California Case Clarifies Cost Shifting In Electronic Discovery Disputes

January 2005

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Plaintiff's may seek less discovery based on a recent ruling in Toshiba America Electronic Components vs. Superior Court (2004, 21 Cal Rptr. 3d at 532). The Court concluded that California Code of Civil Procedure Section 2031(g) (1) shifts the cost of providing compilations of electronic data in a usable format to the demanding party.

The underlying case involves a fairly typical commercial dispute in which electronic discovery is sought. Plaintiff (Lexar Media, Inc) alleged misappropriation of trade secrets, breach of fiduciary duty, and unfair competition. Plaintiff served defendant (Toshiba) with a request for production of documents that included "electronic mail" and "other forms of electronically or magnetically maintained information." Toshiba responded with over 20,000 pages of "readily available" documents, but withheld approximately 800 computer backup tapes which covered periods going back to 1994. According to Toshiba, the data on the backup tapes had to be further processed to see what information the tapes contained, and that such efforts would cost $1.5 million to $1.9 million. A smaller sample of (130 tapes involving 15 key dates) would cost approximately $210,000. Toshiba refused to perform what it contended was the necessary processing, thus causing the discovery dispute.

Plaintiff relied on several federal district court cases that held that the producing party should not be penalized when the producing party has elected to maintain records in a manner that makes it hard to retrieve the data. Plaintiff was assisted by Toshiba's admission that the tapes were not well organized or labeled, and some involved legacy systems that had become obsolete. Toshiba responded that the analysis described in federal cases warranted cost-shifting in this situation. The trial court granted plaintiff's motion without comment, thus causing the appeal by Toshiba.

Normally, the Court of Appeal simply sends a "no thanks" postcard on writs involving discovery disputes. Thankfully, the Appellate Court took this case, as this issue arises frequently.

On appeal, Toshiba cited CCP 2031(g) (1), arguing that an automatic cost shifting was applicable. CCP 2031(g) (1) says:

"Any documents demanded shall either be produced as they are kept in the ordinary course of business, or be organized and labeled to correspond with the categories in the demand. If necessary, the responding party, at the reasonable expense of the demanding party shall, through detection devices translate any data compilation into reasonably usable form." [Italics added by the Court.]

The Appellate Court concluded that the trial court's apparent reliance on federal cases (in which the responding party normally bears the expense) was faulty legal analysis. Therefore, the trial court ruling was an abuse of discretion that had to be reversed.

The Appellate Court quickly concluded that Toshiba's backup tapes were "data compilations" within the meaning of California's CCP 2031(g) (1). In so doing, the Court ignored one of plaintiff's strongest arguments; namely, that plaintiff's demands did not require any compilation, but only the data itself. The cost of the conversion was to be incurred only because Toshiba refused to turn the tapes over in their original form. We suspect that future cases will focus on the argument that no compilation is required.

Having decided that the tapes were a compilation, this left as the primary issue

"whether the phrase 'at the reasonable expense of the demanding party' is a mandatory cost-shifting provision, or whether it merely permits the trial court to shift the cost to the demanding party when the responding party objects."

The Court rejected plaintiff's reliance on federal decisions, and concluded that CCP 2031(g) (1)

"is unequivocal. We need not engage in protracted statutory analysis because its plain language clearly states that if translation is necessary, the responding party must do it at the demanding party's reasonable expense."

The Appellate Court limited its finding by stating that this "does not mean that the demanding party must always pay all costs associated with retrieving usable data from backup tapes" but instead must only pay "its reasonable expense for a necessary translation." The trial court remains responsible for determining the factual issues of "reasonableness" and "necessity".

This case is a bit extreme, in that most companies now realize that the extensive backup tapes maintained by Toshiba are not necessary. As new technologies and retention policies evolve, the cost of electronic discovery should decline.

Even if the demanding party must pay for "compilations", it is usually cost-justified to do so. Electronic discovery remains far less expensive than any comparable alternative that relies upon paper or other manual means. Demanding parties should focus their requests only for information that is worth reviewing in the first place. Once this is done, the issue of cost sharing should not prevent work that is cost-justified in the first place.

Fulcrum Inquiry is a forensic investigations firm that is skilled in computer forensics and electronic discovery. By combining technical capabilities and accounting expertise, we are able to more quickly gather and understand relevant records.