E-Discovery — When Information Becomes Evidence
Do you know where your electronic records are? It’s time you did. A full year has passed since federal courts changed the rules as to what electronic data — including e-mail and instant messages — can be hauled into court. And that’s given lawyers just enough time to sharpen their skills in the legal practice known as e-discovery.
Since recent amendments to the Federal Rules of Civil Procedure took effect in federal courts, state courts have begun looking at how they treat electronic data during the pretrial exchange of information by lawyers, known as discovery. Nine states recently approved e-discovery provisions, and another 13 states are considering them. The trend could negatively impact unprepared small and midsize businesses. That’s because most of them have become quite adept at storing data — but not at retrieving it.
“We store e-mail on individual backup tapes. If I had to physically hunt down an e-mail on one of those tapes, it’d be a real pain,” says Mark Hargrove, CIO and chief operating officer of Fresh Produce Sportswear in Denver. The clothing maker employs more than 200 workers, including 120 in remote offices who use e-mail heavily. “It would take several days to find a specific message.”
Hargrove understands this better than anyone. He was director of information systems at Silicon Graphics in 1996, when William Lerach targeted the company in a class-action lawsuit for allegedly defrauding shareholders. Lerach, a partner in the law firm of Milberg, Weiss, Bershad, Hynes & Lerach, filed more than 600 class-action suits in the 1990s, many requiring considerable amounts of
e-discovery. Silicon Graphics “spent weeks looking for electronic files,” says Hargrove. The suit was dismissed in May 1996 in U.S. District Court.
With the Silicon Graphics case in mind — and Congress’ passage of the Private Securities Litigation Reform Act of 1995 to reduce frivolous class-action lawsuits — the federal rules governing electronic data were approved by the U.S. Supreme Court and took effect Dec. 1, 2006.
So, which businesses need to be aware of e-discovery? Everyone with a computer, because most documents today begin their life in an electronic form. Although it’s a bigger concern for large companies, e-discovery applies to small businesses as well. The rules are intentionally imprecise, leaving room for the state courts to interpret them. Consider these tips to ensure that your company is protected.
ONE: Create a clear and consistent retention policy.
All businesses need to create and follow strict records-management policies, says Diane Barry, senior managing consultant in the e-discovery practice group of LECG, an expert-services firm in Emeryville, Calif.
The policies need to explain what kinds of records are kept (financial records, e-mail, IMs and blogs); how they will be kept (for example, whether copies of all files are automatically archived); in what format (such as tape backup or paper); when and if they are to be destroyed; and who destroys them.
Businesses also need to decide how long they will keep IT records — for example, logs noting who is accessing which servers.
TWO: Purge files consistent with your set policy.
What records do you need to keep? “There’s no law that says you simply have to keep everything,” says Barry. “There are two reasons to keep files: if you have a business need for it, or if you have a legal need for it,” she says (for example, financial records for tax purposes, or compliance records for regulated industries). Everything else should get tossed during routine purges of electronic files, she says.
“We only keep tapes going back 90 days,” says Fresh Produce’s Hargrove, which is at least a “50 percent conscious decision” because of cost and potential legal vulnerability
Hoarding too many files, whether electronic or paper, carries financial and legal risks. Additionally, data storage per se is inexpensive. But sifting through electronic data is not. That’s one reason legal experts keep as little as possible. But, if litigation should ensue, you’re obligated to halt the destruction of files (see “The Lowdown” column).
THREE: Ensure that archived records are searchable.
The problem is, retaining records for an appropriate amount of time is just one aspect of the challenge. The other — and trickier — part involves searching those records to find the smoking-gun e-mail that could prove or disprove a case.
“Many companies have well-managed systems for business continuity,” explains Jim Barrick, CEO of Control Discovery, a San Francisco firm that specializes in e-discovery services. “Unfortunately, that train comes off the track when they have to retrieve that information. While the task is storage, the goal is retrieval.”
FOUR: Build a topographical map of your electronically stored information.
Before businesses know what to throw out, they need to know what they have. Most don’t. E-discovery case law is filled with examples of companies, large and small, who sabotaged their own defense by not knowing where their data was. Indeed, 30 percent of small companies surveyed by law firm Fulbright & Jaworski in 2007 said so-called “pre-production” efforts accounted for a fifth or more of overall litigation costs.
Civil Procedure E-Discovery ‘Cliff Notes’
Although the Federal Rules of Civil Procedure spans 160 pages, the most crucial changes relative to e-discovery involve four areas:
- The definition of “discoverable” material: The amendments introduce the phrase “electronically stored information” to Rules 26(a)(1), 33 and 34 to acknowledge that information — in any form — is discoverable.
- How quickly data must be made available: The amendments to Rules 16 and 26 essentially say that lawyers must decide quickly — within 99 days of a lawsuit being filed — what electronic data can be examined for evidence and how the files will be examined. They used to have nine months. Given such a short window, the amendments note that IT and legal departments must work together. Amended Rule 26(b)(2) makes a distinction between data that is and is not reasonably accessible. Under the new rule, a responding party need not produce electronically stored information from sources that it identifies as not reasonably accessible because of undue burden or cost.
- What format electronic data takes: Rule 34(b) addresses the format in which the files will be reproduced for use by lawyers and the court.
- What happens when electronic files are lost: This can happen, for example, through automated purging of e-mail after 90 days. The safe-harbor provision, Rule 37(f), provides that, absent exceptional circumstances, a court may not impose sanctions on a party for failing to provide information lost as a result of the routine, good-faith operation of an information system
Important Ruling: Phoenix Four Inc. v. Strategic Resources Corp.
The U.S. District Court in New York ruled in 2006 that the defendant, investment adviser Strategic Resources of New York, had overlooked the equivalent of 2,500 boxes of documents during the e-discovery portion of its trial with investment firm Phoenix Four of the Bahamas. The reason: The IT staff never spotted a partitioned hard-drive section containing data. The judge found that the “duty in such cases is not to retrieve information from a difficult-to-access source, such as the server here, but rather to ascertain whether any information is stored there.”
Do the Right Thing … and Prove It
Being right isn’t enough. Sometimes, you need to prove it. And that’s why electronic documents are increasingly subpoenaed in civil cases. “In civil court, you only have to be 51 percent right,” says Trent Livingston, a principal in the e-discovery practice group of expert services firm LECG of Emeryville, Calif. “Even then, small and medium businesses are often unable to prove that they did the right thing.”
But it’s not because of a lack of documentation; most businesses have too much. It’s because they’ve captured the wrong data or simply can’t find the right data. That’s why, Livingston and other legal experts agree, businesses need to consider e-discovery before they deploy any electronic data archiving and management system.
Quantum Marine Engineering of Florida uses an archiving system by GFI MailArchiver to archive all its Exchange communications, including attachments.
The Fort Lauderdale, Fla., maker of yacht hydraulic systems and stabilizers manufactures specialized equipment to keep these large luxury boats stable when the ocean swells. Development of new products takes several months and a great deal of specific, largely electronic communication between the engineers and builders, says Michael Bartlett, IT director for the 50-employee company.
“Most of the drawings and design files go back and forth between the engineers via e-mail,” he says. The company used to allow unrestricted e-mail stores, with some mailboxes surpassing 2 gigabytes. Today, their total e-mail store is growing by about 4GB per month. The IT team needed to control Exchange growth, yet preserve important documents and be able to find them quickly when requested.
“People are so used to having everything in their mailbox. First, people think, ‘Why are you being so mean?’ But we let them know that everything exists on the server. Once they see we have an archive backing them up, it’s much easier for them to accept,” he explains.
Quantum Marine Engineering archives its electronic communications for two years and limits employees to 250 megabytes per mailbox. Bartlett will conduct the first archive purge this spring. Although Bartlett’s company hasn’t faced any e-discovery requests, his policy mirrors those suggested by legal experts: setting electronic-communication retention limits, documenting a company-wide archiving policy and storing these documents in a searchable, centrally stored system. The legal considerations “were not a first driver, but that’s a benefit,” he says.
“A classic moment came when an engineer was on the road and needed to determine what size part had been communicated to the shipyard. There was a major panic on,” Bartlett recalls. After getting a few details about the content of the e-mail, Bartlett found the conflict-ending communication in a few minutes. “People are terrified when a key document is lost, so it’s a great day for an IT guy when you can solve that problem.”