Liberal discovery is a cornerstone of our modern federal court system and is critical to the proper adjudication of cases on their merits. But liberal discovery, particularly in the electronic discovery era, can quickly become prohibitively expensive to all but the largest players, causing one or both parties to question whether the litigation is worth the cost. In the federal courts, unlike the New York state courts, the tension between litigation on the merits and skyrocketing litigation costs is exacerbated by the absence of an automatic discovery stay while a dispositive motion to dismiss is pending. To combat this issue, we propose amending the Federal Rules of Civil Procedure to comport with the position taken by many state courts, including New York, and the federal Private Securities Litigation Reform Act (PSLRA), and stay all discovery upon the filing of a dispositive motion to dismiss a complaint.

The Current System

Currently, only one rule in the FRCP addresses the timing of discovery. Under Rule 26(d)(1), neither party may "seek discovery from any source before the parties have conferred as required by Rule 26(f)[.]" Once this initial conference is held, parties are free to seek discovery from their adversaries and any other third party, while racking up hundreds of thousands of dollars in attorney fees and vendor costs in the process. With large corporations and small businesses alike becoming more reliant on technology, the increased demand for e-discovery has raised these costs exponentially.

According to a survey of Fortune 200 companies, "the average company paid average discovery costs per case of $621,880 to $2,993,567." Although these costs are necessary in some cases, the same survey found that in 2008, "4,980,441 pages of documents were produced in discovery in major cases that went to trial—but only 4,772 exhibit pages actually were marked." Knowing that the cost of discovery is so high in our current system, companies are incentivized to settle lawsuits to avoid those costs even when the plaintiff's case lacks merit. This rational approach, however, has led to an increase in meritless and frivolous lawsuits where plaintiffs routinely seek to extort settlements by threatening vast discovery costs.

Universal Application

To combat this issue on behalf of the securities industry, where nuisance suits were rife, Congress passed the PSLRA in 1995, which mandates a stay of all discovery pending a motion to dismiss. At the time, Congress' focus was on discovery costs to major corporations. But today, all parties run the risk of incurring exorbitant discovery costs in even smaller lawsuits or when defendants hire sophisticated, but less expensive lawyers at smaller law firms. Thanks to the technological boom of the 1990s and 2000s, individuals and small businesses alike can produce and preserve millions of documents—any of which could be the subject of discovery.

As the rationale underlying the PSLRA is now universally applicable, so too should its protections now be offered to all litigants—by amending the Federal Rules of Civil Procedure to mandate a stay of discovery pending a motion to dismiss in all civil actions.

Such a change is far from unprecedented. Some states already stay discovery pending a motion to dismiss. For example, Georgia amended its civil practice rules in 2009 to provide for an automatic stay of discovery lasting 90 days from the filing of a motion to dismiss. Similarly, New York state courts routinely stay discovery pending a dispositive motion, to dismiss or for summary judgment. Codified as Civil Practice Law and Rules (CPLR) 3214(b), the New York rule "stays disclosure until determination of the [dispositive] motion [to dismiss] unless the court orders otherwise."

While opponents of a mandatory stay of discovery pending a motion to dismiss argue that it will unduly prejudice plaintiffs with meritorious cases who will be unable to prosecute their claims while a motion to dismiss is pending, the financial burden of unnecessary discovery outweighs the potential burden of delay imposed on plaintiffs. Moreover, this concern can be ameliorated by amendment of the Federal Rules along the lines of CPLR 3214(b), which provides that a stay of discovery is automatic "unless the court orders otherwise." Every case is, of course, different and courts should have discretion to permit particularized discovery in appropriate cases.

A good source for analyzing those potential exceptions is the PSLRA, which allows discovery to proceed during the pendency of a motion to dismiss where necessary to prevent: (1) the erosion of evidence or (2) the infliction of undue prejudice. As applied by the courts, the threshold for applying these exceptions is high. Courts are reluctant to rely on "erosion of evidence" outside of extreme circumstances such as the necessary deposition of a terminally ill witness. For example, the risk of document destruction as a reason to proceed with discovery was specifically rejected by the Southern District of New York in 2004.

Similarly, courts have applied "undue prejudice" narrowly and only in the context of parallel litigation or government investigations. Delay alone—the principal concern for civil litigants with respect to an automatic discovery stay—has been held insufficient to constitute undue prejudice, according to the Southern District of New York. As set forth in Brigham v. Royal Bank of Canada, No. 08 Civ. 4431, 2009 WL 935684 (S.D.N.Y. April 7, 2009), District Judge William Pauley found that "undue prejudice means 'improper or unfair treatment amounting to something less than irreparable harm.'" It "does not arise 'from a delay in the gathering of evidence or the development of settlement or litigations postures[.]'"

Although it may be tough to satisfy, the high threshold for lifting the PSLRA automatic stay of discovery is appropriate given the potentially exorbitant costs of discovery and the concomitant risks of coercive settlements.

In 1995, Congress addressed this issue as it relates to major corporations. Today, it is time for the Federal Rules of Civil Procedure to grant those same protections to all litigants—not just big business. Though doing so could delay the resolution of some meritorious cases, by providing district judges with discretion to allow particularized discovery, as in the PSLRA and CPLR 3214(b), those unintended consequences could be drastically reduced. Additionally, a mandatory stay of discovery pending a motion to dismiss would reduce the number of meritless lawsuits filed, reduce discovery costs for parties dragged into frivolous litigation, and ultimately promote a fairer judicial system where litigants are not forced to decide between spending money in discovery or spending money to settle a meritless case. Amending the Federal Rules of Civil Procedure to conform with the PSLRA and the CPLR will go a long way toward achieving those goals.

Russell Yankwitt is the founder of Yankwitt LLP. Dina Hamerman is a commercial litigator at the firm. Brian Looser, an intern, assisted in the preparation of this article.