In re Fannie Mae Secs. Litig., 2009 U.S. App. LEXIS 9 (D.C. Cir. Jan. 6, 2009)

Take Away: Trial counsel should be informed by competent technical advisors before entering into discovery agreements or making representations to the Court, especially as they relate to the scope of the request and deadline for response. Cost shifting and burdensomeness arguments should be made before spending the time and money to attempt production. The same goes for invoking the special protections for non-parties under Rule 45(c). Finally, Rule 30(b)(6) depositions continue to be an effective tool for revealing false representations of compliance made by producing parties.  

Move over Lee Majors, the D.C. Circuit Court of Appeals recently gave two-thumbs for The Six Million Dollar Subpoena. Let’s hope this show doesn’t get picked up.

As incredible it seems, a federal regulatory body wound up spending a whopping 9% of its annual budget in searching, reviewing, and producing email from disaster recovery back-up tapes — for a case in which it wasn’t even a party — only to be further sanctioned in the form of an order compelling production (for attorney’s eyes only) of all remaining email that had not yet been reviewed for privledges. Ralph Losey explains the potentially dangerous precedent of this Federal Court of Appeals decision on his blog (here).

In this post, we’ll focus on how the agency got themselves into this predicament and what they might have done to avoid it. The theme of the Court of Appeals decision is clear: the government failed miserably to manage the expectations of the court by promising production by deadlines it couldn’t possibly meet, lethargically moving in the general direction of getting the job done, and then repeatedly going back to the court, hat in hand, for extensions or for a narrower interpretation of what was required in the first place. This case provides a cautionary tale for non-parties to take subpoena requests seriously right off the bat. By moving aggressively to ascertain the impact of the request early on, non-parties will be better positioned to assert the full protects they are afforded under the Civil Rules, avoid misrepresentation to the court, effectively negotiate with requesting parties.

Background. This case involves several senior executives of Fannie Mae who became embroiled in civil disputes stemming from allegations of accounting irregularities, manipulated earnings reports, and inflated executive compensation. In an attempt to show their actions had been approved by the government, the defendants subpoenaed the federal agency charged with oversight, The Office of Federal Housing Enterprise Oversight (OFHEO). In all over 30 categories of documents were demanded by the three subpoenas served on OFHEO; “documents” being broadly defined to included ESI.

The Problem. Burden of response is always a concern for a third-party and this case would have been no exception. Also, given this particular agency’s regulatory purpose, many of its documents could rightly qualify for the common law deliberative process privilege. Therefore, extensive review would be necessary for any documents produced by the agency. OFHEO’s belatedly obtained assessment predicted that attorney review would run between half to over three quarters of the total cost of responding, depending up the technology used and whether or not the request was limited to active data. (Read the March 8, 2007 Assessment by Forensic Consulting Solutions here). No doubt it did. In the end, the government rounded up 50 lawyers (insert favorite bad lawyer joke here) to review the 660,000 responsive documents.

Rule 45’s Protections for Third Parties. It is with exactly these concerns in mind that Fed. R. Civ. P. 45(c) provides special protections for non-parties, including:

R. 45(c)(1)—An affirmative obligation upon the attorney responsible for issuing and serving the subpoena to “take reasonable steps to avoid imposing undue burden or expense on a person subject to the subpoena.”

R. 45(c)(2)(A)—A producing party need not appear in person at the place of production.

R. 45(c)(2)(B)—The subpoenaed person may object within 14 days of being served, which then puts the burden on the issuing party to bring a motion to compel. The third-party need only do such acts as the court specifically orders and this order must protect the subpoenaed person from “significant expense” resulting from compliance.

R. 45(c)(3)—Upon motion, the court is required to quash or modify the order in certain circumstances, such as where the demand would create an “undue burden” or would require the disclosure of privileged or protected matter. The court has the discretion to quash or modify the order under in other circumstances, including where trade secrets are of concern. In the alternative, the court may order production under certain specified conditions where the issuing party shows substantial need and ensures that the subpoenaed person will be reasonably compensated.

As noted by the District of D.C., the same court from which the In re Fannie Mae Litigation was appealed:

When nonparties are forced to pay the costs of discovery, the requesting party has no incentive to deter it from engaging in fishing expeditions for marginally relevant material. Requesters forced to internalize the costs of discovery will be more inclined to make narrowly-tailored requests reflecting a reasonable balance between the likely relevance of the evidence that will be discovered and the costs of compliance.

Linder v. Calero-Portocarrero, 183 F.R.D. 314, 322-323 (D.D.C. 1998).

Additionally, Rule 45(d), which specifies the duties in responding to a subpoena, builds in additional protections, especially where ESI is concerned:

R. 45(d)(1)(C). The person responding need not produce the same electronically stored information in more than one form.

R. 45(d)(1)(D) The person responding need not provide discovery of electronically stored information form sources that the person identifies as not reasonably accessible because of undue burden or cost. On motion to compel discovery or for a protective order, the person responding must show that the information is not reasonably accessible because of undue burden or cost. If that showing is made, the court may nonetheless order discovery from such sources if the requesting party shows good cause, considering the limitations of Rule 26(b)(2)(C). The court may specify conditions for the discovery.

The Government’s Initial Response. OFHEO’s first reaction was to ignore the problem. They allowed the deadline specified in the first subpoena to come and go with no response. As a consequence, they failed to raise their 14-day objection under Fed. R. Civ. P. 45(c)(2)(B).

After receiving a nasty gram from the requesting party for the first subpoena, OFHEO pulled out the government play book and sent over what was obviously a form letter drafted for exactly such an occasion. (See it here). Unfortunately for the government, its letter relied exclusively upon a legal theory that the D.C. Circuit Ct. of Appeals had expressly rejected in an opinion issued a month before. Undeterred, the government continued to assert this theory in a futile motion to quash which was quickly disposed of by the district court. A four month deadline was set for production.

So to review, the government at this point has effectively wasted its golden opportunity to define the requesting party as an unreasonable aggressor and instead has self identified as being an obstructionist. Moreover, a court order is now in place setting a timetable for response without the benefit of the government’s position on feasibility. Not the best start for Uncle Sam.

Options: At this point OFHEO could take several approaches to mitigate its cost exposure, including the following:

  1. Negotiate the discovery request with the requesting party, pointing out their obligation under R. 45(c)(1) to “take reasonable steps to avoid imposing undue burden or expense on a person subject to the subpoena.” Critical to this option is the early involvement of competent technical advisors and the assistance of experienced eDiscovery counsel.
  1. Move for a protective order of information that is unreasonably duplicative, R. 45(d)(1)(C), and/or is “not reasonably accessible because of undue burden or cost,” R. 45(d)(1)(D). Disaster recovery back-up tapes are prime candidates for protection under both provisions and, to the extent that the court nevertheless requires their production, cost shifting arguments would be well founded.
  1. Make a long shot attempt to appeal the discovery order under the “collateral order doctrine”, which allows for interlocutory appeals from the "small category" of decisions "that are conclusive, that resolve important questions separate from the merits, and that are effectively unreviewable on appeal from the final judgment in the underlying action." See, e.g., In re England, 363 U.S. App. D.C. 29, 35 (D.C. Cir. 2004)(finding that the doctrine allowed for review of a district court order that compelled testimony over the Navy’s claim of statutory privilege); In Re Ford Motor Company, 110 F.3d 954 (3d Cir. 1997)(appellate jurisdiction exercised to review a district court order requiring production of material claimed to be privileged). Although typically disfavored as an intrusion on the deference accorded to district courts in managing their dockets, an unusual case such as this, wherein an extraordinarily burdensome request is being imposed, may potentially have a chance.
  1. Disobey the production order and appeal the forthcoming contempt order. This option was actually suggested by the Ct. of Appeals though not at this early stage.

The Course Actually Taken by OFHEO. Following the Court’s November 6, 2006 order, OFHEO began producing documents and asked the requesting parties to narrow their request. Shortly before its four month deadline was up, OFHEO requested a one month extension of time and represented in its moving papers that the parties had agreed to exclude ESI from the request. Fannie Mae at *4. The requesting parties flatly denied this agreement. Id. Following a status conference in April 2007, the court clarified that ESI was included in the required production but granted OFHEO’s new request for a further one month extension.

Interestingly, by the date of the April status conference, OFHEO should have been fully aware of the huge scope of the task before it. After all, its forensic consultant had supplied estimates in the range of $4 to $10 million a month before. Yet, OFHEO only requested a second one-month extension at the conference and thereafter delayed in hiring the staff necessary to comply.

During the summer of 2007 OFHEO reported to the court that it had produced all documents requested. “All” is a scary word in the eDiscovery world and it came back to bite the government here. A 30(b)(6) deposition revealed that, in fact, there was a substantial amount of email stored on the OFHEO disaster recovery back-up tapes, which had not been produced. Id. at *5. The government belatedly explained that it never understood the request to extend to back-up tapes. Id.

A contempt hearing was held in August to assess the burden of examination of these tapes. Id. Despite being apparently well informed since March of costs for discovery from these sources, OFHEO chose to cut a deal after the first day of the hearing rather than continue to argue the burdensomeness of the request. The stipulated order read as follows:

OFHEO will work with the Individual Defendants to provide the necessary information (without individual document review) to develop appropriate search terms. By October 19, 2007, the Individual Defendants will specify the search terms to be used.

Id. at *6 (Stipulated Order P 5, Sept. 27, 2007).

The Fight Over the Stipulated Order. Some have asked where the government’s technical advisors were when this order was written. That’s a good question, especially given the deadline of mere weeks after the Order. Even more concerning is where the heck were the lawyers? The ambiguous language of the stipulated order is open to an interpretation that gives the requesting Defendants virtually unbounded discretion to specify whatever search terms they like.

And that is precisely what they did. Defendants specified over 400 search terms, implicating some 80% of the OFHEO’s email. Id. *6, 17. Naturally, OFHEO objected to the massive request, arguing that the term “appropriate” from the first sentence of the order creates a limitation on Defendant’s right to specify terms, which is found in the second sentence. The district court rejected the OFHEO interpretation, a judgment in which the Court of Appeals would later affirm. Id. *6-7, 9-18.

Too Little, Too Late. Once again, OFHEO was back before the court to ask for an eleventh hour extension. One day before an interim deadline of November 30th, OFHEO asked for an extension until December 21, assuring the court it would and could meet this extended deadline. Id. * 7. Two days before the new deadline OFHEO was back again, this time asking for an extension until January 4th for the production of nonprivileded documents and February 29th for the production of privileged logs. Id. * 7. Moreover, OFHEO informed the court that it had only recently hired the necessary number of contract attorneys!

The court had had enough:

[T]he Court is cognizant of the large number of attorneys, contract attorneys, and OFHEO personnel working to comply with the subpoenas and the resulting costs of this compliance. Nevertheless, OFHEO has treated its Court-ordered deadlines as movable goal posts and has repeatedly miscalculated the efforts required for compliance and sought thereafter to move them.

Id. *8. As a sanction, the court ordered production for attorneys eyes only of all documents withheld on the sole basis of the qualified deliberative process privilege and not logged by the January 4, 2008 deadline. Id.

The Money. In the end, the OFHEO spent $6 Million dollars, 9% of its total operating budget, in responding to the subpoena. In its appeal of the sanctions, the government finally advanced the Rule 45 arguments it should have been making from day one, i.e. narrower requests are appropriate for third parties, good cause is required for burdensome and inaccessible sources, and cost-shifting should be considered for burdensome production. Id. at *19. As noted by the Court of Appeals,

Whatever the merits of these claims, OFHEO abandoned them by entering into the stipulated order. Had OFHEO wanted review of the district court's initial order to compel compliance with the subpoenas, it could have completed the hearing and attempted to convince the court to reconsider. Failing that, it could have defied the adverse ruling and appealed any ensuing contempt finding. See U.S. Catholic Conference, 487 U.S. at 76. Instead, it chose to sign the stipulated order, which ended the hearing and unquestionably settled the discovery dispute. Having stipulated to a schedule for complying with the subpoenas, OFHEO can hardly complain now about being held to its agreement.

Id. at *19-20. Ultimately, the Court of Appeals refused to consider post-production arguments for cost shifting and upheld the District Court’s sanction as a proper exercise of the court’s contempt power. Id. at 20, 24.

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