United States: Understanding U.S. Electronic Discovery and "Best Practices" Therefore

Discovery requests for electronic discovery can be a nightmare. Whether in a regulatory investigation or in a patent infringement lawsuit, those seeking information typically request years of e-mails and assume that such electronic discovery is available at the push of a button. Of course, it rarely is. The recent Morgan Stanley case in which massive punitive damages were awarded — at 1.5 times the actual damages sought — highlights a judicial and jury lack of tolerance for perceived refusal to produce electronic information promptly and completely.

On the other hand, attorneys who have learned about and who have experience in electronic discovery have recognized the various advantages mixed in with the potential horrors. These advantages include significant cost reductions, greater control over document review, and more comprehensive discovery.

In any event, many of the potential horrors involved in responding to electronic data discovery can be anticipated. What is needed to adequately complete electronic discovery, however, is a lot of coordinated effort between a client, the litigators, Information Technology ("IT") experts within a company, and outside electronic discovery experts for ensuring that e-document discovery is handled properly and successfully.

Another problem with electronic discovery is the inadvertent revealing of privileged documents to opposing counsel. ABA Journal (August 2005), page 61. The problem is mainly a matter of volume. The discovery phase can involve millions of papers of documents from e-mails, word processing, instant messaging, hand-held devices, or even deleted data that has been recovered or destroyed. However, software can be utilized to look at names, document metadata, Internet addresses, subject matter, and specified date ranges, which may indicate a document might involve privileged information. One problem is that duplicate copies may be forwarded even though the original copy had been labeled "privileged." An e-mail makes it easy for privileged documents to be forwarded to people who should not have them.

Metadata presents a crucial difference electronic and printed documents. All the information in a paper document is displayed on its face. Not so with electronic documents. Electronic documents carry their history with them. Paper shows what a document says or looks like; metadata tells where the documents went and what it did. As lawyers become aware of metadata as an additional source of evidence, it will continue to gain importance in litigation. Recognizing its evidentiary value, more lawyers are requesting it from opposing counsel as well as using it as a resource in making their own evidentiary presentations. Before producing documents, a review team needs to be aware of and prepared to confront any embedded information that might hurt a client.s position. Lawyers can expect at some point to face requests, or a court order, to produce metadata. Metadata is now considered to be an integral part of the document it describes. Recent advances in technology make preserving and reviewing metadata easier.

Surprisingly to most people, electronic discovery has been part of our Federal discovery scheme for a long time. Federal Rule of Civil Procedure 34 includes requests for production of documents including "electronic data compilations" within its express terms. This has been true for over 30 years.

As an initial matter, courts do require litigants to demonstrate good faith efforts to identify discoverable electronic data and to inform opposing counsel when data is available for production in electronic form. For this reason, it is necessary to assume that any and all electronic documents — even the ones that have been destroyed — should be produced along with any "hard copies" in litigation.

Federal Rule of Civil Procedure 26(b)(2) provides protection from unduly burdensome and expensive document requests. A court may deny a discovery request or require a requesting party to pay expenses if the burden or expense of the proposed discovery outweighs any likely benefits. Courts have become more experienced with electronic discovery. They will expect litigants to demonstrate reasonable approaches to electronic document requests. Electronic discovery requests that are not sufficiently tailored to identify potentially relevant information will be denied.

When a requesting party demonstrates a good faith effort to establish reasonably tailored electronic discovery requests, courts will hold the responding party to a higher standard in providing a full response. A party unable to readily produce responsive documents may open itself up to intrusive measures, such as, the court ordering that an opponent’s expert be given direct access to its computers. Further, one court has interpreted Federal Rule of Civil Procedure 35 to require some showing of non-compliance with discovery obligations before an opponent will be allowed direct access to a company’s computer databases. If a corporation’s own actions contribute to its discovery difficulties, it is especially unlikely that a court will be sympathetic to pleas for relief. Courts are particularly unimpressed with vague claims that a particular request is unduly burdensome.

Nothing can be better than planning when it comes to electronic discovery. Finding, processing, and producing e-documents in response to document requests can be an enormous undertaking. It is, especially if one does not have very much experience, a disorganized effort that can result in extremely bad circumstances. However, with the proper preparation, the document process can be even more efficient than producing "hard copies." Document responses can be streamlined, costs of review and production can be reduced, and court obligations met. This proper planning requires an effort of inside counsel, any outside counsel, IT Departments, and experts. Rather than experience a crisis when litigation arises, proper planning allows leveraging of the advantages of electronic discovery.

When litigation is anticipated, the following items should be considered during the e-discovery planning process:

1. The identity of "key players" with knowledge relevant to the issues in the dispute;
2. The likely locations of responsive documents;
3. Document retention policies that are currently in effect;
4. Whether or not the formal document retention policies were actually used;
5. Any legacy systems in use during the relevant time period;
6. Back-up and archival schedules and policies;
7. The identity of any likely Rule 30(b)(6) witnesses regarding the IT systems;
8. Preservation obligations, including whether back-up tape recycling must be halted;
9. Whether any of expected discovery requests should be narrowed;
10. Document collection and processing methods;
11. Whether deleted or legacy data is at issue;
12. Whether data stored on back-up tapes is at issue;
13. Possible cost- sharing requests;
14. Procedures for production; and
15. Procedures for handling inadvertent disclosure.

As is known, there is "mandatory disclosures at the beginnings of litigations" to opposing parties concerning certain information, including a description of, by category and location, relevant documents and data calculations. This requirement means that a party must search multiple electronic systems for relevant information.

Multiple copies of response to electronic information may be stored on hard drives, networks, back-up tapes, lap tops, floppy disks, employees’ home computers, PDAs and cell phones. Also, the new ubiquitous BlackBerry device (at least in the United States) is yet another electronic storage location that must be searched.

Attorneys must thoroughly investigate the existence of electronic information. In one case, reliance on representations of senior managers about what electronics information existed was not enough. GTFM, Inc. v. Wal-Mart Stores, Inc., No. 98 Civ. 7724, 2000 U.S. Dist. LEXIS 3804, at*3(S.D.N.Y., March 30, 2000). The plaintiffs were asked to provide information about Wal-Mart local sales. In responding, Wal-Mart’s attorney relied on a senior sales executive, who indicated that local sales data was maintained for five weeks only and therefore data older than five weeks was no longer available. Wal-Mart also claimed that providing the information would be unduly burdensome because it did not have centralized computer tracking to accumulate and segregate the information as requested. However, one year later, the plaintiffs deposed a Wal-Mart IT Vice President, who testified that Wal-Mart’s computers could in fact track the requested information for up to one year. At the time of plaintiffs’ original request, the local sales information was segregated and available, but because of the one-year delay caused by counsels’ misrepresentation, that information was no longer available. The court severely criticized Wal- Mart’s attorneys for failing to consult the IT personnel:

An on-site inspection of Wal-Mart’s computer facilities at Wal-Marts’ expense was ordered. The court further imposed upon Wal-Mart all of plaintiffs’ expenses and legal fees created by the inaccurate disclosure, including the cost of the cumbersome process plaintiffs had to use to extract the information sought.

There have also been cases in which the written policy of the company was to recycle back-up tapes after a certain period of time. However, many times, there is a disconnect between the written policy and the actual practice. In a number of cases, back-up tapes have been found not to have been recycled on time and therefore still were in existence. Sometimes the existence of these back-up tapes has been found within the time available for production. At other times, the tapes were recently destroyed and therefore a failure to produce then was found to be sanctionable by the court. Therefore, it is extremely important to make sure that the policies have been actually carried out with respect to back-up tapes.

In addition to mandatory disclosures and responses to specific discovery requests, Rule 30(b)(6) provides for deposing a designated IT person in order to obtain discovery of an opponent.s computer systems.

Providing hardcopies of electronic documents will generally not meet discovery applications. Data is discoverable in computerized form even though the same information has been already produced on paper. While computer-based documents may be technically useable in printed form, they are unnecessarily cumbersome for a reviewing party to review. Production in a form readily readable by the adverse party’s computers is definitely the "preferred alternative."

One case particularly shows this to be true. In In re Bristol-Myers Squibb Securities Litigation, 205 F.R.D. 437, 439 (D.N.J. 2002), all parties initially entered into an agreement regarding copying costs. The plaintiffs were to pay $.10 per page for documents that the defendants copied for production. After the defendants produced a significant quantity of paper and delivered the bill, plaintiff disputed how much they actually owed. Defendants moved for an order seeking reimbursement in the amount of $.10 per page produced, as originally agreed to by the plaintiffs. The plaintiffs had some objections. BMS was producing documents that it had stored in both paper and electronic form, it produced all documents to the plaintiffs in paper form. Defendants scanned documents stored in paper form to create electronic images for its own review, while "blowing back" paper copies for production to the plaintiffs. The plaintiffs argued that the documents that had been stored in electronic form should have been produced in electronic form. The court noted that the plaintiffs specifically asked for paper, even after the court raised the issue of electronic information at a case management conference. The plaintiffs "had every opportunity" to request electronic information, but they did so only after receiving the bill for payment of for production. Nevertheless, the court agreed with the plaintiffs on this issue. The court found it "somewhat troublesome" that the defendants had responsive information electronic form but still produced it on paper! The court held that defendants fell short of their Rule 26 disclosure obligations by not telling the plaintiffs that the information was available in electronic form. The plaintiffs were not required to pay the cost of copying paper because the defendants did not tell the plaintiffs that requested documents were available in electronic form.

Although this is the major case, it is clear that, in most courts in the United States, it is necessary to provide a full disclosure to the other side on what documents are obtainable in electronic format.

Cost-shifting is a topic that many courts are now wrestling with. Questions of undue burden and expense typically arise when a request calls for data that is not readily retrievable. For example, data that has been "deleted" is not readily retrievable because it is stored only on back-up tapes, on outdated systems, and is no longer available in a readily accessible electronic form. Production might require, for example, restoration of back-up tapes or creation of programs to search for and retrieve responsive data. Producing parties frequently argue that the cost of production should be shifted to requesting parties.

Case law on the subject of "cost-shifting" demonstrates courts’ efforts to develop a methodological approach to electronic discovery disputes. The Zubulake decision instructs that the following three-step analysis is required in disputes involving the scope of discovery of electronic data (Zubulake v. UBS Warburg, LLC, 217 F.R.D. 309 (S.D.N.Y. 2003)):

The 7-factor cost-shifting test follows the initial 3-step analysis:

Zubulake, 217 F.R.D. at 323.

In following and applying the Zubulake analysis, subsequent courts have instructed that the seven factors should not be weighted equally. Instead, the central question must be whether the request imposes an undue burden or expense on the requesting party. The court stated that the first two factors, comprising a "marginal utility" test, are the most important. The second party of the analysis should consider factors 3, 4, and 5 in making a determination of expense and relative ability to bear the cost of the expense. The court further stated that factor 6, which considers the importance of litigation itself, must stand on its own and has the potential to predominate over the other factors when it comes into play. Finally, factor 7 was listed as the least important because of the general presumption that the response to a discovery request will generally benefit the requesting party.

A corporation must consider its legal duty to preserve evidence. This duty applies to electronic evidence as well as to paper copies. Specifically, once litigation is pending or imminent, a party must take affirmative measures to preserve potential evidence that might otherwise be destroyed in the course of business. Usual procedures for document destruction recycling may have to be suspended. Most recently, the Zubulake court examined the standards for spoliation of information stored on back-up tapes.

Zubulake v. UBS Warburg LLC, No. 02 Civ. 1243, 2003 U.S. Dist. LEXIS 18771, at *12 (S.D.N.Y., Oct. 22, 2003).

However, the Court noted that anyone who is a party or anticipates being a party to a lawsuit "must not destroy unique relevant evidence that might be useful to an adversary." Id. at *13. Noting that the duty to preserve extends to all employees likely to have relevant information, i.e. the "key players" in the case, the court determined that all of the individuals whose back-up tapes were lost fell into this category of the case.

In assessing the duty of a litigant to preserve evidence, the court noted that electronic data presents some "unique issues":

The court went on to summarize the party’s preservation obligations with regard to electronic data in general, and back-up tapes in particular:

Id. at *16-*17.

Courts also recognize that certain documents are destroyed in the ordinary course of business. Not every missing document provides a finding of spoliation. Spoliation of evidence is the destruction or significant alteration of evidence, or failing to properly preserve evidence for pending or reasonably anticipated litigation. No unfavorable inferences can be drawn from destruction of documents when the circumstances properly account for it. A party may defeat a claim of spoliation by showing that evidence was destroyed pursuant to a valid and consistently enforced document management policy.

One of the most egregious cases of spoliation and document destruction relates to a recent Florida state court decision. Coleman (Parent) Holdings v. Morgan Stanley, 2005 Extra LEXIS 94 (Fla. Cir. Ct. March 23, 2005). Morgan Stanley (MS) served as financial advisor to Sunbeam Corporation in its 1998 purchase of 82% interest in Coleman Co. for cash and stock. Sunbeam and its Chairman, Al Dunlap, had actually engaged in a massive accounting fraud at that time. After Sunbeam’s bankruptcy left Coleman with worthless Sunbeam stock, Plaintiff Coleman (Parent) Holdings filed an action against MS for $485 million, alleging conspiracy and aiding abetting the massive accounting fraud. In discovery, plaintiff sought all e-mail from 1998. MS vigorously resisted discovery requests, arguing e-mail searches would require "a massive safari into the remote corners" of computer back-up tapes that would cost hundreds of thousands of dollars. The parties entered into an Agreed Order requiring MS to search its oldest back-up tapes for 36 employees involved in the transaction, review all e-mails for a critical 2-month period in 1998, and search all e-mail using 29 specific search terms. MS was required to, and did, certify compliance with the Agreed Order. However, on March 1, 2005 the state court found that MS had:

1. Failed to disclose or search more than 2,000 back-up tapes;
2. Failed to disclose the existence of the historical e-mail archive that would have allowed quick and inexpensive searches;
3. Failed to review at least 7,000 additional responsive documents due to an error in MSs search program; and
4. Failed to disclose that the certification was false.
5. Also, MS’s law firm's pro-hac vice applications were revoked, effectively kicking them out of the state.

The court’s March 1, 2005 Order also:

1. Established a set of facts regarding MSs discovery failure;
2. Allowed Plaintiff to argue that MS’s concealment could be considered in determining a punitive damages award; and
3. Shifted the burden of proof to MS to show that it lacked knowledge of Sunbeam fraud and that it did not conspire to defraud the Plaintiff.

A March 23, 2005 Order recited continued "stonewalling" and concluded: "The prejudice to [Plaintiff] cannot be cured — The judicial system cannot function this way." This Order required that much of Plaintiff's complaint could be read to the jury, which was be instructed that those facts were deemed as having been established. At the trial, the judge read the statement to the jury that "MS participated in a scheme to mislead..." As a result, the jury awarded $604 million in compensatory damages and $850 million in punitive damages.

All of this was due to improper discovery of electronic records.

As a responding party, the obvious desire is to avoid claims of spoliation. With paper discovery, intentional acts most typically prompt claims of improper document handling or allegations of spoliation. In electronic discovery, however, intentional acts are not necessary to cause bad results. Changes to data, even unintentional document destruction, can occur unless immediate precautions are taken as soon as litigation is pending or anticipated. The courts have a broad discretion with respect to the imposition of sanctions under Rule 37 for the failure to produce evidence. Sanctions may include monetary penalties (such as attorney’s fees and other costs associated with making a motion to compel), exclusion of evidence, jury instructions regarding adverse inferences, and even dismissal or default judgment. A monetary penalty or award of reasonable attorney’s fees and costs is frequently used as a sanction where a party fails to produce electronic data in a timely fashion. Monetary sanctions are also typically imposed when unnecessary costs are incurred by the party requesting production and considerable time and effort are required by the court.

Courts may also impose severe sanctions in certain instances when a party fails to produce electronic information in a timely manner. The most serious sanction utilized by courts is an order which essentially disposes of the case. An adverse inference instruction to the jury also is commonly used as a severe sanction. The three criteria for the imposition of an adverse inference instruction to the jury for non-production or untimely production are:

When a party demonstrates spoliation, a wide range of sanctions are available. These sanctions include ordering dismissal of the culpable party’s suit, entering a default judgment against a culpable party, striking of pleadings, precluding the culpable party from giving testimony regarding the destroyed evidence, or giving an adverse inference instruction to the jury against the culpable party. Courts are more likely to impose a severe sanction for spoliation of electronic evidence than when faced with the party’s untimely production of relevant documents. However, the court’s authority derives from both Rule 37(b) or from the court’s inherent power. Once it is demonstrated that evidence was destroyed or not properly preserved by a party with an obligation to preserve it, the court must consider:

Generally speaking, once a party knows of an anticipated litigation, courts will impose severe sanctions for destroying electronic evidence even if a party destroyed it in accordance with an established record retention policy. For this reason, a "litigation hold" policy is needed.

Once a litigation is known or anticipated, it is necessary that the client recognize a duty to preserve potentially relevant evidence and the consequences of not doing so. Here are some guidelines, as set forth in the ALAS Loss Prevention Journal (Summer 2005) to establish litigation hold procedures to discuss with the client:

1. Determining the scope of preservation. This requires identifying the time period, subject matter, and cites of potentially relevant information.
2. Issuing a "litigation hold" memo to all employees who potentially have relevant documents or information. In discussing the hold memo, it may be appropriate to consider how the memo recipients will be identified. Consider also reviewing the content of the memo: because it might be discoverable, the memo should be carefully drafted. Among other things, it should specifically describe the types of electronic data that must be preserved and how that data should be maintained and stored. It may be prudent to have recipients acknowledge their receipt and understanding of the memo.
3. Locating all sources of relevant information. This may involve reviewing the client’s document retention policy and talking to its technology personnel regarding the company’s computer system, data retention architecture, back-up procedures, and recycling procedures implemented for back-up tapes. Consider whether it might be necessary to consult an outside expert to help in understanding the client’s IT systems.
4. Contacting key employees. Typically, counsel or an appropriate client representative should contact key employees directly and instruct them regarding their preservation obligations. Normally counsel will need to interview them regarding the procedures for document management and retention. (Of particular importance is how to store and/or destroy e-mail.)
5. Designating a records manager and/or an IT employee to be responsible for segregating and preserving archival records.
6. Monitoring the preservation procedures. The litigation hold memo may need to be reissued periodically. Follow-up discussions with key employees may be necessary to ensure they are properly preserving information. It will be helpful for client documents its preservation efforts.

In view of recent decisions, it is very important to make sure that such procedures are carried out.

Even before a litigation is anticipated, there are certain "best practices" that could be implemented regarding electronic discovery. Here are some of them:

1. Consider implementing a formal document retention policy to formalize rules for saving and destroying electronic documents.
2. Focus on making litigation preparedness a part of employees’ daily work.
3. Establish an ongoing working relationship between in-house legal and IT personnel.
4. Organize data storage efforts and establish systems that simplify later identification, retrieval, and production of responsive information.
5. To preserve evidence when necessary, outline a "litigation hold" plan (as discussed above) for this suspension of usual document destruction and back-up tape recycling protocols.
6. To designate and train an IT department representative to act as the company’s Rule 30b(6) deposition witness when electronic data storage may be at issue.
7. Expand the working knowledge of the client.s operations to include client information systems o that outside counsel is equipped to establish discovery parameters with opposing counsel early in the case and challenge overbroad requests if necessary.
8. Outside counsel should maintain a focus on minimizing the disruption of client operations.
9. Before and after discovery requests are received, adequately explain the scope of the obligation to preserve electronic data and the duty to search different systems and storage media.
10. Outside counsel should become acquainted with key IT personnel.