California District Court Creates Broader Cost-Shifting Standard

October 2011

Couch v. Wan, 2011 WL 2971118 (E.D. Cal. July 20, 2011) raises the possibility that cost-shifting will be applied much more widely. In this action, the requesting party (plaintiffs) sought reconsideration of a magistrate judge's order requiring the parties to share ESI (electronically-stored information) costs. The plaintiffs argued the cost-shifting order was contrary to law because the requested data was stored on reasonably accessible hard drives or optical drives. Upon review, the District Court found for the defendants. Although hard drives were “reasonably accessible” in terms of being able to retrieve the data, the District Court found that this did not, by itself, require the producing party to bear the costs of production.

The landmark case in this area is Zubulake I, 217 F.R.D. 309 (SD NY 2003). Supposedly, the Magistrate and District Court followed this case. In Zubulake I, plaintiff requested the defendant to produce emails maintained on back-up tapes. The defendant requested that the cost of such production be shifted to plaintiff. The Zubulake Court explored a party's obligations to preserve and produce electronic data, as well as the circumstances under which cost shifting would be appropriate. The Court adopted a now often-quoted seven factor test which arguably superseded the previously influential eight factor "Rowe Entertainment vs. William Morris Agency" test. The seven factors are:

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, compared to the resources available to each party
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

Based on this initial ruling, with the assistance of an outside vendor, defendant restored emails from five back-up tapes selected by plaintiff. The emails were searched to determine those relevant to plaintiff's requests. The total cost of restoring the five tapes, reviewing the e-mails for relevance, performing an attorney review, and producing the results to plaintiff was approximately $19,000. Based on the initial costs, defendant estimated the cost of producing everything else would be almost $275,000. In Zubulake II, Civ. 1243, WL 21087136 (SD NY May 13, 2003), the Court evaluated the preliminary information pursuant to the Court's seven factor test to determine whether the production of additional emails was "unduly burdensome". In Zubulake II, the Court determined that the defendant should be responsible for the "lion's share" of the costs. The Court noted that the initial work generated 600 relevant emails that provided support for plaintiff's claims that were not available from any other source. In applying the third factor, the Court noted that Ms. Zubulake's high salary ($650,000 per year) generated the potential for a multi-million dollar recovery. The Court concluded that 25% of the costs should be shifted to the plaintiff.

In Zubulake III, 216 F.R.D. 280 (SD NY 2003), the Court evaluated the results of the back-up tape restoration described above. The Court held that the defendant must continue to carry most of the burden of the complete back-up tape restoration because plaintiff demonstrated that (i) the backup tapes would likely contain relevant information, and (ii) defendant failed to keep all relevant information (principally e-mails) in its active files. Interestingly, the Court's rationale describes the underlying factual situation in the vast majority of circumstances.

In short, the Zubulake Court allowed some cost-shifting, but this was done cautiously. Despite the Court’s finding that the items identified were “highly relevant”, plaintiff Zubulake was asked to pay 25% of the cost of tape restoration.

The Zubulake case is remembered as having arisen in the context of tape restoration. Amended Rule 26(b)(2)(B) of the Federal Rules of Civil Procedure, which was adopted post-Zubulake, allows a court to order that the requesting party pay for some or all of the cost of obtaining the requested ESI if it is "not reasonably accessible because of undue burden or cost". However, most practitioners interpret the "not reasonably accessible" requirement to apply solely to the restoration of backup tapes.

In reporting the Couch vs. Wan case, some suggest that the reason for its unconventional outcome occurs because the producing party is not nominally a party in the case. However, the Magistrate Court described the California Department of Corrections (CDCR) as the “real party in interest”. Presumably, the fact that the CDCR was not nominally a party was not the driving force in the Court’s decision.

Unlike the Zubulake case and others that involve cost sharing, the Couch vs. Wan case does not involve back-up tapes or other challenging recovery methods. Instead, the electronic information at issue can be copied, searched, and otherwise used without any recovery efforts (other than reviewing the files for relevance and a lack of privilege). The requested materials totaled around 140 gigabytes, but the plaintiff/requesting party identified search terms that could be used to further reduce the volume of materials to be produced. On behalf of the CDCR, the California Attorney General stated that it lacked the resources to perform this additional key word search, and that outside resources would be required at a $54,000 cost. Based on this additional cost, CDCR requested that the requesting party (the plaintiff) bear this cost.

The Court started its analysis of Zubulake by citing the seven factors listed above. The Court then interpreted these factors to provide an unusual result, as follows:

“Cost-shifting should only be considered when discovery imposes an "undue burden or expense" that outweighs the likely benefit of the discovery. Fed. R. Civ. P. 26(b)-(c). With discovery of electronic documents, "whether production of such documents is unduly burdensome or expensive turns primarily on whether it is kept in an accessible or inaccessible format." Zubulake v. UBS Warburg LLC, et al., 217 F.R.D. 309, 318 (N.D. Cal. 2003). Accessibility turns largely on the expense of production”.

Uniquely for the Couch vs. Wan Court, accessibility depends upon the cost of the production. Simply put, because the Court found that the CDCR claimed it could not afford the expected cost, the costs are shifted to the requesting party under Rule 26(b)(2)(B).

The facts of Couch vs. Wan are remarkably common. Technically, the data was readily accessible, from sources that typical e-discovery and any computer administrator views as easy to accomplish. Complaints regarding the cost of e-discovery are so common that it might be hard to find many cases where the producing party would not like to apply the Couch vs. Wan test. If the test from Couch vs. Wan becomes widely applied – meaning the producing party thought it was expensive – the vast majority of current e-discovery will involve cost shifting.

Fulcrum Inquiry performs computer forensics and other services involving computerized data recovery and analysis.