRCP articles, CLEs, and maybe even blogs posts.  Nevertheless, it seems useful to really tease out what the FRCP means and does not mean in relationship to e-discovery and enterprise search.

So, in an attempt to debunk this “compliance” myth, I thought I’d devote this blog post to demystifying some of the inaccurate notions about the FRCP.

Federal First

Initially, it’s important to note that the Rules only apply to litigation within the United States Federal court system.  State court litigation, international lawsuits, arbitrations and administrative actions (just to name a few) aren’t under the aegis of the Rules.  While it’s true that certain state courts (Minnesota for example) have selectively adopted the new discovery provisions, most have not.  So, the first step is to check your venue.  Then, assuming the Rules do apply because your organization is in Federal litigation, the impact, while still not crystal clear, does take on more definition.

Relevancy Filters

As a starting place, the discovery process (as part of litigation) is fundamentally limited by Rule 26 to information (electronic and otherwise) that is “relevant” to the case at hand (i.e., “relevant to the claim or defense of any party”).  This distinction is critical because for the most part it prevents the responding party from having to cast a company wide net for all data, a task envisioned by many content management systems.   Certainly, the ability of certain litigation support software systems to access all user created data is valuable when searching for relevant data, but there are many ways to skin that cat.

No Express Retention or Preservation Duties

Legions of articles proclaim that the amended Rules create wholly new duties to retain information in general, as well as infusing new duties to preserve electronic data once litigation is anticipated.  Instead however, the new Rules expressly disavow creating truly new retention or preservation duties.  While it is undoubtedly a good practice to have a retention policy, given the welter of statutes and regulations that do create retention duties, the Rules do not mandate that a company create one ahead of litigation.

What is true, however, is that the new Rules have powerful implications for preservation once litigation is likely because of the requirements to understand, negotiate and produce relevant information early in the litigation process.  Under the new Rules, it is critical to be able to identify and retain potentially relevant data once litigation is filed (or is “reasonably likely”).  And yet, the burden of placing a legal “hold” on data, while often significant, certainly can be achieved without a formal document retention/deletion policy.  Again, the litigation “trigger” is key.

“Records” Aren’t the Focus

Continuing on this theme, but in a slightly different vector, there are differing opinions about the impact that the Rules have on “business records.”  This issue is nebulous since during litigation discovery, it is easy to confuse potentially relevant data corresponding to litigation with “business records,” which are often used in two different contexts.  Initially, there is the “business records” exception to the hearsay rule, which is quite specific and affects the admissibility of evidence in court.

The second, broader definition applies to organizations as they attempt to define a records management program to meet the numerous state, local and Federal mandates.  Commonly, as part of this complex initiative, companies will create records retention programs that specifically define official “records,” unofficial “records,” “non-records,” as well as specific retention periods for certain types of records.  Once the company’s records protocol is put into place there may be some downstream nexus with the Rules, but it won’t manifest itself until Federal court litigation arises, as described above.   The most common intersection occurs when a records retention policy prescribes a deletion event that contradicts the legal “hold” requirements for a record that is likely to be relevant to litigation.

In sum, the foregoing describes the role the FRCP plays in Federal court litigation.  It should be clear that the important, yet relatively narrow, use cases do not include any general compliance mandate in the absence of specific litigation.  I think it’s important to separate myth from reality when it comes to understanding how and when the revised Rules really do come into play.  Failure to do so can create an unpleasant scenario where your organization will either under- or over-prepare for these important litigation guidelines.