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How the New Electronic Discovery Rules Affect Your Business

November 28, 2006

Recognizing the increasing use of electronic communications and the central role they play in lawsuits, the Judicial Conference’s Advisory Committee for the Federal Rules of Civil Procedure has issued new discovery rules that will take effect on December 1, 2006. These new rules clarify a process that has become increasingly murky, contentious, and fraught with peril for parties failing to comply with electronic discovery requests. Businesses need to be aware of these rules and should develop plans for managing electronic data before a lawsuit is even filed.

What is “Discovery” and Why is It Important?
Discovery refers to the process by which a party to a lawsuit exchanges information with the other side through document requests, interrogatories, requests to admit, and depositions. In most civil cases, information obtained from the other side is vital to proving the claim or defense of a party. Accordingly, the scope of discovery in civil cases is extremely broad. Although there is no doubt that e-mails, spreadsheets and word processing files are discoverable, gaps in the rules create uncertainty about the appropriate scope of electronic discovery. Among the most problematic issues under the current rules is a party’s duty to preserve electronic data that may be deleted or overwritten by the routine operation of a computer or network. Many businesses have been sanctioned by courts for such electronic discovery blunders. For example, a jury returned with a $1.5 billion judgment against Morgan Stanley presumptively due to sanctions issued by the court for failing to identify and produce a portion of its back-up tapes, e-mail attachments, and Lotus Notes e-mail. Phillip Morris was ordered to pay $2.75 million in sanctions for e-discovery violations after electronic information on computers of 11 key employees was overwritten and the employees had failed to comply with the “print and retain” e-mail retention policy. Equally problematic is the inability of requesting parties to obtain discovery of electronic documents vital to establishing a claim or defense. The amended rules attempt to address these problems.

Electronic Discovery Must Be Addressed Early
The Federal Rules of Civil Procedure (FRCP) provide for mandatory disclosure of key documents. Amended Rule 26(a) commands litigants to provide “a copy of, or a description by category and location, of all...electronically stored information” in the party’s possession that the disclosing party may use to support its claims or defenses. Rule 26 also requires the parties to confer early in the litigation to craft a discovery plan and to discuss the preservation of discoverable information as well as the format(s) in which the documents shall be produced. Amendments to Rule 34—which governs the production of documents—permit a requesting party to specify the form or forms in which it wants electronically stored information produced. If the requesting party fails to specify a data format, however, the producing party may produce the information in a form in which it is ordinarily maintained or in “a form or forms that are reasonably usable.” The purpose is to avoid discovery disputes that increasingly occur when parties provide data in overly complex or incomplete formats. Amendments to Rule 33(d) provide that an answer to an interrogatory involving review of business records should include a search of electronically stored information and permit the responding party to answer by providing access to that information where “the burden of ascertaining or deriving the answer” is substantially the same for either party. Although this may provide time and cost savings to the answering party, the downside is that the requesting party may get direct access to their opponent’s electronic information systems.

Protections for Parties Responding to Electronic Discovery
Under Rule 26(b)(2) a party need not provide electronically stored information in response to a discovery request if the information is “not reasonably accessible because of undue burden or cost.” The rules recognize that there is a two-tier system for storing electronic data. First-tier information is generally accessible on computer hard drives, networks, removable storage devices, etc. Second-tier information may include backup tapes designed for disaster recovery, legacy data from obsolete systems, and deleted matter that resides as fragments on hard drives. A party may avoid the time and expense of recovering information from the second tier by first providing information from more accessible sources. The committee notes to the amended rules warn that “a party that makes information ‘inaccessible’ because it is likely to be discoverable in litigation is subject to sanctions now and would still be subject to sanctions under the proposed rule changes.” Thus, to avoid potential claims of spoliation or malfeasance, it may be necessary to identify sources of information not reasonably accessible due to undue burden or cost.

One of the biggest obstacles in electronic discovery is the expense and delay involved in reviewing documents for privilege prior to production. Rule 26(b)(5)(B) establishes a procedure whereby a party may assert it has inadvertently produced privileged information without intending to waive the privilege. After receiving notification, the receiving party must return, sequester, or destroy the information and may not disclose it to third parties. Of course, this type of “claw-back” provision does not relieve a party of its obligation to review documents for privilege prior to production. Once privileged communications have been seen by opposing counsel, it is impossible to unring the bell.

Under Rule 37(f), absent exceptional circumstances, sanctions cannot be imposed for loss of electronically stored information resulting from the routine, good-faith operation of an electronic information system. The “routine operation” of computer systems may include the alteration and overwriting of information, which often occurs without the operator’s awareness. However, this provision does not relieve a party of its obligation to preserve information by instituting a “litigation hold” as soon as it is made aware of a potential claim. Good faith operation means reasonably modifying or suspending operations that cause the automatic loss of data. Although this rule is referred to as a “safe harbor,” a party cannot use the rule to thwart discovery obligations.

Five Preemptive Strategies for a Cost-Effective Response to Future Litigation
(If you are currently involved in litigation, consult your attorney before beginning any of the following procedures, as destroying data could constitute spoliation of evidence.)

  1. Document your internal and external storage systems. Create a description of your company’s data storage systems and locations of key storage facilities. The document should identify information technology (IT) personnel with knowledge of the systems and facilities. Do not forget to include external means and mechanisms used to store and back up information, such as laptops, company cell phones, personal digital assistants (e.g. BlackBerry® devices), mp3 players, flash drives, or other media storage devices.

  2. Evaluate and potentially revise back-up procedures. Be aware of your company’s back-up procedures, including timing, duration, and the format in which the back-up data is stored. This information will enable counsel to quickly determine which data is accessible and which data should be categorized as inaccessible. Your IT department should have an effective back-up means in place for disaster recovery purposes (but be wary of an unnecessarily expansive procedure). Then, be certain IT personnel are following the procedure. Are there 500 backup tapes laying in a box for no reason? Throw them away. Is an old server from five years ago collecting dust in a closet? Throw it away.

  3. Implement or update document retention policies to include electronically stored information. Every organization should have a global document retention policy that limits how long information is kept and sets forth procedures for uniform and timely destruction of both paper documents and electronic data. This policy may be influenced by certain regulatory or compliance mandates. A document retention policy may be the first item requested by an opposing party—so be sure it accurately articulates your global practice of handling information. Put protocols in place to insure the policy is actively enforced and periodically updated. A policy becomes meaningless if not observed in practice.

  4. Establish a protocol for dealing with electronic discovery. Establish a “litigation hold” procedure to be activated when your company is on notice of pending litigation. When you are notified a lawsuit may be brought (by you or against you), there is an obligation to ensure potentially relevant information is preserved. This obligation includes notifying employees in possession of discoverable information. Work with your IT department to develop an action plan to smoothly (and defensibly) activate an appropriate litigation hold. Designate a point person in the IT department who can assist with issues that may arrive in future litigation. This person should also keep you informed of newly acquired information technology affecting data storage and requiring updating the document retention policy.

  5. Once again, get your IT department involved. All too often, parties make promises or demands without consulting the IT department. Failure to involve your IT professionals may lead to unnecessary cost, delays, or even court-imposed sanctions. Moreover, IT staff can provide critical advice about grounds to object to electronic discovery requests as overbroad or unduly burdensome. Nobody knows better than IT how “inaccessible” a document may actually be.

Electronic data will continue to comprise an increasing share of business records. Establishing policies to manage such data in the event of a lawsuit will save you time, money and headaches down the road.

If you have questions or would like additional information, please contact Mark Schmidt (414-287-9643 or mschmidt@gklaw.com) or another member of the Godfrey & Kahn Litigation Team.


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