Not having knowledgeable e-discovery counsel can be costly -- a lesson the Office of Federal Housing Enterprise Oversight (OFHEO) found out the hard way. Failure to devise a comprehensive plan for responding to a third party subpoena seeking ESI ended up costing the agency over $6 million to comply with a court order, more than 9% of the agency's entire annual budget. In a rare Court of Appeals decision, In re Fannie Mae Securities Litigation, 552 F.3d 814 (D.C. Cir. January 6, 2009), the D.C. Court of Appeals affirmed the district court's order holding the OFHEO in contempt for failing to comply with a discovery deadline to which it agreed. But it's a bit more complicated than that.
The OFHEO regulates Fannie Mae and Freddie Mac, government sponsored enterprises participating in the secondary mortgage market. Fannie Mae is subject to a number of private civil actions which have been consolidated into multidistrict litigation in the U.S. District Court for the District of Columbia.
In the summer of 2006, individual defendants who were former Fannie Mae executives subpoenaed 30 categories of documents from the OFHEO. The OFHEO was not a party to the litigation. After some discussion, the request was limited to certain email communications stored on OFHEO's network and backup tapes. By the summer of 2007, OFHEO reported that it had produced all of the documents requested. The defendants conducted a 30(b)(6) deposition of OFHEO, and learned that it had failed to search all of its off-site disaster recovery tapes. A few months later, after the OFHEO failed to produce additional documents, the individual defendants moved to hold OFHEO in contempt. Following the first day of the contempt hearing, OFHEO and the individual defendants entered into a stipulated order that required OFHEO to conduct searches of its disaster-recovery backup tapes and provide all responsive documents and privilege logs by January 4, 2008. The order contained the following provision:
OFHEO will work with the Individual Defendants to provide the necessary information (without individual document review) to develop appropriate search terms. By October 19, 2007, the Individual Defendants will specify the search terms to be used.
Pursuant to the stipulated order, the individual defendants submitted over 400 search terms, which covered approximately 660,000 documents. OFHEO objected on the grounds that the stipulated order limited the individual defendants to "appropriate search terms," not a list that was "tantamount to a request for the dictionary." The District Court disagreed, and ruled that the stipulated order gave the individual defendants sole discretion to specify search terms and imposed no limits on permissible terms.
OFHEO undertook extensive efforts to comply with the request, hiring 50 contract attorneys solely for that purpose, and spending over $6 million dollars. OFHEO moved for and received two extensions, but failed to meet the deadline. The individual defendants renewed their motions for contempt, and the district court granted them, finding that the OFHEO's efforts at compliance were "too little, too late." As a sanction, the court ordered production of all documents withheld on the basis of the qualified deliberative process privilege and not logged by the January 4, 2008 deadline.
After a thorough analysis of the language in the order, the Court of Appeals upheld the district court's ruling, holding that "whatever ...ambiguities may lurk in the stipulated order, it unambiguously requires OFHEO to process the search terms the individual defendants specify." Id. at 821.
The OFHEO made another challenge: that it substantially complied with the stipulated order in good faith, and that contempt was therefore inappropriate. The Court of Appeals recognized that if its was deciding the matter in the first instance, it might not have held OFHEO in contempt. However, because the review was for abuse of discretion, and the Court found that the OFHEO provided no basis for concluding that the district court abused its discretion in finding OFHEO in contempt.
What are the expensive lessons learned?
- Hire knowledgeable counsel upfront to deal with the issues inherent in producing ESI. Cleaning up a mess later is much more expensive. You need counsel who understand the nuances involved, the technical issues and the potential expense associated with preserving, collecting, reviewing and producing ESI.
- Negotiation of search terms is a standard step in producing ESI, and not one to be entered into lightly. It could likely have saved millions of dollars here, where the OFHEO gave defense counsel carte blanche to decide the terms.Work with your counsel to develop a plan that is efficient, cost-effective and fulfills your obligations under the federal rules.
- Then, and this is important, get the parties to agree to it or go to the judge and get sign off before undertaking any expense. It is unlikely, absent the OFHEO's shenanigans of failing to respond or pretending the Court's November 2006 order didn't include ESI, that the district court would have required the OFHEO to spend $6 million to produce information. So the Court of Appeals suggests, and recent decisions from district courts are in line with approaches that minimize the costs to parties, especially third parties to an action.
- Once you have sign off of your obligations, execute the plan, document your steps and move onto the next challenge.
Continuing to deny that knowledgeable counsel is needed in this new and rapidly developing area of the law will continue to cost organizations copious amounts of cash. And who can afford that in this economy?
Kudos to Liz Chamberlin for assistance with this post.