Jason Atchley : Legal Technology : New Discovery Rules to Rein in Litigation Expenses

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New Discovery Rules to Rein in Litigation Expenses

Creighton Magid, Corporate Counsel

October 29, 2014    | 0 Comments

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Ask U.S. businesses about the country’s legal system, and the primary complaint almost always involves cost. Not far behind is the lament that the high cost of litigation forces companies to offer generous settlement payments, even when the merits of the case suggest that the case should be taken to trial or settled for a much smaller amount. Although lawsuits are likely to remain expensive, the federal judiciary has approved new rules that represent an important assault on runaway costs.
Most of the cost involved in a typical business lawsuit is incurred in pretrial discovery. Although discovery has long been expensive, costs exploded with the introduction—and now near-ubiquity—of electronic data, including emails and databases. In larger cases, the cost of document discovery can easily reach into the millions of dollars per lawsuit. Perhaps more important, because the court rules place little restraint on the tendency of lawyers to search through as much data as possible in the hope of finding something useful, the process is not only expensive but inefficient. One survey of large lawsuits found that for every 1,000 pages of documentation produced in discovery, only one page became an exhibit at trial.
This treasure hunt for documents imposes costs on companies in another respect: The current litigation system requires companies to incur significant costs to ensure that documents and data—primarily in electronic form—are preserved for potential litigation. The reason is that, with increasing frequency, the outcome of lawsuits is determined not so much by whether a contract was broken or whether a fraud took place, but how well the litigants preserved electronic data. Earlier this year, for example, a federal judge in Louisiana instructed a jury that because a pharmaceutical company had failed to preserve certain records—even though the records may not have been useful in the lawsuit—the jury was “free to infer those documents and files would have been helpful to the plaintiffs or detrimental to” the pharmaceutical company. The jury went on to slap the pharmaceutical company with a $6 billion punitive damages verdict.
The risk of such an instruction drives many companies to spend huge sums on document preservation and storage that would otherwise be unnecessary for their business operations. A report issued earlier this year by professor William Hubbard of the University of Chicago Law School pegged the “fixed” cost of implementing hardware and software systems to preserve electronic data to be $2.5 million per year for large companies, and the additional, lawsuit-specific costs of preserving data to range from $12,000 per year for small companies to nearly $39 million per year for large companies.
On September 16, the Judicial Conference of the United States—a group of 26 federal judges that serves as the policy-making body for the federal courts—announced several proposed amendments to the rules that govern discovery and trials in the federal courts that address the problem of discovery cost in several significant ways. First, the new rules emphasize that discovery is to be “proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.” The explanatory notes accompanying the proposed rules make it plain that the intent of the rules is to encourage active judicial oversight of the discovery process to ensure that discovery is not excessive, redundant or more expensive than necessary.
Second, the proposed rules give judges more explicit authority to ask the party requesting documents and information to share in the costs of locating and producing such documents and data. Whereas the cost of locating, processing, reviewing and producing information—including electronically stored information—today is almost always borne by the producing party, the new rules portend greater judicial willingness to condition approval of expensive document and data requests on the requesting party’s willingness to pick up the tab, particularly when the importance of the requested data is not obvious or when the likelihood of finding useful information is low relative to the effort and cost of searching for it.
Third, the new rules place explicit limitations on the circumstances under which courts may mete out the most severe sanctions for failure to preserve electronically stored information. At present, some federal courts take the position that only intentional loss or destruction of documents may result in an “adverse inference instruction”—that is, the judge telling the jury that a party has failed to preserve data, and, as a result, the jury may (or even must) presume that the unavailable data or documents are unfavorable to that party. Those courts similarly require willfulness before imposing even more draconian sanctions such as dismissal. Other federal courts are of the view that even inadvertent failures to preserve data (typically electronic data) may give rise to such sanctions.
The new rules make it plain that judges cannot impose any sanctions without first determining that the loss of data or documents prejudiced the opposing party, and that any sanctions may be “no greater than necessary to cure the prejudice.” Moreover the proposed new rules are explicit that the most severe sanctions, such as adverse inference instructions or dismissal, may be imposed “only upon finding that the party [that failed to preserve data] acted with the intent to deprive another party of the information’s use in the litigation.”
The new rules will help bring clarity and uniformity to the imposition of sanctions for spoliation and should limit the imposition of the most severe sanctions (as well as the expensive motion practice concerning such sanctions). Further, the new rules will likely reduce the cost of corporate document preservation, as companies will no longer have to over-preserve electronically stored data and information as protection against the possibility that merely inadvertent loss of such data and information could be grounds for the most serious sanctions (and billion-dollar punitive damages verdicts).
The new rules will not be a panacea, however. Whether spoliation occurred “with the intent to deprive another party of the information’s use in the litigation” still will be decided by district court judges. In the Louisiana pharmaceutical case, for example, the judge determined that the destruction of documents before the pharmaceutical company anticipated litigation over the particular dispute at issue constituted intentional spoliation, because a litigation hold involving different and previously resolved claims had never been withdrawn (imposing, in the judge’s view, an ongoing preservation obligation). Still, the new rules’ unmistakable directive should give federal judges pause before imposing the more severe types of spoliation sanctions.
The proposed new rules are now before the U.S. Supreme Court, which is likely to approve them. Absent (unlikely) action by Congress to reject or modify the rules, the new rules will go into effect on December 1, 2015. Although that is a year away, the clear statements of the Judicial Conference concerning the need to reduce litigation costs and to cabin the circumstances under which the most severe sanctions may be imposed for failures to preserve (primarily electronic) data and information can be expected to begin influencing the decisions of judges and lawyers much sooner.
Creighton Magid is head of the Dorsey & Whitney’s Washington, D.C., office. He’s a member of the electronic discovery practice group and co-chair of the firm-wide products liability practice. He focuses on technology, commercial and products liability litigation.

Read more: http://www.corpcounsel.com/id=1202674945208/New-Discovery-Rules-to-Rein-in-Litigation-Expenses#ixzz3HdUe4RtQ

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