Earlier this month, the Sedona Conference issued the final version of its “Commentary on Rule 34 and Rule 45 ‘Possession, Custody, or Control.’” The Commentary recommends adopting the “legal right” test to analyze the enforcement of subpoena and document requests, rejecting the “practical ability” standard used by some federal courts, including in New York. Most significantly, the Commentary lends support for parties seeking to encourage courts to apply the legal right test when considering document requests and subpoenas directed to a U.S. subsidiary for documents in the “possession, custody, or control” of an overseas or out-of-state parent or affiliate. The Commentary does not change the law, but it is influential and can and should be cited to any court considering this question.
Federal Rules of Civil Procedure 34 and 45 both require a responding party to produce “documents, electronically stored information (ESI), and tangible things” in the party’s “possession, custody, or control.” The Rules do not explain or define “possession, custody, or control,” however, and it has been left to the courts to interpret and apply that phrase. In doing so, different standards have emerged.
Under the legal right standard, parties are required to produce documents over which they have actual control, or those documents to which they have a legal right. Under the practical ability standard, followed by some courts in the Second, Fourth, Eighth, Tenth, Eleventh and District of Columbia Circuits, parties must produce those documents they have a practical ability to obtain, but to which they have no legal right. (A third standard, known as “legal right plus,” is used less frequently.)
The final 102-page Commentary explains the significant policy reasons in favor of uniform adoption of the legal right test, particularly in light of advances in technology such as cloud computing.
As the Commentary points out, the practical ability test poses numerous problems for responding parties. For example, foreign data privacy laws often prevent dissemination of documents maintained overseas. Where a party is served a document request or subpoena for records kept by a related entity, including parents and subsidiaries, producing those records could subject the producing party and the related entity to penalties under international and foreign laws. This is a particularly difficult analysis given the increasingly widespread use of cloud computing, where the physical location of documents and ESI is harder to define. Under the practical ability test, a U.S. district court could order production of those records and impose sanctions on the responding party that chooses not to produce.
That tension does not exist under the legal right standard, however, because in this scenario the responding party has neither actual control (the documents are overseas) nor a legal right (the documents are protected from dissemination by foreign privacy laws). Accordingly, the responding party would not be subject to sanctions for refusing to comply with the demand or subpoena. Similarly, courts applying the legal right standard are more apt to respect corporate structures, such as when documents are sought from a responding party’s affiliate.
Another example is where the responding party and the entity in possession of the sought-after documents are subject to a contract prohibiting disclosure of the non-party’s documents. Under the practical ability standard, the responding party could be subject to a breach of contract claim (or worse) if it complies with the court’s order to produce, and subject to court sanctions if it fails to comply. Under the legal right standard, the responding party would not face that kind of lose-lose situation.
The Commentary also notes that under the practical ability test, responding companies can access and produce documents and ESI in the possession of former and current employees, raising obvious privacy concerns. Under the legal right standard, responding companies would not necessarily be required to produce employees’ documents and ESI.
The situations described above have all arisen in district courts. To the extent parties subject to discovery requests and subpoenas under Rules 34 and 45 find themselves in jurisdictions that favor the practical ability standard— such as the Second Circuit—they would be well-advised to cite to the Sedona Conference’s Commentary.