United States v. McGraw-Hill Companies, Inc. , 302 F.R.D. 532 ( 2014 )

ORDER RE: MOTIONS TO COMPEL [201] [202] [204] [206] [207] [208]

DAVID O. CARTER, District Judge.

I. BACKGROUND

As the Court previously explained, “[t]his is a ease about credit ratings — how they are created, whose interests they serve, and how they may or may not have been manipulated during the period leading up to this country’s financial meltdown.” Order, July 16, 2013 (Dkt. 34). The Government alleges that S & P deliberately misrepresented the integrity of its ratings in pursuit of financial gain. See generally Compl. (Dkt. 1).

Since the Court denied S & P’s motion to dismiss, the parties have been engaging in discovery. S & P has repeatedly insisted that both the Government and non-parties have “stiffed” it on its discovery requests. See, e.g., Hearing Tr. at 82:21-83:14 (Mar. 11, 2014) (Dkt. 148). On April 15, 2014, the Court denied S & P’s Motion for Phased Trials and partially granted its Motion to Compel Discovery from the Government. Order, April 15, 2014 (Dkt. 166). To break the discovery logjam, the Court ordered S & P to “file motions to compel against the five largest third parties with respect to the presently outstanding Rule 45 subpoenas.” Order, May 28, 2014 (Dkt. 186).

Now, S & P moves to compel production from six non-parties: (1) RBS Securities Inc. (Dkt. 201); (2) the National Credit Union Administration (Dkt. 202); (3) Bank of America and Merrill Lynch (Dkt. 204); (4) Countrywide Securities Corporation (Dkt. 206); (5) Deutsche Bank Securities, Inc. (Dkt. 207); and (6) Citigroup Global Markets, Inc. and Citibank, N.A (Dkt. 208).

II. ANALYSIS

A. Motions to Compel

The Court heard argument during a daylong session on July 29, 2014. By the end of the session, S & P and each of the non-parties represented that all disputes — except those related to costs — had been resolved. Therefore, the Court issues no ruling as to the scope of any discovery request.

B. Cost-Shifting Under Rule 45

All of the non-parties have objected to the subpoenas and request that the Court order S & P to bear any significant expenses related to production.

If a court orders a non-party to comply with a subpoena over that non-party’s objection, then the court must shift any “significant expenses resulting from compliance” to the requesting party. Fed.R.Civ.P. 45(d)(2)(B)(ii); Legal Voice v. Stormans Inc., 738 F.3d 1178, 1184 (9th Cir.2013). “[O]nly two considerations are relevant” to the cost-shifting inquiry: “(1) whether the subpoena imposes expenses on the non-party, and (2) whether those expenses are ‘significant.’ ” Legal Voice, 738 F.3d at 1184 (adopting the rule set out by Linder v. Calero-Portocarrero, 251 F.3d 178, 182 (D.C.Cir.2001)). A court “must order the party seeking discovery to bear at least enough of the cost of compliance to render the remainder ‘non-significant.’ ” Id. (citing Linder, 251 F.3d at 182).

1. Multi-Factor Analysis

Historically, there are at least seven factors that courts have considered when determining whether to shift costs: the non-party’s interest, if any, in the outcome of the case, Pollitt v. Mobay Chem. Corp., 95 F.R.D. 101, 105 (S.D.Ohio 1982); the relative ability of the parties to bear the costs, id.; the public importance of the litigation, United States v. IBM Corp., 62 F.R.D. 526, 528-29 (S.D.N.Y.1974); the scope of discovery, United States v. CBS, Inc., 666 F.2d 364, 371 n. 9 (9th Cir.1982); the invasiveness of the request, id.; the extent to which the producing party must separate responsive information from privileged or irrelevant material, id.; and the reasonableness of the costs of production, id.

These factors predate the 1991 amendment of Rule 45. At least one court has remarked that “there is no indication that [the drafters of the new Rule 45] intended to overrule prior Rule 45 case law, under which a non-party can be required to bear some or all of its expenses where the equities of a particular case demand it.” In re Exxon Valdez, 142 F.R.D. 380, 383 (D.D.C.1992). Several district courts within the Ninth Circuit concur, holding that these seven factors survive the 1991 amendment. See, e.g., CallWave Communs., Inc. v. Wavemarket, Inc., No. C 14-80112, 2014 U.S. Dist. LEXIS 88073, at *10-11, 2014 WL 2918218, at *3-4 (N.D. Cal. June 26, 2014).

However, the Court doubts that these factors survive the 1991 amendment. First and foremost, several of the factors cannot be squared with the Ninth Circuit’s plain holding that, “the only question before the court in considering whether to shift costs is whether the subpoena imposes significant expense on the non-party.” Legal Voice, 738 F.3d at 1184 (emphasis added). Many of the factors, like the public importance of the litigation, do not bear on the question of whether “the subpoena imposes significant expense on the non-party.” See id. Absent a strained definition of “significant,” for example, a non-party’s expenses are not made less significant by the fact that the litigation is important to the general public.

Second, the pre-1991 Rule 45 did not contain the phrase “significant expense” at all. It provided:

A subpoena may also command the person to whom it is directed to produce the books, papers, documents, or tangible things designated therein; but the court, upon motion made promptly and in any event at or before the time specified in the subpoena for compliance therewith, may (1) quash or modify the subpoena if it is unreasonable and oppressive or (2) condition denial of the motion upon the advancement by the person in whose behalf the subpoena is issued of the reasonable cost of producing the books, papers, documents, or tangible things.

Fed.R.Civ.P. 45(b) (March 1,1990) (emphasis added). Given that, now, the “only question” is whether the subpoena imposes a “significant expense” and the old Rule 45 made no mention of a “significant expense,” the seven factors developed under the old Rule 45 are only marginally instructive, if at all.

Third, all seven factors were developed to guide the court’s exercise of discretion, which was eliminated by the 1991 amendment. The pre-1991 Rule 45 provided that courts “may ... condition denial of [a motion to quash] upon the advancement ... of the reasonable cost of [production].” Id. (emphasis added). Each factor was posited and considered on the premise that the courts were determining whether to exercise their discretion. See CBS, 666 F.2d at 371 n. 9 (identifying four factors that courts have considered when applying the “discretionary mechanism for awarding costs”); Pollitt, 95 F.R.D. at 105 (“Pursuant to the discretion granted by [R]ule 45(b), this Court must be sensitive to the potential burden imposed on a non-party during discovery, by balancing [factors].”); IBM, 62 F.R.D. at 528-29 (considering factors “[i]n exercising [its] discretion”). Four of the factors were identified in CBS, where the Ninth Circuit “deeline[d] to curtail district courts’ discretion over the discovery process by adopting formal guidelines favoring nonparty reimbursement.]” 666 F.2d at 371. The 1991 amendment, however, did exactly that. See Legal Voice, 738 F.3d at 1184; Linder, 251 F.3d at 182; Exxon Valdez, 142 F.R.D. at 383. The factors provided guidance for courts to exercise discretion that they no longer have.

Fourth, Rule 45 was amended to make cost-shifting a matter of course. Even prior to the 1991 amendment, the Ninth Circuit noted that, “[n]onparty witnesses are powerless to control the scope of litigation and discovery, and should not be forced to subsidize an unreasonable share of the costs of a litigation to which they are not a party.” CBS, 666 F.2d at 371. The purpose of the 1991 amendment was to, in part, “clarify and enlarge the protections afforded persons who are required to assist the court by giving information or evidenee[.]” Fed.R.Civ.P. 45 advisory committee’s note to the 1991 amend. The drafters intended for costs to be more routinely shifted, i.e. not subject to equitable balancing by the courts, in order to avoid burdening non-parties who are compelled to “assist the court by giving information or evidence.” See id. The decision in Legal Voice simply gave effect to the amendment’s purpose.

Someone must pay the costs of production — the issue is whether those costs should fall on a party to the suit or a non-party who is powerless to control the scope of discovery. The Ninth Circuit has clarified that the former bears the burden, to the extent that the expenses are significant. See Legal Voice, 738 F.3d at 1184 (emphasis added). This is both fair and efficient, building in an incentive for the requesting party to keep requests as narrow as possible. Consequently, the multi-factor analysis — which helped courts decide whether to shift costs — is now obsolete.

2. Two-Step Test for Shifting Costs

“[0]nly two considerations are relevant” to the cost-shifting inquiry: “(1) whether the subpoena imposes expenses on the non-party, and (2) whether those expenses are ‘significant.’ ” Legal Voice, 738 F.3d at 1184. The shifting of significant expenses is mandatory, id., but the analysis is not mechanical; neither the Federal Rules nor the Ninth Circuit has defined “significant expenses,” which is a term that readily lends itself to myriad interpretations depending on the circumstances of a particular case.

First, courts must determine what counts as an “expense.” See id. The touchstone is whether the expense “result[s] from compliance” with the court’s order compelling production. See Fed.R.Civ.P. 45(d)(2)(B)(ii). Without knowing what the non-parties intend to claim, it would be premature for the Court to catalogue the types of expenses that fall on either side of the line between expenses and non-expenses. But, one thing is certain: an unreasonably incurred expense is not an expense “resulting from compliance.” See Michael Wilson & Partners, Ltd. v. Sokol Holdings, Inc. (In re Michael Wilson & Partners, Ltd.), 520 Fed. Appx. 736, 741 (10th Cir.2013) (affirming the shifting of only half the costs where the non-parties “assume[d], rather than demonstrate[d], that all of their requested attorney’s fees are reasonable”). In addition, the Court is skeptical that “services provided by an attorney to a non-party for the non-party’s sole benefit and peace of mind” can be counted as “expenses.” See O’Chesky v. Koehler (In re Am. Hous. Found.), No. 12-cv-00222, 2013 Bankr.LEXIS 2268, at *13, 2013 WL 2422706, at *3 (N.D. Tex. June 4, 2013). In other words, Rule 45 does not cut a blank check to non-parties — unnecessary or unduly expensive services do not “result from compliance” and, therefore, do not count as “expenses.”

Second, courts must determine “whether those expenses are ‘significant.’ ” Linder, 251 F.3d at 182; Legal Voice, 738 F.3d at 1184. Courts should consider the ability of the producing non-party to bear the costs of production. The Ninth Circuit endorsed the D.C. Circuit’s analysis in Linder, which, in turn, noted that “a court might take into account the financial ability of the non-party to bear some costs,” 251 F.3d at 182. See Legal Voice, 738 F.3d at 1184 (“We agree with the D.C. Circuit’s analysis of the amended rule[.]”). This consideration makes practical sense — an expense might be “significant,” for instance, to a small family-run business, while being “insignificant” to a global financial institution.

The Court looks to other decisions for benchmarks as to what expenses are “significant” for certain types of non-parties. The D.C. Circuit “had no trouble concluding that” estimated expenses of nearly $200,000 were significant for the Defense Department, the State Department, and the CIA. See Linder, 251 F.3d at 179-80, 182-83. The Ninth Circuit had “no trouble concluding that $20,000 is ‘significant’ ” for a non-profit legal advocacy group. See Legal Voice, 738 F.3d at 1181, 1185. In a case cited by both the Ninth and D.C. Circuits, a district court held that $9,000 might be “significant” for two attorneys. See Williams v. City of Dallas, 178 F.R.D. 103, 113-14 (N.D.Tex.1998). This range provides guidance to courts to determine the amount of expenses that is “significant” for a particular non-party.

It is highly probable that some portion of the costs of production will shift to S & P.¹ However, at this point, the Court can only speculate as to the precise amount. Therefore, after documents have been produced and a meaningful record has been established, the Court will review motions for cost-shifting from the non-parties, if such motions are in fact filed. To perhaps underscore the obvious, it behooves both S & P and the non-parties to reach an agreement on their own, bearing in mind the mandate of Rule 45 and Legal Voice and the non-parties’ burden to demonstrate that the costs are reasonable and “resulted from compliance” with the Court’s order. See Michael Wilson & Partners, 520 Fed.Appx. at 741 (affirming the shifting of only half the costs where the non-parties “assume[d], rather than demonstrate[d], that all of their requested attorney’s fees are reasonable”). The Court expects that each non-party’s account of its claimed expenses will be specific and lean.

III. DISPOSITION

Within fifteen days of this Order, S & P and each of the non-parties shall meet and confer to discuss whether the scope of the discovery requests should be modified in any way. All production shall be completed within thirty days after that fifteen-day period. In other words, the non-parties shall complete all production pursuant to the pending subpoenas, or modifications thereof, within forty-five days of this Order. At that point, the Court will entertain motions for (1) sanctions brought by S & P against any non-parties who fail to fully comply with the Court’s Order and (2) cost-shifting brought by the non-parties, which must include a careful accounting of all expenses, how they “resulted from compliance,” and an explanation as to their reasonableness.

1 . In addition, the Court finds that even under the multi-factor analysis, S & P should bear a portion of the costs of production. See CallWave, 2014 WL 2918218, at *3-4, 2014 U.S. Dist. LEXIS 88073, at *10-11. Admittedly, this is a case of notable public importance, inquiring into who is to blame for a financial crisis that wreaked terrible havoc. See IBM, 62 F.R.D. at 528-29. It is also true that these are not purely disinterested non-parties, considered by many to deserve the lion’s share of the blame. See Pollitt, 95 F.R.D. at 105; In re First Am. Corp., 184 F.R.D. 234, 242 (S.D.N.Y.1998). However, the scope of discovery is incredibly broad in all of these instances, obliging the non-parties to produce tens of millions of pages of documents; the requests are incredibly invasive, requesting internal communications from all of these institutions; and, consequently, the producing non-parties will need to devote substantial resources to sort responsive material from privileged or irrelevant material. See CBS, 666 F.2d at 371 n. 9.