E-Discovery: The Basics

Transcription

1 E-Discovery: The Basics Christopher H. Mills 430 Mountain Avenue Murray Hill, New Jersey Rhonda Wilcox 1500 Resurgens Plaza 945 East Paces Ferry Road Atlanta, Georgia Attorneys fears about what their clients might contain are often matched only by their hopes about the treasures that might be found in the produced by their adversaries. Todd Pettys, Associate Professor, University of Iowa College of Law 1 More money is probably spent litigating electronic discovery problems than in litigating class actions. This is part of potentially every case in the 21 st Century. Ken Withers, e-discovery expert and attorney at the Federal Judicial Center 2 I. Introduction Although they may not appreciate the extent of the technological revolution wrought by and other electronic forms of communication, most attorneys understand that there has been a revolution. Rare is the individual who does not know how affected litigation involving Bill Gates ( Do we have a clear plan on what we want Apple to do to undermine Sun? ) or Monica Lewinsky ( Nice that the Big Creep didn t even try to call me on V-day. ). A year after the amendments to the Federal Rules of Civil Procedure were implemented, LexisNexis reported that 61 percent of in-house counsel responding to a 2007 survey said they were very or somewhat confident that they were fully prepared to deal with e-discovery. Thirty percent said that they were not very confident and 5 percent not at all confident. In another survey, conducted by e- discovery consultant Lexakos, almost 55 percent of in-house counsel surveyed said their companies needed to spend more time developing discovery and litigation readiness plans. Fifty-two percent agreed they had to improve their litigation hold procedures. NewJersey

2 The new rules, designed to create standards for the preservation and production of electronic documents, went into effect on December 1, The good news is that the new Rules created some standards in what was formerly a patchwork of decisions cobbled together by judges with varying degrees of technological understanding and sophistication. The bad news is that the new Rules put electronic discovery squarely in the forefront of issues to be addressed in civil litigation, while creating little or no guidance for terms such as good faith and reasonable. There is now a plethora of case law interpreting the Rules, but as the vast majority of it has been crafted by district courts, there is little binding authority to guide attorneys and their clients. E-discovery has quickly gone from being an obscure area of inquiry to one in which competence is necessary to meet one s ethical obligations to the client and the court.. As two California attorneys recently observed, Due to the absence of a coherent body of law, courts seem to decide digital discovery disputes based on an amalgamation of their own armchair knowledge of technology and precedent from traditional forms of discovery disputes. 3 That is likely to continue. Attorneys may well find that e-discovery victories will go to the lawyer who can explain his or her case while demonstrating mastery of the technological issues and familiarity with e-discovery case law that will assist in interpreting the new Rules. Already, several attorneys have discovered that failing to ensure preservation of electronic evidence can lead to sanctions, adverse inferences, and bad publicity. II. What s new: The requirement to discuss e-discovery at the start of litigation. Although a few high-profile cases illustrated the potential pitfalls of e-discovery, many lawyers have virtually ignored this aspect of litigation. As recently as five years ago, discovery was often concluded with no substantive discussion of electronic issues. The new Rules, however, were designed to ensure that attorneys discuss electronic discovery issues at their very first meeting. A few highlights of the new Rules: Rule 16 includes electronic discovery among the topics that may be addressed in a pretrial scheduling order. Specifically, the order may include any provisions for the disclosure and discovery of electronically stored information and any agreements the parties have reached to minimize the risk of waiver of privilege. Rule 26(f) states that the parties discovery conference must include discussion of any issues relating to disclosure or discovery of electronically stored information. Rule 26(b)(2) excuses a party from providing discovery of electronically stored information that is not reasonably accessible because of undue burden or cost. The burden is on the producing party to show that there is such an undue burden or cost. Another new subsection of Rule 26 allows a party to claw back privileged or attorney workproduct information that was inadvertently produced during discovery. 4 Pursuant to Rule 26(b)(5)(B), the producing party must notify the recipient of the inadvertently produced material and state the basis for any claim of privilege. The receiving party may then either return or destroy the material, or ask the court to rule on privilege claims while sequestering the documents. Importantly, the new rule provides a procedure for resolution of issues of inadvertent disclosure only. It does not address the substantive issue of waiver or the ethical duty to preserve a client s confidential information. 5

3 Rule 34 specifically mentions electronically stored information as a form of document that may be requested. The default form for producing electronically stored information is that in which it is ordinarily maintained [or] reasonably usable. Rule 37(f) states that absent exceptional circumstances, a court may not impose sanctions under these rules on a party for failing to provide electronically stored information lost as a result of routine, good-faith operation of an electronic information system. However, the Advisory Committee Notes provide that good faith may require that a party intervene to suspend certain features of the routine operation of an information system to prevent loss of information subject to preservation obligations. This is significant for clients with auto-delete or document destruction plans, and attorneys will need to be vigilant in reminding them of their duty to preserve information. The Advisory Committee s Notes emphasize that there is no link between Rule 37 and the new Rule 26: just because a party believes that a source of electronically stored information is not reasonably accessible under Rule 26(b)(2) does not necessarily mean that the party can allow routine deletion of that information without incurring sanctions. Although the new Federal Rules have garnered the most attention in recent months because of these changes, it is important to remember that some courts have their own Local Rules that deal with e- discovery as well. State courts may also have rules dealing with electronic discovery, some of which are more detailed than the Federal Rules. III. What s not new: has always been discoverable. Documents are discoverable if a party can be compelled to produce them during a lawsuit. The focus of most electronic discovery disputes centers not on the discoverability of the information. [I]t is a well-accepted proposition that deleted computer files, whether they be s or otherwise, are discoverable. 6 The 1970 Advisory Committee Notes to Federal Rule of Civil Procedure 34 stated, The inclusive description of documents is revised to accord with changing technology. It makes clear that Rule 34 applies to electronic data compilations from which information can be obtained only with the use of detection devices. (Emphasis added.) Similarly, in the 1993 amendments to Rule 26, the Advisory Committee Notes stated that required disclosures include computerized data and other electronically-recorded information. As one court explained: As used by the advisory committee, computerized data and other electronically-recorded information includes, but is not limited to, voice mail messages and files, back-up voice mail files, messages and files, back-up files, deleted s, data files, program files, backup and archival tapes, temporary files, system history files, web site information stored in textual, graphical or audio format, web site log files, cache files, cookies, and other electronically-recorded information. 7 Since it s black letter law that computerized data is discoverable if relevant, 8 what s the fuss about electronic discovery? As the court observed in The Antioch Co. v. Scrapbook Borders, Inc., a key issue is who should bear the burden of reconstructing lost data. 9 The nature of and other electronic data makes them fundamentally different from the paper documents traditionally sought in discovery. The law had previously developed slowly, with few clear patterns emerging.

4 When e-discovery made news over the past few years, it was usually because a party was being sanctioned for failing to preserve documents that could have been relevant to litigation. In 2004, for example, a federal judge issued sanctions totaling $2.75 million against 11 senior executives of the Phillip Morris Company. 10 The judge noted that at the initial conference in the case, Philip Morris had been directed to preserve all documents and other records containing information which could be potentially relevant to the subject matter of this litigation. Despite this direction, she wrote, Philip Morris continued its policy of deleting all that was 60 days old. The judge, finding it essential that the corporate and legal community understand that such conduct will not be tolerated, sanctioned the 11 executives $250,000 each. IV. Delete doesn t mean delete: Some background on electronic documents The problem with is that there s so much of it. Two unique features of electronic communication contribute to its proliferation. First, is easy; in many ways it has replaced the telephone as the preferred method of quick communication. By most estimates, the average American office worker sends or receives 24 messages a day. 11 Attorney Susan C. Sears has noted, Individuals tend to view as a form of talking to an counterpart, and the potential immediacy of exchange often causes users to communicate more informally and casually. 12 The sheer volume of information, combined with the tendency of workers to be, in Sears words, more candid or careless in subject matter and word choice, quickens the pulse of many a lawyer. The tendency to use so casually may be because of the false notion that it can be deleted. More workers, and certainly more attorneys, are coming to realize that that is not the case. This ties into the second reason electronic discovery requests can produce so much information. As one writer has put it, delete does not mean delete. 13 Michael Marron explains: In reality, the delete function does not immediately make a message irretrievable. Instead, the computer merely marks the message as available to be overwritten by newer information. The length of time that passes before a message is actually deleted from a hard drive depends almost entirely on two factors: the size of the storage space available on the computer (generally the more space available, the longer a message will remain retrievable) and the degree to which new data is inputted (the more new data input, the quicker the message is likely to be overwritten). Thus, if a computer has a large memory capacity and is used infrequently, a deleted may remain available for a significant period of time. 14 The combination of sharing documents, saving previously edited versions, and backing up copies on diskettes, tapes, and optical devices, means that a discovery request that used to uncover a single paper document will now produce many. How many? According to Ken Withers, a research associate with the Federal Judicial Center, a single electronic document will be backed up 12 times if the company (as is common) makes monthly tapes of its computer system. If the document is shared with three internal recipients, all three employees copies are saved on the monthly tapes, bringing the total number of documents to 40. If the document is a work in progress, with five different drafts reviewed by the three recipients, there are 184 copies floating around somewhere. 15 Combine these with the s

5 used to circulate the drafts, and the total number of discoverable items for a single document can top 1,000. If you looked at the screens of these hypothetical three workers, you probably wouldn t see all these items. So where are they? In one of the several kinds of electronic data. 16 A, Active data Active data is readily available and accessible to users. messages, word processing documents, and databases are among the items that workers use daily. Active data also includes copies made by the operating system. Windows, for example, stores temporary files in a Temp directory. Microsoft s Exchange Outlook automatically creates archives of data, including the folders for Calendar, Tasks, Journal, Sent Items and Deleted Items. B. Cloned data Cloned data, sometimes called replicant data, consists of automatically backed-up files that are stored on a computer s hard drive. Word-processing programs commonly save documents on a periodic basis so as to avoid total loss in the event of a system error. This means that a deleted document may still exist in some form on the hard drive. Cloned data is not immediately accessible and can be expensive to retrieve. C. Back-up data Many, if not most, businesses back up the information on their computer systems. Back-up tapes may be made daily, weekly, or monthly, depending on the needs of the company in the event of a system crash. Back-up tapes are not easily searchable; they are merely a snapshot of the way the system looked at a given time. They are not designed or organized as files for later use. The purpose of some back-up tapes is to prevent catastrophic loss of vast quantities of information. That being the case, the tapes are often recycled, or taped over when the information contained on them would not be current enough to restore a compromised system. D. Residual data As noted above, deleted data is not really erased. The space on the computer is simply marked as available and may be overwritten at a later time. Deleted files, also called ghost files, remain available until something else takes their place. If the amount of data that is written over a file is smaller than the original file, a fragment of the old document remains. E. Metadata In addition to these kinds of data, electronic documents contain something called metadata. Metadata has been described as information about information. For an , for instance, metadata tells who the author is, who received the message (including the cc and bcc recipients), the creation date, and information about attachments. Consecutive s between two parties will create a conversation thread that is included in the metadata so that an expert can tell not just when a particular message was sent but also whether it generated a reply and/or prompted a response.

6 For other electronic documents, such as contracts or memos created in a word-processing program, metadata includes the original author, dates of creation and/or modification, and other evidence such as redlined revisions. Some programs store more than 90 different types of metadata. 17 As one writer explains, When a dispute arises over how various recipients changed a document, or what information a witness had at a given time, [metadata] often resolves the issue. 18 In many cases, the parties may agree simply to provide printed copies of s. But for those who doubt the good faith of litigants on the other side, discovery in electronic form may provide proof of fraud or misrepresentation. Meta data is a trove of information about whether an adversary has properly preserved documents in the face of litigation, says attorney Lynn Reilly. If documents are missing, it can reveal when they were deleted. 19 V. Who s paying? Cost-shifting in electronic discovery. Often the focus of discovery is not so much on the substantive information in the data sought as on the cost of retrieving that data. Data retrieval can cost millions. As Ken Withers has pointed out, a company of 100 people, each generating 25 s a day, 250 days a year, will produce 625,000 messages annually. Twelve monthly backups of the company s computer system will then yield 7.5 million s. 20 The cost of discovery will depend largely on where these items are stored and how much expert knowledge is required to retrieve them. Then they must be reviewed for relevance and privilege claims. In Rowe Entertainment, Inc. v. The William Morris Agency, Inc., 21 an oft-cited case, the plaintiffs sought s created by the employees of four corporate defendants. One of the defendants, The William Morris Agency, obtained an estimate from an outside consultant of the cost of complying with the discovery request. William Morris had 56 employees and backed up its electronic files five times a week. It had also changed some of its software, and one of the programs it used was no longer commercially available. The outside expert estimated that cataloguing, restoring and processing all the agency s back-up tapes for two years would cost $9,750, The defendants moved for a protective order relieving them of the obligation of producing the . The court reviewed the case law in this area and observed, One line of argument... holds that the responding party should bear the costs of producing electronic data since if a party chooses an electronic storage method, the necessity for a retrieval program or method is an ordinary and foreseeable risk. 23 The contrary argument is that the requesting party should bear the burden since, when the costs of discovery are internalized, that party can perform a cost-benefit analysis and decide whether the effort is justified. 24 The court rejected the first theory, finding that it is not enough to say that because a party retained electronic information, it should necessarily bear the cost of producing it. 25 But it also rejected the second line of thinking, saying that it flies in the face of the well-established legal principle... that the responding party will pay the expenses of production. 26 Additionally, a rule making the requesting party pay places a price on justice that will not always be acceptable, said the court, since it would result in the abandonment of meritorious claims by litigants too poor to pay for necessary discovery. 27

7 Instead, the Rowe court charted a different course, outlining a balancing approach that would weigh eight factors in determining who pays for electronic discovery. The Rowe court s reasoning has been cited favorably in court decisions and several articles by attorneys and computer experts. 28 The appeal may lie in Rowe s attempt to find a principled method to approach cost-shifting issues. The eight factors outlined in Rowe ultimately led the court to determine that the plaintiffs should pay the costs of obtaining discovery. The considerations the judge weighed included: (1) the specificity of the discovery requests; (2) the likelihood of discovering critical information; (3) the availability of such information from other sources; (4) the purposes for which the responding party maintains the requested data; (5) the relative benefit to the parties of obtaining the information; (6) the total cost associated with production; (7) the relative ability of each party to control costs and its incentive to do so; and (8) the resources available to each party. 29 A. Specificity of the discovery requests The less specific the requesting party s discovery demands, the more appropriate it is to shift the costs of production to that party. 30 Where a party multiplies litigation costs by seeking expansive rather than targeted discovery, that party should bear the expense. 31 The most redeeming aspect of this factor may be that it cuts down on the producing party s attorney expenses. If the discovery request asks for s only for certain individuals, then review of those s (to determine, for instance, relevance and privilege issues) will be significantly reduced and therefore less expensive. However, as demonstrated above, a request to produce s from just one person can be burdensome. The court in McPeek v. Ashcroft put it more colorfully, stating that making the producing party pay for all costs of restoration creates a disincentive for the requesting party to demand anything less than all of the tapes. American lawyers engaged in discovery have never been accused of asking for too little. To the contrary, like the Rolling Stones, they hope that if they ask for what they want, they will get what they need. 32 B. Likelihood of a successful search The Rowe court here incorporated the marginal utility approach espoused by the court in McPeek: The more likely it is that the backup tape contains information that is relevant to a claim or defense, the fairer it is that the [responding party] search at its own expense. The less likely it is, the more unjust it would be to make [that party] search at its own expense. The difference is at the margin. 33 The Rowe court ultimately decided that there was a high enough probability that a broad search of the defendants s will elicit some relevant information that the search should not be precluded altogether. 34 Because there had been no showing that the s are likely to be a gold mine, however, the marginal value of searching the s was modest at best. 35 This militate[d] in favor of imposing the costs of discovery on the plaintiffs. 36

8 C. Availability from other sources The court in Rowe cited Anti-Monopoly, Inc. v. Hasbro, Inc., a case in which the defendant had already produced requested data in hard copy, but the plaintiff wanted the same information in electronic form. While recognizing that prior production in one form does not foreclose the plaintiff s demand, the court held that [if] plaintiff wants the computerized information, it will have to pay defendants reasonable costs of creating computer programs to extract the requested data from defendants computers. 37 The court in Rowe, by contrast, noted that there had been no showing that the defendants s are generally available other than by a search of the defendants hard drives or back-up tapes. The representations that important s were probably printed out are entirely speculative. 38 This consideration favored requiring the defendants to produce the s at their own expense. The court s analysis seems to indicate, however, that a responding party that could establish that it had a policy designed to preserve relevant , and could produce documents pursuant to that policy, might be able to shift the costs of examining other sources of this information to the requesting party. D. Purposes of retention The Rowe court explained, If a party maintains electronic data for the purpose of utilizing it in connection with current activities, it may be expected to respond to discovery requests at its own expense. 39 Conversely, however, a party that happens to retain vestigial data for no current business purposes, but only in case of an emergency or simply because it has neglected to discard it, should not be put to the expense of producing it. 40 Of course, if a party regularly accesses its data for business purposes, it is probably easily searchable and therefore not as burdensome to produce in response to discovery requests. But, [j]ust as a party would not be required to sort through its trash to resurrect discarded paper documents, so it should not be obligated to pay the cost of retrieving deleted s. 41 The Rowe court found no evidence that the defendants in that case accessed either their back-up data or their deleted s in the normal course of business, and this factor tip[ped] in favor of shifting the costs of discovery to the plaintiffs. 42 E. Benefit to the parties Where the responding party itself benefits from the production, there is less rationale for shifting costs to the requesting party. 43 That benefit, the Rowe court said, could come in one of two ways: benefit to the regular activities of the respondent s business, or benefit in litigation from review of its own records. 44 The court found no evidence that cataloguing or searching the deleted data would be of any benefit to the defendants, and so cost-shifting was appropriate. F. Total costs If the total cost of the requested discovery is not substantial, then there is no cause to deviate from the presumption that the responding party will bear the expense. 45 The court found that costs in Rowe were substantial by any definition and counseled in favor of cost-shifting. 46

9 G. Ability to control costs [W]here the discovery process is going to be incremental, it is more efficient to place the burden on the party that will decide how expansive the discovery will be. 47 The plaintiffs in Rowe, the court said, would be able to calibrate their discovery based on information received in the initial searches, and were therefore in the best position to decide whether further searches would be justified. 48 This also militated in favor of cost-shifting. H. The parties resources [T]he ability of each party to bear the costs of discovery may be an appropriate consideration. 49 The Rowe court noted that in some cases, the costs, even if modest in absolute terms, might outstrip the resources of one of the parties, justifying an allocation of those expenses to the other. 50 But in Rowe, the court found that all the parties had sufficient resources to conduct this litigation. 51 The factors set forth in Rowe were subsequently modified in a line of cases decided by United States District Court Judge Shira A. Scheindlin in 2003 and Judge Scheindlin issued five groundbreaking opinions in the case of Zubulake v. UBS Warburg that are cited in almost every serious discussion of electronic discovery. 52 In the first, she modified the Rowe factors, noting that as applied, they undercut the presumption that the responding party pays for production. 53 Judge Scheindlin eliminated the first Rowe factor, the specificity of the request, finding that it was duplicative of the second and that the two should be combined to test the extent to which the request is specifically tailored to discover relevant information. 54 She also eliminated the fourth factor, finding that the purposes for which the responding party maintains the requested data is typically unimportant. Whether the data is kept for a business purpose or for disaster recovery does not affect its accessibility, which is the practical basis for calculating the cost of production. 55 Judge Scheindlin also added some factors to the Rowe test, saying that Rule 26 requires consideration of the amount in controversy and the importance of the issues at stake in the litigation. 56 Discovery is often expensive, she noted, but expense is relative. A response to a discovery request costing $100,000 sounds (and is) costly, but in a case potentially worth millions of dollars, the cost of responding may not be unduly burdensome. 57 The importance of the issues at stake in the litigation would rarely be invoked, she stated, typically arising in toxic tort class actions, social reform litigation, or cases implicating important legal or constitutional questions. If a case had the potential for broad public impact, she wrote, then public policy weighs heavily in favor of permitting extensive discovery. 58 Judge Scheindlin s seven-factor test, then, would involve weighing: 1. The extent to which the request is specifically tailored to discover relevant information; 2. The availability of such information from other sources; 3. The total cost of production, compared to the amount in controversy; 4. The total cost of production, compared to the resources available to each party; 5. The relative ability of each party to control costs and its incentive to do so; 6. The importance of the issues at stake in the litigation; and 7. The relative benefits to the parties of obtaining the information. 59

10 The factors, she wrote, should not be weighted equally. The first two (comprising the "marginal utility test") were the most important, the second three factors were the next most important, and the final two factors would rarely make any difference, but could be very important in the few cases to which they would apply. 60 Zubulake was an employment discrimination case in which the plaintiff sought all s on her former employer s computer system that mentioned her. The company sought to shift the expense of searching its backup tapes to the plaintiff. In Zubulake I, Judge Scheindlin articulated the test above, and also noted that because the cost shifting analysis is so fact-intensive, it is necessary to determine what data may be found on the inaccessible media. Requiring the responding party to restore and produce responsive documents from a small sample of the requested backup tapes is a sensible approach in most cases. 61 She directed UBS to produce all s on its active servers, and to produce, at its expense, responsive s from five backup tapes. It should then prepare an affidavit detailing the results of the search, as well as the time and money spent, so that Judge Scheindlin could conduct the appropriate cost-shifting analysis. 62 Judge Scheindlin reviewed UBS s results in Zubulake III, noting that the cost of restoration and production from the five backup tapes was $19, Based on the cost of the five test tapes, UBS estimated the total cost of producing documents for all of its backup tapes would be $273, $165,954 to restore and search the tapes and $107,694 in attorney and paralegal review costs. 64 After weighing each of the factors, Judge Scheindlin ordered UBS to bear 75 percent of the costs of production, and Zubulake to bear 25 percent. 65 Notably, Judge Scheindlin observed that a court should consider cost-shifting only when electronic data is relatively inaccessible, such as in backup tapes. 66 Her suggestion that litigants perform a sample to determine the likely cost of production mirrors the comments of the Advisory Committee on the amendments to Rule 26(b). The Advisory Committee also articulated a similar list of factors for courts to consider when determining whether a party should be required to produce information that is not readily accessible: 1. the specificity of the discovery request; 2. the quantity of information available from other and more easily accessed sources; 3. the failure to produce relevant information that seems likely to have existed but is no longer available on more easily accessed sources; 4. the likelihood of finding relevant, responsive information that cannot be obtained from other, more easily accessed sources; 5. predictions as to the importance and usefulness of the further information; 6. the importance of the issues at stake in the litigation; and 7. the parties resources. Courts will probably continue to refer to the factors as discussed in Rowe and Zubulake, partly because they help to flesh out the considerations listed in the Advisory Committee Notes. It is important to note, however, that Rowe and Zubulake dealt with cost-shifting. Rule 26(b) is more fundamental, as it weighs whether a party will be required to produce data at all not just who should pay for it.

11 VI. What if we don t have it anymore? Spoliation and preservation issues. In addition to the financial burden of recovering deleted s, a company that does not produce s requested in discovery may be subject to other penalties if the court determines that the company has engaged in spoliation. Spoliation is defined differently by different circuits, but as a general rule, it means the destruction or significant alteration of evidence, or the failure to preserve property for another s use as evidence in pending or reasonably foreseeable litigation. Most courts hold that the duty to preserve evidence arises when one is placed on notice that documents are relevant in either pending or potential litigation. 67 If a corporation knew or should have known that the documents would become material at some point in the future then such documents should have been preserved. 68 Sanctions available under Federal Rule of Civil Procedure 37(b)(2) include dismissal or default judgment if the party destroys evidence in the face of discovery requests or court order to preserve documents. If there is a legitimate reason for routinely destroying documents, courts are probably as likely to recognize that reason in electronic discovery situations as in traditional ones; the new Rules are not an order to retain every piece of electronic information forever. Just as in traditional discovery, however, courts will probably inquire as to the business justification for a document destruction policy. Particularly in light of the new Rules, the question will be when, and why, a business decided to destroy documents. Arthur Andersen s ill-timed directive to employees to comply with its document retention policy, coming on the heels of its notice of an SEC investigation, was deemed an obstruction of justice by the jury that heard the case. 69 The jury believed that the company, having been lax in its document destruction policy for some time, evidenced bad faith when it suddenly decided to shred hundreds of documents while the Enron investigation was pending. 70 The same rationale is likely to apply to electronic evidence. In RKI, Inc. v. Grimes, for example, the court noted that no mechanical or engineering reason required the defendants to defragment a computer four times in ten days. 71 The plaintiff alleged that the defendants had deliberately destroyed evidence that they had misappropriated the plaintiff s trade secrets. The court agreed that defendants spoliation of evidence on their computer supports a negative inference that defendants destroyed evidence of misappropriation. 72 Therefore, the court could find misappropriation even without the direct evidence the plaintiff had supplied. 73 (Emphasis added.) One of the most high-profile cases on this issue to date has been Coleman (Parent) Holdings, Inc. v. Morgan Stanley & Co., Inc. 74 The plaintiff in that case sued Morgan Stanley, alleging that Morgan Stanley conspired with Sunbeam to misrepresent Sunbeam s financial situation when Sunbeam purchased an interest in Coleman in exchange for cash and stock. Sunbeam subsequently filed for bankruptcy, and Coleman filed an action against Morgan Stanley seeking $485 million in damages. Florida Circuit Court Judge Elizabeth T. Maass issued an Order on March 1, 2005 finding that Morgan Stanley had failed to meet its discovery obligations by overwriting s contrary to its legal obligations to maintain them in readily accessible form for two years and with knowledge that legal action was threatened. 75 She directed Morgan Stanley to immediately comply with an Agreed Order issued almost a year earlier, requiring the company to preserve and produce s. She also reversed the burden of proof on the aiding and abetting and conspiracy elements, stating that Morgan Stanley would bear the burden of proving to the jury that it lacked knowledge of the Sunbeam fraud and did not aid and abet or conspire with Sunbeam. 76

12 Coleman, dissatisfied with Morgan Stanley s subsequent discovery responses, filed a Renewed Motion for Entry of Default Judgment. Judge Maass issued another Order on March 23, 2005, detailing a host of discovery failures, including software errors that failed to capture all relevant s, failure to stop recycling backup tapes in violation of a Cease and Desist Order, and untimely production of more than 6,000 backup tapes. 77 She found that Morgan Stanley had deliberately and contumaciously violated numerous discovery orders, and that the prejudice to Coleman from those failings cannot be cured, given the amount of time that would be required to restore the backup tapes and the amount of time left before trial. 78 She granted Coleman s Renewed Motion for Entry of Default Judgment in part, determining that certain facts alleged in the complaint would be deemed established for all purposes in this action. She also wrote that the jury would be instructed that it may consider [facts related to Morgan Stanley s noncompliance with court orders] in determining whether MS & Co. sought to conceal its offensive conduct when determining whether an award of punitive damages is appropriate. 79 The jury awarded Coleman more than $1.4 billion. That amount, plus the scathing tone of Judge Maass s Orders, has drawn the attention of many attorneys and e-discovery experts. The verdict was later thrown out by an appellate court, but the decision still draws regular commentary, because of the extent to which the discovery issues practically overwhelmed the substantive matters in the case. Judge Maass sharply criticized Morgan Stanley for a lack of candor, blaming both company employees and outside counsel for discovery abuses. 80 Some courts have held that a presumption or inference arises only when the spoliation or destruction [of evidence] was intentional, and indicates fraud and a desire to suppress the truth, and it does not arise where the destruction was a matter of routine with no fraudulent intent. 81 Lewy v. Remington Arms Co. is a case dealing with paper records, but several commentators have attempted to apply its reasoning to electronic document policies. Lewy addressed the defendant s record retention policy, which provided for routine destruction of paper documents after a certain period of time. The Eighth Circuit Court of Appeals set forth a three-factor test to determine whether a negative inference instruction should be given to the jury: (1) whether the record retention policy is reasonable considering the facts and circumstances surrounding the relevant documents (the court noted that a three year retention policy may be sufficient for documents such as appointment books or telephone messages, but inadequate for documents such as customer complaints ); (2) whether lawsuits concerning the complaint or related complaints have been filed, the frequency of such complaints, and the magnitude of the complaints ; and (3) whether the document retention policy was instituted in bad faith. The reasoning of the Lewy analysis would seem to transfer fairly readily to cases involving e- mail. On one hand, there are many more and other electronic records than paper documents to preserve. On the other hand, a company would require much less storage space to keep the electronic versions. Significantly, a finding of bad faith is not always necessary to impose sanctions. Sometimes mere negligence is enough to trigger severe consequences for the company that cannot produce relevant electronic discovery. Recently, more and more companies have begun deleting s over a certain age, usually 60 or 90 days. s that no one has taken affirmative measures to save elsewhere are automatically deleted from the system. Businesses should be aware, however, that once a party is on notice of a potential lawsuit, it continues its automatic-delete policy at its peril.

13 In one such case, In re Intel Corp. Microprocessor Antitrust Litigation, 82 Plaintiff AMD sharply criticized Defendant Intel s decision not to suspend its automatic purge of s more than 35 days old. In a filing with the Court, AMD alleged that Intel allowed certain data to be destroyed because it [r]elied exclusively on a move-it-or-lose-it honor system that required individual custodians to correctly identify, segregate and proactively move relevant evidence to media or their local computer before that data was destroyed by a network purge. 83 Intel apparently had acted in good faith, issuing detailed litigation-hold notices to thousands of employees and developing a back-up plan to preserve documents just in case the initial plans didn t work out. When Intel discovered that some documents had not been preserved, it hired outside counsel to interview individual employees about their level of compliance with the litigation hold instructions. Intel s outside counsel determined that the lapses were attributable to human error, and Intel reported the same to AMD. In reaching their conclusions, the outside attorneys prepared hundreds of pages of reports and attorney notes. AMD sought production of those documents, and argued to the court that they should be allowed to test Intel's assertion that the discovery failures were in fact due to human error. The court agreed, and determined that AMD would be allowed to review the otherwiseprivileged materials prepared by Intel s attorneys. 84 In re Intel is significant not only because it highlights the perils of automatic-delete systems and the potential pitfalls of human error. It also shows that when a litigation hold system fails, attorneys cannot simply say oops! and expect their opponents and the court to accept proffered explanations. Human error or negligence can be costly to the client. The CEO of one company was personally fined $10,000 for his company s inadequate document retention policy. In Danis v. USN Communications, Inc., 85 the defendant had been ordered to preserve certain documents pending a lawsuit. The court said it was plain that USN made efforts to preserve documents, and in fact had produced a massive volume of hard copy and electronically stored information. 86 But the court fined the company s CEO $10,000, holding him personally responsible for the failure to implement a proper document retention program. 87 The court found that the inadequacies in the document preservation program at USN created several potential gaps, which resulted in documents being discarded without having been reviewed to determine whether they should have been preserved. 88 It remarked that the obligation to preserve documents that are potentially discoverable materials is an affirmative one that rests squarely on the shoulders of senior corporate officers. 89 USN actually had a policy; it just didn t implement it well. The policy was communicated to staff members at a meeting attended by officers and high-level managers. But the court found: [The CEO] personally took no affirmative steps to ensure that the directive was followed. [He] did not direct that USN implement a written comprehensive document preservation policy, either in general or with specific reference to the lawsuit; he did not instruct that any or other written communication be sent to staff to ensure that they were aware of the lawsuit and the need to preserve documents; and he did not meet with the department heads after this staff meeting to follow up to see what they had done to implement the document preservation directive. 90 The court noted that the CEO delegated the responsibility for document retention to the company s in-house attorney, who had no litigation experience whatsoever and whose approach to the document preservation task reflected his inexperience. 91 The in-house lawyer did nothing to

14 ensure that all USN employees who handled documents that might be discoverable were aware of the lawsuit and the need to preserve documents: he held no meetings with employees below the managerial level, and he did not issue any written communications to anyone on the subject. 92 The court found no evidence of intentional destruction of evidence. But it explained, [W]e also believe that more than good intentions were required; those intentions had to be followed up with concrete actions reasonably calculated to ensure that relevant materials would be preserved. 93 USN s failure to put into place clear procedures and standards concerning document preservation, and its failure to adequately follow through to ensure that those standards were followed, constitutes fault that is, extraordinarily poor judgment or gross negligence. 94 Accordingly, in addition to the fine, USN faced a jury instruction that would make clear to the jury that the responsibility for the absence of those documents rests not with plaintiffs, but with USN. 95 VII. Has the bar been raised for professional competency? If the new Federal Rules have the potential to change the landscape with regard to litigation, how much do lawyers need to know about computers in order to meet their ethical obligation of competent representation? It is difficult to say. Although courts have long observed that an attorney has leeway to choose among various alternative strategies, they have also noted that There is nothing strategic or tactical about ignorance In McNamara v. United States 97, the U.S. District Court for the Eastern District of Virginia found that counsel in a criminal case was ineffective, observing that In the modern environment of law practice, the law changes rapidly and develops in significant ways as a matter of course. One consequence of this modern environment, and of dramatic advancements in technology, is the advent of extensive resources for staying abreast of developments in the law. Numerous... on-line services serve this important purpose. The case was subsequently overruled by the Fourth Circuit Court of Appeals, 98 but the logic of the District Court does seem to be similar to the reasoning of courts that have issued sanctions for e- discovery failures. They seem to assume that a lawyer, having undertaken to represent a client in an e- discovery matter, must understand the technological capabilities of the client in order to adequately perform his or her duties. In the words of the McNamara court, As technology and resources develop, the minimum knowledge and preparation required of lawyers develops as well. 99 VIII. What should we do now? These and other cases highlight the importance of addressing electronic discovery issues early long before a complaint is served. As Judge Scheindlin noted in a law journal article published one year before her seminal Zubulake decisions, [W]ithout a written electronic document retention policy, it may be difficult to explain, let alone justify, the destruction of electronically-stored information sought in the course of discovery. 100 What should attorneys do to prepare for e-discovery? We have drafted a checklist of tips in a second paper distributed in the materials. A few points, are key:

15 1. Develop and/or advise your clients on document retention policies now. Once litigation is commenced, it may be too late to draft such a policy, because the court and opposing counsel will quite reasonably suspect that it was developed to avoid discovery obligations. See Hynix Semiconductor, Inc. v. Rambus, Inc., 2006 U.S. Dist. LEXIS (N.D. Cal. 2006) ( a document retention policy adopted or utilized to justify the destruction of relevant evidence is not a valid document retention policy, and [i]t follows that implementing such a policy in advance of reasonably foreseeable litigation would not be proper and could constitute spoliation ). On the other hand, it is neither necessary nor desirable to keep every or draft document that is created, merely because it is possible to do so. The expense of having counsel sift through lunch invitations, forwarded jokes, and other trivia could be prohibitive, but some judges will have little sympathy. Judge Scheindlin wrote in Zubulake I: A good deal of accessible, easily produced material may be kept for no apparent business purpose. Such evidence is no less discoverable than paper documents that serve no current purpose and exist only because a party failed to discard them. See, e.g., Fidelity Nat. Title Ins. Co. of New York v. Intercounty Nat. Title Ins. Co., 2002 U.S. Dist. LEXIS 11916, No. 00 C 5658, 2002 WL , at *6 (N.D. Ill. July 2, 2002)(requiring production of documents kept for no purpose, maintained chaotically and cluttered in unorganized stacks in an off-site warehouse); Dangler v. New York City Off Track Betting Corp., 2002 U.S. Dist. LEXIS 14938, No. 95 Civ. 8495, 2000 WL , at *1 (S.D.N.Y. Oct. 11, 2000)(requiring production of documents kept disorganized in dozens of boxes ). 217 F.R.D. at Talk with the client s IT personnel and outside vendors about the legal implications of changes to electronic data storage systems. Many of the cases dealing with e-discovery involve litigants whose computer systems were upgraded during the course of discovery. System upgrades cannot be avoided, but they can have a significant impact on e-discovery. A system upgrade should not be undertaken without discussing document preservation issues that may arise down the road. 3. Once litigation is reasonably anticipated, counsel should become very familiar with client electronic data storage systems early in the representation. Attorneys cannot instruct clients on how to preserve information unless they understand how that information is created and stored. Set up a meeting with the person responsible for the client s computer and other electronic data systems, and discuss how those systems work. (Is there a central server? How many employees have Blackberries? Is there an auto-delete program in place? Does the company create backup tapes?) Judge Scheindlin s decisions in Zubulake are worth reading in their entirety, if only to see how specifically she addressed the technical issues involved. 4. Prepare preservation and/or litigation hold letters to both clients and opposing counsel. With the client s assistance, draft a document preservation directive to appropriate company personnel. For companies employing more than a handful of people, this will likely involve input from two persons: one familiar with the client s electronic information systems, and one who has the authority to direct appropriate people to comply with the litigation hold. Once you have developed a document that