Gary J. Mennitt
Gary J. Mennitt ()

CLI Editor’s Note: This column was originally published in the New York Law Journal on May 2.

On April 9, 2014, the Commercial Division Advisory Counsel requested public comment on a proposed rule to govern discovery of electronically stored information from nonparties. Comments are due on or before May 28, 2014. The proposed rule, Commercial Division Rule 34, provides that “[p]arties and nonparties should adhere to the Commercial Division’s Guidelines for Discovery of Electronically Stored Information (ESI) from Nonparties.” Those guidelines , in turn, set forth procedural rules designed to “improve[e] the efficiency of e-discovery and reduc[e] the potential costs and burdens imposed on non-litigants.”1 The guidelines thus represent the Commercial Division’s most recent effort to craft workable discovery rules in the era of Big Data.

The operative provisions of the guidelines fall into three general categories: (1) obligations of the party seeking ESI discovery from a nonparty; (2) obligations of the nonparty in receipt of a demand for ESI discovery; and (3) mutual obligations to meet and confer regarding discovery disputes. This article analyzes these provisions and discusses the likely impact on litigants and nonparties if proposed Commercial Division Rule 34 is adopted.

Requesting Party Obligations

Litigants bear the initial burden of promoting the efficient procurement of ESI discovery from nonparties. The guidelines encourage a party who demands such information “to engage in discussions regarding the ESI to be sought as early as permissible in an action.” The guidelines thus contemplate an early dialogue between the requesting party and the nonparty regarding the scope of the discovery demand. Such a dialogue would be permissible at any point after the filing of the summons and complaint, and could potentially, perhaps ideally, occur in advance of the service of a subpoena duces tecum on a nonparty.2 As this provision appears to be purely aspirational—parties are “encouraged” to comply—it will remain permissible practice to serve a subpoena duces tecum prior to engaging in any discussions with a nonparty.

Not all of the provisions under the guidelines are merely suggestive, however. Paragraph III provides that a party seeking discovery of ESI from a nonparty should consider certain “proportionality factors” in order to “reasonably limit” its requests. Specifically, the requesting party bears the burden of tailoring its discovery request based on the following factors: the nature of the litigation; the amount in controversy; the expected importance of the ESI; the availability of the ESI from another source (such as a party); the relative accessibility of the ESI; and the expected burden and cost of the nonparty.3

In some respects, the proposed proportionality factors are a scale without a needle. Should a discovery request be considered disproportionate if the nonparty’s cost of production is $20,000 and the amount in controversy is $1 million? What if the amount in controversy is $10 million? Does it matter whether the alleged damages are the balance due on a loan or lost future profits for a new enterprise? The guidelines offer no examples of discovery requests that violate the proportionality requirements, and thus shed little light on how the various factors should be weighed. Initially, balancing the proportionality factors will be a matter for negotiation between the requesting party and the nonparty, as the guidelines expressly provide for consideration of these factors during the meet-and-confer process, discussed infra. The proportionality factors will likely be the subject of motion practice until the bar becomes familiar with how the Commercial Division will apply the multi-factor balancing test.

A party requesting ESI discovery from a nonparty is also obligated to defray the nonparty’s “reasonable production expenses.” This defrayal obligation is not new; the requesting party is required to cover the reasonable production costs of the nonparty under the CPLR.4 The guidelines clarify, however, which expenses may constitute “reasonable production expenses” in the context of a nonparty’s production of ESI discovery. In addition to the costs incurred by the nonparty in connection with identifying, preserving, and producing the requested ESI (including use of “advanced analytical software programs and other technologies”), the requesting party may be required to pay the fees of the nonparty’s outside counsel and e-discovery consultants, whom businesses increasingly rely on to respond to discovery requests. Disruptions to the nonparty’s business may also constitute a reasonable production expense “to the extent such a cost is quantifiable.” Thus, it will often be in the interests of both the requesting party and the nonparty to limit discovery to the most relevant categories of documents in order to minimize unnecessary accrual of expenses.

Obligations of the Nonparty

The guidelines also impose a number of responsibilities on nonparties who receive requests for ESI discovery in connection with Commercial Division cases. Under Paragraph II, a nonparty that receives such a request is “encouraged to promptly issue a preservation notice/litigation hold concerning the requested ESI.” The guidelines further provide that the nonparty should issue a litigation hold that “reasonably cover[s] the requested ESI” until the scope of the request is delineated by agreement or court order. Thus, a nonparty’s immediate obligations in the face of a discovery request are arguably equivalent in some respects to those of a party to the litigation.

The guidelines ‘ imposition of a broad preservation duty upon nonparties is potentially problematic. The preservation of ESI materials subject to discovery can pose a challenge to actual litigants, who have the benefit of placing a request in the context of the underlying litigation. It is questionable whether nonparties should be required to shoulder equivalent preservation responsibilities. For businesses that receive dozens of subpoenas duces tecum annually, crafting and issuing a litigation hold for each could be unduly burdensome.

Moreover, the provisions of the guidelines pertaining to ESI preservation are in tension with the Court of Appeals’ decision in Ortega v. City of New York,5 which held that third-party negligent spoliation of evidence is not a cognizable tort in New York. In light of these concerns, members of the bar, particularly those representing banks and other recipients of large numbers of third-party subpoenas, may wish to submit comments explaining how the proposed ESI preservation provisions will impact their clients’ businesses.

Should a nonparty object to an ESI discovery request on grounds that the production of the requested documents would be unduly burdensome, the nonparty is required to state such objection with “reasonable particularity.” However, the nonparty need not seek judicial intervention. Within 20 days of service of the subpoena, the nonparty should direct its objections to production of ESI materials to the party requesting such discovery. The nonparty’s specific identification of the objectionable aspects of the discovery request—such as overbreadth or redundancy—may assist the requesting party to amend its request as appropriate. In the event that the nonparty’s objections are not resolved through this process, the burden will fall on the requesting party to move to compel compliance with the subpoena.6

Meet and Confer

Consistent with earlier amendments of the discovery rules,7 the guidelines seek to minimize the New York judiciary’s involvement in the third-party discovery process. To that end, the guidelines direct the requesting party and the nonparty to “resolve disputes through informal mechanisms” and to “initiate formal motion practice only as a last resort.” Thus, the requesting party and the nonparty are required to meet and confer regarding the gamut of issues that typically arise in cases involving significant e-discovery. Such issues include “the scope of the ESI discovery, the timing and form of production, ways to reduce the cost and burden of the ESI discovery (such as advanced analytic software applications and other technologies that can screen for relevant and privileged ESI), and the requesting party’s defrayal of the nonparty’s reasonable production expenses.”

Should disputes persist after the requesting party and nonparty have met and conferred in good faith, the requesting party and nonparty are encouraged to tap the court’s resources for alternative dispute resolution (ADR). For instance, the requesting party and nonparty may request a telephonic conference with a special referee or seek the appointment of an uncompensated mediator under Rule 3 of the Commercial Division Rules. Though resort to these ADR resources is merely “encouraged” under the guidelines , it is possible that judges in the Commercial Division will look unfavorably upon discovery motions filed prior to exhaustion of non-judicial remedies. Thus, a party seeking ESI discovery from nonparties may be incentivized to carefully focus their requests and will likely be well served to move to compel production only as a “last resort.”

Conclusion

Proposed Commercial Rule 34 and the proposed guidelines attempt to clarify and streamline the procedure for seeking electronic discovery materials from nonparties. If the proposed rule is adopted, parties seeking ESI discovery from nonparties will be responsible for reasonably limiting the scope of their requests, taking into consideration the nature of the litigation, the amount in controversy, the expected importance of the ESI, the availability of the ESI from another source (especially through party discovery), the relative accessibility of the ESI, and the expected burden and cost to the nonparty.

Nonparties, on the other hand, will be encouraged to take early action to preserve responsive ESI and to articulate their objections to production with specificity. Finally, the guidelines ‘ meet-and-confer requirements will encourage requesting parties and nonparties to resolve discovery disputes through informal negotiations and use of the court system’s ADR resources.

The stated purpose of the guidelines is to improve the efficiency of third-party ESI discovery, to encourage the early assessment and discussion of the costs and burdens associated with that discovery, to identify the costs that the requesting party will be required to defray, and to encourage the non-judicial resolution of related disputes. No doubt, the Commercial Division also seeks to ease the burden on the courts to police disputes regarding requests for ESI discovery from nonparties. The public has the opportunity to weigh in as to whether the guidelines properly and adequately promote these goals.

Gary J. Mennitt is a partner at Dechert and co-author of a chapter in ‘Commercial Litigation in New York State Courts’ (West 2010, Supp. 2013). Evan B. McGinley, an associate at the firm, contributed to the writing of this article.

ENDNOTES:
1. John W. McConnell, Memorandum Regarding Proposed Adoption of a New Rule of the Commercial Division (Apr. 9, 2014), available at https://www.nycourts.gov/rules/comments/PDF/PC-Packet-CD-RuleNonPartyESI.pdf.

2. See CPLR 304(a) (“An action is commenced by filing a summons and complaint or summons with notice.”); CPLR 3120(1) (any party may serve a subpoena duces tecum on any other person “[a]fter commencement of an action”). Thus, third-party discovery is permissible even before the appearance of a defendant.

3. This appears to be an exclusive list of the guideline factors bearing on the proportionality of a discovery request.

4. See CPLR §§3111, 3122(d).

5. 9 N.Y.3d 69, 876 N.E.2d 1189 (2007).

6. CPLR 3122.

7. See Velez v. Hunts Point Multi-Serv. Ctr., 29 A.D.3d 104, 109, 811 N.Y.S.2d 5, 8 (2006) (discussing the 2003 amendment of CPLR 3120 to remove the requirement of a motion on notice to obtain document discovery from nonparties).