Whether legal fees incurred by a non-party will need to be reimbursed in connection with a non-party's production of electronically stored information (ESI) can determine litigation strategy whether to pursue a non-party through a subpoena for documents and, then, whether to engage in motion practice to seek to compel production.

Counsel is often left on the "horns of a dilemma" when it comes to evaluating whether it ultimately will be required to pay such non-party's attorney fees. If counsel for the subpoenaing party first raises the issue of legal fees, counsel for the non-party would likely demand it, and the subpoenaing party would need to agree to pay them often without knowing the magnitude of the expense, an unsavory position in which to be. Alternatively, the non-party will simply demand payment or, more frequently, the issue is left unspoken or unresolved. Thus, the subpoenaing party is often left little choice but to either not pursue the subpoena or move to compel seeking an order that it is not required to pay such fees. This would be met, no doubt, with a cross-motion seeking the opposite relief. Such motion practice likely would then have to be made on an incomplete record before the non-party has completed, much less perhaps even started, its search for responsive ESI and is unlikely to be able to "guestimate" the expenses of the ESI production, including the magnitude of attorney review time. See Energy Transfer Equity, L.P. v Corvex Mgt. LP, 2018 N.Y. Misc. LEXIS 4628, 2018 NY Slip Op 32579(U), *6 (Sup. Ct. N.Y. Co. Oct. 10, 2018) ("Estimates about a document review reflect a best-case scenario. Every time petitioners sent a letter, held a meet and confer or fought about redactions, the reasonable production costs increased. And petitioners asked for a document-by-document privilege log instead of a categorical privilege log—they cannot make a demand for such a time-intensive task and be surprised when it dramatically increases the legal fees"). Accordingly, neither side would likely receive closure with the court's decision, and would need to likely await a subsequent motion before the parties' know who will be absorbing the non-party's legal fees and by how much.

Indeed, as one motion court recently noted, after ordering that "documents had to be produced and that petitioners would have to pay reasonable costs, petitioners had a choice [and t]hey could choose to go forward and pay respondents' reasonable legal fees or decide that it was not worth the expense to seek these documents." Id.

The issue of payment of non-party attorney fees when responding to a subpoena was addressed by this author in a 2019 NYLJ article entitled "Who Pays for E-Discovery Attorney Fees, Vendor Expenses," NYLJ, Vol. 262 No. 45 (Sept. 3, 2019). However, as discussed below, recently, a Surrogate's Court issued an informative decision in Matter of Khagan (Elghanayan), 114 N.Y.S.3d 824 (Surr. Ct. Queens Co. Sept. 18, 2019), laying out the factors that a court may consider in deciding whether to order the payment of non-party attorney fees.

In Khagan, a non-party entity and its sole member moved, pursuant to CPLR Rule 3122(d), to compel the requesting party to defray the reasonable production expenses, including $92,076.04 in legal fees, incurred in responding to subpoenas duces tecum. The non-parties had been hired by the petitioners as real estate consultants to assist in the development of real property owned by a trust. Movants' attorney advised that approximately 20,000 electronically stored files had been collected which would need to be reviewed before production. There had been "some discussion in an attempt to limit the number of records that would have to be reviewed, such as excluding direct communications between the parties or from other third parties who were served subpoenas or by narrowing the fourteen year time period covered by the subpoenas, but no agreement was reached." Counsel reviewed 19,583 electronic records and deemed 11,650 responsive and not privileged, and provided copies of them to the attorney for the trustees for their own privilege review. Demand was made not only for the costs of retrieving and reproducing the ESI, but also for legal fees.

The Surrogate's Court held that:

[t]here is no specific reference to attorney's fees in [CPLR Rule 3122(d)]. The Practice Commentaries to the rule, while noting the omission of a specific reference to attorney's fees, suggests that the court would be empowered to direct the payment of attorney's fees, "particularly where any substantial right of the nonparty witness is involved and representation by an attorney is needed," referring the reader to the Commercial Division Rules, 22 NYCRR §202.70(g), and an opinion predating the statute.

The court further stated that:

legal fees incurred by a non-party conducting e-discovery in complying with a subpoena are potentially reimbursable in Surrogate's Court proceedings. Such legal expenses, however, must be reasonable. Furthermore, in the absence of a prior agreement between the demanding party and the non-party, such fees are subject to the exercise of the court's power to limit or deny them to prevent unreasonable expense or other prejudice to any person as the circumstances may present.

Counsel contended that even if attorney fees are recoverable by a non-party, movants were not the typical innocent non-party bystanders as they were "intimately involved with the trustees in the management of the trust properties, as well as in a failed development" project. As such, counsel argued that "[b]ut for the fact that involved here are a trust and an estate accounting proceeding rather than a plenary action," the non-parties would have been named as defendants and should be treated as if they were parties and be required to pay their own expenses of producing responsive documents.

Ultimately, the Surrogates' Court, in weighing the fact specific nature of all the arguments, ruled that:

[g]iven the above and having considered the breadth of the subpoenas' demands; the failure to reach an agreement on reducing the scope of the subpoenas as to certain documents; the lack of prior notice given to the respondents that movants would seek reimbursement for their legal fees; Cole's relationship with the trustees in the management of the trust; and excluding certain expenses for conferring with the trustees' counsel, preparing objections to the subpoenas and the like, the court directs that in addition to the $5,571.28 electronic discovery vendor expense, movants are to be reimbursed for their reasonable legal fees and expenses in the amount of $40,000.00.

Mark A. Berman is a commercial litigation partner at Ganfer Shore Leeds & Zauderer. He is a past chair of the Commercial & Federal Litigation Section of the New York State Bar Association (NYSBA) and the current co-chair of NYSBA's Committee on Technology and the Legal Profession.