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Court Approves Use of Predictive Coding, Disagrees that it is an “Unproven Technology” – eDiscovery Case Law


In Dynamo Holdings v. Commissioner of Internal Revenue, Docket Nos. 2685-11, 8393-12 (U.S. Tax Ct. Sept 17, 2014), Texas Tax Court Judge Ronald Buch ruled that the petitioners “may use predictive coding in responding to respondent's discovery request” and 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”.

The cases involved various transfers from one entity to a related entity where the respondent determined that the transfers were disguised gifts to the petitioner's owners and the petitioners asserted that the transfers were loans.

The respondent requested for the petitioners to produce the electronically stored information (ESI) contained on two specified backup storage tapes or simply produce the tapes themselves. The petitioners asserted that it would "take many months and cost at least $450,000 to do so", requesting that the Court deny the respondent's motion as a "fishing expedition" in search of new issues that could be raised in these or other cases. Alternatively, the petitioners requested that the Court let them use predictive coding to efficiently and economically identify the non-privileged information responsive to respondent's discovery request.  The respondent opposed the petitioners' request to use predictive coding, calling it "unproven technology" and added that petitioners could 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.

Judge Buch called the request to use predictive coding “somewhat unusual” and stated that “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… 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.”

With regard to the respondent’s categorization of predictive coding as “unproven technology”, Judge Buch stated “We disagree. Although predictive coding is a relatively new technique, and a technique that has yet to be sanctioned (let alone mentioned) by this Court in a published Opinion, 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. In fact, 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.”

As a result, Judge Buch ruled that “[p]etitioners may use predictive coding in responding to respondent's discovery request. 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.”

So, what do you think?  Should predictive coding have been allowed in this case?  Please share any comments you might have or if you’d like to know more about a particular topic.

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