We cover cost-shifting in eDiscovery fairly often. In fact, this post is barely a week old. A recent case out of New Jersey, Juster Acquisition Co., LLC v. North Hudson Sewerage Authority, dealt with this issue, and in a concise opinion, Magistrate Judge Michael Hammer relied upon the Zubulake Factors to determine whether cost-shifting was appropriate. The Zubulake Seven-Factor test originated from Zubulake v. UBS Warburg, LLC [PDF] a seminal 2003 New York case.  

The dispute in Juster came from a failed business deal (don’t they all?). The defendant, NHSA, needed help to refinance and recapitalize its debt. The plaintiff, Juster, vied for the contract, and alleged that it had expended considerable time and effort into forming a proposal for NHSA. Both parties disagreed about two main issues: (1) that they had entered into, and executed, a term sheet that included an Exclusivity Provision; and (2) that NHSA had to reimburse Juster for its proposal. When the deal completely fell through, Juster claimed that NHSA’s actions had cost it $41 million.

Discovery began and NHSA soon objected to a request for production from Juster for 67 proposed search terms of its ESI. NHSA filed a letter requesting a protective order, on the basis that the request was an undue burden, or alternatively, asking for an order from the court to make Juster pay for its own discovery demand, i.e., a cost-shift.

The court made swift work of NHSA’s request, reiterating that such a request is the moving party’s burden:

“[D]efendant has failed to provide any law or analysis in support of its request for a protective order. That is, defendant presents no compelling factual basis or sufficient legal background to support its motion for a protective order. . . Moreover, given the nature of the dispute, the Court cannot find that the search terms are unreasonable. In addition, NHSA fails to show how it would be unreasonably cumulative or duplicative to perform the requested search discovery. Therefore, the Court cannot conclude that there is good cause for a protective order.”

The court then found that NHSA failed to follow the plain language of Rule 26 of the Federal Rules of Civil Procedure by including a good-faith certification and denied the request for a protective order.

Moving on to the cost-shifting request, the court looked to Zubulake, which established the basic principle that determining whether the production of documents is unduly burdensome has one important consideration: whether or not that information is accessible or inaccessible:  

“[A]ctive, online data, near-line data, and offline storage/archives are typically identified as ‘accessible’ electronic data. Backup tapes and erased, fragmented, or damaged data are typically identified as ‘inaccessible’ electronic data. Thus, electronic data that is stored in ‘a readily usable format’ is deemed ‘accessible’ whereas electronic data that is not readily usable (i.e., data that must be restored, de-fragmented, or reconstructed) is considered ‘inaccessible.’” (internal citations omitted).

Once again, NHSA was doomed by its failure to meet its burden:

“NHSA, as the responding party, has failed to satisfy its burden of showing that the ESI sought by Juster is inaccessible. NHSA has not asserted that any of the requested data is located on backup tapes. . . It has not asserted that any of the requested data is erased, fragmented, or damaged in any way. . . As a result, the Court cannot find that the ESI requested by Juster falls into either category of ‘inaccessible’ electronic data. Because such data is in fact accessible to NHSA, defendant must bear the attendant discovery costs. Even though defendant has failed its threshold requirement of demonstrating that Juster seeks ‘inaccessible’ ESI, this Court will nonetheless provide additional reasons for denying NHSA’s fee-shifting request.”

The court moved on to the Zubulake Factors and then analyzed them one-by-one:  

“The Zubulake Court set forth a seven-factor test to determine whether discovery costs should be shifted, which are weighted more-or-less in the following order:

1) the extent to which the request is specifically tailored to discover relevant information;

2) the availability of such information from other sources;

3) the total cost of production, compared to the amount in controversy;

4) the total cost of production;

5) the relative ability of each party to control costs and its incentive to do so;

6) the importance of the issues at stake in the litigation; and

7) the relative benefits to the parties of obtaining the information.”

Factors One through Five landed in favor of Juster, and the court found Factors Six and Seven to be neutral, but more importantly, less-critical (and not dispositive) to the analysis. Of particular note was the court’s analysis of Factor One:

“Further, it is important to note that after Juster provided NHSA with the proposed discovery request, NHSA agreed in writing that each party would bear its own costs in connection with producing discovery. Accordingly, the first factor is in favor of Juster.” (emphasis added and internal citations omitted).

With the Zubulake Factor test in favor of Juster, the court also denied NHSA’s request for a cost-shift.

The Zubulake Factor test is law in the Third Circuit and certainly not controlling nationwide, but its application and analysis is clean, allowing a court to succinctly determine when cost-shifting is appropriate in eDiscovery cases. However, it could be susceptible to exploitation in limited cases.

Consider the Juster court’s analysis of Factors 3 through 5, the financial factors. The court was persuaded by the ratio of the cost of discovery to the total amount in controversy. NHSA estimated that the search would cost between $6,000 and $16,000, and Juster alleged that it was owed no less than $41 million. After accounting for NHSA’s considerable resources, the court did not think the discovery costs were substantial enough for cost-shifting.

But one can imagine a case with less at stake. If a plaintiff alleges a much smaller amount in controversy (say, thousands of dollars as opposed to millions), a similarly broad discovery request as the one in Juster may compel a court to cost-shift, since the ratio of discovery to amount in controversy would be much larger. And in that case, if a plaintiff must pay for its own discovery costs in amounts nearing what it hopes to collect, is the suit even worth it? The weight the court attributes to these financial factors seems to simultaneously incentivize making hefty damages claims and prejudice plaintiffs with less money at stake.

Like in any civil litigation, there must be careful attention paid to the cost-benefit analysis of bringing a suit. And while it may have some limitations, the Zubulake Factor test appears to level the playing field when it comes to cost-shifting eDiscovery.

Written by Joey Chindamo, intern at IT-LEX.