SDNY Clarifies Standard for Allowable “Discovery on Discovery”

A requesting party seeking to compel discovery into the producing party’s document collection processes – sometimes called “discovery on discovery” – has always faced an uphill battle. Courts fear allowing discovery to continue indefinitely. Mere suspicion of deficient document production is insufficient; the requestor must proffer an “adequate factual basis” for its belief. Recently, the Southern District of New York found that such a showing is not made where the requestor produced only limited relevant unproduced emails and the requestor did not specify how its requested relief would remedy the alleged discovery defects.

Freedman v. Weatherford International was a securities fraud case. Plaintiffs alleged defendant Weatherford International Ltd. (“Weatherford”) systematically underreported its taxes and issued false financial statements that inflated Weatherford’s earnings. A senior Weatherford employee called the whistleblower hotline, alleging the head of Weatherford’s tax department had engaged in improper practices. In response, Weatherford hired Latham & Watkins (“Latham”) to conduct an independent review. Latham found no evidence of intentional misconduct and reported this to Weatherford’s auditors, Ernst & Young (“E&Y”), who issued a clean audit opinion. Several months later, Weatherford announced it would restate earnings for the third time, leading Weatherford’s Audit Committee to conduct a second independent review, conducted by its own separate outside counsel, Davis Polk & Wardwell, LLP (“Davis”).

Plaintiffs filed suit and, upon receiving defendants’ document production, alleged it was deficient. Plaintiffs moved to compel defendants to produce hit reports comparing the results of the search terms defendant used with the searches and hits generated during the Latham and Davis internal investigations. While defendants previously provided to plaintiffs the search terms used in each investigation, plaintiffs argued they had no way of measuring the adequacy of defendants’ production without reviewing the requested hit reports. Defendants argued that creating the reports would be excessively burdensome, technically infeasible, and plaintiffs had no legal basis to request them.

The Weatherford court initially denied plaintiffs’ request on the grounds that plaintiffs had not proffered an adequate factual basis for their belief that the current production was inadequate. However, after receiving a third party production containing 18 relevant emails belonging to Weatherford custodians (but never produced by Weatherford), plaintiffs moved for reconsideration, claiming these emails established defendants’ production was “significantly deficient.” Plaintiffs argued production of the requested reports showing how discovery was conducted in the internal investigations as compared to the Weatherford case would lead to identification of additional relevant unproduced documents.

For a second time, the Weatherford court rejected plaintiffs arguments, stating that requests for “discovery on discovery” should be “closely scrutinized” to prevent the already costly and time consuming discovery process to continue in perpetuity. The Weatherford court found the discovery of 18 relevant unproduced emails had to be viewed in the context of Weatherford’s production of hundreds of thousands of documents, comprising nearly 4.4 million pages. Thus, it was “unsurprising that some relevant documents may have fallen through the cracks.” Further, the Weatherford court determined that plaintiffs’ requested reports were unlikely to remedy the alleged discovery defects, in light of Weatherford’s undisputed contention that of the 18 emails, only three would have been identified by a search used in one of the investigations. Consequently, it found the requested reports to be of “dubious value.”

Weatherford should provide some comfort to counsel engaged in a voluminous document production. The SDNY’s decision appears to limit the extent to which a requesting party can challenge the sufficiency of a document production or the producing party’s discovery methods. Even the presentation of responsive unproduced emails may not carry the day if the emails comprise a miniscule portion of the entire production. Further, without offering a feasible plan as to how the requested relief would remedy the alleged discovery defects, a court may be loathe to grant “discovery on discovery” requests, which may allow discovery to continue ad nauseum.

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