United States: Averting Potentially Costly Electronic Discovery Lapses

While lawyers across the country have been concerned about electronic discovery and its implications for several years now, recent court judgements have made this a significant financial issue as well. A $1.45 billion verdict is quite an attention-getter when it comes to the potential consequences of discovery failures.

As has been widely covered in the press, a Florida jury awarded that amount in compensatory and punitive damages to Ron Perelman in his lawsuit against Morgan Stanley. The decision can be traced to a series of strongly worded instructions from the judge to the jury along with a partial default judgment shortly before the start of the trial. In press reports, this high-profile and controversial judgment was said to be largely the result of repeated discovery issues over the course of a year, which culminated in the company’s stating on the eve of trial that it had found records that it had previously said it did not have.

This case is but one example –albeit a large and high-profile one – of the results of glitches in responding to a discovery request, particularly when it comes to electronic document retention, location of relevant files, and the searching of electronic records. Planning ahead for discovery can therefore save a company considerable money, both in employee time and in risk management and risk reduction.

As many people know, discovery takes place in the course of litigation, when one side asks that the opposing side disclose all documents related to a specific topic. This is generally the lawyers’ responsibility, involving financial executives only when the subject of the discovery request includes documents in their possession and/or control. In the wake of Andersen and Morgan Stanley, however, the retention and disclosure of electronic records is no longer solely a legal concern. The stakes have been raised for the company as a whole.

Potential civil verdicts are not the only consequences of lapses in electronic discovery. Effective document production is critical to conducting a successful internal investigation if such an endeavor were to become necessary. The more reliable the internal process, the better the chances of mitigating or preventing external inquiries.

Further, several provisions within the Sarbanes-Oxley Act of 2002 include implications for document retention that could later become of issue in discovery. The act significantly increases criminal penalties for improper destruction of documents that would impede, obstruct, or influence official procedures.

It does no good, however, to have the correct documents stored if the company cannot find them, review them, and disclose them when necessary. Under common judicial practices, the court permits the fact finder (either judge or jury) to draw an adverse inference against a party that fails to produce documents that a reasonable person could have produced. Regulators can be even stricter.

Given all of these factors, proper handling of discovery requests cannot begin

when a request is made. It must start much earlier, with company executives working together to develop a litigation-hold program and a plan for responding to discovery.

Developing such a program involves various degrees of difficulty, depending on the structure of the information technology system. For example, an organization with a single consistent, well-documented IT structure would have a considerably easier time in setting up a hold program than would a company that has grown by acquisition over the years and whose systems vary by department.

Regardless of the complexity, however, preparation for document preservation and production is critical to reducing the cost and risk associated with litigation over the long term. For example, corporations have tended to rely on their outside lawyers in individual cases to determine proper responses to discovery requests. However, because most companies have different law firms representing them in different litigation matters, the risk arises that the company will respond differently to similar discovery requests.

This could lead to discovery disputes, which could in turn result in increased legal fees because of prolonged litigation, and potentially to greater judgments being awarded against the company.

Modern computer systems produce vast quantities of data, much of which is the result of automatic functioning of the computers and their networks and is completely irrelevant to discovery requests or the underlying issues in question. Accordingly, it is not economically feasible, nor would it make sense, for a corporation to preserve absolutely everything. However, recent case law and changes to the Federal Rules of Civil Procedure suggest that if a dispute arises and the company can demonstrate that the way it handled its records and responses to the requests in the matter at hand was reasonable and consistent with the way it has handled records and discovery requests in other matters, the likelihood of sanctions is considerably lower.

For this reason, it is in the company’s best interests to establish an enterprise-wide records retention and litigation hold policy, and to train those people in its legal, IT, and records management departments in the policies and procedures designed to facilitate consistent and effective document preservation and production.

This can seem a daunting undertaking, and in some cases, it is. The first step, though, is building the team. Individuals from the company’s legal, IT, records management, and compliance departments must be involved for the project to succeed. Cooperation among these groups will help to ensure that all of the bases are covered if and when it comes time to place a hold on documents.

Recent legal developments require lawyers to fully understand the company’s IT system.¹ In many cases, the corporate IT team does not understand the legal considerations well enough to effectively educate the attorneys. Therefore, an outside party who understands both technology matters and the litigation process can help provide lawyers with the confidence they must have in their understanding of the technology as it pertains to potential litigation.

Once the planning committee is assembled, it first reviews the various information systems, the records that they contain, and their operating and backup procedures. Based on this information, the company then identifies the strategic and tactical requirements to improve its ability to manage, search, and produce electronic.

Finally, the committee will develop the plan to bridge the gaps. These solutions can include software to aid in document management, new procedures on how to issue and follow up on litigation hold notices, or even changes to the information systems structure itself to ease response to preservation orders.

When a request comes in or litigation is threatened, the first step is data preservation. Once litigation has been filed – or if the company has a reasonable expectation of litigation –the lawyers must ensure that all relevant data is held.² They will decide what must be retained and direct those affected accordingly.

If a particular person or small group is likely to have many relevant documents, the legal team may have "forensic images" made of their hard drives. This is the only way to fully preserve the data residing there. It is not economically or practically feasible to image every employee’s computer, so a line will be drawn.

No matter how many hard drives are imaged, a hold notice will be issued to all people who potentially possess relevant documents, as determined by counsel in the context of the discovery request, or as negotiated with opposing counsel. The notice should tell them to preserve any information they have, in either paper or electronic format, that might be relevant to the issues in dispute, including network files, voice mails, or hard copy documents.

The lawyers also must follow up with the individual recipients to ensure that they are retaining the potentially responsive records. Additionally, the follow-up plan often includes interviews with the individual notice recipients. The interviews would focus on how the person uses e-mail and other electronic tools so that the attorneys can ascertain whether the preservation notice, if followed to the letter, will result in the preservation of all potentially relevant information.

As the litigation proceeds, the lawyers will then collect the data that the individuals have retained in order to review it and eventually to produce those records that are responsive to the request.

The goal of this entire process is to increase efficiency in document production associated with litigation and to thereby reduce the company’s risk. This risk can take the form of legal fees as well as the potential for a huge judgment if errors occur.

If done correctly, an investment up-front of time and dollars to establish a plan and streamline data collection can save millions if not billions in litigation fees and judgments.

Effective preparation for litigation holds includes:

• A team in place that includes legal, IT, records and compliance specialists familiar with the hold policies and procedures and prepared to respond

• A database of all information available within the company, where it is kept and how long records are retained before being destroyed. This will help ensure consistent answers to questions related to document retention within the company.

• Pre-set procedures for discovery response that occur with each request – the same notice goes out to potential information custodians, follow-up procedures are dictated and followed, and levels of escalation are determined for those who do not reply