Cost-Shifting in Federal Court Discovery: Where We Are and Where We’ve Been

We all know the long-standing general rule that a party must ordinarily pay its own costs to respond to discovery. Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 358 (1978). However, effective December 1, 2015, Rule 26 of the Federal Rules of Civil Procedure was amended to expressly address cost-shifting in discovery, a practice that has already been employed in many federal districts. Specifically, sub-section 26(c)(1)(B) was added to state that, when entering a protective order, a court may specify terms “including time and place or the allocation of expenses, for the disclosure or discovery[.]”  (Emphasis added.)

One might infer that the express acknowledgement of cost-shifting in the Federal Rules is meant to signal a trend toward a general increase in cost-shifting orders. The Advisory Committee Notes, however, are quick to throw cold water on this idea, explaining that the amendment was designed only to recognize courts’ authority to order cost-shifting, and not to make cost-shifting the “new normal”:

Rule 26(c)(1)(B) is amended to include an express recognition of protective orders that allocate expenses for disclosure or discovery. Authority to enter such orders is included in the present rule, and courts already exercise this authority. Explicit recognition will forestall the temptation some parties may feel to contest this authority. Recognizing the authority does not imply that cost-shifting should become a common practice. Courts and parties should continue to assume that a responding party ordinarily bears the costs of responding.

Although the Notes say that the new amendment “does not imply that cost-shifting should become a common practice,” this does not necessarily mean that cost-shifting should not become more common than it is right now.

Before Rule 26(c)(1)(B), federal courts typically relied on two other provisions of the Federal Rules for authority to order cost-shifting. First, Rule 26(b)(2)(B), which provides that “[a] party need not provide discovery of electronically stored information from sources that the party identifies as not reasonably accessible because of undue burden or cost.” This sub-section is limited to electronically stored information, and is further limited to information identified as “not reasonably accessible,” and neither of these limitations are contained in the new sub-section 26(c)(1)(B). Courts also used to rely on Rule 26(b)(2)(C)(iii), which was interpreted to permit cost-sharing if the court determined that “the burden or expense of the proposed discovery outweigh[ed] its likely benefit[.]” That sub-section has, however, been removed and replaced by the December 1, 2015 amendments.

Going forward, we anticipate that the addition of Section 26(c)(1)(B), which is worded less restrictively than either of its “predecessors” in Rule 26, will encourage more attorneys to seek cost-shifting in discovery, notwithstanding the Advisory Committee Notes explaining that the amendment is not meant to make cost-shifting “a common practice.” Currently, the keystone decision on cost-shifting in federal discovery is the Southern District of New York’s opinion in Zubulake v. UBS Warburg LLC,  217 F.R.D. 309 (S.D.N.Y. 2003). Under Zubulake, cost-shifting is only permitted if the requested documents are deemed “inaccessible”. This analysis is largely controlled by the manner in which the information at issue is stored, and whether it is available in a readable format. If the information is found to be inaccessible, then cost-shifting may be permitted under Zubulake, subject to an eight-factor balancing test, which considers:

(1) the specificity of the discovery requests; (2) the likelihood of discovering critical information; (3) the availability of such information from other sources; (4) the purposes for which the responding party maintains the requested data; (5) the relative benefits to the parties of obtaining the information; (6) the total cost associated with production; (7) the relative ability of each party to control costs and its incentive to do so; and (8) the resources available to each party.

This test is based, in part, on the language of Rule 26(b)(2)(C)(iii), quoted above, that has since been removed and replaced by a reference to Rule 26(b)(1), which, after the December 1, 2015 amendments, emphasizes the importance of proportionality in defining the scope of discovery:

Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the needs of the case considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resource, the importance of discovery in resolving the issues, and whether the burden or expense of the proposed information outweighs its likely benefit.

(Emphasis added.) When the Zubulake decision was issued in 2003, the court essentially proceeded on the premise that cost-shifting would only be appropriate where the discovery requests at issue presented an “undue” burden or expense, which would only exist if the information at issue was “inaccessible,” and would then be subject to the eight-factor balancing test articulated above.

If Zubulake was decided again today, under the Federal Rules as amended on December 1, 2015, it is not clear that the Court would choose to impose the pre-requisite that cost-shifting can only be permitted where the information at issue is “inaccessible.” Further, the multi-factor test articulated by the court (assuming the court would still choose a multi-factor test, a trend that never seems to go out of style), would likely resemble the proportionality factors now articulated in Rule 26(b)(1). These changes to the analytical framework could point to the conclusion that cost-shifting is merited in a greater number of cases than previously ordered. This is especially significant in jurisdictions that have not yet adopted the Zubulake approach to cost-shifting or articulated a standard of their own.

In sum, while the authors do not expect the recent addition of Rule 26(c)(1)(B) to usher in a sea-change where the requesting party will typically be expected to shoulder some percentage of the responding party’s discovery costs, it is expected to increase the number of motions filed seeking cost-shifting, which should, in turn, increase the raw number of cost-shifting orders in federal discovery. Further, the recent amendments’ overall focus on proportionality could lead some courts to soften the analysis that they use to determine when cost-shifting is merited. The key takeaway for attorneys and defendants is that the practice of cost-shifting is now expressly acknowledged in the Federal Rules, and, while it may not become commonplace, it is certainly not going to become any less common.