This update addresses the following recent developments and court decisions involving e-discovery issues:
A Northern District of Illinois decision denying a law firm’s reimbursement request for document production costs incurred to provide documents to the Small Business Administration relating to the firm’s former client;
A West Virginia federal court decision holding that defendant, as the prevailing party, could recover the costs of an ESI conversion to a readable format ordered by the court in response to plaintiff’s motion to compel; and
A Virgin Islands Superior Court decision denying plaintiff’s motion for sanctions against a third-party subpoena recipient for failure to comply fully with requests seeking documents covering a 20-year period, finding the third party had made a diligent attempt to comply in a reasonable manner with the subpoena and accepting that documents would not be available as a result of application of the third party’s document retention policy.
1. In United States v. Cardinal Growth, L.P., 2015 WL 850230 (N.D. Ill. Feb. 23, 2015), Chief U.S. District Court Judge Ruben Castillo denied a law firm’s request for reimbursement of costs in producing documents to the Small Business Administration relating to the firm’s former client.
The Small Business Administration (SBA) brought an action against Cardinal Growth L.P. for its failure to repay $21 million. The court entered a consent order appointing SBA as Cardinal’s receiver; granted SBA, as the receiver, possession of all of Cardinal’s documents; and directed Cardinal’s attorneys to turn over all of Cardinal’s documents in their possession. Pederson & Houpt, P.C. (P&H) was Cardinal’s transaction counsel for 11 years and retained an outside vendor to produce thousands of emails and documents to SBA.
P&H claimed $44,256.70 in costs and sought reimbursement pursuant to Rule 45 of the Federal Rules of Civil Procedure. The district court denied this request, finding that SBA’s request was not made pursuant to Rule 45 but was made instead in response to the court’s order, which required P&H as Cardinal’s counsel to produce the requested documents. As a result, in the court’s view, “Rule 45 does not control.” Id. at *2.
The court found that P&H’s request for reimbursement would be denied even if Rule 45 applied. When a nonparty is ordered to produce documents pursuant to Rule 45, “the presumption is that the responding party must bear the expense of complying with discovery requests.” Id. (quoting DeGeer v. Gillis, 755 F. Supp.2d 909, 928 (N.D. Ill. 2010)). The court retains discretion to shift costs based on three factors: “(1) whether the nonparty has an interest in the outcome of the case; (2) whether the nonparty can more readily bear its costs than the requesting party; and (3) whether the litigation is of public importance.” Cardinal Growth, 2015 WL 850230, at *2 (quoting DeGeer, 755 F. Supp. 2d at 928).
The district court ruled that P&H failed to meet each of these three factors. First, the court stated that P&H was not a typical disinterested party. It collected more than $2 million in legal fees for its work for Cardinal, gaining “substantial income from Cardinal, drafted and prepared hundreds of transactional documents and participated in the design of numerous complex transactions.” Cardinal Growth, 2015 WL 850230, at *3. Second, the court found that P&H could more readily bear the costs than SBA. “Relative to the substantial income that P&H collected from Cardinal, the expenses incurred by P&H in complying with the Court’s order did not constitute a ‘significant expense.’” Id. (citation omitted). The court indicated that production costs could more appropriately be viewed as “overhead expense” due to the firm’s selected method of storing emails, which is what the court found “drove the need for an outside vendor.” Id. Third, the court determined that the litigation was of “public importance” to fulfill the SBA’s regulatory mission and to repay Cardinal’s creditors. Id.
Finally, the court noted that SBA was now operating in the shoes of Cardinal as its receiver. As such, P&H was under an ethical obligation to provide all relevant documents to SBA. Clients are entitled to all documents relevant to the client, and the “delivery of a client’s files or other property should be done ‘without additional cost to the client.’” Id. (quoting Apa v. Qwest Corp., 402 F. Supp. 2d 1247, 1250 (D. Colo. 2005)).
2. In Hanwha Azdel v. C & D Zodiac, 2015 WL 1417058 (W.D. Va. Mar. 27, 2015), U.S. District Court Judge Norman Moon issued an opinion holding that defendant, as the prevailing party, could recover the costs of an ESI conversion to a readable format ordered by the court in response to plaintiff’s motion to compel.
In May 2012, plaintiff sued defendant for allegedly failing to make payments to plaintiff under the parties’ memorandum of understanding regarding the purchase and development of a composite sheet product. Id. at *1. The district court ultimately granted summary judgment for defendant and dismissed the complaint. Id.
Defendant, as the prevailing party, filed a bill of costs under 28 U.S.C. § 1920 requesting that plaintiff be taxed approximately $39,000 for various incurred litigation costs. Id. Plaintiff opposed the $39,000 amount as excessive, and the matter was referred to a Magistrate Judge for a Report and Recommendation. The Magistrate Judge’s Report recommended that plaintiff be taxed approximately $36,000 of costs, including approximately $8,000 pursuant to 28 U.S.C. § 1920(4) for defendant’s conversion of ESI into a readable format, after the entry of a court order compelling such production. Id. at *1, *3.
Judge Moon rejected plaintiff’s objections to the Magistrate Judge’s recommended taxing of costs for the ESI conversion. Id. at *3. First, plaintiff argued that defendant incurred the ESI conversion expenses only because it had failed to comply with Federal Rule of Civil Procedure 34. Id. at *3. Judge Moon acknowledged that the defendant had been ordered by the court to convert the ESI to a readable format but concluded that the Magistrate Judge “did not find any lack of due diligence, bad faith, or other similar misconduct that would preclude Defendant from recovering the ESI conversion costs.” Id. at *4. “[B]ecause Defendant’s costs were ordered by the court, were not incurred for the convenience of the producing party, and Defendant did not benefit from the data conversion services, the costs were recoverable under § 1920.” Id.
Second, the plaintiff claimed that the Magistrate Judge had “no supporting rationale” for finding that the ESI costs were “compensable ‘conversion,’” as opposed to ESI “processing” and cited the invoice for the ESI services as stating the data was “‘processed,’ not converted.” Id. at *3, *4. The district court found, however, that the plaintiff had previously acknowledged that the issue was one of conversion and that software could be acquired to complete the conversion at a “relatively modest cost.” Id. at *4. Moreover, the order granting plaintiff’s motion to compel specifically stated that “Defendant shall pay the reasonable costs . . . to convert Defendant’s ESI discovery production into a readily usable format.” Id. (emphasis in original). Judge Moon held that the use of the term “processing” in the invoice for the work did not “dislodge the magistrate judge’s funding that Plaintiff sought ‘conversion’ of ESI” and that such conversion “is recoverable under § 1920(4).” Id.
3. In United Corp. v. Tutu Park Ltd., 2015 WL 457853 (V.I. Super. Jan. 28, 2015), the Superior Court of the Virgin Islands denied plaintiff’s motion for sanctions against a third-party subpoena recipient for failure to comply fully with the subpoena seeking documents ranging over a 20-year period, finding the third-party had made a diligent attempt to comply in a reasonable manner with the subpoena and accepting that documents would not be available as a result of application of the third party’s document retention policy.
In late 2012, Kmart, a third party in a breach of contract case, received a subpoena from plaintiff United Corp. seeking production of 21 categories of documents involving requests spanning more than 20 years. Id. at *2. Kmart filed a motion to quash, and plaintiff moved to compel Kmart to produce responsive documents. Id. The court granted United’s motion to compel and instructed Kmart to produce documents “as requested by [United] in its Motion to Compel.” Id. These requests included two categories of data in dispute: (1) financial information relating to the sale of merchandise at a specified Kmart store for each year from 1991 until the present; and (2) detailed information on food items sold at the same Kmart store for each year from 1991 to the present. Id. at *3. Kmart produced documents pertaining to merchandise sales for the years 2000–12 but claimed that it did not maintain records prior to 2000 pursuant to its record retention policy. Id. Kmart also indicated it could produce only its gross sales, gross profit, net sales and net profit for the years 2006–13 because certain software changes and database conversions after its 2003 bankruptcy and 2005 merger with Sears, Roebuck and Co. made the data unreadable. Id. With respect to the food sales, Kmart produced responsive documents for years 2006–13 but maintained that no such documents existed prior to 2006 due to the 2005 Sears merger. Id.
United, dissatisfied with Kmart’s production, filed a motion requesting an order of contempt and imposition of a sanction of $500 per day until Kmart produced the outstanding ESI. Id. at *2. The court denied the motion, acknowledging that Kmart had not produced documents for all the dates requested but had made “a diligent attempt to comply in a reasonable manner” with the court’s order for the production of documents. Id. at *5.
First, the court found that “a corporation may be justified if it chooses not to retain records that are over nine years old.” Id. at *4. The court rejected United’s position that because Kmart is a “multi-national corporation,” its records would be “necessarily computerized.” Id. at *5 (emphasis in original). The court observed that not all multi-national corporations with ESI store it for an extended period of time, finding that “[c]orporations typically employ data retention policies and dispose of records after a period of time.” Id. The court concluded that it “does not find that Kmart’s use of such a method justifies an order of contempt, especially considering the age of the records requested by the Plaintiff.” Id.
Second, the court found it “reasonable” that Kmart’s ability to access records had been disrupted by its bankruptcy and subsequent merger with Sears and accepted that certain records would be unavailable due to software and database conversions. Id. at *4. The court reasoned that in light of the “fact that, in some cases, [United] seeks records dating back to 1991, in combination with the fact that Kmart has undergone internal reorganizations, Kmart’s internal review constitutes sufficient diligence to avoid an order of contempt from this Court.”Id. at *5.