On September 17, the U.S. Tax Court rejected the IRS’ claim that technology-assisted review (TAR) is an “unproven technology” and found it an appropriate tool for parties to use to limit the burden of e-discovery.
During discovery in Dynamo Holdings Limited Partnership, Petitioner v. Commissioner of Internal Revenue, the IRS filed a motion to compel two taxpayers to produce two backup storage tapes, copies of the tapes, or their contents. The taxpayers characterized the request as a “‘fishing expedition’” and asserted it would take months and at least $450,000 to comply with the IRS’ request because it would have to review between 3.5 and 7 million documents on each tape for responsiveness and privilege. The taxpayers asked the court either to deny the IRS’ motion or to allow the petitioners to use TAR, asserting that the tapes contained irrelevant sensitive data, including personally identifiable information and protected health information. The IRS claimed TAR was “‘unproven technology’” and suggested the taxpayers could avoid this expense by skipping review and later clawing back any privileged documents.
Although the IRS sought permissible discovery, the court nonetheless viewed the IRS’ request as a matter of two unworkable extremes: it would not force the taxpayers to agree to the proposed clawback, and it recognized the significant time and expense required to review the ESI. Therefore, the court sided with the taxpayers, calling the use of TAR “a potential happy medium.”
The court found TAR “widely accepted for limiting e-discovery to relevant documents and effecting discovery of ESI without an undue burden.” It was swayed by testimony from the taxpayers’ expert, who compared the costs of manual review—$500,000 to $550,000 to review 3.5 to 7 million documents—against the costs of TAR—$80,000 to $85,000 to review 200,000 to 400,000 documents. Relying on the discovery rules, which should “‘be construed to secure the just, speedy, and inexpensive determination of every case,’” the court found TAR would “reduce the universe of information on the tapes using criteria set by the parties to minimize review time and expense and ultimately result in a focused set of information germane to the matter.” The court left the door open for the IRS to file another motion to compel if it found the taxpayers’ response incomplete.
This important opinion may pave the way for other legislative courts and federal agencies to move away from linear review. It also illustrates the stark difference in costs that parties may exploit as a tool for convincing regulatory agencies and other parties to agree to TAR. Here, had the taxpayers filed a motion seeking a protective order to shield them from unduly burdensome discovery, the court could have apportioned discovery costs between the parties. Seeking guidance from an e-discovery specialist early in a case to ascertain the scope of discovery and the potential cost savings of using tools such as TAR can give parties important leverage during preliminary discovery conferences.