Bytes, bits and bucks: cost shifting and sanctions in e-discovery: in the electronic forest where sanctions can abound, good faith of the part of counsel in meeting requests can go a long way in avoiding trouble.

• Author: Barkett, John M.

ELECTRONIC discovery, known as e-discovery, is a hot-button litigation topic. Cost shifting and sanctions dominate the case law. The current landscape of cost shifting is dominated by the Zubulake test, which redefined the cost-shifting debate in the federal courts in 2003. The Rowe rubric had done the same a year earlier.

E-discovery sanctions are a trap for the unwary, as is evidenced by a selection of e-discovery cases in which sanctions were sought or awarded in state or federal courts the past two years. It's not surprising that the U.S. Judicial Conference has proposed amendments to the Federal Rules of Civil Procedure in an attempt to deal with the thorny issues raised by e-discovery. In the meanwhile, there are practical guidelines lawyers can follow to manage the costs of e-discovery compliance and avoid e-discovery-related sanctions.

COST SHIFTING

Who pays for electronic document production--the requesting party or the producing party? In cases in which the dollars at stake are large, the answer to this question likely begins with the decisions of Judge Shira A. Scheindlin of the U.S. District Court for the Southern District of New York in Zubulake v. UBS Warburg LLC. (1)

1. Zubulake I

   Zubulake I held that the responding party generally bears the cost of production of electronic evidence, including e-mail. The issue arose in the context of Laura Zubulake's request for responsive e-mail from her former employer, UBS, in her gender discrimination case in which she claimed a failure to promote her and retaliation for filing a charge of discrimination with the Equal Employment Opportunity Commission.

   Cost shifting is a function of whether the electronic data sought is "accessible" or "inaccessible," the district court stated. If accessible, it must be produced at the responding party's cost; if inaccessible, a cost-shifting analysis is required.

   During discovery, UBS had produced 100 pages of e-mail. In contrast, Zubulake produced approximately 450 pages of e-mail correspondence she had retained from her employment. She claimed that UBS either had additional responsive e-mails or had improperly deleted them.

   UBS conceded that responsive e-mail existed on optical storage media, as required by Securities and Exchange Commission regulations, and that indexes of its magnetic backup tapes revealed that responsive e-mails were contained on a total of 94 tapes. After an initial discovery conference, UBS agreed to produce responsive e-mails from five individuals named by Zubulake for a 16-month period from the date of her hire to one month after her termination, "if retrieval is possible." Despite this agreement, UBS did not try to retrieve e-mail from optical media or magnetic backup tapes. Instead, it contended the initial production was sufficient and that further efforts would be too costly, first estimated at approximately $300,000, then stated at oral argument to be $175,000. Zubulake then filed a motion to compel production and sought sanctions.

   Because Zubulake herself had produced approximately 450 pages of e-mail correspondence, Judge Scheindlin agreed that UBS either had additional responsive e-mails or had deleted them. She also noted that Zubulake had produced a UBS e-mail that might qualify as a "smoking gun" in support of her case.

   Under Rule 34 of the Federal Rules of Civil Procedure, Judge Scheindlin explained, electronic documents, including e-mails, are indistinguishable from paper documents with respect to production obligations, even if the electronic documents in question "may have been deleted and now reside only on backup disks." Whether production of electronic evidence is unduly burdensome or expensive turns primarily on whether it is kept in an accessible or inaccessible format. And whether electronic data is accessible or inaccessible depends on which of five types of media it is stored. (2)

   Data which is (1) "online" or archived on current computer systems, such as hard drives, (2) "near-line," such as that stored on optical disks or magnetic tape stored in a robotic storage library from which records can be retrieved in two minutes or less, or (3) "off-line," but in storage or archives, such as removable optical disks or magnetic tape media are readily accessible using standard search engines because the data are retained in machine readable format.

   On the other hand, (4) routine disaster recovery backup tapes that save information in compressed, sequential and nonindexed format, and (5) erased, fragmented or damaged data are generally inaccessible, because a time-consuming, expensive restoration process is required to obtain information.

   Both Zubulake and UBS had agreed that the eight-factor cost-shifting test for electronic discovery articulated in Rowe Entertainment Inc. v. William Morris Agency Inc. should be used to determine whether cost shifting was appropriate. The Rowe factors are:

   (1) the specificity of the discovery requests; (2) the likelihood of discovering critical information; (3) the availability of such information from other sources; (4) the purposes for which the responding party maintains the requested data; (5) the relative benefits to the parties of obtaining the information; (6) the total cost associated with production; (7) the relative ability of each party to control costs and its incentive to do so; and (8) the resources available to each party. (3)

   In deciding whether to permit cost shifting, Judge Scheindlin first concluded that the Rowe test was improper because it generally favors cost-shifting. She found that as applied, the Rowe test improperly undercuts the presumption that the producing party pays by Rowe's failure to include all the cost-shifting criteria in Federal Rule of Civil Procedure 26(b)(2) by weighting all factors equally and by not developing a full factual record. (4)

   Judge Scheindlin crafted a three-step analysis. First, the district court must "thoroughly understand the responding party's computer system, both with respect to active and stored data." For data stored in accessible data format, the usual rules of discovery should apply, and the responding party should pay the cost of producing responsive data. A court should limit cost shifting "only" to situations in which electronic data are "relatively inaccessible, such as in backup tapes." (Emphasis in original.)

   Second, since the "cost-shifting analysis is so fact-intensive, it is necessary to determine what data may be found on the inaccessible media." The district court thought that a sensible approach in most cases is to require the responding party to restore and produce responsive documents from a representative sample of such inaccessible media.

   Third, to remedy the imbalance of the Rowe test, Judge Scheindlin concluded that the following seven factors should be considered, "weighted in more-or-less the following order":

   1. The extent to which the request is specifically tailored to discover relevant information.

   2. The availability of such information from other sources.

   3. The total cost of production, compared with the amount in controversy.

   4. The total cost of production compared to the resources available to each party.

   5. The relative ability of each party to control costs and its incentive to do so.

   6. The importance of the issues at stake in the litigation.

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

   The court found that e-mail on UBS's active user e-mail files and archival optical media were very accessible and easy to retrieve, and she ordered UBS to produce all responsive e-mail from those sources. But Judge Scheindlin recognized that the information on the 94 magnetic backup tapes was not easily accessible. Adopting a backup tape sampling approach first embraced in McPeek v. Ashcroft, (5) the district court ordered UBS to produce, at its expense, responsive e-mails from any five of the 94 backup tapes selected by Zubulake. UBS was to file an affidavit thereafter with the results of the search and of the time and money spent in restoring this sample. After reviewing the contents of the UBS backup tape sample and its certification, Judge Scheindlin said she would conduct the appropriate cost-shifting analysis.

2. Zubulake III (6)

   Zubulake III contains Judge Scheindlin's cost-shifting analysis in which she ruled that UBS should pay 75 percent of the cost of production and Zubulake should pay the remaining 25 percent. This ruling followed the results of an initial analysis of five of what turned out to be 77, not 94, backup tapes. This restoration resulted in 6,203 unique e-mails. After filtering for references to the plaintiff, 1,075 remained. Following a privilege review by UBS's outside counsel, UBS produced approximately 600 e-mails, six times the number initially produced.

   Judge Scheindlin then applied her seven-factor test and reiterated that the first two factors of its cost-shifting test--together known as the "marginal utility test" first announced in McPeek--should be given the greatest weight. As to the first factor, she determined that the e-mails located on the backup tapes did not contain direct evidence of gender discrimination but that they were relevant and demonstrated that "the discovery request was narrowly tailored to discover relevant information."

   As to the second factor--the availability of information from other sources--Judge Scheindlin found that a significant number of responsive e-mails, including some particularly damaging to UBS, had not been preserved and existed only on backup tapes. While she acknowledged that some of the substance of the 600 e-mails was available from other sources--for example, printed copies--a good deal of it could be found only on backup tapes. She concluded that direct evidence of discrimination might be available only through restoration of the backup tapes. She also recognized that the existence of that evidence is "still speculative." As a result, she held that Zubulake...