US Supreme Court weighing proposals to curtail scope, burden and uncertainty of discovery in US Federal Court

February 2015 | LEGAL & REGULATORY | LITIGATION & DISPUTE RESOLUTION

Financier Worldwide Magazine

In US civil litigation, a party has a duty to preserve its documents and data, including electronically stored information (ESI) such as email, which are potentially relevant to a pending or reasonably anticipated lawsuit. The historically broad scope of civil discovery in US federal courts, coupled with the now ubiquitous use of ESI and the draconian sanctions sometimes levied against parties that fail to preserve discoverable ESI, have combined to make discovery an inordinately expensive, intrusive and time-consuming process. The federal Judicial Conference of the United States has recommended several amendments to the US Federal Rules of Civil Procedure (FRCP), the rules governing civil cases in the US federal courts. Herein two key amendments are examined which, if adopted, should significantly narrow the scope of US discovery in federal court and reduce the spectre of sanctions should an unintentional loss of electronic information occur.

Limiting the scope of US discovery – proportional discovery under Rule 26(b)(1)

Under the FRCP, and specifically current Rule 26(b)(1), civil discovery encompasses any non-privileged information that is “relevant to any party’s claim or defense”, with the courts having discretion to extend the scope of discovery to any item “relevant to the subject matter involved in the action”, without regard to the admissibility, if the discovery simply appears “reasonably calculated” to lead to the uncovering of admissible evidence. See current Rule 26(b)(1).

Proposed amendments to Rule 26(b)(1) would limit this broad scope by explicitly requiring discovery to be “proportional to the needs of the case”, with proportionality assessed through examination of the case’s monetary value, the importance of the issues raised in the case and the role of discovery in resolving those issues, the parties’ respective resources, and whether the cost of discovery outweighs its likely benefit. The proposed rule would also confine discovery to the parties’ actual claims and defences by removing the federal court’s discretion to allow discovery of matters generally relevant to the ‘subject matter’ of the case. See Proposed Rule 26(b)(1). While the amendments still permit discovery of materials that may not be admissible at trial, the proposed rule would eliminate discovery of material that is just ‘reasonably calculated’ to lead to admissible evidence, a phrase that is often (mis)interpreted to expand even further the scope of discoverable material. See FRCP Rules Appendix, B-44.

The proposed amendments would significantly narrow the scope and expense of discovery, at least in federal court. And, while federal courts have previously sought to inject proportionality into the discovery process, the proposed amendments, by expressly requiring proportionate discovery limited to the claims and defences in dispute, should yield a more efficient, and thus less costly, discovery phase.

Electronic discovery in the US courts – little shelter in the ‘safe harbour’

Current Rule 37(e) addresses ESI discovery or more specifically the situation where a party fails to preserve discoverable ESI. Adopted in 2006, this so-called ‘safe harbour’ rule was intended to insulate parties from sanctions when ESI was lost per the “routine, good faith operation of an electronic information system”, unless “exceptional circumstances” surrounding the destruction warranted a judicially-imposed sanction such as fines, adverse inferences and the striking of claims or defences. US courts have taken widely divergent views regarding what constitutes ‘exceptional circumstances’, with some courts imposing sanctions for the negligent loss of ESI and others requiring evidence that the data loss was intentional and in bad faith. The uncertainty over these standards, and the threat of sanctions for even the unintentional loss of ESI, led many corporations to adopt a policy of ESI ‘over-preservation’, thereby retaining information well past any legal, regulatory or business need to do so. Such over-preservation carries various technical and operational downsides, not the least of which are increased costs, especially where data is increasingly stored on remote servers or ‘cloud’ platforms operated by third-party providers. See FRCP Rules Appendix, B-14, 15.

Higher threshold for ESI discovery sanctions – reforms to Rule 37(e)

A change was needed. After much review, draft amendments and public consultation, the Judicial Conference has recommended a revised version of Rule 37(e) that would replace the current rule and in its stead impose a multi-step approach to a party’s failure to preserve ESI. Under the proposed rule, sanctions are authorised only as a last resort in the most egregious cases.

Threshold for the proposed rule. Proposed Rule 37(e) would apply only when a party failed to take the ‘reasonable steps’ to preserve ESI it was required to retain for litigation. While the proposed amendments do not define what constitutes ‘reasonable steps’, the formal guidance notes explain that “due to the ever-increasing volume of [ESI] and the multitude of devices that generate such information, perfection in preserving all relevant [ESI] is often impossible”. See FRCP Rules Appendix, B-60, 61. The proposed rule will not apply where the ESI loss occurs despite a party’s reasonable steps to retain it. Thus, where discoverable ESI is lost due to events beyond a party’s control, such as failures within a cloud service provider or a cyber-security breach, such loss alone should not trigger sanctions so long as appropriate measures were taken in advance to guard against such risks. See id.

Curative measures short of sanctions. Where, however, a party’s failure to take reasonable preservation efforts results in ESI loss, proposed Rule 37(e) directs the courts to first consider cure over sanctions, i.e., whether the lost information can be “restored or replaced through additional discovery”. See proposed Rule 37(e). If it can be, then sanctions are not authorised.

If the information cannot be restored, and upon a judicial finding that the discovering party has sustained ‘prejudice’ from the ESI loss, proposed Rule 37(e)(1) permits, but does not require the court to order curative ‘measures’ that must be “no greater than necessary to cure the prejudice”. As these measures are not specified, the federal courts will have discretion to impose significant consequences where appropriate – such as limiting the evidence that may be presented by the party that lost ESI, or permitting the parties to offer evidence and argument regarding the information loss. See FRCP Rules Appendix, B-64. Such measures, however, cannot include the sanctions authorised for the wilful destruction of ESI.

Sanctions for wilful ESI destruction. Proposed Rule 37(e)(2) restricts the imposition of the most severe sanctions to parties who “acted with the intent to deprive another party of the information’s use in the litigation”. By explicitly incorporating this bad faith standard, the rule would abrogate prior decisions that imposed sanctions based on a negligent failure to preserve ESI. Upon a showing of intentional ESI loss, the court is not required to, but may firstly “presume that the lost information was unfavorable to the party”; secondly “instruct the jury that it may or must presume the information was unfavorable to the party”; or thirdly “dismiss the action or enter a default judgment”. See proposed Rule 37(e)(2).

The federal courts are cautioned, however, to exercise care before imposing these sanctions. Indeed, the comments explain that even “finding an intent to deprive another party of the lost information’s use in the litigation does not require a court to adopt any of the measures listed” in the rule. See FRCP Rules Appendix, B-67. Instead, the remedy must be proportionate in the circumstances, meaning that “the severe measures authorized by [proposed Rule 37(e)(2)] should not be used when the information lost was relatively unimportant or lesser measures such as those specified in [proposed Rule 37(e)(1)] would be sufficient to redress the loss”. See id.

Potential implications of the proposed amendments

The foregoing amendments to Rules 26(b)(1) and 37(e), amongst others, have been sent to the US Supreme Court for review. If the Court adopts the proposed changes by 1 May 2015, the amendments would take effect 1 December 2015 absent legislative intervention by the US Congress.

If adopted, the amendments would herald the welcome (re)emergence of reasonableness and proportionality in discovery, particularly electronic discovery. By narrowing the scope of discovery in federal court to the parties’ respective claims and defences, and requiring discovery to be proportional to what’s at stake in a given action, proposed Rule 26(b)(1) should help return the discovery process to its proper place in litigation, that is, as a means for parties to investigate the underlying merits of a lawsuit, and not the focus of the suit itself. In addition, by introducing various factors that must be met before a court may award relief for a party’s failure to preserve ESI, proposed Rule 37(e) would make sanctions for ESI loss a last-resort option triggered only where a party deliberately destroyed material information for litigation advantage.

Even with these changes, the scope of civil discovery in the US federal courts will still be broad in comparison to civil law jurisdictions, and perhaps most other common law jurisdictions. The proposed amendments also do not alter a party’s underlying duty to preserve information for discovery in pending or reasonably anticipated litigation, and while the threshold for sanctions may be higher, the proposed rules still allow courts to impose potentially significant measures for the unintentional failure to preserve ESI. Nonetheless, a more streamlined and proportional discovery process, coupled with a uniform standard governing ESI loss, should ease the burden of ESI management, provide greater predictability for companies dealing with ESI discovery, and enable corporations to craft information retention policies without an undue fear of discovery-related sanctions, assuming the policy appropriately accounts for legal and regulatory requirements, as well as business needs, and is reasonably implemented and maintained.

Joe Falcone is a partner at Herbert Smith Freehills New York LLP. Mr Falcone can be contacted on +1 (917) 542 7805 or by email: joseph.falcone@hsf.com. This article was prepared with the assistance of Danielle Langhoff, counsel at Herbert Smith Freehills New York LLP.

Joe Falcone

Herbert Smith Freehills New York LLP