Insurance Class Actions Insider -

A recent article in Corporate Counsel and an EpsteinBeckerGreen client alert report that the federal courts’ Advisory Committee on Civil Rules has voted to recommend a slate of amendments to the Federal Rules of Civil Procedure.  A copy of the proposed amendments does not yet appear to be available online.  As reported in these articles, Rule 26(b)(1) would be amended to require the parties to limit discovery to make it “proportional to the needs of the case.”  The amendments would also limit depositions to 5 per party instead of 10; reduce the length of depositions from 7 hours to 6 hours; reduce the maximum number of interrogatories from 25 to 15; and limit requests for admission to 25, excluding requests pertaining to the genuineness of documents.  (All of these limits could be increased by court order or stipulation.)  Other proposed changes would require written responses to discovery requests to state objections with specificity and clearly state whether responsive materials are being withheld on the basis of objections (as a practical matter, this is typically required today).  Proposed changes to Rule 37 would require that, before imposing sanctions or an adverse jury instruction for failure to preserve evidence, a court would need to find “substantial prejudice” and that the failure was “willful or in bad faith,” or that the failure “irreparably deprived a party of any meaningful opportunity” to litigate the case.  Other changes would reduce deadlines for activities early in a case (the time to serve process, issue a scheduling order, and allow for service of document requests before a Rule 26(f) case management conference). 

In most class actions, these changes, if adopted, will probably be welcomed by defendants.  Defendants devote most of their efforts in class actions to defensive discovery, with typically limited information available from the named plaintiffs and the putative (or certified) class.  In class actions that survive initial motion practice, discovery typically becomes a large expense for the defendant.  The real question will be how strictly courts enforce these new limitations, if they are adopted.  If courts take the view that class actions are so complicated that the new rules can largely be ignored, the new rules would have little practical impact.  But if courts recognize that class actions often are narrowly pled to focus on one or two limited issues, then applying these new limitations to class actions in such cases potentially could achieve swifter, less expensive resolution of these cases.

Last week I attended the ABA National Institute on E-Discovery in New York.  Here is part one of my summary of some key insights from the conference: 

• Use of Social Media by Company Employees:  When companies allow their employees to access social media websites from corporate computers and information regarding company business is posted on such sites (sometimes in violation of company policy), that can present significant problems when such information is requested in discovery.  The recommendation of one of the panelists was that companies should prohibit access from corporate computers and posting of corporate information by employees.  But it was also reported that some companies are allowing access and even forming their own internal “social media” intranet sites where employees can have online conversations, conduct seminars, create groups, etc.  That can sometimes present challenges for implementing litigation holds and preserving and collecting data from these sites when required in litigation. 
• Obtaining Social Media Discovery from Plaintiffs:  This can potentially be a fertile ground for discovery from named plaintiffs in putative class actions (but keep in mind that this may spark requests for such information from the defendant, depending on what the company’s policy is regarding employee access to and use of such sites).  Magistrate Judge Kristen Mix of the District of Colorado gave a very thorough presentation on this subject.  She explained that Facebook tends to fight civil subpoenas, based on the Stored Communications Act and Electronic Communications Privacy Act, although courts sometimes order compliance.  Facebook’s formal written policy is somewhat vague regarding its response to subpoenas: 

Responding to legal requests and preventing harm

We may share your information in response to a legal request (like a search warrant, court order or subpoena) if we have a good faith belief that the law requires us to do so. This may include responding to legal requests from jurisdictions outside of the United States where we have a good faith belief that the response is required by law in that jurisdiction, affects users in that jurisdiction, and is consistent with internationally recognized standards. We may also share information when we have a good faith belief it is necessary to: detect, prevent and address fraud and other illegal activity; to protect ourselves and you from violations of our Statement of Rights and Responsibilities; and to prevent death or imminent bodily harm.

While Facebook reportedly tends to fight civil subpoenas, it provides a “button” whereby a user can download his or her entire content for purposes of responding to discovery requests (or other purposes).  Requesting that the opposing party do this in a document request and if necessary seeking a court order requiring them to download the content themselves is often a more expeditious route than serving a subpoena on Facebook.  But there can be technical issues – sometimes the “button” will not work effectively for users that post a large amount of content on Facebook.  There also could be concerns about material being deleted by the user, which may or may not be retained by Facebook.  Judge Mix emphasized that many judges are not that familiar with social media sites and how they work because, to avoid any appearance of impropriety in becoming “friends” with lawyers and others, many judges tend to eschew entirely participation in these sites.  That makes it important to explain these things thoroughly in discovery hearings and any motion practice, and not assume the judge knows the basics of how social media sites work.

A major expense for defendants in class actions is the cost for electronic discovery vendors to collect, search through, process and host electronic data to be produced in discovery.  These often amount to hundreds of thousands of dollars.  These costs are likely to rise with the advent of computer-assisted predictive coding (see my March 9, 2012 post).  Can a prevailing party recover some or all of these large costs?  The Third Circuit recently held that scanning of hard copy documents, conversion of native electronic files to TIFF format, and transfer of VHS tapes to DVD format were recoverable, but other costs were not.  The recoverable costs here (and this case was not a class action) amounted to about $30,000 out of a total of $365,000.  In some class actions the scanning and conversion costs are considerably larger.  If a named plaintiff has to bear that cost, many cannot do so without suffering a substantial financial hardship, so the risk of incurring this cost can be a significant disincentive for a named plaintiff to bring a class action, and a not inconsequential bargaining chip in settlement discussions.  In some jurisdictions, plaintiff’s counsel may be able to bear these costs if they lose, although in other jurisdictions ethical rules may not permit that.  Even if plaintiff’s counsel is responsible for the costs, however, many plaintiffs’ firms will not take lightly having to pay out of pocket tens of thousands of dollars in e-discovery costs.

In Race Tires America, Inc. v. Hoosier Racing Tire Corp., No. 11-2316, 2012 U.S. App. LEXIS 5511 (3d Cir. Mar. 16, 2012), the dispute centered on the proper interpretation of the federal statute regarding taxable costs, which provides, in pertinent part, that costs taxed against a losing party may include “[f]ees for exemplification and the costs of making copies of any materials where the copies are necessarily obtained for use in the case . . . .”  28 U.S.C. § 1920(4).  The district court had awarded the full $365,000, on the theory that the e-discovery charges were the modern equivalent of “exemplification and the costs of making copies.”  Race Tires, 2012 U.S. App. LEXIS, at *13. 

The Third Circuit explained that the costs statute goes back to 1853, long before anyone imagined copy machines, let alone e-mails and massive computer databases full of them.  There was a change in 2008 at the recommendation of the Judicial Conference of the United States, which modified “copies of papers” to “copies of any materials,” but otherwise the language goes back to a pre-computer era when you would need either a printing press or someone to write out copies by hand.

The Third Circuit first addressed whether “exemplification” would encompass e-discovery costs.  It concluded that “exemplification” must have a different meaning from “making copies,” based on the principle of statutory construction that separate terms used should be presumed to have distinct meanings.  The court concluded, based on dictionary definitions and prior case law, that “exemplification” refers to presentation of illustrative evidence (such as demonstrative exhibits) or authentication of public records, neither of which would apply to the e-discovery costs being claimed.

The Third Circuit then analyzed the meaning of “making copies.”  Laypersons might find it amusing that lawyers and judges really debate things like what it means to “make copies.”  The Third Circuit again went to a dictionary on that question, finding that “copy” means “an imitation, transcript, or reproduction of an original work.”  Id. at *22-23.  The court concluded that:

[W]e identify the following general categories of services comprising the vendors' electronic discovery services: collecting and preserving ESI; processing and indexing ESI; keyword searching of ESI for responsive and privileged documents; converting native files to TIFF; and scanning paper documents to create electronic images.

Of the activities undertaken by the vendors, only the conversion of native files to TIFF (the agreed-upon default format for production of ESI), and the scanning of documents to create digital duplicates are generally recognized as the taxable "making copies of material."

Id. at *25.  The Third Circuit further reasoned that the various steps that would be required before the digital era to identify potentially responsive documents and review them for responsiveness and privilege were not recoverable costs; only the actual copying was.  So the use of computers to do some of the kinds of things that lawyers or paralegals used to, and still do with hard copy documents would not be recoverable.  The court noted that Rule 26(c) allows a party in a motion for protective order to ask a court to shift additional costs, but that was not sought here.

This is unlikely to be the last word on recoverability of e-discovery costs, but it appears to be the first appellate decision on the issue.  Insurers and other defendants should remember to take advantage of the recoverability of at least a portion of e-discovery costs when they can, and try to collect as much as possible.  Recoverable costs are often an afterthought or not even thought about when you win on a dispositive motion.  An amendment to the federal statute may also be in order to expand recoverability of e-discovery costs and thereby deter frivolous litigation and encourage parties to narrow the scope of what they seek in e-discovery so as not to run up a large bill of costs.  Don’t forget though that in complex insurance claim litigation, insurers that demand extensive e-discovery from an opposing party can also be stuck with a larger bill of costs if they lose.

The e-discovery world is abuzz about the new decision by Magistrate Judge Andrew J. Peck of the Southern District of New York regarding computer-assisted coding.   The case is Moore v. Publicis Group, No. 11 Civ. 1279 (ALC) (AJP), slip op. (S.D.N.Y. Feb. 24, 2012).  This is an issue of particular interest for Judge Peck, who also wrote an article on the topic in October 2011.  While it’s an issue that goes far beyond class actions or insurance class actions, it certainly has the potential to impact such cases in a major way. 

For those who haven’t heard of it, computer-assisted coding involves the use of special software to conduct a search through electronic documents (e-mails, attachments and other electronically-stored data) to identify documents relevant to a particular lawsuit.  The way it works, as explained in the opinion, is that a more senior lawyer representing the party responding to the document request reviews a small, random sample of a subset of documents, say a few thousand documents, drawn from a massive collection of say several million potentially-relevant documents (the Moore case involved over 3 million emails, and it appears that was just the beginning).  This sample might or might not first be narrowed through key word searching.  The reviewer scores the documents for their degree of relevance to the document requests.  The software then, “trained” by the reviewer, searches through the remainder of the documents and endeavors to identify their degree of relevance.  A particular statistical confidence level is selected in using the software, say a 95% confidence rate.  Sometimes more than one round of this kind of review is needed to “train” the computer consistent with the selected confidence rate.  Experienced lawyers do the review because they are better at identifying the degree of relevance. Documents that the system determines to have a lack of relevance below a particular score selected by the parties are presumed to be irrelevant, and only the relevant documents are reviewed for privilege and produced.  The idea is that this process should achieve the objective of identifying, with a sufficient confidence rate, the relevant documents, at a substantially lower cost than the usual procedure of having junior associates or contract attorneys review documents one by one for relevance (as I did over a decade ago as a junior associate at Skadden Arps).  According to Judge Peck, statistical data shows that this new computer software, when properly “trained” by senior lawyers, is now more accurate in determining relevance than the old method of manual human review.  It also makes possible review projects where the set of electronic data is so large that it would be impossible (or the cost unfathomable) to conduct a manual review. 

What Magistrate Judge Peck’s opinion seems to suggest is that this process works best where the protocol provides the party seeking the discovery with complete access to all non-privileged documents that were reviewed by the senior reviewer, and the manner in which they were tagged (for a particular level of relevance or relevance as to a particular issue), so that the party seeking the discovery can be comfortable that the “training” of the computer system is being done fairly, and thus that the computer search that is conducted based on that “training” is appropriate.  It seems to me that another approach that might be appropriate in some cases would be to let the party seeking the discovery do the review that “trains” the computer, so they are ones that are identifying what they deem to be relevant.  First the producing party would need to do a privilege review on the random sample of documents (and probably exclude other particularly sensitive documents that do not fall within the scope of the requests), but the random sample would be only a relatively small number of documents to review for privilege, etc.  If the party seeking the discovery then reviews the non-privileged documents and “trains” the computer surely they cannot complain that it was not done properly.  There may be problems that prevent using that approach in particular cases but it strikes me as an option that is worth considering. 

It also strikes me that this kind of system could also be useful in identifying privileged documents, perhaps not to make final determinations, but for narrowing what needs to be reviewed for that purpose, particularly where a clawback order is in place.  If a computer can be trained to identify levels of relevance to a high degree of certainty it likely can be trained to identify privilege in a similar way.

Judge Peck’s decision makes a few other interesting points: 

• Rule 26(g)(1)’s certification requirement applies only to initial disclosures, and does not require producing parties to certify that document productions are “complete.”  He also notes that in cases involving massive amounts of data no lawyer could certify that a production is “complete.”  Rather, the standard of compliance is one of proportionality under Rule 26(b)(2)(C).  This rule requires federal courts to limit discovery where “the burden or expense of the proposed discovery outweighs its likely benefit, considering the needs of the case, the amount in controversy, the parties’ resources, the importance of the issues at stake in the action, and the importance of the discovery in resolving the issues.”
• Rule 702 and Daubert only apply to expert testimony and are inapplicable to the method used to search for documents in discovery.  Thus, the procedure followed for computer-assisted coding should not have to meet Daubert standards, but instead be a reasonable process in accordance with the proportionality rule. 

In my mind the advent of this software and the fact that it has the strong support of at least one judge on a court that handles many of our country’s most complex civil cases seems like a great development for the cause of achieving what the very first rule of civil procedure (which Judge Peck cites) calls for, that is, “the just, speedy and inexpensive determination of every action and proceeding.”  Fed. R. Civ. P. 1.  If this new technology (no doubt expensive, but that won’t last forever) can cut the cost of litigation substantially and result in more cases being resolved on the merits (rather than by settlements driven by litigation costs) that will be a very positive development for our legal system and the legal profession.  More complex cases can be tried if the parties spend less time and money on discovery.  There will be fewer jobs for recent (and not so recent) law school graduates to stare at a computer screen all day coding documents, but that is not what they thought they were going to school for anyway, and not particularly productive for our economy.

It is relatively rare for defendants to take discovery from non-named members of the putative class, which generally requires court approval.  But such discovery can be quite useful in opposing class certification by highlighting differences in experience and viewpoints among putative class members.  Where depositions of a sample of putative class members turn up information that would be relevant at trial, the defendant may have a strong argument that if a class were certified it would have to depose every member of the putative class, making a class action unmanageable.   

A recent post by Andrew Trask on his Class Action Countermeasures blog brought to my attention a recent decision by the Northern District of California in Antoninetti v. Chipotle, Inc., 2011 U.S. Dist. LEXIS 54854 (S.D. Cal. May 23, 2011).  This is an Americans with Disabilities Act case that appears to be premised on a claim that the defendant’s Mexican restaurants are constructed in a manner that does not allow handicapped customers to watch their food being prepared (because of the height of internal walls), while non-handicapped customers can do so.  The plaintiff filed, with her motion for class certification, 41 declarations signed by non-named members of the putative class.  The defendants sought leave to take depositions of 20 of these people, limited to one hour.  The court granted the motion, allowing the depositions with the one-hour limitation, and requiring that they be videotaped (apparently to aid the court in  evaluating any inappropriate conduct during the depositions).  The court found it significant that the individuals had “injected themselves into the litigation” by signing the declarations.  The defendant submitted proposed questions, plaintiff’s counsel objected, and the court ruled on the objections in an appendix to its opinion, overruling the vast majority of the objections.

This type of discovery can be useful in insurance claims-related class actions to help illustrate why class treatment is improper, and why the facts of each putative class member’s claim matter in resolving the merits.  It does not seem fair that in this case the only people being deposed are individuals who were hand-picked by plaintiff’s counsel.  That may result in a skewed presentation to the court, even after these depositions are taken.  I think a more appropriate procedure would be to let each side select a sample of putative class members to depose, or to have only the defendant select them if the plaintiff did not wish to take any such depositions, or to use a random selection process.  While this will be an imposition on people who may not have expressed a desire to participate in the litigation, it would be a relatively small number of people, would be a small imposition on their time, and would aid the court in evaluating class certification.  One might analogize this involuntary but rare participation in the court system as similar to jury service.  Alternatively, the defendant (or both sides, where permitted) could contact people and depose only those who agreed to give depositions.