Appellate courts do not often weigh in on e-discovery issues, but when they do, it is a big deal. The United States Court of Appeals for the District of Columbia did so on January 6, 2009, when it issued an opinion on e-discovery and sanctions. In re Fannie Mae Securities Litigation, _ F.3d _, 2009 WL 215282009, U.S. App. LEXIS 9 (D.C. App. Jan. 6, 2009). Typically, I would be glad to have a Circuit Court opinion on e-discovery. Not so here.
Unfortunately, In re: Fannie Mae Securities Litigation sets a troubling precedent in favor of enforcing exorbitant e-discovery costs. In this case, the Office of Federal Housing Enterprise Oversight (“OFHEO”), was required to spend six million dollars, representing nine percent of its total annual budget, just to comply with a subpoena for electronic documents. Although OFHEO clearly had relevant information to the multidistrict litigation against the Federal National Mortgage Assn. (“Fannie Mae”) and the Federal Home Loan Mortgage Corp. (“Freddie Mac”), they were not a party to the litigation. This fact, coupled with the high expense involved in an over-broad e-discovery request, did not seem to concern the court, which is why this decision is troubling.
Why Fannie Mae Is Dangerous Precedent
The Appellate Court in the opinion written by Circuit Judge David S. Tatel rejected with little discussion the argument that the respondent should not have been compelled to comply with the subpoenas without considering the costs of compliance, cost shifting, narrowing the scope of production, or showing good cause to retrieve inaccessible data. Id. at *7. The Circuit Court did not even address the merits of these arguments, but, instead, basically said it was too late, you “agreed” to it, so now you are stuck with it regardless of the costs and consequences. For this reason, Fannie Mae should be strictly limited to situations where the parties have knowingly consented to an order they later fail to follow. Here is the language of the Court:
Federal Rule of Civil Procedure 45 requires courts to safeguard non-party subpoena recipients from significant expense resulting from compliance. See Watts v. SEC, 482 F.3d 501, 509 (D.C. Cir. 2007). According to OFHEO, the district court violated Rule 45 by compelling compliance without considering cost-shifting, narrowing the scope of the requests, or “find[ing] that defendants demonstrated good cause for forcing OFHEO to retrieve its inaccessible data.” Appellant’s Opening Br. 31-32
Whatever the merits of these claims, OFHEO abandoned them by entering into the stipulated order. Indeed, OFHEO’s trial counsel agreed to the stipulation in the middle of a hearing scheduled for the very purpose of considering OFHEO’s objections to the subpoenas. 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 re-consider. 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.
The opinion should be limited to the “unusual” facts of the case. But, since the decision itself did not take pains to do so, the door is open for Fannie Mae to be exploited and cited to try to require parties and non-parties alike to incur excessive e-discovery expenses. I do not think that is what the appeals court had in mind, they were obviously just trying to uphold the lower court’s discretion, but that is the net result. As a consequence, other courts will have to deal with this precedent for years. I expect they will do so by carefully distinguishing and limiting the holding to the facts of the case.
Electronic discovery costs are a runaway train that must be stopped. This new opinion sets dangerous precedent making that task even more difficult than it was before. Certainly courts will distinguish and limit the case, but it is still a problem because many parties requesting e-discovery may try to inflate its importance to support outrageous demands.
Fannie Mae Shows Zero Tolerance For Common “Rookie” e-Discovery Errors
Even when limited to its facts, Fannie Mae is still dangerous because, like it or not, the facts presented are not all that unusual. When it comes to e-discovery, most lawyers are still struggling beyond their depth. It is not that uncommon for trial counsel to enter into agreements for search and production of electronic documents without first understanding its possible costs and burden. They also rarely understand how long it takes to review and produce gigabytes of data, nor do they know much if anything about modern search technologies. It is also not uncommon for generalist litigators to later make things worse with an “old-school” type fight-everything attitude and a series of too little, too late, productions.
This is just what happened here. In the midst of a hearing, trial counsel agreed to restore backup tapes, search them using plaintiffs’ terms, and then produce all email and attachments that were not privileged. Obviously the attorney did not intend by this agreement to assume a $6 Million Dollar burden, nor did the client authorize their attorney to do so. How can you have a six million dollar agreement without a “meeting of the minds?” Yet, the district court keeps coming back to that agreement, made in the midst of a hearing, as the justification for requiring a non-party to spend 9% of their total annual budget to comply with a subpoena. The Circuit Court then upheld the decision as within the very broad discretion allowed to a district court to manage discovery. They did so without any comment or reaction as to the injustice of imposing this kind of e-discovery cost and burden.
This case sends a very strong message to the Trial Bar to be very careful about what they agree to in a midst of a hearing. It shows that they should never agree to anything concerning e-discovery without first consulting with an e-discovery specialist, preferably one who is part of a larger tech/law e-discovery team. In fact, this case clearly demonstrates that an e-discovery lawyer (if you can find one) should attend every discovery hearing.
Trial lawyers, no matter how smart and skilled they may be, are not qualified to swim in these waters alone. Fannie Mae shows just how dangerous these waters can be. You may think something can be done fairly easily and inexpensively, and later be shocked to learn that it will cost millions, and take months, or even years to do. Apparently the trial judge did not understand how common a mistake this is. I am confident that if the government lawyers for OFHEO had had an experienced e-discovery lawyer with them at the first hearing, they would not have stipulated to the order they did, and all of the disasters that followed could have been avoided. But they did not, and as a result, they were bushwhacked.
The requesting parties here were allowed to specify 400 keywords, which, not too surprisingly (to us anyway), returned over 660,000 emails and attachments. By the way, does anyone seriously think that the plaintiffs suing Fannie Mae and Freddie Mac will now actually review all of these emails? No way! They will cull it down and only review a small percentage, which is exactly what the government should have done. I am willing to bet that most of the 660,000 emails produced will have little or no probative value. Like most cases, it will probably come down to a few hundred key documents, and maybe a few thousand more of some interest (to the attorneys). At the end of the trial, the jury will only remember four or five. This kind of forced production of 660,000 emails is irresponsible over-kill on a vast scale. It is infuriating because we, the American taxpayers, are forced to underwrite this fiasco.
It gets worse. The obviously over-broad search terms retrieved approximately 80% of all of the agencies email. Yet, this did not seem to trouble the district court, nor the appeals court, who actually stated that the 80% return “figure may simply indicate that most of the emails actually bear some relevance, or at least include language captured by reasonable search terms.” Id. at *6. Do they really think that 80% of the agency’s total email is relevant to the case? Obviously they have never read a large email collection before. The statement is incredible. As to the later explanation – “or at least include language captured by reasonable search terms” – the logic is meaningless and circular. Of course all of the emails retrieved contained one or more of the 400 search terms. That is why they were retrieved! How does that make them “reasonable” search terms?
In re: Fannie Mae Securities Litigation arguably stands for the proposition that if you agree to an e-discovery production, you may well be bound to your agreement, even if the agreement later proves to make no sense and the client has to go broke in the process. This is dangerous precedent. No one should be required to spend outrageous sums of money to comply with a subpoena, no matter what their lawyer may have said or done. Six Million Dollars, representing 9% of a governmental agency’s budget, is too high a burden to place on a party to litigation, much less a non-party. The principles of proportionality and Rule 26(b)(2)(C) should trump and prevail over any agreements inadvertently made by legal counsel. No wonder the government is going broke, just like many of the homeowners that Fannie Mae and OFHEO were supposed to protect.
Six Million Dollars
The district court later interpreted the stipulation that OFHEO’s attorney had made in the middle of a hearing to allow the requesting parties to specify any search terms they wanted; so they did. They specified 400 keyword terms which returned over 660,000 documents. Even though the government lawyers clearly did not understand what they had agreed to, they went ahead with the search and spent $6,000,000 in the process. Another big mistake. They should have tried to get relief first before spending the money. If that was refused, they still should have refused to spend $6,000,000. Instead, as the appellate court later recommended, they should have “defied the adverse ruling and appealed any ensuing contempt finding.” The bottom line is, once you spend the money on e-discovery, it is very hard to get it back. Unless you have specifically reserved the right for cost shifting, and sometimes even when you do, there is no money back guarantee.
You may well wonder how they managed to spend $6,000,000 to comply with a subpoena. As is typical, the main costs were for privilege review. Here is the language of the appellate court:
OFHEO undertook extensive efforts to comply with the stipulated order, hiring 50 contract attorneys solely for that purpose. The total amount OFHEO spent on the individual defendants’ discovery requests eventually reached over $6 million, more than 9 percent of the agency’s entire annual budget.
One would think at that point the courts would give the agency a break. But no, the government lawyers had made a series of promises to the court that they did not keep, mainly as to when the review would be completed and the emails produced. There are consequences for such failures. Unless you have done big projects like this before, it is unbelievable how long review can take and how many things can, and do, go wrong. Delays are inevitable and should be anticipated. They should enter into the calculus as to when a project can be completed and production made.
Clearly the government lawyers were once again making promises and representations to the court without the assistance of an experienced e-discovery lawyer. They made promises they could not keep and did not give adequate explanations for the delays. They also failed to cooperate and make rolling productions. Instead, they produced nothing at all while the contract lawyer review expenses kept going through the roof. To the district court judge, who almost certainly was never involved in a large e-discovery project before appointment to the bench, it looks like a series of broken promises and downright contempt. I do not know what happened here, but it was probably a series of mistakes and miscalculations, not intentional defiance of the court.
Regardless of the true cause, some of the the courts in Washington have obviously grown tired of lawyers making promises and commitments that they do not keep. They wanted to send a message that their actions would not be tolerated, and that is exactly what they did. Here is the language of the district court explaining the situation at *3:
*3 On November 29, 2007, the day before an interim deadline for production of several categories of material, OFHEO informed the district court that it would be unable to meet that deadline and moved for an extension until December 21, assuring the court that it could meet that extended deadline. The court granted the motion, but two days before the extended deadline, OFHEO informed the court not only that its previous assurances had been based on insufficient data, but also that it had only recently hired the necessary number of contract attorneys. OFHEO told the court that it would be unable to comply with the extended interim deadline, and that although it could produce all non-privileged documents by the ultimate January 4, 2008 deadline, it would be unable to produce all the required privilege logs until February 29.
The individual defendants renewed their motions to hold OFHEO in contempt. On January 22, the district court granted the motions. The court recognized OFHEO’s efforts at compliance, but deemed them “not only legally insufficient, but too little too late,” stating:
[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.
OFHEO was held in contempt of court, as punishment they would not only have to pay for everything, with no hope of cost-shifting, but they would be required to produce some 20,000 emails without advance privilege review. The production was to be made on an “attorneys-eyes-only” basis, and a chance to later assert the unique kind of government privilege at issue here, the “deliberative process” privilege, but still, opposing counsel will be allowed to see all.
Here is the appellate court’s explanation:
[T]he district court directed the office to provide the actual documents withheld on the basis of the deliberative process privilege and not logged by the deadline. The district court described the sanction as “designed to move the [d]iscovery process forward and to allow for [a] more targeted, and therefore more truncated, privilege litigation process.”Hr’g Tr. at 26 (Jan. 22, 2008). The district court therefore specified that the compulsory disclosure would not waive the privilege with respect to further disclosure; directed that the documents be provided only to individual defendants’ counsel; and created a mechanism for OFHEO to recover documents found to be privileged.
I am not troubled by the privilege sanction. It stops short of a waiver and it appears that OFHEO deserved this counter-measure to make up for its many prior delays.
The part of this decision that astounds and disturbs me is the affirmance of the propriety of requiring a non-party to spend 9% of its total budget to comply with a subpoena, simply because their attorneys blindly agreed to comply without considering the cost of compliance. Here is how the Appeals Court explains its holding at *8:
*8 District judges must have authority to manage their dockets, especially during massive litigation such as this, and we owe deference to their decisions whether and how to enforce the deadlines they impose. See Berry v. District of Columbia, 833 F .2d 1031, 1037 n. 24 (D.C.Cir.1987). Though we recognize OFHEO’s strenuous efforts to comply, the district court found them to be “too little too late,” Hr’g Tr. at 19 (Jan. 22, 2008), and determined that the office’s compliance was inadequate, id. at 21. In making this assessment, the court placed great weight on the long history of the discovery dispute and on OFHEO’s repeated requests for extensions, ultimately concluding that OFHEO had requested one extension too many and that strict enforcement of its deadline was warranted. Given the district court’s intimate familiarity with the details of the discovery dispute, the scale of the production requested, and the progress of the multidistrict litigation as a whole, we are ill-positioned to second-guess that assessment. Were we on this record to overturn the district court’s fact-bound conclusion that OFHEO dragged its feet until the eleventh hour, we would risk undermining the authority of district courts to enforce the deadlines they impose.
I understand the importance of district court discretion, enforcing deadlines, and not second-guessing discovery calls. I am in favor of that. Also, I have often called for judges to get tough and stop allowing all of the “hide the ball” games. On the whole, I think judges have been far too tolerant of attorney misconduct. But, this case goes too far and punishes the wrong people. A government agency has been unfairly punished for conduct of their legal counsel. In the process, the second of the fourteen Sedona Principles has clearly been breached:
2. When balancing the cost, burden, and need for electronically stored information, courts and parties should apply the proportionality standard embodied in Fed. R. Civ. P. 26(b)(2)(C) and its state equivalents, which require consideration of the technological feasibility and realistic costs of preserving, retrieving, reviewing, and producing electronically stored information, as well as the nature of the litigation and the amount in controversy.
A non-party should never be required to spend $6 Million to comply with a subpoena. Moreover, by requiring OFHEO to restore and search its disaster recovery backup tapes, the requesting plaintiffs and the courts also violated the eighth Sedona Principle:
8. The primary source of electronically stored information for production should be active data and information. Resort to disaster recovery backup tapes and other sources of electronically stored information that are not reasonably accessible requires the requesting party to demonstrate need and relevance that outweigh the costs and burdens of retrieving and processing the electronically stored information from such sources, including the disruption of business and information management activities.
This case demonstrates what can happen when these fundamental precepts are not followed. It cannot be fair and just to allow a lawyer’s actions to drain 9% of an agency’s total annual budget, a budget paid for by taxpayer funds. Congress did not approve OFHEO’s budget last year thinking that 9% of it would go to help a group of plaintiffs sue Fannie Mae. The appellate court, and the district court before it, should have made an economic analysis of the situation in reaching its decision and considered the gross inefficiencies of its ruling.
I understand the need to affirm trial court discretion, but the appeals court could have upheld the authority of the lower court and still mitigated the economic impact of this ruling in some way. For instance, it could have allowed for possible cost-shifting. At the very least, the appeals court should have carefully limited its holding and expressed some abhorrence of the burden imposed. It should have considered the possible impact of this ruling on the future jurisprudence of e-discovery. It did not. It went too far, just as the pendulum was beginning to swing the other way. The economy and fair minded judges everywhere will no longer tolerate this kind of excess. For this reason, I predict that Fannie Mae will come to be seen as the high-point of out-of-control e-discovery spending. It will be all downhill from here, especially if we can muster up the competence and cooperation needed to make it happen.