U.S. Tax Court Deems Predictive Coding to Be a “Reasonable Inquiry”
Dynamo Holdings Limited Partnership et. al. v. Commissioner of Internal Revenue, Consolidated Case Nos. 2685-11 and 8393-12 (U.S. Tax Court, D.C., July 13, 2016) involves Petitioners’ disputes over adjustments to tax returns. During discovery, the government objected to Petitioners’ use of predictive coding (also called technology assisted review (TAR)) to identify responsive and/or privileged data on two backup tapes. The government argued that the technology was “unproven”. The court disagreed and permitted the use of TAR. The court further advised the government that it could move to compel additional discovery if Petitioners’ responses were insufficient. Subsequent to the TAR based production, the government filed a motion to compel further discovery. The court denied the motion, holding that the use of predictive coding satisfied the “reasonable inquiry” requirement. A jointly prepared predictive coding protocol was then utilized by Petitioners in producing over 180,000 documents.
After such production, the government filed an additional Motion To Compel, this time seeking certain documents not included in the Petitioners’ prior productions. The government argued that the predictive coding response was flawed. The court examined “recall versus precision” with respect to predictive coding and agreed to assume the level of recall was too low. It then turned to whether relief was warranted.
The court determined that the government’s Motion to Compel was predicated upon two “myths” – the “myth of human review” (i.e., the concept that human review is the “gold standard by which all searches should be measured”) and the “myth of a perfect response” (the myth that discovery is perfect). The court found that human review is far from perfect, because human reviewers may disagree about what constitutes a responsive document. The court also found that neither the FRCP nor the Tax Court Rules require a “perfect” response but instead require “reasonable inquiry”. Because the Petitioners used acceptable predictive coding methods in determining what to produce and produced what the predictive coding determined was responsive, the Federal Rules and the Tax Court Rules were satisfied – a reasonable inquiry was made. The court denied the Motion to Compel.