Omnicare, Inc. v. Mariner Health Care Management Co., No. 3087-VCN (Del. Ch., May 29, 2009), read opinion here.
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On May 29, 2009, Vice Chancellor Noble issued a decision granting cross-motions to compel in this matter. For those readers who are interested in large complex discovery disputes, especially one involving electronic information with traditional problems of “scope” and “volume,” this case may be of interest to you. While the scope of the discovery issues in dispute were somewhat “run of the mill” for a case involving a contract dispute between a nursing home operator and a pharmaceutical supplier, the Court put the volume/scale of the dispute in context with words like “large,” “numerous,” “complex,” “data-intensive,” “massive,” “burdensome” and “voluminous” (and that was only in the “Introduction” to the Opinion).
There were two issues in the Court’s analysis of the electronic information discovery dispute that are rare for the Court of Chancery to discuss (indeed, this may be the first opinion from the Court that addresses “electronically stored information or “ESI”, a defined term in the Federal Rules of Civil procedure). Those issues deal with cost-shifting and “Back-up Tapes.”
By way of background, Omnicare brought this action to compel performance of an alleged contractual obligation to guarantee the payment of approximately $100 million that the defendants (and their affiliates) owed under certain provisions (the “Guarantee Provisions”). Omnicare sought injunctive relief and damages to “remedy, among other things, [d]efendants’ alleged ongoing breaches of their agreement to provide Omnicare and/or its pharmacies with 10-days advance written notice of any facility transfers and to ensure that any new lessee, manager, transferee or other operator of transferred facilities enters into successor agreements with Omnicare’s pharmacies.” Omnicare also asserted causes of action for fraudulent transfer and alter ego/veil piercing.
Cross-Motions to Compel
Omnicare sought the production of the following six categories of information: (1) specific billing errors defendants identified, the basis for disputing the amounts; and the specific billing errors that the Defendants objected to within 60 days of the date of the invoice; (2) information regarding transfers of facilities; (3) financial information “tailored to Omnicare’s claims for fraudulent conveyance, alter ego and veil piercing”; (4) documents sufficient to identify individuals with any direct or indirect ownership interest in any of the defendants; (5) documents containing certifications and other statements made to the government regarding goods and services received from Omnicare and provided to Medicare patients; and (6) email on backup tapes for certain periods for which no email is available due to the automatic deletion program Defendants had in effect prior to September 2007 (“Backup Tapes”). Defendants sought production of the following four categories of information: (1) contracts that relate to Omnicare’s standing or right to assert its claims in this Case; (2) “affiliate” level information and documents; (3) certain information and documents related to “most favorable pricing” and “Medicaid pending” elements of the billing dispute; and (4) information and documents showing prior investigations, charges, complaints or lawsuits regarding the billing process utilized by Omnicare or Omnicare pharmacies.
Vice Chancellor Noble reviewed and discussed in detail each of the topics in dispute and in the end, he granted both parties’ motions to compel the information that each sought.
Cost-Shifting and Backup Tape Analysis
The Court then turned to the issue of emails and “all of Defendants’ email for approximately three years … from 2003 to 2005 has been automatically deleted.” Apparently, in order to review and produce the emails from periods during which all email was automatically deleted, the Defendants would need to restore the 2004 and 2005 backup tapes. The parties disagreed about who should pay for this restoration estimated to be between $22,000 and $40,000.
The general rule is that the responding party bears the expenses associated with producing electronic information sought in discovery, but the Court, “in the exercise of both its inherent equitable powers and the wide discretion to manage discovery under Court of Chancery Rule 26, may act to alter this norm when appropriate.”
Vice Chancellor Noble noted the dearth of Delaware law on the subject of ESI, cost-shifting, backup tapes and restoration of email so he turned to the Federal Rules of Civil Procedure, which were amended in 2006, to address the discovery of data that is “not reasonably accessible because of undue burden or cost.”
After analyzing the multi-factor approach employed in the Court in the Southern District of New York in Zubulake v. UBS Warburg LLC, the Vice Chancellor decided not to shift costs of production. In reaching that decision, the Court determined that “[d]efendants have not adequately demonstrated that the ESI in question is not reasonably accessible. Simply because the ESI is now contained on Backup Tapes instead of in active stores does not necessarily render it not reasonably accessible.” Interestingly, the Court commented on Omnicare’s argument concerning records management policies noting that:
Omnicare’s attempt to demonstrate impropriety in Defendants’ data retention policy and its implementation is unpersuasive. The better approach is proposed by the Defendants. Production should first be from Defendants’ active stores in order to assess the likelihood of finding relevant and discoverable data on the Backup Tapes. If that is productive, then it becomes more likely that recovery from the Backup Tapes would be fruitful and processing of the Backup Tapes at Defendants’ expense would be appropriate.
For those of you interested in some of the more subtle issues raised by discovery and ESI, Vice Chancellor Noble made some interesting observations in a couple of footnotes. Footnote 32 references a Duke Law Review article dealing with various tests that courts have used to determine when cost-shifting is appropriate. Footnote 34 discusses the language in Rule 26 of the Federal Rules of Civil Procedure (“not reasonably accessible due to undue burden or cost”), the leading Federal Case in this area, Zubulake v. UBS Warburg LLC, and the issue of the cost necessary for the producing party to carry its burden of demonstrating ESI as not reasonably accessible or to justify cost-shifting.