United States: How Do the New Rules on Electronic Discovery Affect You?

Originally published December 14, 2006

On December 1, 2006, the recent revisions to the Federal Rules of Civil Procedure relating to electronic discovery ("new Rules") went into effect. The effect of these new Rules has been substantially exaggerated, if not misunderstood, by the press. For example, contrary to some newspaper accounts, the Rules do not give rise to an affirmative obligation to maintain every electronic document and organize them for retrieval indefinitely.

So what do the new Rules really mean for your company? The enactment of these new Rules reflects a fundamental recognition by the federal judiciary that electronic documents play a central role in many cases. The Rules shine a spotlight on electronic document management, and reaffirm the need for many companies to adopt best practices, namely:

• knowing what electronic documents the company keeps, as well as how, where and for how long;
• managing electronically stored documents under reasonable retention policies; and
• preserving documents, or putting a litigation "hold" on routine destruction as needed, in the event of litigation or investigation.

Even before the enactment of these new Rules, electronic documents played an important role in many litigated cases. Indeed, the volume of electronic documents in use today makes their collection, review and production in litigation a complex, timeconsuming and expensive process. Some aggressive litigators have used civil discovery procedures to seek voluminous amounts of electronic information with questionable relevance. Where parties have willfully destroyed relevant information, failed to disclose the existence of backup tapes and failed to disclose technical production problems, some courts have awarded monetary sanctions that have reached tens of millions of dollars. Under the new Rules, judges and regulators will apply a higher level of scrutiny to a company’s efforts to take reasonable steps to preserve and disclose electronic documents.

In short, in response to the new Rules, your company should consider taking actions to achieve the following goals:

• revisit your document retention policies and practices;

• identify a records retention officer and a supporting document management team across key departments to minimize burdens of electronic discovery;

• minimize disruptions of preserving documents and modifying document retention practices via a well-planned litigation "hold" process; and

• respond to electronic discovery obligations cost-effectively.

Companies should use the new Rules as an opportunity to revisit their document retention policies and practices, and take steps to ensure that they are retaining only the documents, information and electronic information systems they need to manage the business. For example, it is not uncommon for many businesses to recycle backup tapes after 30 or 90 days. While you must maintain certain records because of a valid business purpose, under regulations, or because of potential or actual litigation, many companies maintain voluminous amounts of unnecessary documents with no business, legal or regulatory purpose. In the event of litigation or government investigations, managing, reviewing, collecting and producing these documents can be extremely burdensome.

The substance of the new Rules provides even more incentive for companies to scrutinize regularly their data retention practices and policies. If a company has wellconsidered data retention practices and policies, some of the most vexing issues raised by the new Rules can be avoided or minimized. For examples:

• Rule 26(b)(2)(B) now makes explicit that where a party identifies sources of electronic information as not "reasonably accessible" because of "undue burden or cost," following a motion to compel, the party who seeks to avoid producing the documents must make a sufficient showing, and that even so, subject to certain limitations and conditions, a court "may nonetheless order discovery from such sources if the requesting party shows good cause." Moreover, because the new Rules provide no clear standard regarding which data are "reasonably accessible," parties will have uncertainty, and thus may be forced to litigate over whether such data must be produced.

• In order to facilitate accessibility of electronic information, Rules 33 and 34 now provide, in certain circumstances, for parties to request or offer direct access to electronic information systems. Such direct access, if necessary, raises potentially problematic confidentiality and privilege concerns.

The impetus to improve information retention practices is compounded by the trend of increasing liability for failures relating to alleged information mismanagement. The recent indictment alleging misconduct in the course of investigations conducted for Hewlett-Packard and the company’s $14.5 million settlement and agreement to corporate governance reforms illustrate the potential for legal consequences and negative publicity that can result from increased public scrutiny on improper collection and management of information. Since 2002, over 30 states have enacted data breach notification laws that require companies to notify customers when there has been a breach whereby personal information is acquired by someone without proper authorizations. These notifications can trigger high profile public awareness of security breaches. Additionally, the Federal Trade Commission has brought over a dozen cases challenging faulty data-security practices by companies that handle sensitive consumer information. In many of these cases, the legal and publicity risks could have been avoided or minimized had unnecessary information not been collected, maintained or retained at all.

Corporate policies, of course, should be followed into practice. An unrealistic policy that is not followed is not necessarily helpful, and potentially even harmful, by arguably creating an unrealistic standard of care. You should communicate document retention policies through training and direct delegation of compliance responsibilities, and should attempt to ensure that they are applied with consistency. Consider enforcing, auditing or otherwise monitoring compliance with document retention policies. Plan to be realistic and vigilant regarding maintenance of unnecessary documents, information and electronic information systems and revisit these policies and practices on a regular basis.

As part of any document retention policy, you will likely appoint a "records retention officer" or equivalent who will work with people from multiple departments, such as Legal, Information Technology and Human Resources. Formalizing these relationships into a standing "document management team" will help the company respond to electronic discovery obligations in a way that minimizes disruption and expense.

Effective management of the categories and locations of electronic documents creates easier management of the cost associated with the process of obtaining and reviewing any of the information in the litigation context. With a handle on what you have, you will also be well-positioned to address and respond to the following likely questions once litigation ensues:

• Did you take prompt and adequate steps to "preserve" electronic documents from routine document retention and destruction practices upon knowledge that litigation might be likely?

• Did you comply with your own policies and procedures for storing, retaining and destroying documents?

• Once litigation was filed, did you sufficiently disclose the categories and locations of your electronically stored information to other parties?

• Which electronic documents (e.g., backups, deleted documents, documents on legacy systems) are "reasonably accessible"?

• What "form" should be used to produce the electronic documents?

• Is your production of electronically stored information complete?

Should litigation or an investigation arise, a company will have to respond quickly to the often burdensome and complex demands, including: (i) preservation of documents via an appropriate "litigation hold" process; (ii) responding to electronic discovery obligations, including providing a "records management" witness. A document management team can facilitate these obligations, which are discussed in more detail below.

While parties are already required to preserve documents once litigation or an investigation is reasonably anticipated, the new Rules provide additional incentives. For example, before discovery even begins, the parties are now required under Rule 26(f) to confer on issues relating to preserving discoverable information. Additionally, the new "safe harbor" under Rule 37 to avoid sanctions applies only to information lost from "routine, good faith operation"; the commentary to the new Rules suggests that this good faith operation "may involve" a party’s intervention in the routine operation of an information system "if that information is subject to a preservation obligation." Companies should therefore consider steps to be prepared and able to modify some of their document retention practices via a "litigation hold" process on short notice if needed.

The new Rules may require companies to collect (and, if necessary and reasonably accessible, restore) and then review and produce to the other side, the electronically stored information that will be the focus of discovery. Even before discovery begins, Rule 26(a)(1)(B) now requires automatic disclosure of a description by category and location of electronically stored information that each party may use to support its claims or defenses. Opposing counsel will use this information as a "road map" to plan discovery of a company’s electronic information systems.

In order to best manage the scope of the "road map" to be offered and keep electronic discovery obligations generally cost-effective, the company will need to brief litigation counsel quickly on its electronic information systems, potentially including emails, instant messages, network data, non-networked computers, laptops, PDAs, voicemails and other places that information is stored. Companies will also need to have a good understanding of the scope, extent and accessibility of the backups of their electronic information. In many cases, companies have been asked already to produce a witness to testify as to practices and procedures before, and in response to, litigation. Companies can respond to such demands in a cost-effective manner if their response to litigation is well-planned.

Many companies will confront litigation at some point, often without warning. In view of the potentially catastrophic consequences of improper handling of electronic documents, you should ensure that proper steps are taken, such as those outlined above, to minimize the disruptions and costs of litigation. If you would like additional information about the issues addressed in this client alert, please contact:
Deborah S. Birnbach, Anthony M. Feeherry, David J. Goldstone, Forrest A. Hainline, III, Ira J. Levy, Mark S. Raffman, Brenda R. Sharton,

Laura M. Stock and Anastasia M. Fernands contributed to the preparation of this alert.

Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.

This article, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP or its attorneys. © 2007 Goodwin Procter LLP. All rights reserved.