Evan Glassman and Jeffrey Novack
Evan Glassman and Jeffrey Novack ()

It is beyond dispute that the explosive growth of electronically stored information (ESI) has transformed civil discovery, including third-party discovery. With greater volumes of information available from third parties than ever before, and court and policymaker sensitivity to the imposition of costs on third parties, counsel must take care to ensure that their third-party discovery practice is efficient and cost-effective. This article explores cost-effective third-party discovery practice. In particular, it discusses how counsel may be able to minimize costs by assuming certain costs directly and arranging for documents to be produced to, and warehoused by, the requesting party’s own in-house team or an outside vendor selected by the requesting party.

Both the Federal Rules of Civil Procedure (FRCP) and New York CPLR contemplate third-party discovery practice and sensitivity toward costs to third parties.

Federal Rules

Under the Federal Rules, subpoena practice is outlined in FRCP 45. It provides that the issuing party “must take reasonable steps to avoid imposing undue burden or expense on a person subject to the subpoena.”1 District courts are obligated to “enforce this duty and impose an appropriate sanction—which may include lost earnings and reasonable attorney fees—on a party or attorney who fails to comply.”2 The rule similarly offers protections against the compelled discovery of ESI “from sources that the person identifies as not reasonably accessible because of undue burden or cost.”3 Where an objection to a discovery request is made, and the requesting party moves, and the court orders compliance, the court’s order must protect the non-party “from significant expense resulting from compliance.”4 Federal courts have held that cost-shifting is not only appropriate in this context, but “particularly appropriate,” “since Rule 45 directs courts to minimize the burden on non-parties.”5 In determining whether cost-shifting is appropriate, courts have cited a variety of tests.

Some federal courts have listed the factors as: “(1) whether the nonparty has an interest in the outcome of the case; (2) whether the nonparty can more readily bear the costs; and (3) whether the litigation is of public importance.”6 With respect to the first factor, “[w]here the non-party was involved in litigation arising out of the same facts or was substantially involved in the underlying transaction, courts have found the non-party to be interested in the outcome of the litigation.”7 This is significant because “the rule aims to protect” the “innocent, disinterested bystander.”8

Federal courts have also cited the factors listed in the Sedona Conference’s 2008 commentary on non-party discovery practice: “(a) the scope of the request; (b) the invasiveness of the request; (c) the need to separate privileged material; (d) the non-party’s interest in the litigation; (e) whether the party seeking production of documents ultimately prevails; (f) the relative resources of the party and the non-party; (g) the reasonableness of the costs sought; and (h) the public importance of the litigation.”9

And other federal courts have cited yet another list of considerations entirely: “(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 benefit 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.”10 Courts have also highlighted, in determining the appropriateness of third-party cost shifting, whether there was a cooperative and collaborative dialogue between the parties, with one court even calling it the “controlling factor” in its analysis.11

Cost-shifting in the federal context is normally limited to the cost of searching, collecting, and producing, and not the cost of reviewing the documents since “the producing party has the exclusive ability to control the cost of reviewing the documents.”12 Decisions as to cost-shifting may have a long tail. The U.S. Court of Appeals for the Ninth Circuit recently held that orders on cost-shifting could be appealed after the order itself, or after final judgment in the underlying case.13

New York Rules

The New York CPLR evinces a similar sensitivity to third-party costs. CPLR 3111 and 3122(d) provide that the “reasonable production expenses of a non-party witness shall be defrayed by the party seeking discovery.” What is included as “reasonable production expenses” is unclear, however. In Tener v. Cremer, the Appellate Division, First Department indicated that courts “should allocate the costs of…production” to the requesting party but offered no overt guidance as to what those costs could include.14 The First Department did, however, suggest a potential openness to considering a broader range of costs than under the federal rules. It directed the trial court, on remand, to consider in its cost allocation “the cost of disruption…to…normal business operations.”15 At least one New York Supreme Court decision prior to Tener allowed for recovery of attorney fees.16 Another Supreme Court decision, however, awarded only the minimum wage for the costs of “researching” and identifying the documents to be produced, tasks that might, in some instances, be assigned to attorneys.17

Third-party discovery cost-shifting in New York state courts appears to represent a departure from party discovery. Third-party practice affirmatively provides for cost-shifting by the court while party discovery requires that the producing party make a motion for cost-shifting. With respect to party discovery, in 2012, the New York’s First Department held that party cost-shifting should be evaluated under the seven-factor test laid out by the Southern District of New York in Zubulake v. UBS Warburg.18

Practice Pointers

While, as evidenced above, third-party discovery practice is governed by broad principles and is highly fact-sensitive, some best practices have emerged.

First, counsel should consider, if both New York state and federal courts are available, whether the clearer non-party discovery law of federal court militates in favor of filing in, or removal to, federal court. This could be a significant consideration if it is anticipated that the matter will entail substantial third-party discovery and ESI, particularly given the unclear scope of fee-shifting under New York state law.19

Second, counsel should avoid placing undue weight on whatever particular factors the court at issue has announced that it applies in determining cost-shifting. It is far more likely that, whatever the declared factors are, courts will look to a broad range of equitable considerations.

Third, counsel should investigate potential third parties’ financial resources and interest in the outcome of the case, since both are potential factors in determining cost-shifting. It may be that multiple third parties could provide similar information, but vary in terms of their resources, or their potential interest in the case. Basic due diligence on these matters at the outset may help avoid cost-shifting later in the case.

Fourth, along the same lines, counsel should also consider who is, and who is not, a third party. Courts have repeatedly held that a party need not have “legal ownership or actual physical possession of the documents” so long as they have “the right, authority or practical ability to obtain the documents from a non-party to the action.”20 This is a key consideration in an era when companies may have complex corporate structures and in which companies are increasingly storing their information on clouds maintained by third parties.21

Fifth, counsel should carefully craft its discovery requests to avoid undue burden at the outset. Reasonable initial requests are far more likely to foster the cooperative discovery process the Sedona Conference and the courts have emphasized. They are also likely to limit costs in three respects: (1) they will likely result in a more targeted production and limit your own review time; (2) they will likely limit the costs of the reviewing party and, therefore, the amount of costs that are ultimately shifted, if any; and (3) they will likely undermine the third party’s case for cost-shifting more broadly.

Sixth, counsel should work collaboratively and constructively with third parties on their requests. This should include candid discussion of possible ESI search terms, data custodians, and burden to the third party. Counsel should also consider requesting information as to the number of “hits” search terms generate before the third party proceeds, since a greater number of hits will likely entail both greater attorney review time and costs of production. It may be appropriate to have several rounds in which search terms are tested before a reasonable number of hits is attained. Importantly, courts have held that a requesting party has an obligation to propose search terms and custodians, even in the face of intransigence by the responding party.22

Finally, if, as part of counsel’s dialogue with third parties, a third party indicates that it will seek costs, counsel should seriously consider negotiating a reasonable agreement as to the handling of costs. Agreeing to the handling of costs will avoid the time, expense, and distraction of litigating the issue, provide certainty, and avoid the potentially long tail of cost-shifting disputes.

Counsel should also consider, as part of any negotiation as to costs, affirmatively offering to handle, in-house or through a third party of the requesting party’s choosing, the production and storage of the third party’s electronic data. While unconventional, this approach has been successfully implemented on several occasions by the author’s firm. It has the virtues of: (1) signaling your reasonableness to the court regardless of whether the third party accepts the proposal; and (2) if the third party accepts, allowing for in-house control of the potential costs of production—the costs that are most likely to be the subject of cost shifting. And, while untested in litigation, it is easy to imagine its appeal to the courts, given their focus on collaboration and cooperativeness.

While adversaries may be skeptical of this approach, their concerns are likely capable of being addressed through appropriate protections. Counsel can agree: (1) that the producing party will have remote access to upload the data at issue; (2) that only technical personnel from counsel for the requesting party will have access to the database until it is designated for production; (3) those personnel will be screened from counsel for the requesting party; (4) that no lawyer from the requesting party will have access to the database until the production is authorized; (5) that lawyers from the requesting party will have access only to the data that is designated for production by the producing party; and (6) to the disposition of the data at the conclusion of the litigation.

For counsel for the requesting party, it will be important to agree that their receipt of these documents does not in any way create an attorney-client relationship between counsel and the producing party. It will also be important the requesting party contractually insulate itself from any potential liability based on its hosting of the data. The requesting party can do so by drafting contractual provisions that mirror those used by third-party discovery vendors.

Conclusion

Third-party discovery is, and will continue to be, an important discovery tool, and courts will continue to be sensitive to the costs of such discovery on third parties. Counsel should take care to foster a collaborative and cooperative approach, when possible. This approach will minimize the time spent litigating disputes, likely result in more useful, targeted productions, and lower any potential cost-shifting.

Evan Glassman is a partner in the New York office of Steptoe & Johnson. Jeffrey A. Novack is an associate at the firm.

Endnotes:

1. FRCP 45(d).

2. FRCP 45(d)(1).

3. FRCP 45(e)(1)(D).

4. FRCP 45(d)(2)(B)(ii).

5. United States Nat’l Bank v. PHL Variable Ins., No. 12 Civ. 6811, 2012 WL 5395249, at *4 (SDNY Nov. 5, 2012); Watts v. S.E.C., 482 F.3d 501, 509 (D.C. Cir. 2007); Sahu v. Union Carbide Corp., 262 F.R.D. 308, 317 (SDNY 2009).

6. In re World Trade Center Disaster Site. Litig., No. 21 MC 100, 2010 WL 3582921, at *2 (SDNY Sept. 14, 2010); Dow Chem. v. Reinhard, No. M8-85, 2008 WL 1968302, at *2 (SDNY April 29, 2008); In re Law Firms of McCourts and McGrigor Donald, No. 19-96, 2001 WL 345233, at *1 (SDNY April 9, 2001).

7. In re Subpoenas to Folliard, No. 10-mc-789, 2012 WL 907763, at * 3 (D.D.C. March 16, 2012).

8. Dow Chem. v. Reinhard, No. M8-85, 2008 WL 1968302, at *2 (SDNY April 29, 2008).

9 . DeGreer v. Gillis, 755 F.Supp.2d 909, 929 (N.D. Ill. 2010).

10. In re Subpoena to Creeden & Associates, No. 12 C 5573, 2012 WL 4580841, at *2 (N.D. Ill. Sept. 28, 2012).

11. DeGreer v. Gillis, 755 F.Supp.2d 909, 929 (N.D. Ill. 2010); Apple v. Samsung, No. 12-cv-0630, No. 12-cv-0630, 2013 WL 1942163, at *3 (N.D. Cal. May 9, 2013).

12 . Id.; Zubulake v. UBS Warburg, 216 F.R.D. 280, 290 (SDNY 2003).

13. Legal Voice v. Stormans, 738 F.3d 1178, 1182 (9th Cir. 2013).

14. Tener v. Cremer, 89 A.D.3d 75, 82 (1st Dept. 2011).

15. Id.

16. Finkelman v. Klaus, No. 5257/05, 2007 WL 4303538 (Sup. Ct. Nassau Co. Nov. 28, 2007).

17 . Klein v. Persaud, 906 N.Y.S.2d 780, at *2-4 (N.Y. Sup. 2009).

18. Zubuluke v. UBS Warburg, 217 F.R.D. 309 (SDNY 2003).

19. Id.

20. Bush v. Ruth’s Chris Steak House, 286 F.R.D. 1, 5 (D.D.C. 2012).

21. Id.; Dietrich v. Bauer, No. 95-cv-7051, 2000 WL 1171132, at *2-5 (SDNY Aug. 16, 2000).

22. DeGreer v. Gillis, 755 F.Supp.2d 909, 929 (N.D. Ill. 2010); Apple v. Samsung, No. 12-cv-0630, No. 12-cv-0630, 2013 WL 1942163, at *3 (N.D. Cal. May 9, 2013).