Appeals Court Requires Federal Agency to Spend 9% of Its Total Annual Budget to Comply with 3rd Party Subpoena of Electronic Records:
The United States Court of Appeals for the District of Columbia on January 6, 2009 issued an opinion affirming a contempt order against the Office of Federal Housing Enterprise Oversight (“OFHEO”). In re: Fannie Mae Securities Litigation 2009 U.S. App. LEXIS 9 (D.C. App. Jan. 6, 2009). The net result of the opinion is to affirm orders that required OFHEO to incur over $6 Million in expenses to respond to individual defendant discovery requests. The appeals court noted that this was more than 9% of the agency's entire annual budget, but did not seem too troubled by that. OFHEO was not even a party to the suit where they were required to bear this enormous burden. No wonder the government is going broke, just like many of the homeowners that Fannie Mae and OFHEO were supposed to protect.
How could such a thing happen you may well wonder? It is the usual answer. If you are a regular reader of the e-Discovery Team blog, you know what it is already.
OFHEO was served with third party subpoenas in connection with litigation against Federal National Mortgage Assn. (“Fannie Mae”) and the Federal Home Loan Mortgage Corp. ("Freddie Mac"). OFHEO handled the e-discovery very poorly, to put it mildly, and was held in contempt by the district court in Washington D.C. The agency had not complied with a prior order that their lawyers had consented to. Turns out the consent order allowed the requesting parties to specify any search terms they wanted, so they did. They specified 400 keyword terms which returned over 660,000 documents. The government lawyers clearly did not understand what they had agreed to. Still, they went ahead with the search and spent $6,000,000 in the process. As is typical, the main costs were for privilege review. Here is the actual language of the unsympathetic appellate court:
OFHEO undertook extensive efforts to comply with the stipulated order, hiring 50 contract attorneys solely for that purpose. The total amount OFHEO spent on the individual defendants’ discovery requests eventually reached over $6 million, more than 9 percent of the agency’s entire annual budget.
One would think at that point the courts would give the agency a break. But no. The government lawyers made a series of promises to the court that they did not keep. Thus, the district court judge, and then the appellate court, were comfortable shouldering the government with the expense. They wanted to send a message to the government that their actions would not be tolerated. Here is the language of the district court explaining the situation:
[T]he Court is cognizant of the large number of attorneys, contract attorneys, and OFHEO personnel working to comply with the subpoenas and the resulting costs of this compliance. Nevertheless, OFHEO has treated its Court-ordered deadlines as movable goal posts and has repeatedly miscalculated the efforts required for compliance and sought thereafter to move them.
The appellate opinion covers many issues, including a waiver of privilege as an additional sanction. But the part that really astounds me is the affirmance with little discussion of the propriety of requiring a non-party to spend 9% of its total budget to comply with a subpoena, simply because their attorneys blindly agreed to comply without considering the cost of compliance. Here is that portion of the opinion that seems controversial to me:
Federal Rule of Civil Procedure 45 requires courts to safeguard non-party subpoena recipients from significant expense resulting from compliance. See Watts v. SEC, 482 F.3d 501, 509 (D.C. Cir. 2007). According to OFHEO, the district court violated Rule 45 by compelling compliance without considering cost-shifting, narrowing the scope of the requests, or “find[ing] that defendants demonstrated good cause for forcing OFHEO to retrieve its inaccessible data.” Appellant’s Opening Br. 31–32. Whatever the merits of these claims, OFHEO abandoned them by entering into the stipulated order. Indeed, OFHEO’s trial counsel agreed to the stipulation in the middle of a hearing scheduled for the very purpose of considering OFHEO’s objections to the subpoenas. Had OFHEO wanted review of the district court’s initial order to compel compliance with the subpoenas, it could have completed the hearing and attempted to convince the court to reconsider. Failing that, it could have defied the adverse ruling and appealed any ensuing contempt finding. See U.S. Catholic Conference, 487 U.S. at 76. Instead, it chose to sign the stipulated order, which ended the hearing and unquestionably settled the discovery dispute. Having stipulated to a schedule for complying with the subpoenas,
OFHEO can hardly complain now about being held to its agreement.
Is it just to allow a single government lawyer's goof to drain 9% of an agency's total annual budget, a budget drawn from taxpayer funds? Should the appellate court have considered an economic analysis of the situation in reaching its decision, and perhaps ruled differently in the face of a possible gross inefficiency? What happened to proportionality and Rule 26(b)(2)(C)? It seems that the court erred in ordering what amounts to a wanton waste of taxpayer funds. The precedent set by this opinion is dangerous. At the very least, the court should have carefully limited its holding to the facts of this case. I predict that courts considering this opinion in the future will do just that.
Fannie Mae will come to represent the high point of excessive spending in e-discovery.
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