November 2008 “

November 2008
HOW TO EFFECTIVELY MANAGE THE US LITIGATION RISKS
INVOLVING DISCOVERY OF ELECTRONIC “DOCUMENTS “
By generating, transmitting and storing enormous amounts of electronic information, companies
expose themselves to significant risks and costs in the important discovery phase of US litigation.
Unlike courts in civil law systems, US courts require that parties (and sometimes even non-parties)
search for and provide to a requesting party broad categories of materials that may be “relevant” (a
term that is very broadly defined in US rules) to the issues in litigation. This discovery obligation
applies to material in electronic form – including but not limited to emails – as well as to hard copies
of documents, photographs, sound and video recordings and other types of material within the
possession, custody or control of a party (or a non-party receiving a subpoena).
Failing to properly produce electronic information in a US lawsuit can cause companies, including
non-US companies, to suffer serious financial and reputational consequences. In theory, the
December 2006 revisions to the Federal Rules of Civil Procedure (the “Rules”), specifically
addressing e-discovery for the first time, granted companies some relief from these risks and costs.
In order to benefit from the Rules, however, companies must establish and implement a proactive
document management policy (“DMP”). This note will explain business risks of e-discovery in US
litigation, outline how a company can best minimize those risks through a DMP, and offer some
practical guidance on implementing an effective DMP.
E-discovery in the US Presents Serious Risk
In recent years, several high-profile US court rulings have illustrated how grave the consequences of
e-discovery failure can be. Particularly instructive is Coleman v. Morgan Stanley.1 Coleman brought
claims against Morgan Stanley for hundreds of millions of dollars in alleged damages arising out of a
corporate acquisition. During the discovery phase of the lawsuit, Morgan Stanley failed to timely
identify and produce a number of back up tapes containing company e-mails. Confronted with this
and other e-discovery failures, the Court ordered the jury to assume certain facts against Morgan
Stanley and invited the jury to consider Morgan Stanley’s actions in discovery when assessing
whether to award punitive damages. The jury rendered a verdict of $1.45 billion against Morgan
Stanley.2
In another case, UBS Warburg was required to pay a reported $29 million to former employee Laura
Zubulake in a wrongful termination case after some of its employees deleted relevant e-mails that
1
Coleman (Parent) Holdings, Inc. v. Morgan Stanley & Co., Inc., No. CA 03-5045 AI, 2005 WL 674885
(Fla. Cir. Ct. Mar. 23, 2005).
2
Clare v. Coleman (Parent) Holdings, Inc. et al., No. 4D05-1575, at 3 (Fla. Cir. Ct. May 24, 2006). The
judgment in that case was later reversed on other grounds. Morgan Stanley Co. Inc. v. Coleman (Parent)
Holdings, Inc., 955 So.2d 1124, 1126 (Fla. Dist. Ct. App. 2007).
-2UBS was unable to recover.3 The court found that UBS Warburg’s failure to create and maintain a
DMP and to communicate that policy to its employees led to the employees’ willful deletion of emails. The judge then allowed the jury to presume the lost information was relevant and would have
been helpful to Zubulake, making it far easier for her to win a favorable jury verdict.4
The risks and costs facing companies, however, are not limited to large jury verdicts and the
resulting publicity nightmares. The discovery process itself, even if handled with utmost care, can
become unreasonably burdensome and expensive. A company’s ability to meaningfully defend itself
in a massive lawsuit may be directly related to its capabilities to locate and produce electronic
information. For instance, in a recent securities class action lawsuit against Boeing,5 plaintiffs’
lawyers discovered that Boeing stored 14,000 tapes in a warehouse and demanded certain
documents from those tapes.6 Boeing had not catalogued the tapes and apparently could not figure
out which e-mails were on which tapes without restoring all of them. Boeing had to spend significant
sums restoring tapes that it probably had no need to preserve in the first place. In the end, Boeing
decided to settle the lawsuit for $92.5 million.
Having An E-Document Management Policy Is Essential
A proactive approach is required. Companies that merely react to the requirements of e-discovery in
a particular case are vulnerable; if a company’s management of data in electronic form has not been
sufficiently well organized, it will often be too late to deal with the problems once litigation has been
commenced. There are good business reasons to adopt and implement a DMP; the risk of being
drawn into US litigation makes it particularly important to do so.
The Rules reflect a balanced approach. They require the parties and their lawyers to consider and
discuss at an early stage in any US federal court action the procedures for disclosing electronically
stored information. The Rules also attempt to deal with one of the criticisms of e-discovery: that
some courts have inappropriately required corporate litigants to unnecessarily engage in a costly
program of reviewing data from backup tapes. The Rules presume that a party ordinarily should not
be required to produce electronically stored information that is not “reasonably accessible”, out of
concern about the burden and cost.7 The authors of the Rules gave as a specific example data
contained on server back up tapes.8 Despite this presumption, US courts can still order that
inaccessible electronic data be produced in an appropriate case. If pressed on a motion to compel,
the party objecting to producing the inaccessible electronic information will have to show that the
information is indeed too burdensome and expensive to produce. The court still may order
production of the information, if the party seeking the information shows good cause to obtain it.
Whether there is good cause to produce inaccessible electronic information is subject to the Court’s
balancing of several relevant factors. In particular, however, it will be difficult for a party seeking
inaccessible electronic information to demonstrate “good cause” if the information sought is
obtainable from another source.9
3
Geoffrey A. Vance & Courtney Ingraffia Barton, Drowning in Zubulake: The Rules, Pitfalls, and Benefits
of Electronic Discovery, Nat'l Legal Center for the Public Interest, Vol. 10, No. 4, at 14 (Apr. 2006).
4
5
Zubulake v. UBS Warburg LLC, 229 F.R.D. 422, 437 (S.D.N.Y. 2004).
In Re Boeing Sec. Litig., No. C97-1715Z (W.D. Wash. 1997).
6
Comments to the Advisory Committee on Civil Rules on the Pending Proposals to Amend Rules
26(b)(2) and 37(f) of the Federal Rules of Civil Procedure Relating to Electronic Discovery, Trial Lawyers
For Public Justice and the TLPJ Foundation, at 9 (Feb. 15, 2005).
7
Fed. R. Civ. P. 26(b)(2)(B).
8
Introductory Comments to Revised Rule 26(b)(2).
9
See Fed. R. Civ. P. 26(b)(2)(C).
-3An effective DMP enables a company to make a better informed decision about what information it
may easily access. A company with an effective DMP will be able to explain to the Court why certain
information is stored in a particular way and what material is reasonably accessible. The company
will be more likely to have critical documents at its fingertips, which will make an opponent’s requests
for inaccessible data seem unreasonable. A court will be more likely to deny the opposing party’s
request to embark upon fishing expeditions into data that is difficult to access.
The new Rules create a “safe harbor” from judicially-ordered sanctions for the loss of material that
was deleted as part of a “routine, good-faith operation of an electronic information system before the
company had reason to implement a “litigation hold”10. The touchstones are routine and good faith.
A company cannot avoid e-discovery problems by indiscriminately deleting electronic documents; in
addition to satisfying the commercial needs of the business, companies are required by various laws
to keep certain categories of records. A proper DMP, however, will allow unnecessary information to
be eliminated. This, in turn, will help legitimately control the sheer volume of information that
otherwise would have to be reviewed for production in litigation. When a company routinely deletes
electronic information it is legally permitted to destroy, based on a sound, business-driven DMP, it
increases its chances of avoiding sanctions in subsequent litigation. If, by contrast, a company
haphazardly deletes certain materials but not others, it runs a greater risk of being sanctioned; a
court is more likely to draw the inference that particular documents were deleted with a view to a
future litigation posture rather than because of business reasons, such as saving electronic storage
space. If the company chooses neither to implement a DMP nor to delete electronic information, it
could still be sanctioned if it fails to find and identify relevant information in its vast stores of
electronic data.
How to Implement an Effective E-Document Management Policy
Once a company decides to create a DMP, it must ensure that the policy preserves information that
is important to its business operations as well as that required to be preserved by law. The task of
understanding and sorting through the many types of documents and information companies
generate takes time and patience, and requires a dedicated team effort including contributions by
senior management, in-house counsel, outside counsel, in-house IT personnel, department heads,
and often outside IT consultants.
While the actual components of good DMPs vary widely depending on factors such as business
sector, company size, industry standards, and the laws of the various jurisdictions in which the
company operates, there are a few fundamental steps to establishing a good DMP. Most important
is having a business-driven, neutral and consistent plan. Courts easily spot DMPs that, in design or
implementation, try to skew results so that companies will gain a future litigation advantage. This
could result in serious court-imposed sanctions. The overall test should be common sense and
reasonableness. If the company can articulate sound business logic for its DMP, chances are
greater that a court will later find the company has acted in good faith.
The company also needs to determine the priority of having a DMP and budget accordingly. In
addition, companies need to assess their current systems and information structure. This involves
learning what types of information are produced, received, stored, and destroyed – and where,
when, and how. In-house IT personnel, department heads, and records custodians are essential in
this phase of the process. Particularly important to learning about the company’s documents is
assessing legacy data and what can and should be done with that information.
10
“Litigation holds” are discussed at pp. 4-5, below.
-4In addition to these fundamental starting points, effective DMPs have in common a number of key
features, including:
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Compliance with applicable laws;
Specific tailoring to a company’s culture so that employees readily accept and adhere to it;
Automated features that help retain and destroy electronic documents11;
Reliable training for all employees so that they understand the importance of the DMP and
do not try to circumvent it;
Consistent enforcement and consequences for employees who deliberately violate the DMP;
A design that management has carefully thought through and documented;
A designated legal dispute response team and an explanation of “holds” placed on the
destruction of documents when there is a lawsuit or regulatory investigation;
Regular enforcement and compliance updates to high level management;
Routine audits to ensure the plan is being followed;
Oversight by employees with authority to modify the DMP as necessary, in case an
unforeseen problem arises and immediate protective action is necessary; and
A presentation suitable to be discovered in future disputes.
The Importance of “Litigation Holds”
Application of “litigation holds” is critical. US law imposes a duty to preserve material relevant to a
litigation or even a potential litigation; the duty arises “when a party reasonably should know that the
evidence may be relevant to anticipated litigation.”12 A “litigation hold” must be implemented in order
for a company to live up to this obligation. The consequences of failing to preserve relevant
information once the duty to preserve attaches can be severe, including: the entry of default
judgment against the violator; adverse evidentiary inferences against the violator; and monetary
sanctions and fines, including attorneys’ fees and connection for damages caused to the adversary.
Before any company begins destroying information under an established DMP, it therefore must
assess whether regulatory action or a lawsuit has been commenced against it or whether it has
reason to know such legal activity is impending. If it is a party to an existing or anticipated legal
action in US, the company should promptly seek legal advice as to which documents may be
destroyed and which should be preserved. The company should also ensure that all employees
know when not to destroy or delete documents and what documents (including data in electronic
form) not to destroy or delete. The “litigation hold,” to the extent it is applicable, will override normal
document retention/destruction schedules pursuant to a DMP.
The duty to implement an effective “litigation hold” is not satisfied by a general, one-time
memorandum or email to staff. Specific guidance must be provided as to what material is to be
retained, and the “litigation hold” should be “periodically re-issued so that new employees are aware
of it, and so that it is fresh in the minds of all employees.”13 US courts expect in-house and outside
counsel to take an active role in implementing the “litigation hold” by overseeing and monitoring
employees’ efforts to retain and produce the relevant information.
This includes direct
communication with the employees most likely to have relevant information. Counsel should also
11
One study in the US found that 34 percent of employees do not know the difference between e-mail
that must be saved and e-mail that can be purged. Am. Management Ass'n, 2006 Workplace E-Mail,
Instant Messaging & Blog Survey: Bosses Battle Risk by Firing E-Mail, IM & Blog Violators (visited Oct.
15, 2008) <http://www.amanet.org/press/amanews/2006/blogs_2006.htm>.
12
Silverstri v. General Motors Corp., 271 F.3d 583, 591 (4th Cir. 2001).
13
Zubulake, 229 F.R.D. at 433.
-5keep a detailed record of the company’s efforts to preserve and produce relevant material, as
challenges to the implementation of “litigation holds” can be expected in any ensuing litigation.
Failing to appreciate the importance of effective “litigation holds” can undermine a DMP’s primary
purpose of putting the company on sound footing in legal disputes.
Conclusion
Developing and implementing an effective DMP is important for any company that might face
litigation in the US. Having an effective DMP will not only improve day to day business efficiency,
but also may save millions of dollars in future legal disputes.
Marc Gottridge
Lisa Fried
Lovells LLP
590 Madison Avenue
New York, New York 10022
USA
+1 212 909 0600
[email protected]
This note is written as a general guide only. It should not be relied upon as a substitute for legal
advice.