Toxic Tort Litigation Blog : Toxic Tort Lawyer & Attorney : Epstein Becker Green Law Firm : Product Liability, Contamination, Pollution

On February 28, 2012, the Appellate Division, First Department, issued its decision in U.S. Bank N.A. v. GreenPoint Mortgage Funding, Inc., 2012 N.Y. App.Div. LEXIS 1487, which  adopted the standards established in the SDNY's 2003 landmark decision in  Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (SDNY 2003).  In its decsion, he First Department held that the  party producing electronically stored information ("ESI") bears the the burden of paying for the production.  This unanimous decision represents a reversal of several New York trial court rulings holding that the party requesting disclosure had the obligation to pay for its production. 

As is often the case, interesting appellate decisions can be the product of discovery disputes that have a high chutzpah quotient.  Here, not only did GreenPoint seek to have plaintiff pay for its ESI production, it went a step further in demanding that plaintiff pay for the cost of GreenPoint's attorneys' pre-production time in performing a pre-production privilege review. Would this appeal have been filed if attorneys' fees had not been in the mix?

Several weeks ago, I reported here about the First Department's adoption (in Voom H.D. Holdings) of Zubulake's standards for addressing the spoliation of ESI evidence.  In  U.S. Bank N.A. v. GreenPoint Mortgage Funding, Inc., the court has turned to Zubulake yet again, in the absence of any guidance in the CPLR concerning ESI disclosure cost allocation.  Although it is unclear whether the other New York appellate departments will similarly embrace Zubulake, the decision harmonizes state and federal discovery practice in Manhattan courts, if not upstate.

Therefore, it is all the more important for the practitioner to appreciate that Zubulake's cost allocation mandate is by no means absolute.  Under Zubulake, the producing party must only bear "the initial cost of searching for, retrieving and producing discovery".  The decisions sets forth seven factors for courts to consider in evaluating whether to shift all or part of the cost of ESI production back to the requesting party.  For example, costs may be shifted back to the requesting party if: (1) the request is not tailored to discover relevant information; (2) the discovery can be obtained from other sources; (3) the cost of production as compared to the amount in controversy; (4) the cost of production, compared to the resources available to the parties; (5) the relative ability of each party to control costs and their incentive to do so; (6) the importance of the stakes in the litigation; and (7) the relative benefit to the parties of obtaining the information at tissue. 

We should expect that state court practitioners, seeking to avoid having their clients bear  the costs of ESI production alone,  will shortly be committing these seven factors to memory. 

New York practitioners should stay abreast of important new rules and proposed rules governing E-discovery in both the state and federal courts in New York.  As reported by Mark A. Berman in an article in the New York Law Journal on January 3, 2012, NYSBA's influential E-Discovery Committee has released a report entitled,"Best Practices in E-Discovery in New York State and Federal Courts", which contains practical "hands-on" advice concerning what Mr. Berman describes as  the challenging electronic discovery landscape relating to the preservation, collection and production of ESI. Until now, state court  practitioners perhaps have not felt the same pressure in a state court setting as in federal court  to "get it right" when it came to ESI.  This may begin to change. The working group of the NYS Unified Court System is expected to shortly release a bench book on ESI, which will be provided to state judges.  In Manhattan, Commercial Division Justice Jeffrey K. Oing, is utilizing a model electronic e-discovery order, which may soon become the norm in commercial litigation throughout the State.  Even more than previously, e-discovery concerns need to be raised with both the client and the adversary at the earliest possible stage of a claim.  The Berman article provides a good overview of the key guidelines in the report.

 Duane Morris reported today concerning a decision in Race Tires America, Inc. v. Hoosier Racing Tire Corp., 2011 U.S. Dist. LEXIS 48847 (W.D. Pa. May 6, 2011). There, the U.S. District Court for the Western District of Pennsylvania held that the prevailing defendants at trial  may recover a whopping $367,000 in e-discovery costs because such costs are the modern-day equivalent of duplication costs.  Although the court took care to limit its ruling to the "unique" facts associated with this case, should litigants consider more narrowly tailoring their discovery requests and seeking early agreement on the scope of electronic productions?  Following an affirmance of an award of summary judgment to defendants by the Third Circuit, the defendants sought to recover their costs—the vast majority of which were related to e-discovery. The plaintiff objected, contending that the costs were not taxable pursuant to 28 U.S.C. § 1920(4), which permits recovery of "[f]ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case." The issue before the district court was the applicability of § 1920(4) to electronically stored information, an issue which has not yet been addressed by the Third Circuit. In its ruling, the district court first focused on the words "exemplification" and "copying." While recognizing that these terms "originated in and were developed in the world of paper," it viewed the steps a vendor takes to produce electronic data as the "electronic equivalents of exemplification and copying."  Defendants were able to demonstrate that plaintiff  aggressively pursued e-discovery under the case management plan, and the court found that the requirements and expertise necessary to retrieve and prepare documents for production were an indispensable part of the discovery process.  Although the district court limited the holding to the facts presented by the case, it is likely that the expanded view of 1920(4) will be debated in other district courts around the United States in the months to come. Although many courts have attempted to allocate the costs of e-discovery fairly before a party undertakes this obligation, this cases suggests that courts may seek to revisit the allocation of e-discovery costs following entry of judgment.  According to the decision, it is up to the party seeking to recover these costs to demonstrate that the costs at issue were incurred for the sole purpose of complying with an adversary's demands rather than, for example, improving the appearance of documents for trial presentation purposes. 

Are defendants in New York product liability and toxic tort litigation better off in federal court than in state court? Federal court discovery rules certainly are more liberal than state court discovery rules. There, plaintiff’s experts are subject to deposition and, if appropriate, Daubert challenges. In contrast, state court provides only minimal expert disclosure. However, state court rules concerning the production of electronically stored information (“ESI”) may be more favorable to corporate defendants litigating in state court. In state court, the general rule is that the requesting party pays for the defendant’s ESI retrieval. In federal court, the court will apply “proportionality” concepts, and balance the importance of the discovery with the burden on the producing party. Thus, the result of the burden shifting analysis is somewhat more complex and subject to more variables. As reported in this space on November 4, 2009, (“Cost Allocation of E-Discovery in NY Trial Courts”), the Joint Committee on Electronic Discovery, convened by the Association of the Bar of the City of New York, has recommended that the legislature amend the CPLR to address time-consuming ESI disclosure disputes. The new proposed CPLR rule is expected to address a litigant’s duty to preserve ESI in anticipation of litigation; the scope of that duty; and the scope of ESI production. 

An article in Kramer Levin’s Electronic Discovery Update (January 2010), “Cost Shifting in New York: Forum Makes All the Difference,” discusses the background of the general presumption in state court that the requesting party pays for the cost of discovery. Although the CPLR does not explicitly apply this presumption to ESI costs, New York state courts have followed this presumption when deciding how to allocate e-discovery costs. In Lipco Elec. Corp. v. ASG Consult. Corp., for example, the court found that “… cost shifting of electronic discovery is not an issue in New York, since the courts have held that, under the CPLR, the party seeking discovery should incur the costs.” Lipco Elec. Corp. v. ASG Consult. Corp., 4 Misc.3d 1019(A), 2004 WL 1949062 (Sup. Ct. Nassau Co. Aug 18, 2004). In contrast to state court practice, the standard under federal jurisprudence is less clear cut.  The Hon. Shira Scheindlin (SDNY) has articulated a multi-factored balancing test, which has been influential in guiding determinations of when the cost of producing “inaccessible” data should be shifted to the requesting party. Zubulake v. UBS Warburg LLC, 216 F.R.D. 280 (S.D.N.Y. 2003). The Kramer Levin Update observes that a recent New York trial court opinion declined to apply this federal approach, stating that it was “not empowered – by statute or case law – to overturn the well settled rule in New York state that the party seeking discovery bear the cost incurred in its production.” T.A. Ahern Contractors Corp. v. Dormitory Auth. of the State of N.Y., 2009 WL 806779 (Sup. Ct. N.Y. Co. Mar. 19, 2009). Citing the policy behind the rule, the court observed that the requester-pays standard gives a party “a strong incentive to formulate its discovery requests in a manner as minimally burdensome as possible.”  I predict that the differences between state and federal ESI practice will narrow in the near term, possibly with the promulgation of a CPLR rule, and that New York will ultimately adopt a more federal approach modeled on the influential Sedona Conference Working Group template.  However, for the present, a New York state court plaintiff runs the risk of incurring substantial costs in demanding burdensome ESI from a corporate defendant.  Be careful what you wish for!

The Manual For State Trial Courts Regarding Electronic Discovery Cost-Allocation, authored by the Joint E-Discovery Subcommittee of the Association of the Bar of the City of New York, is required reading for any New York state court litigator involved in e-discovery.  The Manual is intended to assist New York State judges and court personnel in managing issues relating to the cost of discovery of electronically stored information, or "ESI'.  As  state court decisions on e-discovery cost allocation are likely to reference the Manual, practitioners are well-advised to familiarize themselves with the Manual now.  The authors cite one study that found that between 58% and 90% of litigation budgets are devoured by document review.  The issue of who pays for  e-discovery--the requesting party or the responding party--often involves sums of money above and beyond the damages sought by the claimant.  As a result, litigation costs drive cases to settle that should not settle on the merits.  Although New York law mandates that the requesting party pay the costs of discovery, there is authority in New York law for requesting parties to seek protective orders aimed at shifting all or part of the ESI costs to the producing party.

Of interest to practitioners outside New York, the Manual provides an overview of ESI burden and expense, and cost-shifting rules, adopted in states across the country.  This discussion, as well as a review of federal case law, suggests that New York is not "going it alone" but is drawing on the principles developed at the Sedona Conference and in leading cases such as Zubulake, which provides a seven-factor balancing test for determining cost allocation.