19 Dec E-discovery case law trends beginning to emerge
Madison, Wis. – Erik Phelps doesn’t particularly like being the bearer of bad news, but as a business attorney for Michael Best & Friedrich, he often sounds like the old commercial slogan: “You can pay me now or pay me later.”
And with the number of e-discovery cases picking up dramatically – a recent monthly Lexis Nexis report included nearly 25 e-discovery cases – the longer you wait to craft sound policies and processes, and effectively communicate them, the more you will eventually pay.
Several major companies already have e-discovered this the hard way. Medtronics, having already invested millions just to retrieve and review documents, including vast amounts stored on backup tape, was stunned by a jury verdict of $570 million and learned a hard lesson about retaining too much electronic information. Morgan Stanley was ordered to pay $604 million in damages to an investor after it failed to produce e-mails in a fraud case, and Phillip Morris was ordered to pay court-imposed sanctions of $2.9 million for failing to comply with its own document retention policy.
“The sanctions that are coming down are very, very real,” Phelps noted.
Unfortunately, about two thirds of U.S. businesses are still unprepared to meet e-discovery requirements that were instituted under revised Federal Rules of Civil Procedure on Dec. 1, 2006, data storage researcher Michael Osterman said in the Dec. 17 edition of eWeek.
Hold that document
Even for complacent companies, Phelps said e-discovery case law is providing more answers in three specific areas: litigation holds, obligations to preserve data, and the determination of what information is reasonably accessible.
In terms of litigation holds, which refer to the records relevant to a claim or lawsuit, Phelps offered practical lessons from the case of a professor that sued a college for sexual harassment. First, be prepared for the possibility that the plaintiff’s attorneys will be willing to pay a third party to paw through your computer records. This could be compelled by a court order, even if it includes an employee’s personal information that the company has promised to keep private.
Another point of law that should get a CIO’s attention is the potential for conflicting testimony from multiple IT employees. Envision, he said, raising your right hand and swearing to tell the truth (and nothing but the truth) and answering detailed questions about your IT operations.
Unfortunately for the college in question, that was hardly the case. One IT worker had never heard of his employer’s record-retention policy, another testified that the policy isn’t followed on the computers of former employees, one said she was never asked to do a records search, and a human relations manager said she’d never heard the term “litigation hold,” the need for which arose the minute there was an initial allegation of sexual harassment.
Needless to say, the court was not amused by this haphazard approach to e-discovery – especially the poorly communicated records retention policy. “Can you see where this is leading?” Phelps asked. “The court found that the defendants’ failure to place a litigation hold on those communications was at least negligent, if not reckless.”
The Court also can direct an adverse inference instruction to the jury, or what Phelps calls the “settle quickly sanction.” The judge, while instructing the jury after all evidence is heard, will say that because the defendants failed to produce documents, the jurors are obligated to assume that it was done on purpose. In other cases, a Court might render a default judgment, which means the case won’t even go to the jury.
For a small community college (or a small business) with an equally small IT staff, a severe financial judgment can be devastating.
So far, there is some guidance on a company’s obligation regarding backup tapes. In a heavily litigated reinsurance dispute involving National Union Fire Insurance, the plaintiff wanted more than 100 backup tapes that would have to be restored at cost to the defendant. In this case, the company was not ordered to restore the tapes at its expense, but Phelps believes the reason the court didn’t order it was that the tapes did not pertain to the relevant time period at issue in the case.
In a recent case in Wisconsin’s Western District Court, a discrimination claim was filed against Lincoln County by an employee. Attorneys wanted to search through four terabytes of data to uncover any evidence of employment discrimination, and it would have cost $27,000 to analyze it. The Court ordered that some of the requested data be produced, instructed the county to focus on certain search terms, and ruled that the parties split the cost.
This particular court’s reputation for having a “rocket docket” would place additional pressure on CIOs to comply. The Western District of Wisconsin has one of the fastest times to trial in the U.S. federal court system, around 12 months, and that’s not as much time as it sounds. A defendant may have to produce tens to hundreds of gigabytes of documents, e-mails, and spreadsheets for a single case, and the vast majority will be required within three months – on top of everything else a CIO is expected to do.
“The trend is clear – defendants are being directed to produce electronic documents when the plaintiffs request it,” Phelps said, “and bad behavior will lead to bad results.”
Bad will and credibility problems also lead to bad results. Morgan Stanley was punished because it assured the Court that it has produced all relevant e-mail, only to produce additional and more damaging documents later on. The company was being sued by an investor that claimed Morgan Stanley defrauded him by making misstatements related to the 1998 sales of his controlling stake in Coleman Co. to Sunbeam. For failing to produce relevant e-mails, the Judge instructed the jury to assume that Morgan Stanley helped Sunbeam inflate its earnings.
Regarding the tardy e-mails, Phelps remarked, “Talk about a conversation with a CEO or a board that you don’t want to have happen.”
Most sanctions depend on the volume of documents and the value of the claims. An organization involved in a $1 billion claim that does not produce enough documents, then dumps them on the eve of a trial, is going to get more than a slap on the wrist. Judges are trying to be fair, Phelps said, but if you game the process with egregious discovery behavior, sanctions are likely to follow.
A CIO who is on top of things will have frequent meetings with staff attorneys, review e-discovery processes, and map out what the organization’s infrastructure looks like – essentially knowing where data “lives” so the organization can react to litigation. The number of hours spent on e-discovery is growing, but the time investment depends largely on a company’s litigation profile.
Fortunately, Phelps sees e-mail search tools improving, companies becoming more conscientious about transforming record-retention policies, and courts are starting to limit the scope of issues they deal with.
There still are some mysteries, however. There is not much case law for guidance on the handling unstructured data like images, but with a little due diligence, even a stray file or two should not bring a company to ruin.
“If you sit up on the witness stand and know your policy, and it appears you have been reasonable, the fact that something shows up on someone’s jump drive two months later, that’s probably not a sanctionable event,” Phelps said. “When the HR manager says she doesn’t know what a litigation hold is, that’s a problem.”
The risk of procrastination
The foot-dragging cited by Osterman Research comes as no surprise to attorney Joe Olson of the Milwaukee office of Michael Best and Friedrich. “Most companies are taking a we’re not going to do anything until we have to approach,” he said. “It’s not so much a problem to establish a policy. The hard part is communicating and educating employees, especially in large companies with multiple locations.”
Olson said companies need to comb their own records to determine which records they are legally obligated to keep, which records it would make sense to keep, and which records they can destroy. For example, a contract should be retained for about seven years after it expires because the statute of limitations on legal exposure is six years after expiration.
“Companies have gotten into the bad habit of keeping everything,” Olson said.
While technology managers clearly have a role in compliance, the Courts have made it clear that the buck stops with senior executives and company boards. In several cases, upper management has been “called out” for its failure to ensure compliance, and while Olson isn’t aware of any personal sanctions against executives, he noted, “that doesn’t mean a creative judge can’t try to do it.”
• CIO Leadership Series: WARF’s Patty Prime offers tutorial on e-discovery
• Electronic discovery about more than unplugging the shredders
• John Flanagan: Document retention policy can get your arms around e-discovery
• Juan Ramirez: Finding “Safe Harbor” in a sea of electronic discovery
• Tim Hansen: Quick peeks, Clawback Agreements, and the rules of electronic discovery