The opinion of the court was delivered by: Baylson, J.
MEMORANDUM RE: DISCOVERY "FENCE" AND COST ALLOCATION
Substantial disputes about the scope of discovery, and sharing the costs of discovery, before a determination is made whether this case should be certified as a class action, have divided the parties. The disputes are substantial and the cost of the discovery requested by Plaintiffs is considerable. This issue, where Defendant's financial exposure will drastically increase if a class is certified, appears to be one of first impression.
Plaintiffs in these cases signed contracts to become members of a health/fitness organization and allege that they thereafter encountered deception and breaches concerning their desire to terminate their membership.*fn1 Plaintiffs filed a consolidated class action Complaint on October 18, 2011 (ECF No. 35). The claims contained in the most recent Complaint are as follows:
1. All plaintiffs -- Kenneth J. Silver, Joshua Vaughn, Lori Bohn, Sharon N. Lockett, and Justin P. Bronzell -- claiming for breach of contract.
2. Plaintiff Joshua Vaughn, claiming for violations of the Florida Deceptive and Unfair Trade Practices Act.
3. Plaintiff Lori Bohn, claiming for violations of the Washington consumer Protection Act.
II. Summary of the Case Management Conferences
As a result of various filings by the parties, the Court ascertained that this case warranted active discovery management. The Court has consistently ruled that the parties must focus on appropriate discovery so that they could proceed to a hearing, following Plaintiffs' anticipated Motion for Class Determination, as envisioned by In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305 (3d Cir. 2008).*fn2 Four separate discovery conferences have taken place since January 2012, as follows:
1. January 31, 2012 (Order of February 1, 2012 (ECF No. 47)) -- The parties had been unable to agree on a discovery plan, and the Court authorized the initiation of discovery on both class action and merits, and directed that discovery should focus on the claims of the named plaintiffs, who are proposed class representatives, and merits issues that may be relevant as part of the class action determination. In addition, the Court directed that discovery should be initiated and completed promptly with respect to Defendant's corporate documents that set forth policies and practices that apply to the issues in the case and Plaintiffs' claims. The Court allowed depositions of corporate officers and employees after documents were produced, and set some deadlines, which proved to be unduly optimistic and were later vacated.
2. April 25, 2012 (Order of April 26, 2012, (ECF No. 51)) -- The Court made a number of suggestions about having cost effective discovery focusing on class action issues, but also considering merits to the extent they may be relevant on the class action certification. Following this conference, the parties agreed on a Stipulated Protective Order protecting confidential information. (ECF No. 48)
3. May 8, 2012 (Order of May 10, 2012 (ECF No. 57)) -- The filings of the parties, including a Motion to Compel of May 4, 2012 by Plaintiffs (ECF No. 52), revealed significant differences between the parties and a further discovery conference was held. The Court considered the arguments of the parties concerning discovery, but did not make any specific rulings, noting that Defendant was continuing production of papers, documents and electronically-stored information ("ESI"). Plaintiffs had also noticed Rule 30(b)(6) depositions, concerning the contents and location of Defendant's ESI and paper documents.
4. May 22, 2012 -- A further evidentiary hearing regarding discovery disputes was held on May 22, 2012, which is described in more detail below. Another conference was scheduled for June 28, 2012. However, the parties notified the Court by letter dated May 29, 2012, that they had reached agreement concerning their discovery disputes; accordingly, the Court entered an Order on May 30, 2012 (ECF No. 61), denying Plaintiffs' Motion to Compel as moot.
A pretrial conference had been set for June 28, 2012, but counsel requested it be postponed until the end of July.
Despite the discovery conferences and the parties' having stated that they had reached agreement, Plaintiffs submitted a letter to the Court on July 31, 2012 reporting that many of the same issues raised in the Motion to Compel of May 4, 2012 remained unresolved. Also on July 31, 2012, Defendant denied the allegations in Plaintiffs' letter and requested time to submit a more complete response, which Defendant submitted on August 7, 2012 (ECF #66). Plaintiffs filed a reply on August 8, 2012 (ECF #67). The dialogue back and forth between counsel is similar to a Verdian opera scene where a tenor and a bass boast of their qualities to compete to win over the fair princess.
II. Creating a Discovery "Fence"
Discovery need not be perfect, but discovery must be fair. In determining the boundaries of appropriate discovery in any case where the scope of discovery is subject to disputes, I have found it useful to adopt, as both a metaphor and a guide to determine what discovery is appropriate, a "discovery fence." The facts that are within the discovery fence are discoverable, and relevant materials should be produced; the facts that are outside the fence are not discoverable and documents or information need not be produced in discovery.
There are two other consequences of adopting a discovery fence. First, the "fence" itself must be a "flexible fence." A judge should always be willing to re-examine the contours of the fence depending on new facts that are uncovered, unforseen discovery expenses, or the judge's changing perception about what is fair. The "fence" can bulge or contract as case-specific circumstances require. Counsel should not hesitate in bringing to the Court new facts warranting a change in the fence.
Secondly, not all fact gathering must come from the opposing party. Each party can and should always conduct its own investigation of matters inside and outside the "fence," the results of which may warrant a change to the fence boundaries.
III. Discovery in a Putative Class Action -- Economic Aspects
As the Third Circuit noted in Hydrogen Peroxide, the concept of treating a civil action as a class action dramatically changes the strategies and economic considerations of the parties and their counsel. In an ordinary civil action, involving named parties against named defendants, there is usually a well-defined range of economic consequences. However, a class action, if allowed by the Court, dramatically increases the economic pressure on the defendant.
In a class action, particularly when damages are sought under Rule 23(b)(3), the defendant must defend against the class as the Court has defined it. If there is a class in this case, it will most likely number in the thousands or tens of thousands people -- anyone who joined an LA Fitness Club and later cancelled or sought to cancel their membership. Thus, instead of facing the five named plaintiffs, bringing the case at the present time, Defendant will face exposure to a multitude. The damages sought, if the case goes to trial, would be more difficult to estimate and could be many millions of dollars.
Much has been written in the legal literature about the effect of the 1966 revisions to Fed. R. Civ. P. 23 in this context. The thrust of recent appellate holdings on class actions has been to put significant limits on their scope. Any observer of class action jurisprudence over the last fifty years knows that courts have become much more exacting and demanding that class certification will be fair to a defendant. Compare Eisen v. Carlisle & Jacqueline, 417 U.S. 156 (1974), with Wal-Mart Stores, Inc. v. Dukes, - U.S. -,131 S. Ct. 2541 (2011). Courts must also recognize that there have been many instances, as a result of securities fraud, product defects, or conspiracies that involve price-fixing under the antitrust laws, e.g., where many thousands of people have been significantly damaged. In these cases, class actions have proven an efficient method of transferring unlawfully obtained wealth from the offenders to the victims with generous fee awards to class counsel.
IV. Asymmetrical Discovery
Another important aspect of this case is that the discovery is asymmetrical. In other words, Plaintiffs, consumers who were members of LA Fitness for brief periods and allege that they had difficulty canceling their memberships, number only five. If the class action is denied, perhaps another small group of individuals will intervene to join them as named parties. Even in aggregate, these individuals have very few documents. Perhaps they have kept a copy of their membership contract, or copies of correspondence with LA Fitness.
On the other hand, Defendant LA Fitness has millions of documents and millions of items of electronically stored information ("ESI"). Thus, the cost of production of these documents is a significant factor in the defense of the litigation.
Since Plaintiffs have authorized their counsel to seek a class action, the scope of discovery from Defendant is greatly enlarged. To some extent, discovery is necessary for the parties to advocate, and for the Court to determine, whether a class is appropriate under Rule 23. The scope of discovery, on the merits, will be even further enlarged. Virtually all of this discovery will be directed to Defendant.
Both sides legitimately want to limit their own costs of pretrial discovery. Defendant wants to limit its production of information as much as possible under the applicable rules, in part to save costs, but also, candidly, to provide Plaintiffs with as little material as possible from which to find evidence for use at trial (or in settlement negotiations).
Plaintiffs naturally want to limit their own costs of discovery, and will not voluntarily assume responsibility for the costs of Defendant producing Defendant's documents.
Professor Coffee wrote about problems posed by asymmetrical discovery in 1987, as follows:
Asymmetric litigation stakes necessitate that the plaintiffs' attorneys, as independent entrepreneurs, minimize costs, while defense attorneys can persuade their own clients to litigate according to a more luxurious style. Closely related to this first scenario is a second: defendants may exploit asymmetric stakes by increasing the ante while the plaintiffs respond by engaging in low cost, 'feigned' litigation that can give the action the appearance of being frivolous. Even if defendants cannot force plaintiffs to match them dollar for dollar, they still may be able to demonstrate that protracted litigation is unprofitable for the plaintiffs because the eventual fee recovery will neither cover the plaintiffs' attorneys' opportunity costs nor compensate them for the risk associated with their contingent fee. A third possibility is that plaintiffs' attorneys can diversify their risks by managing a portfolio of individual actions; their tactics may then make sense if their hope is either to identify from among this portfolio a risk averse defendant who will settle generously or to discover a 'smoking gun' that changes the litigation odds in plaintiffs' favor after only a limited search. Finally, there remains the original possibility that a litigation cost differential may sometimes enable plaintiffs' attorneys to engage in practices that resemble extortion.
At bottom, the tradeoff between the asymmetric stakes and cost differential effects is indeterminate.
John C. Coffee, The Regulation of Entrepreneurial Litigation: Balancing Fairness and Efficiency in the Large Class Action, 54 U. CHI. L. REV. 877, 893 (1987).
This Court does not in any way suggest that counsel is acting otherwise than in the interests of their clients, but economic motivation and fairness are relevant factors in determining cost shifting of disputed discovery burdens.
The fact that Defendant has more documents than Plaintiffs does not necessarily mean that Defendant's production should be limited. However, as in this case, where the cost of producing documents is very significant, the Court has the power to allocate the cost of discovery, and doing so is fair. If Plaintiffs' counsel has confidence in the merits of its case, they should not object to making ...