Controlling the Rising Costs of Electronic Discovery in the U.S.

June 3, 2008

Speakers
Edward Flanders, Partner, Pillsbury Winthrop Shaw Pittman LLP
Jeffrey J. Joyce, Vice President, Kroll Ontrack Consulting
Wayne C. Matus, Partner, Pillsbury Winthrop Shaw Pittman LLP

Moderator
Fusae Nara, Partner, Pillsbury Winthrop Shaw Pittman LLP

A distinguished panel of litigation specialists shared their expertise on dealing with the costs of electronic discovery, including the challenges of e-discovery for companies operating in a multinational and multilingual context.

"E-discovery has become a headache for a lot of us involved in the legal field. And it really doesn't matter if it's litigation or a government investigation or a commercial transaction, you've got to deal with the electronic evidence," said moderator Fusae Nara, a partner at law firm Pillsbury Winthrop Shaw Pittman.

The first thing to note is that electronically stored information is discoverable, meaning subject to compulsory disclosure, in the U.S., said panelist Edward Flanders, also a partner at Pillsbury. ESI "is a very, very broad term and can be very intrusive insofar as the type of data that individuals store that may be relevant to litigation." Failure to comply with e-discovery obligations can lead to sanctions and even the loss of the lawsuit. E-discovery "is quite expensive now, but it's going to get much, much more expensive as we continue to use more and more, and store more and more electronically stored information as opposed to keeping information in paper documents."

Under U.S. law, the duty to preserve information "actually is triggered when you should reasonably anticipate that litigation is likely or that a government investigation is likely," Mr. Flanders said. Thus this duty can come into play well before one files a litigation or is sued. Moreover, it's not merely deliberate actions that can violate discovery obligations: "It may be pursuant to some policy where e-mails are deleted if they are sitting in your inbox for more than 90 days, or they are contained on backup tapes that are routinely circulated" for re-use.

It's not expensive to preserve electronic data, he added; what's expensive is reviewing and analyzing the vast amounts of data that companies retain.

Ms. Nara asked, "I think a lot of people from the corporations want to know when am I really supposed to do this. It's easy when you are hit by a complaint out of nowhere, but if some dispute is brewing, especially in a patent case, you get the warning letter or whatever, when do you really start having a duty to preserve?"

"There is no bright-line test, unfortunately," replied Mr. Flanders. "It's really a judgment call."

Generally, he said, "a court looking back will look at what was reasonable under the circumstances and won't hold the company liable if to an objective person it didn't look like litigation was likely to ensue in the future."

Wayne Matus, another Pillsbury partner, suggested an alternative formulation. "Whenever you're going to start to try and assert the attorney-client privilege for communications, you've reasonably anticipated litigation," he said. "The moment that lawyers in the legal department start being involved, the moment that you think that you're having private communications, if you want to have a privilege to those communications, then you also have to start preserving your documents."

"For big companies, they have hundreds of possible disputes arise every day with suppliers and vendors and employees, and you do need to balance it, because if you viewed every time somebody raised their hand and said 'hey I've got a problem with you' as a duty to preserve, you would have to shut down your operations," agreed Jeff Joyce of Kroll Ontrack Consulting.

Mr. Matus added, "Most of the federal judges that we talk to, if you were to talk to them as well, would say I just want to know that you were reasonable. If you, in a large organization, set up rules and you follow them consistently and they are logical, you are going to be okay. It's when you don't think these things through, it's when you don't pay attention to the issues that we're raising, that you get yourself in trouble."

ESI subject to the duty to preserve includes a very wide range of types of data, from e-mails, instant messages and word-processing documents--drafts as well as final documents--to information stored on cellphones, PDAs such as BlackBerrys, iPods (which, as flash memory devices, are not just for music), USB memory sticks, DVDs and CDs, and voicemail systems, the panel members explained. ESI can also include information that's not user-generated: accounting system data, shipping data, manufacturing data. "If you've got an employment class action, you're dealing with time cards and HR systems," information that's rarely if ever stored in paper form, said Mr. Joyce. Indeed on a worldwide basis, only 8 percent of information is put on paper or in other forms; 92 percent is in electronic form.

And if the information is under the company's control, Mr. Flanders said, it will be the company's burden to preserve it even if it's in the possession of a subsidiary or a vendor, for example if the company outsources its IT function.

When the duty to preserve is triggered, Mr. Flanders emphasized, it's very important to put out a litigation hold, which is an instruction to employees not to delete potentially relevant ESI. This includes suspending routine operations that might result in the loss of potentially relevant ESI. Thus "if the company's policy is to overwrite backup tapes every two weeks," company officials must "make sure that there is a process in place that those backup tapes will be identified and then taken out of the circulation and stored so that they are not overwritten."

"Some of you at least have probably sent a few e-mails that you hope don't show up in the front page of The New York Times," Mr. Joyce remarked, underscoring the importance of ESI in litigation. "I know I have. For some of the folks here that you are going to see, they weren't so lucky. These e-mails did come out in the paper and in the press and led to some criminal prosecutions."

Thus after an investigation had been launched, Frank Quattrone wrote a memo to his staff reading "we strongly suggest that before you leave for the holidays, you should catch up on file cleaning." An accountant at American Home Products, commenting on the fen-phen litigation, sent an impolitic message to his CEO: "Do I have to look forward to spending my waning years writing checks to fat people worried about a silly lung problem?" And Bill Gates e-mailed the Microsoft Business Development team to say, "It seems clear to me that it will be very hard to increase browser market share on the merits of [Internet Explorer 4] alone. It will be more important to leverage the [Operating System] asset to make people use [Internet Explorer] instead of Navigator," Netscape's competing browser.

"Obviously the regulators get a hold of something like this and it gives them some pretty powerful evidence of what the company's motivations were," Mr. Joyce commented. "Every lawsuit you have, whether it's an employment discrimination case or a commercial case, you find some really good gems in the e-mail and it's the evidence that we all use in our cases now. So, you've got to go find it."

To illustrate the severity of sanctions for noncompliance, Mr. Flanders told of an employment litigation against an internationally recognized securities firm that resulted in a $29 million jury verdict against the firm, including $19 million in punitive damages. An employee of the firm had deleted e-mails after the duty to preserve was triggered, and the company hadn't preserved the backup tapes. The judge instructed the jury that it could infer that any deleted e-mails would have been helpful to the plaintiff in proving the plaintiff's claims. "It's impossible to know how much of [the verdict] resulted from this adverse inference," Mr. Flanders said, but "that is a really devastating type of sanction and really probably is why the plaintiff prevailed in that case."

Ms. Nara commented: "In hindsight, looking at these cases, you sort of have this 'duh' reaction. But when in the middle of the discovery, how much are you supposed to do," including how far back to preserve data and which departments to include in the litigation hold, "is very difficult to determine."

"You are always graded with 20/20 hindsight, which is the biggest problem," Mr. Joyce said. "And the decisions you make today might not get evaluated for 18 or 24 months or longer," by which time the people who made the decisions may no longer be with the company.

"One of the biggest things you can do is if you have your procedures and processes in place and you are ready for e-discovery issues, documenting the decisions that are made and the steps that you take as you go through the e-discovery phase of the litigation and having that record available to explain to the judge," he said.

"Unless you are a very unusual person, you don't remember what you ate for dinner last Tuesday night, let alone the steps that you took three months earlier on a particular day when you were presented with a certain set of facts," Mr. Matus agreed.

A member of the audience asked, "How does one go about defining the scope of what to preserve on a case-by-case basis? Is it company wide? Is it to a division? Is it to a particular area?"

"It's not as difficult as you think, but it's unique to each case," Mr. Matus replied.

In an employment discrimination case, he said, talking with the plaintiff or the plaintiff's lawyer will provide a sense of who's being complained about. "You need to take discovery of your own client," including the individual's manager, coworkers, and the HR and IT departments. It's not warranted to send a blast e-mail to 5,000 or 150,000 people saying we've been sued or we may be sued, so preserve everything; "but if you want to be narrow and specific, then you are going to have to do reasonable steps to determine what's reasonable. And then you need to talk to the people whose documents are being held to make sure that you have cast a wide enough net."

Another audience member commented, "it seems to be reasonable to expect a company to store e-mails, but I don't think it's very reasonable to expect people to store IM messages. Instant messaging is supposed to be perishable."

Mr. Matus said that he'd agree, but only in the case where IM is installed ad hoc by an individual and isn't part of the corporate culture or strategy. "If the company is installing IM systems and it's using it for regular communications between its people, then it should do this. And I might add, the SEC takes my view."

"You don't want to handle a crisis situation or an immediate situation without being ready for it," Mr. Matus cautioned. Companies need to map out their IT systems and know where their data is located, and prepare forms and notices in advance, before litigation starts and before the duty to preserve is triggered.

Mr. Joyce told of interviewing a client's IT staff and "asking them whether they stored IMs in the ordinary course of business and he said yes, we do. And I said then you probably need to tell your lawyers. And he said we tell them we don't store instant messages, because we don't want to have to deal with it. Whether they were right or wrong, draw your own conclusions, but the point there is you've got to get into the IT area before litigation starts and figure out what they are doing and what they are keeping." There might or might not have been a good reason for this company to keep these IMs, "but it's a decision that needs to be made in broad daylight, not in the bowels of the IT department in the middle of the night."

Surveys indicate that litigation accounts for 60 percent of the typical general counsel's budget, of which 60 percent is discovery, and 60 percent of discovery is e-discovery, Mr. Matus said. At 20 percent of expenditures, e-discovery thus "is, frankly speaking, the single area where a general counsel has the greatest opportunity to save money."

Mr. Matus described a patent case he's currently handling that involves a large financial institution. Kroll identified over 340 people at the client who might have relevant information, interviewed about 250 of these, and preserved information on roughly 325 people, some of whom have left the company. The process involved saving data on local hard drives, on servers for Lotus Notes and Microsoft Office and Outlook, and investigating what other forms of communications were used.

The decision has been made to seek court approval to produce information for about 85 individuals. The next step will be to collect and process documents from these 85 people, eliminate duplicates and system files, and then filter the documents using keywords.

About 2.5 terabytes of electronic information have been collected to this point; Mr. Matus said he expects that number to more than double.

To give an idea of the volume of data, a single backup tape can store 200 gigabytes of compressed data, or a fifth of a terabyte, the equivalent of 17.5 million printed pages, Mr. Joyce observed.

The first thing to do to save money, and "the way to save the most money, is to have an effective policy that takes into account the regulatory obligations. It takes into account what it is that you strategically need to have for your business but gets rid of everything else," said Mr. Matus. "There are a lot of times when people use language that is unfortunate," that is a joke and not meant seriously, "and you just don't want to have that see the light of day. So, you need to have a policy and you need to enforce it."

This isn't a matter of one-size-fits-all, the panelists emphasized. Multinationals must comply with the laws of many countries; companies have different regulatory and financial reporting requirements. The policy has to be practical and fit the company's business needs and its culture.

In developing a policy, Mr. Joyce said, "make sure you involve the IT folks early, because it's easy for the lawyers to sit in their offices and draft a policy that the IT folks cannot comply with because of storage issues, architectural issues, and the like."

Kroll and other vendors have electronic tools, Mr. Matus noted, "that can take hundreds of thousands or millions of documents and organize them in a way that enables lawyers inside the company and outside the company" to review the situation and provide a prompt assessment of the risks and exposures to a company faced with, for example, a Justice Department subpoena claiming possible antitrust violations. "You save an incredible amount of money, that's number one; but number two, you are actually ready to answer the regulator in a reasonable period of time rather than taking an embarrassing position" that can't be backed up later on.

Computer applications like Kroll's First View can make use of a relatively small amount of e-mail to analyze the volume of communications among various people and display the results graphically, so that in a theft of trade secrets case, for example, "you see pretty quickly that the vice president is communicating with a certain number of people, but then all of a sudden you have folks outside of the company" with whom the executive is also exchanging messages, Mr. Matus said. "I've used this in federal court in front of a judge early in a case to get an order on getting communications and bank accounts frozen from an adversary by showing the communications, who was at the center of what I alleged to be a conspiracy. It was extremely powerful and influential on a federal judge. We never could have sifted through the data in time to have gotten a meaningful order out of the federal court without this."

American courts are seeking information that's located not just here, but in Japan and in Europe, which complicates matters further, Mr. Matus noted. Japanese laws allow production of documents that would otherwise be shielded by privacy laws if the documents are demanded in a lawsuit, but currently the law is interpreted to refer to lawsuits in Japan only and not to U.S. litigation. The EU has a similar law that's interpreted more broadly in most EU countries, but narrowly in France.

Furthermore, he said, in both France and Japan a party that seeks to take private data out of the country must use a vendor that's qualified under the laws of France or Japan as the case may be. Processing and filtering Japanese and other Asian-language data is a complex process because there are hundreds more character sets than there are in English, and there are only a few vendors that have the capability to do this.

Automated tools can quickly winnow out documents that are manifestly not relevant because they are system files, for example, or were created before or after the time period in question, or don't contain relevant keywords, Mr. Matus said.

When it comes to the actual legal review of massive quantities of data, computerized tools are also starting to play an important role, he continued.

It might seem that a team of lawyers would do a better job of judging relevance than a computer program, and indeed there are vendors who use lawyers in countries like the Philippines and India, along with quality assurance and sampling techniques, to provide "pretty good accuracy" and considerable cost savings. A recent study by the eDiscovery Institute demonstrated, however, that machines may well be more accurate than humans even in the legal-review phase. Indeed, Mr. Matus said, "we actually stink, I put it provocatively, in terms of looking at relevant information."

The eDiscovery Institute research involved 10,000 documents produced in response to a Justice Department antitrust inquiry on the Verizon-MCI merger. During the actual case, Verizon spent $13.5 million on processing and legal review of 1.4 terabytes of data. Keywords and electronic filtering weren't used, and only 7.2 percent of roughly 1.9 million documents were found to be relevant.

In the study, the Institute had two senior associates at a well-respected New York law firm independently examine the 10,000 documents. The associates' up-or-down judgments on relevance were compared with a "gold standard" established by Verizon's assistant general counsel. The correlations between the associates' judgments and the AGC's results were only 72 percent and 77 percent--meaning that by this standard, about one in four documents were mismarked.

Flipping a coin would yield a 50 percent correlation, Mr. Matus pointed out. "So, how good is the legal review? Twenty-two percent above flipping a coin? Is this really worth the $13.5 million you spent?"

The Institute also had the documents reviewed using two different automated systems. The machines' results matched the AGC's judgments 84 percent and 88 percent of the time--significantly better than the results of the two human testers, and cheaper and faster to boot.

There are some situations where outsourcing to offshore vendors isn't appropriate, Mr. Flanders cautioned. "It's not as easy as simply identifying a company in the Philippines or India and saying this is great, I'm going to save lots of money, I'm going to send the hard drives to them and they will review it and send it back to me."

When legal review is delegated to such a vendor, the company's lawyers have an ethical obligation to provide proper supervision. They must make sure that the offshore lawyers have been properly trained.

Moreover, Mr. Matus added, "there are some cases involving trade secrets or certain sensitive information where you're just not going to want that information to leave U.S. shores. Or if it's in Japan, you don't want it to go out of Japan."

Summing up, Mr. Flanders listed a number of essential questions that companies need to consider:

1.    Do you have a document retention policy that deals with ESI?
2.    Do your employees comply with such policy?
3.    Do you know where potentially relevant ESI is stored in the event you are subject to U.S. discovery?
4.    Do you have a process in place to enable you to respond to subpoenas or other demands for ESI (e.g., issue and enforce a “litigation hold”)?
5.    Are you able to effectively and efficiently process, review and produce relevant ESI upon demand?

"I've had clients who have had hundreds of backup tapes that were 10 years old in some room somewhere, and those could potentially have to be restored and reviewed," he said by way of illustration. "When I asked the company why do you have these backup tapes, they said just in case we might need them some day.

"Well, there would have been nothing wrong with disposing of them, as long as there wasn't a duty to preserve triggered at that time, and they weren't subject to discovery--just to get rid of them, pursuant to a document retention policy. But by keeping them for no good reason, it potentially could expose your company to hundreds of thousands of dollars in cost to have to restore those tapes and have lawyers review them and produce information from them."

***

Is there a standard time period in the U.S. for preserving business records, five years or seven years or 10 years?

It depends on statutes of limitations and specific requirements on preservation, Mr. Matus responded. Six or seven years is typical for federal and state banking and securities regulations, though some are 10 years. If the company has a 99-year lease on a piece of real estate, or patent rights that will last for 20 years, it's going to be kept much longer. "There are all sorts of considerations. In some large companies that I have worked with, we have had 300 categories. In other companies we have had as few as 10 [categories] where we have been able to rationalize the business process and reduce it."

"Those periods of time do vary from as short as no time at all, just get rid of it, to infinity," he said. "You need to think it through. But I would say that a good rule of thumb is that more than half of a corporation's materials need to be kept six or seven years, and most companies try to keep them around for a couple of years more than that."

When you turn over the documents that you have found to be relevant, what form do they have to be in? Do you have to print out the e-mails if the other side asks for them on paper?

"There are a lot of different ways to do it," including a load-file format, "which is a dataset that can be loaded into any number of litigation support tools," Mr. Joyce answered. "Usually it involves a dialogue between the two sides, because as a practical matter the party producing the information doesn't want to produce it in a form that the other side can't use it in."

If one side asks for paper but the paper would be two truckloads' worth, that's not going to be practical for either side. Thus, "I would suggest that you work on that before you make your production so you don't have a surprise and have to go do it again."

"The 30-second answer for the lawyers in this room who are working in companies and want to know it is, number one, under the federal rules, the party that requests has the opportunity... to state the form that they want," added Mr. Matus. "The responding party can either agree or say no and produce it in the form that they want. As long as the production done is in at least the same level of searchability as it is within the corporation's own original files, you can produce in the form that you choose if you are the producing party."

"You can't dumb down the data so that the other side has a more difficult time of looking at it or reviewing it," Mr. Matus said. "And everything that I just told you is what the federal rules say, but there are individual judges who have their own rules and don't follow the federal rules and will have you come into the courtroom and tell you how you are going to do it in their cases."

--Katherine Hyde