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“Like any Ordinary Litigant, the Government Must Abide by the Federal Rules of Civil Procedure”

Posted in CASE SUMMARIES

S.E.C. v. Collins & Aikman Corp., 2009 WL 94311 (S.D.N.Y. Jan. 13, 2009)

In this case, arising from claims of securities fraud, the court addressed questions concerning the government’s discovery obligations in civil discovery.  Throughout discovery in the case, several disputes arose regarding the SEC’s production of documents and its failure to perform sufficiently thorough searches for the requested information.  Following extensive analysis of the individual issues, the court ultimately concluded that “[w]hen a government agency initiates litigation, it must be prepared to follow the same discovery rules that govern private parties…”

Document “Dump”

In response to defendant’s request for documents in fifty-four separate categories, the SEC produced 1.7 million documents (approximately 10.6 million pages) maintained in different databases and containing different metadata protocols.  Defendant objected to the production, arguing that the SEC failed to identify documents responsive to his request for documents supporting particular factual allegations and instead preferred to “dump” a huge volume of documents while suggesting that the defendant is capable of searching them himself to locate what is relevant.  The SEC responded by claiming that it did not “maintain a document collection relating specifically to the subject addressed” and thus it produced the documents as they were “kept in the regular course of business.”

In the course of the disagreement, the defendant informed the court of the existence of approximately 175 file folders maintained by the SEC correlating to the specific factual allegations of the complaint and maintained in the regular course of agency business.  The SEC objected to the production of those files arguing that “the compilation itself is attorney work product” and that its disclosure would reveal the attorney’s mental impressions and conclusions.

In its discussion of the applicable law, the court first noted the narrow nature of the work product protection provided to the selection and compilation of documents, and that equity weighs against work product protection for document compilations which are inaccessible by other means.

Turning to the applicability of the work product protection in this case, the court stated that compilations are not “core” work product unless organized by legal theory or strategy and thus, are provided a lesser level of protection.  Accordingly, in at least one case with similar facts, a court ordered plaintiffs to provide the location of documents supporting factual allegations, even where defendants were already in possession of the documents.  The court further reasoned that even if the compilation of file folders was work product, defendant demonstrated his substantial need for the documents that could not be obtained elsewhere.

The court then addressed the question of undue hardship where the SEC claimed the defendant could search the already produced documents and find “substantially the same documents identified by the SEC” (in its 175 file folders) without impinging upon the thought processes of the SEC attorneys.  The court agreed, but noted the significant time and expense such a review would necessitate.  Expressly invoking its ability to weigh equitable considerations, the court concluded, “[i]t is patently inequitable to require a party to search ten million pages to find documents already identified by its adversary as supporting the allegations of the complaint.”  Accordingly, the court held that the 175 file folders were not protected as work product.  (The court went on to hold that for the same reasons, compilations prepared by an SEC accountant and another law firm were also not protected as work product.)

Having determined the file folders were not privileged, the court turned to the SEC’s contention that it already fulfilled its discovery obligations by producing millions of documents as maintained in the usual course of its business.  The analysis began with a discussion of what constitutes an appropriate production as kept in the “usual course of business.”  Following analysis of the definition of “business,” the court determined that production as documents are kept in the “usual course of business” required a party to meet either of two tests.  First, the option is available to enterprises that function in the manner of commercial enterprises.  Second, the option is available for records resulting from “regularly conducted activity.”  Otherwise, the court determined, a party must produce documents under Rule 34’s alternative: “organize[d] and label[ed]…to correspond to the categories of the request.”

The court explained the logic that when records do not result from “routine and repetitive” activity, there is no incentive to organize them into a predictable system.  The court went on to state that the purpose of Rule 34 is to facilitate production in a useful manner; therefore “it is reasonable to require litigants who do not create and/or maintain records in a ‘routine and repetitive’ manner to organize the records in a usable fashion prior to producing them.”

Thus, the court indicated, where the Government acts in the manner of a commercial entity, as it often does, and creates and maintains records in an efficient fashion such that they would allow for easy analysis of a claim, production as they are kept in the usual course would be acceptable.  However, according to the court, investigation is not routine or repetitive and therefore cannot fall within the scope of the “usual course of business.”  Accordingly, the court ordered the production of documents responsive to defendant’s request for information to support each factual allegation of the complaint.  To the extent that one or more of the SEC’s 175 file folders were responsive, they were ordered produced.

General Subject Matter Documents

Defendant’s requests also sought several general categories of documents related to SEC policy and enforcement actions.  The SEC objected to each of the relevant requests as overly broad and unduly burdensome.  Moreover, the SEC rejected defendant’s proposal that it would establish a search protocol that would balance identification of information against the strain on agency resources.  Rather, the SEC unilaterally limited its search to “centralized compilations” in three selected divisions and indicated they found no responsive documents.  The SEC also argued that in light of how the information was organized, the burden of production was disproportionate to the value of the litigation.

The court rejected the SEC’s unilateral approach and refusal to negotiate a search protocol as “patently unreasonable.”  Opining that judicial intervention might not have been required if the parties had fulfilled their obligation to meet and prepare a discovery plan, the court ordered the parties to confer to establish a search protocol that would “reveal at least some of the information defendant seeks.”

Email

The SEC’s initial production contained no email or attachments generated or received by the SEC itself.  The absence of such information was explained by the SEC’s failure to undertake the appropriate search.  In its defense, the SEC indicated that nearly all responsive emails would be privileged or subject to the court’s non-disclosure order and that the defendant had not made the “necessary showing” to require such a costly and time consuming undertaking.  The SEC also criticized defendant’s lack of specificity in his requests which would result in searching through emails of hundreds of attorneys and accountants over an indefinite period of time.

The court rejected the SEC’s blanket refusal to produce any email without even an attempt to negotiate search terms to weed out privileged or irrelevant emails.  Responding to the SEC’s representation that the cost of such a search was too high, the court suggested consideration of sampling “to test the cost and the yield” of the terms.  Accordingly, the parties were ordered to meet to attempt to negotiate search terms and appropriate limitations to subject matter and date.

Upon issuing its order, the court noted that failure to agree could result in the appointment of a Special Master to supervise remaining discovery.

Note: This case also contains a discussion of the Deliberative Process Privilege.