One goal of the discovery process as articulated by the Federal Rules of Civil Procedure is to level the playing field so that no party has an undue information advantage. However, the common criticisms of litigation, namely time and expense, also can be primarily attributed to discovery. The computerized age and the move toward electronically stored information (ESI) present an additional layer of complexity to requesting and producing documents. It is increasingly common for everyday litigation to include forensic imaging of hard drives, conversion of electronic files to a word-searchable format (i.e., optical character recognition [OCR]), and web-based or other hosting of electronic discovery.
A discussion of the specifics of electronic discovery and the further protections to third parties built into the Federal Rules addressing the unique burdens that can be associated with such discovery methods (such as Federal Rule of Civil Procedure 45(d)) are beyond the scope of this article. Nonetheless, electronic documents and email, which has become a veritable instant messaging service, are key drivers behind increasing discovery costs. As John Freeman writes in his book, The Tyranny of Email: The Four-Thousand-Year Journey to Your Inbox (Simon & Schuster, Inc., 2009), “It has been estimated that the average office worker sends and receives 200 emails a day.” Id. at 4, 5. Freeman also notes, “If there is an hour or a minute or a second to spare, email is there. It is our electronic fidget.” Id. In the context of document production, modern-day communication means all roads lead to cost. It has long been accepted that in the “American system,” each party pays his or her own cost. But what happens when the documents necessary to prosecute or defend a case are not in the possession of a party, but a nonparty? Nonparty discovery is an essential tool in the litigation tool box, but in modern day discovery, who should pay?
Federal Rule of Civil Procedure 45(c)(2)(B) states that “an order to compel production shall protect any person who is not a party or an officer of a party from significant expense resulting from the inspection and copying commanded.” Federal Rule of Civil Procedure 45 applies in bankruptcy cases pursuant to Federal Rule of Bankruptcy Procedure 9016. The drafters of the Federal Rules revised the relevant part of this rule to its current structure in 1991 and again in 2006 to take into account the new discovery reality.
By its terms, Federal Rule of Civil Procedure 45(c) applies to an order to compel. Thus, for the rule to be applicable, triggering events include: 1) a discovery subpoena to a non-party; 2) the non-party raising objections to the requests and/or moving to modify or quash the subpoena or for a protective order; 3) the requesting party filing a motion to compel; and 4) the motion to compel being granted. Thus, before seeking costs, a nonparty must not have waived its rights by failing to object to the discovery requests. Prior to the 1991 revisions to Federal Rule of Civil Procedure 45, courts had recognized their discretion to grant discovery relief to nonparties. This included requiring the requesting party to pay the costs of production, relying upon a set of nonexclusive factors including: 1) the scope of the discovery; 2) the depth of the invasion involved in the requests; 3) the extent to which the producing party must separate responsive information from privileged, or even irrelevant, material; and 4) the reasonableness of the expenses involved in making the production. Standard Chlorine of Del., Inc. v. Sinibaldi, 821 F. Supp. 232, 265 (D. Del. 1992); Williams v. City of Dallas et al., 178 F.R.D. 103, 112 (N.D. Tex. 1998); Behrend v. Comcast Corp., 248 F.R.D. 84, 86 (D. Mass. 2008).
After the 1991 revisions, the duty of a court to protect a nonparty from significant expense became mandatory––“an order to compel production shall protect [the nonparty]”––arguably, making it easier for a nonparty to receive reimbursement for its discovery costs. However, the language of Federal Rule of Civil Procedure 45(c) does not require the court to order the party requesting documents to pay all the expenses of nonparty production. Instead, courts must apply a multipronged test that requires at least three factors be considered. The factors are: (1) whether the nonparty has an interest in the outcome of the case; (2) whether the nonparty can more readily bear its costs than the requesting party; and (3) whether the litigation is of public importance. In re Exxon Valdez, 142 F.R.D. 380, 383 (D.D.C. 1992). This is in addition to a finding mandated by the Rule that the expenses be “significant.”
Who is a nonparty?
When deciding who should pay for the costs of discovery, the question of who is a nonparty is seemingly straightforward––isn’t it just a person or entity not named in the litigation? This is true most of the time, but in litigation involving multiple parties and (often) multiple claims, situations can arise where a party is a named party but was dismissed from the suit for one reason or another (e.g., standing) and is therefore still a party to the lawsuit until a final judgment has been entered. In cases involving multiple parties, a court has the authority to enter a final judgment as to one or more but fewer than all the claims or parties. Fed. R. Civ. P. 54(b); see, e.g., Transit Mgmt. of Southeast La., Inc. v. Group Ins. Admin., 226 F.3d 376, 381 (5th Cir. 2000). However, absent entry of a final judgment, any order or other form of decision, however designated, is subject to revision at any time before the entry of judgment adjudicating all the claims and the rights and liabilities of all the parties. Id. at n. 6. In an action dismissing one or more but fewer than all the parties, no appeal lies unless the court makes its required determination that there is no reason for delay and direction for entry of judgment under Rule 54(b) certification, unless one of a few recognized exceptions applies. Id. Because many dismissals are interlocutory orders, they do not qualify as a “judgment” under Rule 54(a) and a seeming nonparty may actually be a party under the Federal Rules of Civil Procedure.
What does it mean to have an interest in the outcome of the case?
As many courts have indicated, the rules governing nonparty discovery were designed to protect innocent third parties from having to bear the burden of other people’s battles. The Notes of the Advisory Committee to the 1991 revisions state “a non-party required to produce documents or materials is protected against significant expense resulting from involuntary assistance to the court.” This provision applies, for example, to a nonparty required to provide a list of class members. Other examples could be the treating physician at a medical clinic after a car accident, when neither the doctor nor the clinic have a financial stake in the outcome of subsequent personal injury litigation––their services having already been paid for––or, in the bankruptcy context, invoices, receipts, or proof of payment sought from nondebtor creditors. However, what if the nonparty is a trade group to which one of the parties is a key member? What if the nonparty is the federal government, which has sequestered and is withholding the relevant documents from a party? What if the nonparty is a business entity owned by or affiliated with one of the parties, but it is still a distinct legal entity?
All these scenarios and several others have been addressed by courts across the country, and yet, the body of case law on this issue is relatively limited. One lesson has emerged––the shifting of costs for responding to nonparty discovery requests is highly factual and ultimately based on the court’s sense of fundamental fairness. In making their determinations, courts prioritize the first factor of “interestedness” as the most significant. See, e.g., Wells Fargo Bank, N.A. v. Konover, 259 F.R.D. 206 (Dist. Conn. 2009) (outlining the three-pronged test, but then discussing only whether the nonparty was interested or not). A nonparty can be “interested” in litigation for several reasons––financial, issue alignment, or because the nonparty was voluntarily involved with the underlying transaction or dispute at issue in the case.
In re Exxon Valdez, borne out of the 1989 catastrophic oil spill, is the seminal case addressing nonparty cost shifting under Federal Rule of Civil Procedure 45(c). In that case, the plaintiffs included five classes of private individuals and the State of Alaska. The plaintiffs claimed that the discovery documents from the Washington D.C.-based trade organization American Petroleum Institute (API) would tend to show that the defendants could have taken measures to prevent, contain, or mitigate the oil spill. In re Exxon Valdez, 142 F.R.D. at 381.The defendants, Exxon Corporation and Alyeska Pipeline Service Company (a consortium of seven pipeline companies), were both members of the API; and their combined dues amounted to 29 percent of the API’s income in the year the issue of fee shifting was before the court. Id. at 380. Thus, the court concluded that the trade association had an interest in the outcome of the case based on its potential financial stake and its substantive issue alignment with the defendants. In reaching that conclusion, the Valdez court emphasized the context of the 1991 amendment to Federal Rule of Civil Procedure 45, with the amendment’s focus on truly disinterested parties, noting that “the drafters of new Rule 45 clearly intended to expand the protection for non-parties such as disinterested expert witnesses.” Id. at 383 (citing the Advisory Committee Notes to 1991 Amendment, which noted that the “growing problem has been the use of subpoenas to compel the giving of evidence and information by unretained experts”).
Another category of “interestedness” is where the nonparty was “‘substantially involved in the underlying transaction and could have anticipated that [such transaction could] reasonably spawn some litigation.’” In re First Am. Corp., 184 F.R.D. 234, 242 (S.D.N.Y. 1998); accord Wells Fargo Bank, N.A. v. Konover, 259 F.R.D. 206, 207 (Dist. Conn. 2009). This could be a situation in which the nonparty entered into a contract with one of the parties or had general business or other dealings with one of the parties.
In re First Am. Corp. was an offshoot piece of litigation from one of the largest bank frauds in world history, perpetrated by the Bank of Credit and Commerce International (BCCI) in which BCCI “created fictitious loans, stole deposits, incurred hundreds of millions of dollars in losses from reckless trading operations, accepted illicit funds from drug launderers and corrupt dictators and blatantly violated banking and criminal laws in virtually every jurisdiction in which it operated.” 184 F.R.D. 234, 236. Price Waterhouse LLP was the auditor of one of the BCCI banks. In an effort by Price Waterhouse to seek costs in responding to a nonparty subpoena, the court found that Price Waterhouse had played a role in the collapse of BCCI––having had access to documents that may have been critical in unraveling bank fraud and maybe even a corresponding responsibility––and should have reasonably anticipated being drawn into subsequent litigation resulting from the BCCI fraud. Id. at 241.
In the context of a motion brought in a bankruptcy case, the U.S. District Court for the District of Connecticut held that the nonparty entity seeking recovery of costs and fees for objections and responses to discovery requests from the plaintiff––Wells Fargo Bank, N.A. as Trustee––was not disinterested because the nonparty entity was affiliated with and controlled by the defendants. Wells Fargo Bank, N.A. v. Konover, 259 F.R.D. at 206. The court also found it relevant that both the nonparty and the defendants were represented by the same law firm in the litigation. Id. In requiring the nonparty to bear all its own costs, the court also found that the alleged fraudulent transfer at issue in the case and involving the nonparty was “at the very heart of discovery requests” and, therefore, the non-party was substantially involved in the underlying transaction. Id. at 207. Likewise, the nonparty ex-wife of a Chapter 7 debtor was denied reimbursement of costs when the bankruptcy court found no undue burden had been placed on her because she had unreasonably resisted discovery requests. There were allegations that the debtor actually owned assets titled in her name (therefore making her a witness) and that she was a defendant in a related avoidance action brought by the Chapter 7 Trustee. Faiella v. Faiella, 2008 Bankr. LEXIS 1452 at *13–14 (D.N.J., Apr. 18, 2008). These facts were enough that the court held she should “expect that her financial entanglements with her ex-husband/housemate will be scrutinized.”
Another example of interestedness is that of United Airlines, a nonparty served with discovery in a case under the citizen-suit provision of the Resource Conservation and Recovery Act of 1976 (RCRA) for injunctive relief against the City and County of Denver based on the potential environmental dangers of aircraft de-icing fluid on a particular concourse used almost exclusively by United Airlines. The District Court in Colorado held that United Airlines had an interest in the outcome of the litigation because its operations were “alleged to be a source of the odors at issue in [the] case.” Crandall v. City & County of Denver, 2007 U.S. Dist. LEXIS 96770 (D. Colo., Jan. 17, 2007). Any judgment affecting the de-icing of planes on this particular concourse was held to have necessarily implicated United’s operations. As a result, the operations of the airline and the airport authority were found to be so intertwined that United Airlines could not be disinterested.
A noteworthy contrast to the interestedness finding of United Airlines is Pan Am and its insurer, United States Aviation Underwriters, Inc. (USAU), nonparties in litigation arising out of the terrorist bombing of Pan Am Flight 103 over Lockerbie, Scotland. In re Appl. Of the Law Firms of McCourts and McGrigor Donald, 2000 U.S. Dist. LEXIS 20287 at *2 (S.D.N.Y., Nov. 3, 2000). In that case, the two accused Libyan nationals sought discovery from two law firms that represented Pan Am and USAU in a separate civil action related to the bombing. Although Pan Am and USAU clearly were very much involved in the underlying events, the court held that these entities were “more closely analogous to ‘the quintessential, innocent, disinterested bystander[s]’ than were the API or Price Waterhouse in the above examples because they, themselves, were victims of the terrorist acts that the requesting parties were charged with committing.” Id. (internal citations omitted). The court found that the equities strongly militated against requiring the victims to bear the cost of their assailants’ defense. Id.
Who can more readily bear the costs?
There is no magic formula that courts use to determine whether the requesting party or the nonparty can more readily bear the costs of production. In fact, it is the factor with the most cursory treatment in the case law. This is partly the result, it seems, of a lack of strenuous argument with regard to this factor on the part of the litigants. Dow Chem. Co. v Reinhard et al., 2008 U.S. Dist. LEXIS 35398 at *2 (S.D.N.Y., Apr. 29, 2008). Many of the opinions contain summary conclusions such as “[p]arenthetically, I doubt that the Government of Oman, who came close to purchasing Dow, will have any trouble covering the expenses for the production, nor that it has refused to do so; nor for that matter would the corporate behemoth Dow.” Id. The treatment of who can more readily bear the costs is resolved in a mere one sentence in Georgia-Pacific LLC v. Am. Int’l Specialty Lines Ins. Co., 2010 U.S. Dist. LEXIS 14220 at *2 (S.D. Ohio, Jan. 20, 2010) (“There is also no reason to believe that Hopple and Garden City Group can more readily bear the costs of production than Defendant.”). Instead, courts often simply conclude that the very nature of the litigant (e.g., a large corporation, government authority, or an individual) determines its ability to pay. See, e.g., id.; see also Prescient Acquisition Group v. MJ Publ’g Trust et al., 2006 U.S. Dist. LEXIS 75383 at *5-6 (S.D.N.Y., Oct. 13, 2006).
Relative inability to pay, however, does not necessarily justify an award where the costs incurred were not necessary. For example, where a disinterested nonparty, nonprofit hospital chose to hire outside counsel in responding to a subpoena issued by the Port Authority of New York and New Jersey––despite having zero interest in the outcome of the litigation––and therefore incurred greater costs in responding, the court determined that it would be inappropriate to charge the legal costs to the better funded Port Authority. In re World Trade Center Disaster Site Litigation: Mt. Sinai Med. Ctr. v. Port Auth. of N.Y. and N.J., Inc., 2010 U.S. Dist. LEXIS 96819 at *51 (S.D.N.Y., Sept. 13, 2010). This was the result, despite the court’s finding that the hospital was financially pressed in its core activities. Id. at *54. The court did note, however, that the hospital received approximately $300 million in federal funding to undertake the studies that were the target of the subpoena. Id.
What is of public importance?
Public importance is the most amorphous of the three factors. The public’s interest in litigation is a factor typically requiring the nonparty to absorb the costs. See In re First Amn. Corp., 184 F.R.D. 234, 242 (S.D.N.Y. 1998). This can be attributed to two reasons: (1) to avoid deterring litigants from bringing lawsuits that are in the public interest by creating a precedent for nonparty cost shifting; (2) and it is equitable to require nonparties to bear their share of cost regarding litigation that is for the “public” good. Virtually all litigation could theoretically be construed as having some public importance––even private matters between two litigants often can be placed in a larger context. However, courts tend to find public importance where the litigation is part of larger-scale litigation, such as class action lawsuits or multidistrict litigation, or where the matter is one that will clearly implicate a public policy issue.
What are “significant” costs?
The short answer is it depends. The determination of what constitutes a significant cost lies with the discretion of the court. Sound Sec., Inc. v. Sonitrol Corp., 2009 U.S. Dist. LEXIS 59630 at *2 (W.D. Wash., June 26, 2009). In the Sound Sec., Inc. case, the nonparty sought reimbursement of more than $26,000 in attorney fees for review and production of documents and more than $60,000 in fees and costs for documents that had not yet been produced. The court determined that these amounts were “significant” when compared with other cases finding “significant costs.” The court noted that in Calero-Portacarrero, $200,000 was significant and in Williams v. City of Dallas, $9,000 was significant. Linder v. Calero-Portaccarrero, 251 F.3d 178, 182 (D.C. Cir. 2001); 178 F.R.D. at 113.
In some ways, this factor is self-selecting. It is usually the case that the parties seeking reimbursement feel burdened by the costs such that it is worth it for them to hire counsel to pursue a motion; therefore, the amounts are usually “significant.” Two words of caution––first, unnecessary expenses, such as the retention by a truly disinterested party of expensive legal counsel, often are not included in the “significant” test; and second, de minimis amounts likewise rarely should be included when seeking reimbursement for costs. An example of the former, in addition to the Mt. Sinai Med. Ctr. v. Port Authority of N.Y. and N.J., Inc. case, is that of Prescient Acquisition Grp., Inc. v. MJ Publ’g Trust et. al, in which the court stated:
“[h]ere, subpoena compliance presented no issues under international bank secrecy laws and no complex privilege issues required analysis . . . two partners billing at $830 per hour spent 28.9 hours on the matter. Two associates who are billed at a rate of $520 per hour spent of [sic] 54.7 hours on the matter and a staff attorney at $290 per hour billed 65.7 hours . . . it is not appropriate to shift the full weight of [Bank of America’s] choices to the plaintiff.”
2006 U.S. Dist. LEXIS 75383 at *6 (S.D.N.Y., Oct. 13, 2006).
With regard to the latter, as the Fifth Circuit stated, “[t]he recovery of costs sought for faxes sent, telephone calls, postage, expenses, and the like, do not warrant recovery under this rule.” In Re Propulsid Prod. Liab. Litig., 2003 U.S. District, LEXIS 16477 at *5 (E.D. La., Sept. 3, 2003).
How are the discovery costs to be allocated?
At the end of the day, clients want to know, “Am I going to have to pay and, if so, how much?” Here again, there are no hard and fast rules; rather, the trial court has significant discretion in allocating costs. It is rare, however, that one party (either the requesting party or the nonparty) will have to bear 100 percent of the costs to comply with the subpoena. A likely scenario is to split costs 50/50 once a determination is made that the equities of the given case warrant some cost shifting. The most important factor is interestedness to the extent that some courts even treat it as a quasi-threshold factor. Emphasize this factor in making arguments to the court but do not omit evidence regarding the other factors.
If you represent the nonparty seeking costs, clear delineation into categories of the costs sought (i.e., forensic imaging, third-party vendors, copying costs, attorney fees, etc.) may aid the court in determining reasonableness. In some cases, your opponent may also be less likely to strenuously oppose the request, if there is transparency in what you are seeking. If you represent the requesting party resisting cost shifting, present the court with a logical alternative allocation of costs. If the nonparty is seeking to have all of his or her costs shifted to your client, argue that at least a certain percentage should be borne by the nonparty based on the particular facts of your case. For example, the Exxon Valdez court found that the proportion of costs to be shifted should be equivalent to the total percentage of revenue the oil and gas requesting parties contributed to the trade association nonparty. Lastly, present evidence on all three prongs of the Exxon Valdez test.
If one lesson can be drawn from the decisions in this area of the law, it is that each decision is extraordinarily fact intensive. While that may be frustrating to clients and to those who prefer a more rigid application of clearly defined rules, there also is plenty of room in this framework for argument. Where the equities determine the outcome, strong advocacy can be your best asset.
Keywords: bankruptcy, litigation, third party, costs, fee shifting, Federal Rule of Civil Procedure 45, expense, discovery, attorney fees
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