Court Approves Use of Predictive Coding Despite Objection to “Unproven Technology”

Dynamo Holdings Ltd. P’ship v. Comm’r of Internal Revenue, Nos. 2685-11, 8393-12 (T.C. Sept. 17, 2014)

In this case, the court approved petitioners’  (Dynamo Holdings Ltd. Partnership et. al.) use of predictive coding to identify potentially responsive and privileged data contained on two backup tapes, despite respondent’s  (Commissioner of Internal Revenue) objection that the technology was “unproven.”

In response to respondent’s motion to compel the production of information contained on two backup tapes, petitioners sought to have the motion denied as a “fishing expedition” or, alternatively, the court’s permission to utilize predictive coding “to efficiently and economically identify the nonprivileged information responsive to respondent’s discovery request.”  Respondent opposed the use of predictive coding, calling it “unproven technology” and argued that petitioners “need not devote their claimed time or expense to this matter because they c[ould] simply give him access to all data on the two tapes and preserve the right (through a ‘clawback agreement’) to later claim that some or all of the data is privileged information not subject to discovery.”

In the course of its analysis, the court noted the “somewhat unusual” nature of petitioners’ request:

In this respect, we note that this request is somewhat unusual.  Our Rules are clear that “the Court expects the parties to attempt to attain the objectives of discovery through informal consultation or communication” before resorting to formal discovery procedures. Rule 70(a)(1).  And although it is a proper role of the Court to supervise the discovery process and intervene when it is abused by the parties, the Court is not normally in the business of dictating to parties the process that they should use when responding to discovery.  If our focus were on paper discovery, we would not (for example) be dictating to a party the manner in which it should review documents for responsiveness or privilege, such as whether that review should be done by a paralegal, a junior attorney, or a senior attorney.  Yet that is, in essence, what the parties are asking the Court to consider — whether document review should be done by humans or with the assistance of computers.  Respondent fears an incomplete response to his discovery.  If respondent believes that the ultimate discovery response is incomplete and can support that belief, he can file another motion to compel at that time.  Nonetheless, because we have not previously addressed the issue of computer-assisted review tools, we will address it here.

Contrasting its unwillingness to order the petitioners to produce ESI without review with the “time and expense” of actually conducting such a review (which the court was also unwilling to require), the court indicated that it found predictive coding to be “a potential happy medium.”  In response to respondent’s assertion that the technology was “unproven,” the court disagreed, reasoning that “the understanding of e-discovery and electronic media has advanced significantly in the last few years, thus making predictive coding more acceptable in the technology industry than it may have previously been” and that “we understand that the technology industry now considers predictive coding to be widely accepted for limiting e-discovery to relevant documents and effecting discovery of ESI without an undue burden.” (Citations omitted.)  The court went on to conclude that “[w]here, as here, petitioners reasonably request to use predictive coding to conserve time and expense, and represent to the Court that they will retain electronic discovery experts to meet with respondent’s counsel or his experts to conduct a search acceptable to respondent, we see no reason petitioners should not be allowed to use predictive coding to respond to respondent’s discovery request.”

The court went on to summarize some of petitioners’ expert witness testimony, noting in footnote that respondent’s expert “did not persuasively say anything to erode or otherwise undercut” it.   Among the points highlighted were the expert’s conclusions that “the trend was in favor of predictive coding because it eliminates human error and expedites review” and that the proposed approach was “the most reasonable way for petitioners to comply with that request.”  Moreover, upon specific analysis of the parties’ “dueling approaches,” the expert concluded that:

[P]etitioner’s approach would reduce the universe of information on the tapes using criteria set by the parties to minimize review time and expense and ultimately result in a focused set of information germane to the matter.  He estimated that 200,000 to 400,000 documents would be subject to review under petitioners’ approach at a cost of $80,000 to $85,000, while 3.5 million to 7 million documents would be subject to review under respondent’s approach at a cost of $500,000 to $550,000.

Accordingly, the court concluded:

Our Rules, including our discovery Rules, are to be “construed to secure the just, speedy, and inexpensive determination of every case.”  Rule 1(d).  If, after reviewing the results, respondent believes that the response to the discovery request is incomplete, he may file a motion to compel at that time.  See Rule 104(b), (d).

A copy of the court’s full opinion is available, here.

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