United States: New E-Discovery Rules: Avoid Costly Consequences By Understanding What The Amendments Allow And Require

On December 1, 2006, the E-Discovery amendments to the Federal Rules of Civil Procedure took effect. These significantly affect how corporations must address issues related to electronic document retention and production. Among other things, the new rules provide guidance and clarification regarding the discoverability of inaccessible data, such as backup tapes, and how to deal with the inadvertent disclosure of privileged information when large amounts of electronic data are produced in litigation. Some of the key provisions are discussed here.

According to Rule 26, parties are now required to address e-discovery issues at the outset of litigation. Prior to the first case management conference, parties must discuss "any issues relating to preserving discoverable information." The initial discovery plan the parties submit to the court must address "any issues relating to disclosure or discovery of electronically stored information, including the form or forms in which it should he produced." Likewise, initial disclosures must identify any electronically stored information (ESI) that a party intends to use to support its claims or defenses.

Thus, lawyers need to understand their clients’ ESI systems at the commencement of a lawsuit. The failure to understand these issues early could result in a party taking ill-advised positions at the Rule 26 conference, which could have adverse effects later in the litigation.

The amendments make explicit what was already established by case law: that ESI is discoverable. But there is now one major exception to that rule: ESI is presumptively not discoverable if the responding party identifies its sources as "not reasonably accessible because of undue burden or cost. Inaccessible data sources include, among other things, backup tapes intended for disaster recovery.

In recent years many expensive discovery battles have been fought over whether a party can force its adversary to restore and produce backup tapes, and whether the requesting party should be required to pay the cost. The amendments now provide a framework, albeit without bright lines, for resolving such disputes.

As noted, inaccessible ESI is presumptively not discoverable under the amendments. That is not the end of the story, however. The requesting party can challenge such an assertion, in which case the issue can be raised with the court. The court can still order production of inaccessible ESI if the requesting party shows "good cause."

In the event a court finds good cause, it may "specify conditions for the discovery," which the Committee Notes indicate can include cost shifting. The new rules, however, do not set forth any standard for cost shifting determinations; thus, courts will look to case law for guidance.

ESI that is reasonably accessible, however, remains fully discoverable. That includes such commonplace items as email, Word documents, PowerPoint presentations, and spreadsheets, among others.

The form in which ESI must be produced also has become a common point of contention. The amendments provide a framework for addressing such issues, although, again, with few bright lines. Under the amendments, the requesting party may, but is not required to, specify the format in which ESI is to be produced. The responding party can object and, if necessary, raise the format issue in a motion to compel.

If the form of production is not specified by party agreement or court order, the responding party must produce the information either in the form in which it is ordinarily maintained or in a reasonably usable form. As a practical matter, this may lead to "native format" productions becoming more commonplace, because the form in which ESI is "ordinarily maintained" would likely be native format and, furthermore, the requesting party may specify native format in its request. The trend in recent case law is toward native-format productions.

Because privilege review is often more time-consuming and costly with ESI, the amendments create a procedure—sometimes referred to as a "clawback" provision—that allows a producing party to assert privilege and work product claims after production. The new provision provides that if information is produced in discovery that is subject to a claim of privilege or of protection as trial-preparation material (i.e., work product), the producing party must notify any party receiving the information of the claim and the basis for it.

The receiving party then must either (1) return, sequester, or destroy the protected material, or (2) present the material to the trial court under seal and ask the court to rule on the privilege claim. According to the Committee Note, however, this provision does not address whether the privilege is waived when asserted after production. Rather, that question is still governed by common law concepts of waiver. As a result, parties should not take this as an invitation to forgo or defer privilege review until after production.

The duty to preserve documents once litigation is anticipated has become an issue of increasing concern to corporations. The amendments contain a safe harbor provision that provides protection from sanctions when documents are destroyed due to the good faith operation of routine electronic data-destruction procedures. Before discussing the safe harbor, however, it is worth revisiting some general principles about document preservation.

When an entity reasonably anticipates litigation, it has a duty to preserve all potentially relevant documents. This means that a corporation must put in place a "litigation hold" to ensure preservation of relevant documents. Such a hold must include the suspension of any routine destruction policy with respect to any documents or data that are potentially relevant. (However, it is unclear the extent to which the duty to preserve relevant documents covers inaccessible electronic data, such as backup tapes intended for disaster recovery.) The consequences of failing to preserve or destroying relevant documents can be severe. In a recent highly publicized case, a court imposed evidentiary sanctions against Morgan Stanley for destroying documents, which led to a jury rendering a $1.4 billion verdict against the company for securities fraud.

The safe harbor provides that "absent exceptional circumstances" a court may not impose sanctions on a party "for failing to provide ESI lost as a result of routine, good faith operation of an electronic information system." The safe harbor, however, is limited. "Good faith" might require that a party—once litigation is anticipated—modify or suspend routine operations to avoid loss of relevant information.

The Committee Note provides that a party may not "exploit the routine operation of an information system to thwart discovery obligations by allowing that operation to continue in order to destroy specific stored information that it is required to preserve." Such actions would preclude a party from relying on the safe harbor and could potentially lead to sanctions for spoliation.

Furthermore, the amendments leave open the question of whether a party’s duty of preservation covers inaccessible electronic data. The Committee Note states that the identification of ESI as inaccessible "does not relieve a party of its common law or statutory duties to preserve evidence" and that this question "depends on the circumstances of each case."

All in all, the amendments constitute a significant change in discovery practice in the federal courts. These changes hopefully will provide more guidance to parties and judges as they grapple with the formidable challenges posed by the immense quantities of discoverable electronic data that now exist.

• Get acquainted with sources of potentially relevant ESI as soon as litigation is anticipated. It may be helpful to designate an IT point person for working with counsel on e-discovery issues. This will lead to more intelligent decision making at the Rule 26 and initial case-management conferences.

• Inaccessible ESI, such as backup tapes intended for disaster recovery, is discoverable only upon a showing of good cause. To make intelligent strategic decisions during the Rule 26 process, litigants should understand as early as possible what they have in potentially relevant ESI and what their own discovery needs are in the litigation.

• Native-format productions of ESI are becoming increasingly commonplace and are implicitly encouraged by the amendments. Thus, it is important to understand the forms in which ESI is kept in order to be ready to address issues that could arise from the form of production.

• The safe harbor protects a party from sanctions only in the event of "good faith" operation of document-destruction procedures. Good faith requires the suspension of such systems to preserve potentially relevant evidence once litigation is reasonably anticipated. As soon as a party knows, or reasonably should know, that it may be sued, it should implement a "litigation hold," which must include the suspension of any routine procedure or policy of destroying any documents or data (including electronic data) that are potentially relevant. It is unclear, however, the extent to which this applies to inaccessible ESI.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.