Greedy Plaintiff Gets Stuck with a Big Discovery Tab

Discovery is not an all-you-can-consume buffet. Yet the temptation to demand endless refills of document productions can be irresistible for some requesting parties. This is particularly true in asymmetrical litigation in U.S. federal court where a responding party is generally responsible to pay their own costs of discovery.[1] This was the case for Lawson v. Spirit AeroSystems, where the court ordered plaintiff Larry Lawson—the former CEO of defendant Spirit AeroSystems—to pick up a $600,000 tab for a TAR 2.0 review conducted by Spirit at Lawson’s demand.[2] This disaster might have been avoided if:

• The Court and parties had properly applied Sedona Principle 6;
• Plaintiff had a better understanding of when and how to use the available tools for information search and retrieval;
• Plaintiff was more familiar with cost-shifting under the Federal Rules of Civil Procedure; and
• The Court had applied the proportionality factors under Rule 26(b)(1) earlier in the discovery process.

Factual Background

Lawson retired as CEO of Spirit AeroSystems (“Spirit”) in mid-2016 and received a retirement package that included a non-compete provision covering a period of two years. The following year, Lawson was engaged by two related investment firms, Elliot Associates, L.P. and Elliott International, L.P. (collectively, “Elliott”) to provide consulting services in connection with a proxy contest that Elliott launched for control over the board of Arconic, Inc. (“Arconic”). Spirit manufactures aerostructures and aircraft components, predominately for Boeing, and Arconic supplies parts and materials to Spirit. When Spirit learned of Lawson’s engagement with Elliott and Arconic, it ceased payments to Lawson under the retirement agreement, asserting breach of the non-compete provisions. Lawson responded by commencing an action in U.S. Federal Court for the District of Kansas.

The primary issue in the litigation revolves around the definition of the term “Business” in the non-compete which prohibited Lawson from being involved in “any business that is competitive with the Business [of Spirit] or any portion thereof.” Fact discovery focused on what overlap existed, if any, between the products and services offered by both Spirit and Arconic.

From the start, the parties differed on the scope of discovery, with Lawson attacking discovery like he had a complimentary pass to Sunday brunch at the Bacchanal Buffet at Caesar’s Palace.

As the former CEO, Lawson started with the position that he had a unique knowledge of the Spirit’s business lines, the most relevant custodians, and where data could be found, starting with the demand that Spirit produce ESI from 69 custodians, plus their assistants, using 90 search terms with advanced connectors. In response, Spirit demonstrated that running Lawson’s search terms over the data from just four custodians would result in over 320,000 hits, with a sampling showing less than 15% of the documents were broadly relevant. The court stepped in ordered a protocol that would reduce the number of custodians and directed the parties to develop search terms that were at least 85% effective.

By September 2019, the parties were at loggerheads over search terms. Spirit had spent over $140,000 to run multiple sampling exercises, with no improvement in the overall responsiveness. Spirit had produced to Lawson the few relevant documents located during the sampling, and also took the extraordinary step of producing 77 non-responsive documents to show Lawson why his proposed search terms were continuously ineffective. In addition, for an unspecified cost, Spirit had produced to Lawson another 4,700 documents, on the issue of the “Business” that Spirit has located through simple custodian interviews and targeted collections.

Plaintiff Insists that Defendant Run TAR

At a telephonic status conference, the parties fought over the failure of Lawson’s proposed search terms and his insatiable appetite for discovery. With approximately 322,000 unreviewed documents remaining from the failed search terms, Lawson proposed that Spirit implement the use of Technology Assisted Review (TAR). Spirit countered that it would instead be willing to proceed with further custodian interviews followed by targeted collections, review, and production.

With preliminary estimates for the TAR review between $155,000 and $290,000, excluding attorney review time, the court pondered “if it might make the most sense to have the Plaintiff shoulder the cost of the next round.”[3] Urged on the use of TAR by Lawson, the court ruled that Spirit should proceed with the TAR review, but granted Spirit “leave to file a motion to shift costs as it relates to the costs involved in that next phase of discovery.”[4] Counsel for Lawson acknowledged the ruling, saying explicitly that “We’re fine with that.”[5] This would prove to be a very expensive bet.

Two days later, counsel for Spirit sent a letter updating its cost estimate to “between $250,000-$400,000 in eDiscovery and document review costs, and $40,000- $60,000 in outside counsel time, as well as additional costs not yet identified.”[6] Lawson was given until 5:00 pm the following day, September 20, 2019, to change his mind “[b]efore Spirit initiates this lengthy and costly process, and before Spirit files its motion to shift costs to Lawson.”[7] Lawson’s counsel responded the next day instructing Spirit to proceed, noting “[t]he Court gave Spirit leave to file a motion to shift costs for the TAR Protocol. Spirit is free to do so, if it believes that it has a non-frivolous basis for such a motion.”[8]

Ten days later, Spirit filed a motion seeking to shift the fees and costs of the TAR review to Lawson “[p]ursuant to Fed. R. Civ. P. 26(c) and the First Amended Scheduling Order (Dkt. 128).”[9] Lawson filed its opposition to the motion, arguing that under Fed. R. Civ. P. 26(b)(2)(B) cost-shifting is only permitted if the moving party can show that the information is not reasonably accessible.[10]

In the meantime, the TAR review proceeded through Fall 2019. In December, after reaching 68.5% recall, Spirit sought to stop the TAR review, reminding Lawson that its motion cost-shifting remained pending. Lawson nonetheless insisted that Spirit continue the TAR process to locate more relevant documents. In an effort to avoid further motion practice, Spirit continued the TAR review. After another few weeks, Spirit reported that it had reached 85% recall, with only 3.3% of documents showing as responsive. At that point, Spirit reported to the Court it had spent approximately $400,000 on discovery fees to its service provider for TAR, and another $200,000 in review fees.

Lawson remained insatiable, filing a motion to compel Spirit to continue to review until it reached 100% recall, asserting that the remaining documents were “critical to [his] ability to rebut Spirit’s unsupported assertion that it and Arconic are in the same Business.”[11]

At a hearing on Lawson’s motion to compel 100% recall from the TAR review, the Court asked if Lawson would be willing to pay the additional estimated $40,000 in costs. Lawson refused and the court in turn denied his motion.[12]

Defendant’s Motion for Cost-Shifting for the TAR Review

With the TAR review complete, the Court took up the Spirit’s motion for cost-shifting. The Court began its analysis noting that Lawson correctly states that under the 1978 Supreme Court holding in Oppenheimer (informally known as the “American Rule”) the producing party ordinarily bears the burden of complying with discovery requests.[13] Cost-shifting is permitted only under limited circumstances as prescribed under the Federal Rules of Civil Procedure; one of those is Rule 26(c)(1), under which a court may, for “good cause” specify the allocation of expenses. [14] Unfortunately for Lawson, his opposition brief focused on Rule 26(b)(2)(B) and the Zubulake line of cases, neither of which is applicable to this situation, rendering Lawson’s entire legal argument moot.

To assess whether “good cause” existed for “the allocation of expenses” of the TAR review from Spirit to Lawson, the Court turned to the proportionality factors from Rule 26(b)(1), as several other district courts had previously done.[15] The court found the first factor, “the importance of the issues at stake in the action” to be against Lawson, while the second and third factors, “the amount in controversy” and “the parties’ relative access to relevant information” were neutral, particularly with Arconic having control over the information related to their own lines of business that would overlap with Spirit’s lines of business.

Turning to the fourth factor, “the parties’ resources” the Court found that while Lawson is an individual facing a Fortune 500 company with $6.8 billion in revenue, he had entered into a multi-million-dollar agreement that required little of him. Moreover, Lawson’s consulting agreement with Elliott contained an indemnification provision that required Elliott to indemnify and defend Lawson against any claim by Spirit stemming from Lawson’s non-compete. The court noted that by this time in the litigation, Lawson had already received over $26 million pursuant to that agreement, in addition to his consulting fee of more than $5 million.

Lawson’s position completely collapsed when it came to the fifth and sixth factors. As to the question of “the importance of the discovery in resolving the issues” the Court noted that the results of the TAR review yielded marginal benefits, at most, with Lawson unable to “articulate in any way in which the documents produced as a result of the ESI/TAR process added anything of meaningful value to the documents and information Spirit produced separately from the ESI/TAR process on the issue of ‘Business’ overlap.”[16] Finally, as to “whether the burden or expense of the discovery outweighs its likely benefit” the court found that performing the TAR review to reach 85% recall was an enormous burden on Spirit and returned only a nominal benefit to Lawson with a small a 3.3% responsive rate of cumulative documents.

In its ruling, the Court noted Spirit had already borne $150,000 in discovery costs prior to the start of the TAR process, and that it was Lawson who wanted to proceed even though the Court had suggested beforehand that doing so seemed disproportional to the needs of the case. The Court therefore concluded that the costs of the TAR review should be fully allocated to Lawson. Having granted Spirit’s motion in full, the Court further noted that under Rule 37(a)(5)(A) it was required to additionally impose reasonable expenses and fees incurred by Spirit in filing the motion.

Driven’s Analysis

There are several important discovery issues that arose during the run-up to this opinion that were not well handled by the parties or the court. Many of these issues could have been avoided had the parties, particularly plaintiff, availed themselves of knowledgeable and experienced eDiscovery consultants or counsel.

First, the court and the parties failed to heed Sedona Principle 6, which states “Responding parties are best situated to evaluate the procedures, methodologies, and technologies appropriate for preserving and producing their own electronically stored information.”[17] In this case, while Lawson was the former CEO and had a general knowledge of Spirit’s information, he did not have hands-on details of where all data resided within the enterprise. Moreover, plaintiff’s interests were misaligned with Oppenheimer (as discussed infra) and Rule 1 of the Federal Rules which requires “the courts and the parties to secure the just, speedy and inexpensive determination of each matter.”[18] A requesting party can easily succumb to intemperance when they believe someone else is picking up the tab – which was doubly the case here: Lawson erroneously presumed that Spirit would pay for his indulgences, and if not, that Elliott would pay under Lawson’s indemnification agreement.

Second, The goal of the eDiscovery process is to identify and produce responsive and relevant documents pursuant to a request for production in a timely and cost-effective manner. Search terms and TAR are both tools for achieving that goal, but neither is a required workflow. It is likely that few documents are needed in this case to demonstrate which products and services that Spirit sells in its “Business”, and an experienced eDiscovery practitioner would know that it would be an incredibly expensive, and likely futile exercise to force Spirit to run a broad search across scores of custodians and data sources with millions of records to definitively prove it. This is particularly the case where the evidence is only half to be found with Spirit, while the other half must come from Arconic. Spirit took the correct approach in performing custodian interviews and targeted collections and found what they needed to find. Lawson is therefore instructive on why courts should follow Sedona Principle 6 and allow responding parties to select the methodologies best suited to fulfill their discovery obligations.

Third, failing to understand the FRCP is an impediment when litigating in federal court. This is not a matter of complex technology or the intricacies of a TAR workflow. Knowing that cost-shifting for discovery costs can occur not just under the limited confines of Rule 26(b)(2)(B), but more broadly pursuant to Rule 26(c) could have helped plaintiff’s analysis of how hard to push for the use of TAR. This is particularly true in the face of the Court’s warning to plaintiffs that it was actively considering cost-shifting followed by the Court’s invitation to defendants to move for cost-shifting.

Finally, Rule 1 is best served when the courts proactively apply Rule 26(b)(1) to limit endless buffet-style discovery tactics like those adopted by plaintiff in Lawson rather than reserve a ruling under Rule 26(c)(1). Recognizing that facts may evolve during the discovery process, in this case, the court granted plaintiff the leeway to overindulge to the point of excess and then handed him the bill. One might argue, particularly with a less sophisticated litigant, that it is manifestly unfair; a seeming bait and switch. However, plaintiff, the former CEO of a Fortune 500 company, was repeatedly warned of the risk of cost-shifting and actively chose to assume the risk. Nonetheless, in hindsight it is clear that all parties would have been better served had the court expedited the end of discovery and allowed the parties to proceed with resolving the merits of this action far sooner.

[1] Asymmetrical litigation is where one party has a much larger volume of information subject to discovery than the other, resulting in a financial asymmetry in the burden of complying with discovery.