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A Trend Toward Cost-Shifting in Discovery?

By Charles S. Fax, Litigation News Associate Editor

 

All civil litigators are schooled in the American Rule [PDF]. Regardless of who prevails in the case, each party pays its own legal fees absent a statutory, contractual, or common law basis for fee-shifting from the prevailing party to the loser. The corollary in pretrial discovery is the presumption that each party bears its own costs of document production, including the expense of identifying relevant documents, screening them for privilege and work product, producing them, and preparing a privilege log.


The American Rule
The American Rule is rooted in the belief that injured parties might not bring meritorious suits for fear of losing and incurring liability for the defendant’s legal fees, even if that risk is slight [PDF]. At best, plaintiffs might settle for less than fair value in an arms-length negotiation. Public interest suits might disappear. Thus, the belief holds, the American Rule promotes the ends of justice.


Justice, of course, cannot play favorites. In the modern era of electronic discovery, the overwhelming costs of production can chill a meritorious defense, inducing settlement for more than the case may be worth. In the discovery context, the effect of the American Rule is evident in Pippins v. KPMG[PDF], in which KPMG estimated its potential costs to preserve, process, and review a massive volume of hard drives sought by plaintiffs at almost $21 million [PDF]. KPMG sought a protective order that it need only maintain a representative sampling of the hard drives, but the court, applying conventional discovery doctrine, denied the motion. The warnings of pro-business groups like the U.S. Chamber of Commerce that the KPMG ruling could encourage overly aggressive discovery requests and force inequitable settlements—hyperbole aside—are not far-fetched.


The KPMG ruling is consistent with a large body of case law. This seems paradoxical because the discovery rules authorize courts to require cost-sharing where circumstances warrant. Rule 26(c) permits a court, for good cause, to impose conditions on discovery, including, according to the advisory notes, “payment by the requesting party of part or all of the reasonable costs of obtaining information from sources that are not reasonably accessible.”


Rule 26 Cost-Sharing
While historically, most courts have been reluctant to employ that authority, in a growing number of discovery decisions, judges have invoked Rule 26 to impose cost-sharing. Noteworthy cases include Boeynaems v. LA Fitness International, LLC [PDF]; Schweinfurth v. Motorola, Inc.; and Foreclosure Management Company v. Asset Management Holdings, LLC [PDF].


Boeynaems is significant for two reasons. First, it marshaled a number of cases in which courts have engaged in cost-shifting. Second, it is apparently the first reported case in which a court applied the doctrine to pre-class certification discovery in a putative class action, shifting significant costs from the corporate defendant to the plaintiffs’ counsel. The court wrote, “If the plaintiffs have confidence in their contention that the Court should certify the class, then the plaintiffs should have no objection to making an investment.”


In Schweinfurth, the court turned on its head the dogma against cost-shifting for fear of discouraging meritorious suits, ordering cost-sharing on the ground that the massive discovery sought “could be used as a weapon to compel settlement.” And in Foreclosure Management Company, as in Schweinfurth, the court read the criteria of Rule 26(b)(2)(C) for limitations on discovery into the cost-sharing authorization of Rule 26(c). (While Rule 26(b)(2)(C) authorizes limitations on discovery if the court finds, inter alia, that “the burden or expense . . . outweighs [the discovery’s] likely benefit,” Rule 26(b)(2)(B) integrates that concept with cost-shifting in the context of e-discovery only.)


The questions are whether these cases signify a trend toward equalization of discovery costs as a judicial management tool, and if so, is that a good thing? The answer to the latter question may turn on whether the respondent represents plaintiffs or defendants. Each side can make a case for the unfairness of cost-shifting, and there is case law to support both views. As to the former question, in the absence of further rule amendments to address the escalating complexity and costs of discovery (e.g., by reducing the scope of discovery absent good cause), there seems little doubt that judges will increasingly lower the bar for application of the cost-shifting mechanisms already in the rules.


Keywords: American Rule, cost shifting, discovery, cost sharing, Rule 26


 

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