e-discovery 2.0

The New Year has now dawned and with it, the certainty that 2012 will bring new developments to the world of eDiscovery.  Last month, we spotlighted some eDiscovery trends for 2012 that we feel certain will occur in the near term.  To understand how these trends will play out, it is instructive to review some of the top eDiscovery cases from 2011.  These decisions provide a roadmap of best practices that the courts promulgated last year.  They also spotlight the expectations that courts will likely have for organizations in 2012 and beyond.

Issuing a Timely and Comprehensive Litigation Hold

Case: E.I. du Pont de Nemours v. Kolon Industries (E.D. Va. July 21, 2011)

Summary: The court issued a stiff rebuke against defendant Kolon Industries for failing to issue a timely and proper litigation hold.  That rebuke came in the form of an instruction to the jury that Kolon executives and employees destroyed key evidence after the company’s preservation duty was triggered.  The jury responded by returning a stunning $919 million verdict for DuPont.

The spoliation at issue occurred when several Kolon executives and employees deleted thousands emails and other records relevant to DuPont’s trade secret claims.  The court laid the blame for this destruction on the company’s attorneys and executives, reasoning they could have prevented the spoliation through an effective litigation hold process.  At issue were three hold notices circulated to the key players and data sources.  The notices were all deficient in some manner.  They were either too limited in their distribution, ineffective since they were prepared in English for Korean-speaking employees, or too late to prevent or otherwise ameliorate the spoliation.

The Lessons for 2012: The DuPont case underscores the importance of issuing a timely and comprehensive litigation hold notice.  As DuPont teaches, organizations should identify what key players and data sources may have relevant information.  A comprehensive notice should then be prepared to communicate the precise hold instructions in an intelligible fashion.  Finally, the hold should be circulated immediately to prevent data loss.

Organizations should also consider deploying the latest technologies to help effectuate this process.  This includes an eDiscovery platform that enables automated legal hold acknowledgements.  Such technology will allow custodians to be promptly and properly apprised of litigation and thereby retain information that might otherwise have been discarded.

Another Must-Read Case: Haraburda v. Arcelor Mittal U.S.A., Inc. (D. Ind. June 28, 2011)

Suspending Document Retention Policies

Case: Viramontes v. U.S. Bancorp (N.D. Ill. Jan. 27, 2011)

Summary: The defendant bank defeated a sanctions motion because it modified aspects of its email retention policy once it was aware litigation was reasonably foreseeable.  The bank implemented a retention policy that kept emails for 90 days, after which the emails were overwritten and destroyed.  The bank also promulgated a course of action whereby the retention policy would be promptly suspended on the occurrence of litigation or other triggering event.  This way, the bank could establish the reasonableness of its policy in litigation.  Because the bank followed that procedure in good faith, it was protected from court sanctions under the Federal Rules of Civil Procedure 37(e) “safe harbor.”

The Lesson for 2012: As Viramontes shows, an organization can be prepared for eDiscovery disputes by timely suspending aspects of its document retention policies.  By modifying retention policies when so required, an organization can develop a defensible retention procedure and be protected from court sanctions under Rule 37(e).

Coupling those procedures with archiving software will only enhance an organization’s eDiscovery preparations.  Effective archiving software will have a litigation hold mechanism, which enables an organization to suspend automated retention rules.  This will better ensure that data subject to a preservation duty is actually retained.

Another Must-Read Case: Micron Technology, Inc. v. Rambus Inc., 645 F.3d 1311 (Fed. Cir. 2011)

Managing the Document Collection Process

Case: Northington v. H & M International (N.D.Ill. Jan. 12, 2011)

Summary: The court issued an adverse inference jury instruction against a company that destroyed relevant emails and other data.  The spoliation occurred in large part because legal and IT were not involved in the collection process.  For example, counsel was not actively engaged in the critical steps of preservation, identification or collection of electronically stored information (ESI).  Nor was IT brought into the picture until 15 months after the preservation duty was triggered. By that time, rank and file employees – some of whom were accused by the plaintiff of harassment – stepped into this vacuum and conducted the collection process without meaningful oversight.  Predictably, key documents were never found and the court had little choice but to promise to inform the jury that the company destroyed evidence.

The Lesson for 2012: An organization does not have to suffer the same fate as the company in the Northington case.  It can take charge of its data during litigation through cooperative governance between legal and IT.  After issuing a timely and effective litigation hold, legal should typically involve IT in the collection process.  Legal should rely on IT to help identify all data sources – servers, systems and custodians – that likely contain relevant information.  IT will also be instrumental in preserving and collecting that data for subsequent review and analysis by legal.  By working together in a top-down fashion, organizations can better ensure that their eDiscovery process is defensible and not fatally flawed.

Another Must-Read Case: Green v. Blitz U.S.A., Inc. (E.D. Tex. Mar. 1, 2011)

Using Proportionality to Dictate the Scope of Permissible Discovery

Case: DCG Systems v. Checkpoint Technologies (N.D. Ca. Nov. 2, 2011)

The court adopted the new Model Order on E-Discovery in Patent Cases recently promulgated by the U.S. Court of Appeals for the Federal Circuit.  The model order incorporates principles of proportionality to reduce the production of email in patent litigation.  In adopting the order, the court explained that email productions should be scaled back since email is infrequently introduced as evidence at trial.  As a result, email production requests will be restricted to five search terms and may only span a defined set of five custodians.  Furthermore, email discovery in DCG Systems will wait until after the parties complete discovery on the “core documentation” concerning the patent, the accused product and prior art.

The Lesson for 2012: Courts seem to be slowly moving toward a system that incorporates proportionality as the touchstone for eDiscovery.  This is occurring beyond the field of patent litigation, as evidenced by other recent cases.  Even the State of Utah has gotten in on the act, revising its version of Rule 26 to require that all discovery meet the standards of proportionality.  While there are undoubtedly deviations from this trend (e.g., Pippins v. KPMG (S.D.N.Y. Oct. 7, 2011)), the clear lesson is that discovery should comply with the cost cutting mandate of Federal Rule 1.

Another Must-Read Case: Omni Laboratories Inc. v. Eden Energy Ltd [2011] EWHC 2169 (TCC) (29 July 2011)

Leveraging eDiscovery Technologies for Search and Review

Case: Oracle America v. Google (N.D. Ca. Oct. 20, 2011)

The court ordered Google to produce an email that it previously withheld on attorney client privilege grounds.  While the email’s focus on business negotiations vitiated Google’s claim of privilege, that claim was also undermined by Google’s production of eight earlier drafts of the email.  The drafts were produced because they did not contain addressees or the heading “attorney client privilege,” which the sender later inserted into the final email draft.  Because those details were absent from the earlier drafts, Google’s “electronic scanning mechanisms did not catch those drafts before production.”

The Lesson for 2012: Organizations need to leverage next generation, robust technology to support the document production process in discovery.  Tools such as email analytical software, which can isolate drafts and offer to remove them from production, are needed to address complex production issues.  Other technological capabilities, such as Near Duplicate Identification, can also help identify draft materials and marry them up with finals that have been marked as privileged.  Last but not least, technology assisted review has the potential of enabling one lawyer to efficiently complete the work that previously took thousands of hours.  Finding the budget and doing the research to obtain the right tools for the enterprise should be a priority for organizations in 2012.

Another Must-Read Case: J-M Manufacturing v. McDermott, Will & Emery (CA Super. Jun. 2, 2011)

Conclusion

There were any number of other significant cases from 2011 that could have made this list.  We invite you to share your favorites in the comments section or contact us directly with your feedback.

For more on the cases discussed above, watch this video:

In the first settlement of its kind, FINRA settled with the SEC on October 27, 2011 due to allegations over a 2008 incident where a regional Kansas City office of FINRA doctored documents.  The alleged doctored documents were from three internal staff meetings, where information was either edited or deleted and then provided to the SEC with the “inaccurate and incomplete” changes. Mary Shapiro, currently the Chairman of the SEC, is in an interesting spot as she was Chief Executive of FINRA at the time of the alleged wrongdoing.  She apparently had no direct involvement with the decision to take action against FINRA.

The motives for doctoring the documents are unclear, and so is whether or not the alterations of the documents led to any material damage other than FINRA’s diminished credibility.  Ironically, the SEC has had its own struggles in recent months with a slew of articles published in various newspapers highlighting their own challenges with document retention and the improper destruction of documents. Both of these scenarios have been called to light by whistleblowers within their respective agencies.

These antics certainly pose the question: Is it a good use of taxpayer money to have regulatory agencies fighting each other over document retention and record keeping practices? The answer is probably no. But the first question begs the second: If they don’t do it, who will?  While information management is not the sexiest part of the SEC and FINRA’s responsibilities, it certainly is an important one and the foundation of their information intelligence.  Without proper document retention and information governance, the probability of connecting the dots to discover insider trading or other malfeasance is low.  Moreover, in order for agencies to retain credibility they need to be able to locate documents with ease and speed and those documents must be truthful and accurate.

Because FINRA is a self-regulatory firm for securities and is overseen by the SEC, it seems appropriate that they investigate matters like the one at hand.  According to the SEC, the 2008 incident is the third instance in the past eight years where an employee of FINRA, or its predecessor, the National Association of Security Dealers, has provided altered or misleading documents to the SEC.  It remains to be seen if this is intentional on the part of FINRA to conceal undesirable facts or to promote an item on their agenda, or if in fact they are simply negligent with regard to their record keeping policies.  Either way, it is a problem for the SEC and the government in general as it undermines agency credibility and compromises the ability to intelligently leverage information.   This settlement also does no favors for FINRA at a time when they aim to expand their 4,600 base of supervisory authority to include 10,000 more investment advisory firms.

So, what can be done about this behavior and the risks it poses? Corporations and governments are facing the same issues that information governance poses due to the data explosion and the growing complexity of data sources today.  At a minimum, there needs to be a policy in place that governs how data, regardless of form, is handled and disposed of in the information lifecycle.  It also makes sense to form an audit committee within the government that can inspect and assess the information management practices of each agency, as well as serve as a  third party mediator between agencies when these challenges arise.  This is a good idea for two reasons.  One, agencies can focus on their responsibilities instead of getting sidetracked with issues they are not expert in, like document retention or record management.  Next, this problem has reached a point that it’s necessary to appoint an independent group to audit the government due to the data explosion and pace of technology today.  We have the SEC and FINRA to watch the financial industry and provide us with assurance that business is being conducted in a lawful manner.  We don’t need the SEC or FINRA to take up document retention as another responsibility, as there are other professionals that can do that more effectively and independently.

While expansion of government is not the goal of forming yet another committee, this committee could potentially free up agencies to do more of the work they are charged with.  This would also promote standardization across agencies and regulatory bodies, which would be a giant step in the right direction as data volumes grow.  The actions that resulted in this settlement were remedial in nature.  FINRA took decisive action to air a podcast about document integrity and scheduled an agency-wide town hall meeting addressing the same for all current and new employees.  They also hired an independent outside consultant to provide additional staff training on document retention and integrity.  This will be a continual educational process for the private and public sector, and employee training and auditing the process will be the lynchpins for success.  The element of deflection is also at work here, as the SEC is not a model example of best practices for document retention and the moment.

The SEC is working through allegations of document destruction, FINRA is accused of document doctoring, but all these assertions circle back to the central theme of having a document retention policy and compliance with that policy.  This naturally leads to the need for education and training, and the ultimate auditing of the process for compliance.  In this rare case of watchdog bites watchdog, three points become clear: 1) The SEC has a higher and best use other than policing these issues; 2) information management has reached a point that it requires a separate and independent body to monitor and regulate allegations of misconduct; and 3) sometimes it takes a dog biting a dog to truly illustrate the magnitude of a problem.

A famous quote from intellectual George Santayana provides an appropriate backdrop for organizations to better understand why they should deploy technology to strengthen their litigation response effort.  As Santayana explained in The Life of Reason: Reason in Common Sense, “[t]hose who cannot remember the past are condemned to repeat it.”

The “past” can be a powerful playbook in the game of eDiscovery.  Fortunately for organizations, the lessons of eDiscovery history abound.  Indeed, the decisions that courts issue every day across the United States and in other countries provide substantial guidance on what organizations should and should not do to properly prepare for the discovery phase of litigation.

One of the principal lessons that can be gleaned from American court cases in 2011 is that technology can help organizations address the demands of eDiscovery in litigation.  Technology has assumed such a significant role because it facilitates the oversight process that lawyers must engage in to ensure that pertinent documents are preserved for discovery.  This year alone, the failure to exercise that oversight has in many instances culminated in evidence destruction and sanctions.

That message was emphasized this summer by a Virginia based federal court in a hotly contested trade secret dispute.  In E.I. du Pont de Nemours v. Kolon Industries (E.D. Va. July 21, 2011), the court determined that it would issue an adverse inference jury instruction against defendant Kolon Industries as a sanction for its evidence spoliation.  The spoliation at issue occurred when Kolon deleted emails and other records relevant to DuPont’s trade secret claims.  After being apprised of the lawsuit and then receiving multiple litigation hold notices, several Kolon executives and employees met together and identified emails and other documents that should be deleted.  The ensuing destruction was staggering.  Nearly 18,000 files and emails were deleted.  Furthermore, many of these materials went right to the heart of DuPont’s claim that key aspects of its Kevlar© formula were allegedly misappropriated to improve Kolon’s competing product line.

Surprisingly, however, the court did not finger the Kolon employees as the principal culprits for spoliation.  Instead, the court laid the blame on Kolon’s attorneys and executives, reasoning they could have prevented the destruction of information through better oversight.  The hold process was particularly flawed.  The notices were either too limited in their distribution, ineffective since they were prepared in English for Korean-speaking employees, or too late to prevent or otherwise alleviate the spoliation.  Given the logistical challenges of implementing a hold in this instance, perhaps only the automated functions of technology such as archiving software might have strengthened the oversight process and obviated the spoliation that took place.

The lack of attorney oversight also factored into another pertinent sanctions order this year, this time from a federal court in Chicago.  In Northington v. H & M International (N.D.Ill. Jan. 12, 2011), the court issued an adverse inference jury instruction against a company that destroyed relevant emails and other data.  The spoliation occurred in large part because the company neglected to establish a global litigation response effort.  For example, there was no process for issuing or ensuring compliance with a litigation hold.  Nor was counsel engaged in the critical steps of preservation, identification or collection of electronically stored information (ESI).  Into this vacuum stepped rank and file employees – some of whom were accused by the plaintiff of harassment – who were tasked with identifying and collecting discoverable emails from their workstations.  Predictably, key documents were never found and the court had little choice but to promise to inform the jury that the company destroyed evidence.

The problems associated with the lack of oversight in DuPont and Northington are compelling reasons why organizations should consider using technology tools as part of their overall litigation response strategy.  One of the most helpful tools in this regard is archiving software.  Indeed, having the right archiving solution in place might have preserved the spoliated records in these actions.

For example, archiving software can be programmed to prevent employees from deleting emails and other electronically stored information.  By ingesting data into a central repository and leaving copies of the materials on local computers, employees could have access to their archived records.  They would not, however, be able to delete those documents from the software archive.  In addition, a litigation hold could have been placed on archived data to prevent automated retention rules from overwriting information.  Either of these features might have prevented much of the spoliation – and the resulting sanctions – that occurred in both the DuPont and Northington cases.

The automated functions of archiving technology can benefit a company’s litigation response in other ways.  For example, such a tool may limit the amount of potentially relevant information available for follow-on litigation.  Absent a legal hold, retention rules that are programmed into the software will ensure that ESI is expired once it reaches the end of a designated period.  In DuPont, such a feature could arguably have eliminated entire categories of older documents before a duty to preserve those materials ever ripened.  This facet not only has the potential to reduce legal exposure, but also the attendant costs associated with reviewing those documents in litigation.

DuPont, Northington and other cases from the recent past delineate the steps companies can take to address the challenges of eDiscovery.  Organizations do not have to “repeat” past mistakes that victimized clients and counsel alike.  Instead, they can implement the right technology tools as part of a thoughtful, proactive approach to litigation.  By so doing, organizations will avoid Santayana’s judgment by “remembering” the lessons of eDiscovery history.

Ordering a “company-wide” search is not enough to shield outside counsel and client from a potentially embarrassing electronic discovery sanction allocation hearing in the Southern District of New York.

In In re A & M FLORIDA PROPERTIES II, the parties disputed the terms and obligations relevant to a purchase and sale agreement for property.  The plaintiff claimed the defendant failed to disclose information that would ultimately have the effect of increasing plaintiff’s purchase price. The defendant claimed that the plaintiff was fully informed of the transaction details and requested emails and other documents from plaintiff to prove plaintiff had knowledge of the details. During e-discovery, the plaintiff’s counsel made the following two costly errors that led to a potentially embarrassing sanction show down with his client:

1. Issuing a broad instruction to perform a “company-wide” search without more detailed instructions
2. Failure to communicate with key IT personnel and employees to understand the client’s retention policies and data systems

The plaintiff’s early productions raised red flags for the defendant because they did not include any internal emails or an email that had previously been exchanged between the parties.  In response, the plaintiff’s outside counsel ordered his client to conduct a “company-wide” search to straighten out the email production issues. The plaintiff’s Chief Technology Officer (CTO) was tasked with overseeing the search, but the search was limited to email in the “live” system and did not include employee archives that the CTO knew existed.  The plaintiff’s counsel later admitted that he did not know the difference between archives and live inboxes and the CTO claimed access to the archives would have been provided to the defendant if only she had been asked. Following multiple searches by a forensic examiner and months of delay, over 9,500 additional emails were eventually produced from the archives that were initially overlooked.

Judge Gonzalez refused to order dismissal or an adverse instruction since the evidence was eventually produced and there was no evidence of bad faith.  However, Judge Gonzalez showed little sympathy for counsel’s failure to “understand the technical depths to which electronic discovery can sometimes go” or to “gain a better understanding of GFI’s [defendant’s] computer system” and issued monetary sanctions to cover the cost of defendant’s attorney fees and forensic examiner.  To make matters worse, the judge also ordered a future hearing to determine how to allocate the cost of sanction between the plaintiff and their lawyers.

Can You Say Embarrassing?

This type of hearing tends to uncomfortably pit client and counsel against each other in a game of he said, she said.  This isn’t Qualcomm revisited where sanctions were in the millions and attorneys from top law firms were scrapping to keep their licenses to practice law.  Nonetheless, the stakes are always high when you’re dealing with sanctions.  I can hear the arguments now:

Outside Counsel:  “When I said ‘company-wide’ search I meant a ‘company-wide’ search!”

Client:  “Well, if you would have been more specific, I would have known to search the archives.  You’re the lawyer after all.  Haven’t you done this before?”

Only a few know the details of what actually transpired and getting into the blame game with your client is something most attorneys want to avoid.

Lessons Learned

The lessons learned in this case are many, but here are a few key points to consider for both law firms and the clients they represent:

• Counsel and corporate IT must over-communicate: at the onset of litigation lawyers and IT should caucus to discuss critical e-discovery items and communicate with each other throughout the entire e-discovery process to ensure risk items related to technology (or anything else) are identified and minimized.
• Senior corporate executives need to take e-discovery seriously: the risk of poorly executed e-discovery isn’t just an issue for the GC. These issues can expose other senior executives (the CTO in this case) to embarrassment and their companies to monetary sanctions.
• The duty to preserve ESI is broad and organizations should utilize the right technology solutions to minimize the risk of error: searching email servers and ignoring other sources where relevant files may exist can harm the business as well as the personal reputations.  Companies should leverage technology solutions that allow for automated and repeatable data collections from multiple data sources like servers and laptops/desktops simultaneously to reduce the risk of human error and sanctions.

Conclusion

In Re Florida A&M Properties II serves as yet another reminder that the bench in the Southern District of New York has little tolerance when practitioners fail to understand the intersection between law and technology.  Since other jurisdictions often look to decisions from the Southern District of New York as persuasive authority, lawyers in other jurisdictions should take note.

It’s not just in New Jersey that corruption is in the news. It feels like everywhere you go, the authorities are investigating white collar crime and thus have an increasing need for electronic discovery technology.

Earlier this month, as those of you who follow my Twitter feed will know, I was visiting customers and partners in Germany. In virtually every meeting, data privacy and corruption investigations were top of mind, and with good reason. Following the Siemens case last year, German investigators have become much more active and it was easy for my hosts to list example after example of recent cases. There was the Deutsche Bahn case of management spying on its own employees, in violation of German privacy laws; the Deutsche Bank case of management spying on its own board; and, the Deutsche Telecom case of management phone tapping employees to find leaks. There were stories of price collusion among cable car companies in the Alps, and corruption investigations into the activities of German companies in Eastern Europe.

A similar focus on anti-corruption exists closer to home. I have written before about the increase in FCPA investigations and that’s been reflected in recent headlines. As the Wall Street Journal reports, Sun and Shell have recently come under the microscope, according to their public filings. And Frederic Bourke, a founder of the accessories firm Dooney & Bourke, was recently found guilty of conspiracy to violate the Foreign Corrupt Practices Act, which may result in jail time.

All indications are that the U.S. Department of Justice and its counterparts overseas are just warming up. It’s not a good time for white collar crime, wherever you are in the world.