Minimizing ediscovery risks. What organizations need to know in today s litigious and digital world.

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1 What organizations need to know in today s litigious and digital world.

2 The main objective for a corporation s law department is to mitigate risk throughout the company, while keeping costs under control. This is why litigation can be so frustrating. It is expensive and the results are unpredictable. In the past decade or so, companies have also found new risks in the litigation process. As technology has changed and more and more documents are created and stored electronically, discovery costs have skyrocketed, while judges have cracked down on litigants that have mismanaged the process. Risks and repercussions In 2006, the US Supreme Court reacted to these changes in technology by approving amendments to the Federal Rules of Civil Procedure. These amendments address how litigants should handle electronic discovery (ediscovery) and electronically stored information (ESI). Many states have similar rules. While it has always been true that electronic documents are subject to the same discovery requirements as paper documents, the 2006 amendments clarify the issue. the best strategy is to put proper resources behind discovery early in order to mitigate these risks. 1 Gibson Dunn Publications, January 15, Coleman (Parent) Holdings, Inc. v. Morgan Stanley & Co., Inc., 2005 WL (Fla. Cir. Ct. Mar. 1, 2005) WL (S.D.N.Y. Jan. 15, 2010) (Amended Order) 2 In addition to the rules, judges have been weighing in on ediscovery more and more frequently. Overall, the number of electronic discovery opinions almost doubled in 2009 from Sanctions were awarded in 70 percent of those cases and in 10 cases, terminating sanctions ended the offending party s participation in the case by default. 1 In some cases, judges and juries have issued staggeringly large monetary sanctions against litigants who have bungled the electronic discovery process. In 2005, a jury found that Morgan Stanley did not conduct adequate electronic discovery because it failed to produce s in a timely fashion. In that case, Coleman v. Morgan Stanley 2, the jury initially granted an eye-popping $800 million in punitive damages to Coleman (the plaintiff). While that award was eventually overturned, the cost, effort and negative publicity involved still made it a very expensive lesson for Morgan Stanley. Companies have sometimes avoided sanctions by claiming ignorance or showing they did not act in bad faith. Today, this is no longer a viable defense. In Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities 3, District Court Judge Shira A. Scheindlin found that the plaintiffs were careless and indifferent about preserving and collecting data, and ignorance is no defense. In the discovery context, the standards have been set by years of judicial decisions analyzing allegations of misconduct and reaching a determination as to what a party must do to meet its obligation to participate meaningfully and fairly in the discovery phase of a judicial proceeding, she wrote in her ruling. A failure to conform to this standard is negligent even if it results from a pure heart and an empty head.

3 Biggest risks occur early While the lawyers jump in as soon as a lawsuit is filed, they don t always intervene in the early stages of ediscovery. A vast majority of lawsuits 80 to 92 percent 4 settle and spending money on discovery early when the case might settle or be withdrawn seems like a waste of resources. However, not all matters that settle do so prior to discovery. In those cases, not acting quickly can cause substantial additional risk. While the details for each discovery project may vary, the basic process does not. The following are the six major steps that take place in most every project 5 : Identification Preservation Collection Processing Review Locating potential sources of ESI and determining its scope, breadth and depth Ensuring that ESI is protected against inappropriate alteration or destruction Gathering ESI for further use in the ediscovery process Reducing the volume of ESI and converting it, if necessary, to forms more suitable for review and analysis Evaluating ESI for relevance and privilege The earliest phases of ediscovery may be the riskiest, but they are also less expensive than the later phases when the data is processed, reviewed and produced to the other side. Production Delivering ESI to others in appropriate forms and using appropriate delivery mechanisms As it turns out, the biggest risks of mishandling or losing data typically occur in the first three phases: Identification, Preservation and Collection. These three phases generally take place inside the corporation before outside counsel is heavily involved. The relative cost of these phases is much lower than the final three, although any spend on those phases might be considered unnecessary if the matter settles early. It is important to keep in mind, however, that it is during these three phases where the most risk of sanctions and adverse inference orders typically occur. For example, in the Morgan Stanley case, Morgan Stanley was cited for not properly preserving evidence; they overwrote potentially relevant s despite obligations under discovery rules and regulations by the US Securities and Exchange Commission to retain those s. In the Pension Committee case, a lawsuit was filed in 2004, but the plaintiffs did not issue written litigation hold notices until 2007 three years too late. In both cases, and in many others, judges and juries found those errors to be inexcusable. These results are common almost all sanctions or adverse inference instructions related to electronic discovery are due to errors in identification, preservation and collection of evidence. As such, the best strategy is to put proper resources behind discovery early in order to mitigate these risks. 4 Glater, Jonathan D., Study Finds Settling Is Better Than Going to Trial, The New York Times, August 7, 2008 at com/2008/08/08/business/08law.html 5 3

4 Benefits of a litigation hold judges and juries now expect that organizations will respond appropriately to the identification, preservation and collection of potentially relevant information. Delay can quickly lead to additional expense or harm to the organization s finances, case and reputation. The problems in Morgan Stanley could have been avoided with proper implementation of a litigation hold. Once a lawsuit is filed or an organization expects that one may be filed, those who may have relevant information must be identified and then asked to submit that data for legal review. The organization must stop its routine data destruction. The simple process of copying an electronic file can alter its metadata, which is data about the data, which can be viewed as spoiling the evidence. ( Spoliation is the legal term.) To ensure that line employees or technical staff properly preserve all potential evidence, legal departments issue what is known as a litigation hold. Issuing a litigation hold seems simple, but it is rife with risk if an unsophisticated approach is taken. The legal team may simply send out an to employees who could have important data, describe the terms of the litigation hold notice and then rely on employees to comprehend what to do and follow through. While this approach is much cheaper and more streamlined than bringing in tools and hiring outside consultants to oversee the process, it is also highly prone to errors and reduces the ability to defend the process in court if necessary. Employees may not understand their obligations to identify, preserve and collect ESI or how to do so. They may inadvertently alter data while trying to save it. They may be too busy to respond appropriately and send everything they can find or nothing at all. A solid litigation hold process includes communication of the hold to all employees who may have related documents ( custodians ) including IT personnel who manage corporate servers; follow-up and monitoring procedures; a system to receive confirmation from custodians that the hold is understood and being followed; continued monitoring to ensure the hold remains in effect and any newly created evidence is being preserved; communication to release the hold and subject the documents to the company s regular records retention procedures upon resolution of the matter. 6 Furthermore, some documents are subject to more than one hold. It is easy to imagine how simply sending out an is not nearly enough if a case ends up being contentious. While spending money as soon as litigation is expected may seem imprudent, the risk mitigation makes it worthwhile. The earliest phases of ediscovery may be the riskiest, but good practices during these phases will save during the later phases when the data is processed, reviewed and produced to the other side. Organizations should be sure to prioritize the earlier phases and not underestimate the risks involved. Early action also reduces costs 6 Gercken, Glenn P., Recommendations for Managing the Litigation Hold Process, e-legaltechnology.org at 4 Effective early planning and action does more than reduce risk. It can also reduce the cost of electronic discovery substantially. Through early case assessments, organizations can determine what information is truly relevant and minimize the amount of unnecessary data they must collect and review. As an example, a litigant in a recent case collected 2,324 gigabytes worth of data, representing approximately 11.6 million documents. Applying an early case

5 assessment process that included analysis, indexing, culling, filtering, de-duplication and keyword filtering, reduced the review set to about 410,000 documents. These processes saved the litigant more than 223,000 billable hours and between $13 and $40 million. 7 An early case assessment can also help an organization take a strategic approach to the lawsuit, offering valuable insights into whether it makes sense to fight the lawsuit or settle as soon as possible. Avoiding a bad outcome is sometimes the biggest cost saver of all. Once a lawsuit is filed, an organization should be ready to act decisively and accept the fact that they must invest time and money in the process. It may be natural to ignore litigation and hope it goes away, but judges and juries now expect that organizations will respond appropriately to the identification, preservation and collection of potentially relevant information. Delay can quickly lead to additional expense or harm to the organization s finances, case and reputation. Organizations should also consider how they might be able to work with their insurance companies to facilitate early action. A policy that specifically states that discovery costs are covered and provides for spending pre-retention can make it much easier to spend early and reduce the risk of sanctions or worse. 7 Assuming review speeds of 50 documents per hour and hourly rates of between $60 and $185 per hour A A (12/10) Zurich 1400 American Lane, Schaumburg, Illinois This is intended as a general description of certain types of insurance and services available to qualified customers. Coverages are underwritten by individual members companies of Zurich in North America, including Zurich American Insurance Company. Certain coverages are not available in all states. Some coverages may be written on a nonadmitted basis through licensed surplus lines brokers. Your policy is the contract that specifically and fully describes your coverage. The description of the policy provisions gives a broad overview of coverages and does not revise or amend the policy Zurich American Insurance Company