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:

William Butterfield is a partner at Hausfeld LLP with over 33 years of experience as a trial attorney and a track record of success.  In addition to serving as a leader in several legal think tanks and teaching law, Mr. Butterfield’s achievements include reaching multiple settlements in the neighborhood of $100 million in complex legal matters.  Last week Mr. Butterfield had the rare opportunity to testify before Congress regarding the Costs and Burdens of eDiscovery in Washington D.C.  The following dialogue captures his experiences and observations testifying before the House Judiciary Committee’s Subcommittee on the Constitution.

Matthew Nelson: What was it like testifying before Congress and why did you feel compelled to testify?

William P. Butterfield: It was my first time testifying before Congress, so I wasn’t sure what to expect.  But it was a positive experience for me, and I’m glad that I was asked to testify.  While there is an organized, and well-financed effort by some in the corporate community to make drastic revisions to the Federal Rules of Civil Procedure, or civil rules, there is also a large segment of the bar (including many attorneys who are thought leaders in this area) who think that the types of “cures” under consideration will do more harm than good.  I think it’s important to give voice to that view, and that is why I testified.

Nelson: What were some of the key points you and other witnesses with different viewpoints made during the hearing?

Butterfield: Rebecca Kourlis, executive director of the Institute for the Advancement of the American Legal System (IAALS), testified that the cost of litigation is in part responsible for fewer trials.  She said that IAALS supports a three-pronged approach to address the problem:  1) More effective judicial case management, 2) Increased cooperation and 3) Rules revisions.  Importantly, Justice Kourlis said that we should defer to the Standing Committee and the Civil Rules Advisory Committee of the Judicial Conference, which is addressing the issues.

William Hubbard, assistant professor of law at the University of Chicago, testified about the costs of preservation and eDiscovery, noting that the costs are relatively modest in most cases.  He testified that most of the high discovery costs are occurring in a very few (5%) cases.

Thomas Hill, associate general counsel at General Electric, testified that the current Federal Rules of Civil Procedure (FRCP) result in American companies waste billions of dollars on unnecessary document preservation and production.  He indicated that part of the problem is that companies must preserve documents before a lawsuit is filed, and often they preserve where no lawsuit is ever filed.  He provided examples of occasions where GE spent more in preservation than the money at stake in the litigation.

My testimony focused on three things:  1) Our legal system depends on discovery and some of the proposals from those seeking drastic rules changes would undermine our goal of searching for the truth in litigation and resolving disputes on the merits; 2) The fear of sanctions that some companies claim are causing them to over-preserve is overblown, given that sanctions are sought in just 1/15th of 1% of federal court cases, and are granted in only about half of those cases; 3) A review of sanctions decisions demonstrates that parties are not getting sanctioned where they acted in good faith.  Rather, they are being sanctioned for egregious conduct.

Nelson: Did you sense a split among party lines or among certain members of Congress or some kind of overwhelming consensus on any issues?

Butterfield: Predictably, there appeared to be some differences between parties, although it is hard to say what reflects the views of Republicans on the committee, because only one of their members participated.  The Democrats expressed two general views:  1) Although eDiscovery presents challenges to litigants, it has been valuable in uncovering critical evidence and is very beneficial to the goals of discovery in general, 2) Congress should not interfere with the Rules Committee, which is carefully studying these issues.  The Republicans, represented by the Subcommittee Chair, Trent Franks, took the position that the current discovery rules do not promote the objectives of Rule 1, which provides that litigation should be just, speedy and inexpensive.  Franks said that the civil rules regarding preservation and spoliation sanctions are too vague, and parties are therefore required to preserve excessive amounts of information.  But despite those differences, I didn’t observe any member calling for congressional intervention at this time.

Nelson: What struck you as interesting or important and what do you expect will be the outcome or next steps for Congress?

Butterfield: What struck me as interesting (and surprising) was that only one member from the majority participated in the hearing.  Nothing during the hearing led me to believe that Congress would interfere with the Rules Committee’s work and process.

For those interested in hearing more, visit the United States Courts website to listen to a full recording of the hearing. To learn more about FRCP developments follow Matt Nelson on Twitter at @InfoGovlawer

Just like Marilyn Monroe stopped traffic in her white dress in The Seven Year Itch, enterprises are being stopped dead in their tracks by the data explosion, lack of information governance policies and overstuffed IT infrastructures.  During the 2004-05 timeframe, a large number of enterprises began migrating to an archive, and this trend has kept steady pace since.  Archiving historically began with email, but has been recently extended to many other forms of information, including social media, unstructured data and cloud content.  This adoption was somewhat related to the historic Zubulake ruling, that required preservation to attach upon “reasonable anticipation of litigation.”  Another significant driver behind the archive need is the ability to comply with a range of statutes and regulations.  The reality is it is difficult to preserve efficiently and defensibly without an archive and other automatic classification technologies.  Some companies still complete the information management and eDiscovery processes manually, but not without peril.

Currently, there is a sudden upsurge in corporations finally starting to shrink the archives that they implemented to manage email, legal preservation requirements and regulatory compliance.  After roughly seven years, over which time there have been many advances in technology, a shift in thinking is taking place with regard to information governance and data retention.  Change has been borne out of necessity, as infrastructures are suffering with the amount of data they are retaining and the pains associated with searching that data.  This shift will enable companies to delete with confidence, clean up their backup tapes, shrink their archives, and manage/expire data on a go-forward basis effectively.  Collectively, this type of good information governance hygiene allows organizations to minimize the litigation risk that’s attendant with bloated information stores.

One reason many archives have become so bloated is because many enterprises purchased archiving software, but did not properly enable expiry procedures according to a  defensible document retention policy.  This resulted in saving everything for the past seven or so years.  Another reason for retaining all data in the archive was because enterprises were afraid to delete anything fearing being accused of spoliation and/or the inability to retrieve data that should have been on legal hold.  These two reasons combined have resulted in companies being forced to address the impact of having to search this massive amount of data in the archive each time a matter arises.  The resulting workflow for data collection is time consuming and expensive, especially for companies that still employ third party vendors for data collection.  For many organizations, the situation has become unsustainable from both a legal and IT perspective.

In recent years, backup has been given less attention as archives have become more common, storage has become more affordable, and most lawyers argue that tapes are “inaccessible” – making restoration less common.  However, there is still an area of concern with regard to over-retention of backup, especially when organizations do not have an archive.  They may be required to produce backup tapes as much of the relevant information to a matter could be contained therein.  This has led to saving large numbers of backup tapes with no real knowledge of what data is on the tapes and no one wanting to be accountable for pulling the trigger on deletion.  When forced to restore backup tapes it can be expensive and an eDiscovery nightmare.

For example, in Moore v. Gilead Sciences (N.D. Ca. Nov. 16, 2011), the plaintiff sought production of “all archived emails” that he sent or received during his five-year tenure with the defendant pharmaceutical company.  The company objected to the request as being unduly burdensome.  The company argued that:

1. The emails were exclusively stored on its disaster recovery backup tapes;
2. It would cost $360,000 to index those tapes, exclusive of processing and review costs;
3. Many of the requested emails would not be retrieved since the company conducted its backups on monthly (not daily) intervals; and
4. Over 25,000 pages of the plaintiff’s emails had already been produced in the litigation.

It is common for the inaccessibility and unduly burdensome arguments to be made with regard to backup tapes to combat indexing and restoration.  However, where a discovery dispute has merit, courts routinely reject projected cost estimates (such as the company’s $360,000 figure) as being unfounded/speculative and order production nevertheless.  [See Pippins v. KPMG and Escamilla v. SMS Holdings Corp.]  Had the judge gone the other way on restoration in Moore, the outcome could have easily been different, expensive and detrimental to the company.

What does this mean for organizations keeping seven years or more of legacy content?  Firstly, take inventory on where backup tapes reside and determine if they need to be saved or if they can be deleted.  Most corporations have amassed many tapes that are only a legal liability at this point.  Technology exists today that can index and search what is on the tapes, enabling educated decisions to then be made about whether to delete and/or transfer to the archive for legal hold.  Essentially, new technology can give sight to the blind.  Those decisions must be made according to a plan and documented.  Backup should only be for disaster recovery.

Secondly, purchase an archive if the company does not yet have one and configure the archive to expire data according to the document retention policy that can protect the company’s data decisions under Safe Harbor laws.

Is the company experiencing what many others are right now, which is an archive that is bursting at the seams? If the company does have an archive, check to see if expiry has been properly deployed according to the company’s policy.  If not, initiate a project to free up the archive from information retention that is unnecessary and that should not be subject to discovery.  Again, this must be documented.  Archives are for discovery and they need to be lean, efficient, and executing the information management lifecycle.

Avoid the request for backup tapes in litigation by having a sufficient archive and clearly stating that backup tapes are solely for disaster recovery. Delete tapes when possible by analyzing what is on them with appropriate technology and through a documented process that will eliminate the possibility of them being discoverable in litigation.

In sum, it is very helpful to examine the EDRM model and carve out what technologies and policies will apply to each aspect of the continuum.  For the challenges addressed in this blog, backup tapes fall under information management as does an archive all the way to the left of the model.  Backup tapes need search and expiry in order to retain only what is necessary for legal hold and should be ingested into an archive;  then, the company’s disaster recovery policies should be enforced on a go-forward basis.  Similarly, the archive needs search and expiration according to document retention policies so it does not become overgrown. From left to right, the model logically walks through the lifecycle of data, and many of the responsibilities associated with the data can be automated.  This project will require commitment, resources and time, but in light of the fact that data is only growing, there aren’t any other options.

As 2011 comes quickly to a close we’ve attempted, as in years past, to do our best Carnac impersonation and divine the future of eDiscovery.  Some of these predictions may happen more quickly than others, but it’s our sense that all will come to pass in the near future – it’s just a matter of timing.

1. Technology Assisted Review (TAR) Gains Speed.  The area of Technology Assisted Review is very exciting since there are a host of emerging technologies that can help make the review process more efficient, ranging from email threading, concept search, clustering, predictive coding and the like.  There are two fundamental challenges however.  First, the technology doesn’t work in a vacuum, meaning that the workflows need to be properly designed and the users need to make accurate decisions because those judgment calls often are then magnified by the application.  Next, the defensibility of the given approach needs to be well vetted.  While it’s likely not necessary (or practical) to expect a judge to mandate the use of a specific technological approach, it is important for the applied technologies to be reasonable, transparent and auditable since the worst possible outcome would be to have a technology challenged and then find the producing party unable to adequately explain their methodology.
2. The Custodian-Based Collection Model Comes Under Stress. Ever since the days of Zubulake, litigants have focused on “key players” as a proxy for finding relevant information during the eDiscovery process.  Early on, this model worked particularly well in an email-centric environment.  But, as discovery from cloud sources, collaborative worksites (like SharePoint) and other unstructured data repositories continues to become increasingly mainstream, the custodian-oriented collection model will become rapidly outmoded because it will fail to take into account topically-oriented searches.  This trend will be further amplified by the bench’s increasing distrust of manual, custodian-based data collection practices and the presence of better automated search methods, which are particularly valuable for certain types of litigation (e.g., patent disputes, product liability cases).
3. The FRCP Amendment Debate Will Rage On – Unfortunately Without Much Near Term Progress. While it is clear that the eDiscovery preservation duty has become a more complex and risk laden process, it’s not clear that this “pain” is causally related to the FRCP.  In the notes from the Dallas mini-conference, a pending Sedona survey was quoted referencing the fact that preservation challenges were increasing dramatically.  Yet, there isn’t a consensus viewpoint regarding which changes, if any, would help improve the murky problem.  In the near term this means that organizations with significant preservation pains will need to better utilize the rules that are on the books and deploy enabling technologies where possible.
4. Data Hoarding Increasingly Goes Out of Fashion. The war cry of many IT professionals that “storage is cheap” is starting to fall on deaf ears.  Organizations are realizing that the cost of storing information is just the tip of the iceberg when it comes to the litigation risk of having terabytes (and conceivably petabytes) of unstructured, uncategorized and unmanaged electronically stored information (ESI).  This tsunami of information will increasingly become an information liability for organizations that have never deleted a byte of information.  In 2012, more corporations will see the need to clean out their digital houses and will realize that such cleansing (where permitted) is a best practice moving forward.  This applies with equal force to the US government, which has recently mandated such an effort at President Obama’s behest.
5. Information Governance Becomes a Viable Reality.  For several years there’s been an effort to combine the reactive (far right) side of the EDRM with the logically connected proactive (far left) side of the EDRM.  But now, a number of surveys have linked good information governance hygiene with better response times to eDiscovery requests and governmental inquires, as well as a corresponding lower chance of being sanctioned and the ability to turn over less responsive information.  In 2012, enterprises will realize that the litigation use case is just one way to leverage archival and eDiscovery tools, further accelerating adoption.
6. Backup Tapes Will Be Increasingly Seen as a Liability.  Using backup tapes for disaster recovery/business continuity purposes remains a viable business strategy, although backing up to tape will become less prevalent as cloud backup increases.  However, if tapes are kept around longer than necessary (days versus months) then they become a ticking time bomb when a litigation or inquiry event crops up.
7. International eDiscovery/eDisclosure Processes Will Continue to Mature. It’s easy to think of the US as dominating the eDiscovery landscape. While this is gospel for us here in the States, international markets are developing quickly and in many ways are ahead of the US, particularly with regulatory compliance-driven use cases, like the UK Bribery Act 2010.  This fact, coupled with the menagerie of international privacy laws, means we’ll be less Balkanized in our eDiscovery efforts moving forward since we do really need to be thinking and practicing globally.
8. Email Becomes “So 2009” As Social Media Gains Traction. While email has been the eDiscovery darling for the past decade, it’s getting a little long in the tooth.  In the next year, new types of ESI (social media, structured data, loose files, cloud context, mobile device messages, etc.) will cause headaches for a number of enterprises that have been overly email-centric.  Already in 2011, organizations are finding that other sources of ESI like documents/files and structured data are rivaling email in importance for eDiscovery requests, and this trend shows no signs of abating, particularly for regulated industries. This heterogeneous mix of ESI will certainly result in challenges for many companies, with some unlucky ones getting sanctioned because they ignored these emerging data types.
9. Cost Shifting Will Become More Prevalent – Impacting the “American Rule.” For ages, the American Rule held that producing parties had to pay for their production costs, with a few narrow exceptions.  Next year we’ll see even more courts award winning parties their eDiscovery costs under 28 U.S.C. §1920(4) and Rule 54(d)(1) FRCP. Courts are now beginning to consider the services of an eDiscovery vendor as “the 21st Century equivalent of making copies.”
10. Risk Assessment Becomes a Critical Component of eDiscovery. Managing risk is a foundational underpinning for litigators generally, but its role in eDiscovery has been a bit obscure.  Now, with the tremendous statistical insights that are made possible by enabling software technologies, it will become increasingly important for counsel to manage risk by deciding what types of error/precision rates are possible.  This risk analysis is particularly critical for conducting any variety of technology assisted review process since precision, recall and f-measure statistics all require a delicate balance of risk and reward.

In their latest survey, entitled “E-Discovery Market Trends: A View from the Legal Department,” Enterprise Strategy Group (ESG) analysts Brian Babineau and Katey Wood analyze a number of interesting statistics and provide a range of insightful conclusions.  By surveying general counsel from large, mid-market (500-999 employees) and enterprise-class organizations in North America they were able to dive into a range of eDiscovery topics, including pain points, operational expenses and prioritizations on a go-forward basis.  Some are more intuitive than others, but in either case the results serve as good calibration metrics for those who endeavor to understand the corporate eDiscovery state of the nation.

“Most corporations are not tracking e-discovery spending…” In what may be the most notable finding of this ESG report, 60% of survey respondents claim that they did not track annual eDiscovery spending in 2010.  The authors correctly note that the eDiscovery process, “which can be highly unpredictable due to its project-by-project nature to begin with, has historically been outsourced to service providers charging at variable rates and often billed back to companies via their law firms.”  Despite the significant challenges of tracking eDiscovery spending, it’s nevertheless irresponsible for organizations to keep their heads in the sand regarding such a significant operational expense.

As the old saw goes, “you can’t manage what you can’t measure,” so it’s almost inconceivable to think that so many organizations aren’t tracking such a significant expense category.  For organizations who want to create a repeatable business process, as opposed to the fire-drill chaos that is typically associated with eDiscovery, it’s vitally important to accurately capture core eDiscovery metrics.  For starters, it’s useful to understand basic collection parameters, such as of the typical numbers of key custodians, average data volumes per custodian, data expansion rates, de-duplication statistics, etc.  Once these metrics are in place, it then becomes possible to manage the process and reduce costs.

Katey went on to expound in an exclusive quote for EDD 2.0:

“E-discovery can be managed as a strategic business process with an understanding of costs, performance and outcomes. When there’s no basis for reporting or comparison, it’s pin the tail on the donkey.  Corporate litigants won’t ever know they’re getting their money’s worth if they don’t even know what they’re spending.”

“E-Discovery accuracy/efficiency isn’t being measured, in large part.” Similar to the failure to measure eDiscovery costs, a full two thirds of GCs (67%) aren’t tracking the “efficiency and/or accuracy of e-discovery document review.” Until corporate counsel can link expectations of competency/efficiency with oversight and performance metrics, outside law firms will likely avoid having their feet held to the fire.  This passive stance makes transparency and process improvement difficult at best.  Additionally, this model of having expectations for efficiency, with low or no accountability, doesn’t bode well for the quick adoption of enabling technologies like predictive coding, since the driver has to inherently be the need/desire for increased efficiency (which axiomatically equals lower law firm review bills).

“Corporate information governance and litigation readiness (especially defensible deletion) are a priority, but not yet a reality.” From an internal prioritization perspective, more than two thirds (69%) of respondents identified their desire to expire/delete data more consistently, “thereby limiting unnecessary data retention for future litigation requests.”  Savvy enterprises correctly recognized the “multi-prong threat of unregulated data retention: the large amounts of irrelevant data ultimately produced for legal review, the greater difficulty of hanging onto potentially litigious documents past their required retention periods.”

This finding is very encouraging, and it ties into the upward momentum the industry is seeing regarding information governance generally – particularly linking the reactive (right) side of the EDRM with the logically connected and proactive (left) side of the EDRM.  As a good first step it’s critical to see organizations now associating good information governance hygiene with lower costs and better eDiscovery response times.  The ESG finding also triangulates with results from the recent Information Retention and eDiscovery Survey, which found that companies having good information governance hygiene were often able to respond much faster and more successfully to an eDiscovery/investigation requests, often suffering fewer negative consequences.

The only downside to the positive information governance trend, as reported by the survey, was that,

“while there are great benefits to defensible deletion, internal initiatives for implementing it too often are stymied by difficulty in obtaining cross functional consensus and authorization, particularly as it touches so many other critical processes like regulatory compliance and legal hold.”

“Legal hold processes are still very manual.” Another similar question revealed that many companies are attempting to get their information governance house in order, but are still in the very early stages.  When asked about their  current legal hold notification and tracking process, a whopping 69% of organizations said that they are using a “manual process performed by internal staff using e-mail and spreadsheets, etc.”  And, another 6% said they either had no formal process or tracking mechanism.

Given the risks attendant to flaws in the preservation process this area is ripe for improvement.  The good news is that 54% of survey respondents are intending to improve their legal hold process, with 25% planning improvement within the next 12 months.  This is a healthy acknowledgement that there is risk, and with a modicum of investment (time, personnel, procedures, and technology) the legal hold area can be brought up to current best practices.

The ESG survey is a welcome temperature gauge into the state of corporate legal departments.  It notes, in conclusion, “with the staggering growth, diversity and dispersion of data, the pain e-discovery is currently causing large and serial litigants are only a symptom of the larger problem of unwieldy and under-developed information management affecting all businesses.”  With data insights from the ESG survey, it’s becoming clear that foundational information governance elements (like deploying auditable legal hold procedures, tracking eDiscovery spending, updating data maps, etc.) are desperately needed by the many organizations that want to turn eDiscovery into a repeatable business process.  The good news is that many of these organization have improvements in mind for the next 12 months, and the challenge will be to make sure these proactive projects maintain the same level of organizational urgency that it often present for more reactive tasks.

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.

The data explosion that has burdened organizations across the globe for the past decade has become increasingly expensive to manage.  Many experts point to storage as the most obvious culprit for higher information governance costs.  There are, however, other factors driving those costs.  For example, demands for electronically stored information in legal and regulatory proceedings have significantly increased expenses surrounding data management.  Those demands have forced organizations to meet the high expectations that courts and regulatory bodies have for how they address their information or face the consequences.

Those consequences include sanctions and regulatory fines for groups that fail to account for how they store, manage and discover their information.  The $919 million verdict rendered in the E.I. du Pont de Nemours v. Kolon Industries case is paradigmatic of this trend.  That verdict was inextricably intertwined with the court’s instruction to the jury that executives and employees for defendant Kolon Industries deleted key evidence after the company’s preservation duty was triggered.

Going to Cloud Services for Data Archiving and eDiscovery

These rising data costs – and the risks they pose – are driving organizations to explore new technologies and methods for managing their data.  The latest alternative to traditional on-premise solutions involves leveraging cloud-based services.

The hype surrounding the cloud has generally focused on the opportunity for cheap and unlimited storage.  While cost effective data storage is important, that factor alone should not be determinative for selecting a cloud service provider.  Organizations must have the actual – not theoretical – ability to retrieve their data and do so in real time.  Otherwise, they may not be able to satisfy legal or regulatory requests, let alone the day-to-day demands of their operations.

In an analogous context, courts have traditionally compelled paper document productions even though the requested materials may be buried in a messy warehouse.  In one such case from this year, a U.S. district court in New York ordered a company to turn over decades-old records that were commingled with other materials in poorly labeled, shrink-wrapped boxes.  The court reasoned that disorganized record-keeping should not excuse an organization from producing relevant information.  See Brooks v. Macy’s (S.D.N.Y. May 6, 2011).

The rationale from the Brooks case is equally applicable to cloud-based services.  Cloud-based data must be intelligently organized so that companies can retrieve data in a timely fashion for business and legal purposes.  Otherwise, the savings achieved through cheap storage will be negated by the resulting legal quagmire.

Paring Back Superfluous and Duplicative Information

To facilitate the data retrieval process, the right cloud service provider should have the capacity to implement and observe applicable company retention policies.  An effective retention policy will generally help a company retain information that must be kept for business, legal or regulatory purposes – and nothing else.  The service provider should enable automated retention rules to ensure that information is kept only for a designated time period.  This will allow data to be expired once it reaches the end of that period.  And by expiring that data, the company will limit the amount of potentially relevant information available for follow-on litigation.

The pool of information can also be decreased through single instance storage.  This deduplication technology eliminates redundant data by preserving only a master copy of each document placed into the cloud.  This will reduce the amount of data that needs to be identified, collected and reviewed as part of the electronic discovery process.  For while unlimited data storage may seem ideal now, reviewing unlimited amounts of data will quickly become a logistical and costly nightmare.

Tools to Facilitate Discovery

A cloud service provider should ideally have eDiscovery functionality.  At a minimum, the service provider should be able to deploy legal holds to prevent users or automated policies from overwriting and destroying data.  Advanced search capabilities should also be included within the cloud-based service to reduce the amount of data that must be analyzed and then reviewed.  Moreover, the provider should support compatible load formats for export to third party review software.

Another key discovery issue is whether the cloud service provider can establish a clear audit trail for transmissions of company data.  Since information could be modified in transit by the routine operation of a service provider’s computer systems, an audit trail is necessary to prove that company documents and their metadata were not affected or otherwise compromised during transmission.  Without this assurance, a company may not be able to demonstrate the authenticity of its data before a tribunal or comply with key regulations.

A cloud server provider that can quickly retrieve and efficiently discover data has the potential to help organizations address their legal and regulatory demands in a cost effective manner.  Such a provider may be just the solution for organizations that are looking to properly address their runaway information governance costs.

Outcry from many in the legal community has caused a number of groups to consider whether the Federal Rules of Civil Procedure (FRCP) should be amended.  The dialogue began in earnest a year ago at the Duke Civil Litigation Conference and picked up speed following an eDiscovery “mini-conference” held in Dallas last month (led by the Discovery Subcommittee –  appointed by the Advisory Committee on Civil Rules).  The rules amendment topic is so hot that the Sedona Conference (WG1) spent most of its two day annual meeting discussing the need for amendments and evaluating a range of competing proposals.

During this dialogue (which I can’t quote verbatim) a number of things became clear to me…

1.  This rules amendment quandary is a bit of a chicken and egg riddle — meaning that it’s hard to cast support wholeheartedly for a rules change if there isn’t a good consensus for what a particular change would accomplish and what the long term consequences might be as technology quickly morphs.  As an example, if there was a redefined preservation trigger that started the duty to preserve when there was a reasonable “certainty” of litigation (versus a mere “likelihood”), would this really make a material impact?  Or, would this inquiry still be as highly fact specific as it is today?  Would this still be similarly prone to the 20/20 hindsight judgment that’s inevitable as well?

2. While it is clear that preservation has become a more complex and risk laden process, it’s not clear that this “pain” is causally related to the FRCP.  In the notes from the Dallas mini-conference, a pending Sedona survey was quoted, referencing the fact that preservation challenges were overwhelmingly increasing:

“[S]ome trends can be noted. 95% (of the surveyed members) agreed that preservation issues were more frequent. 75% said that development was due to the proliferation of information.”

3. Another camp of stakeholders complain that the existing rules (as amended in 2006) aren’t being followed by practitioners or understood by the judiciary.  While this may be the case, it then begs the critical question: If folks aren’t following the amended rules (utilizing proportionality, leveraging FRE 502, etc.) is it really reasonable to think that any new rules would be followed this time around?

4. The role of technology in easing the preservation burden represents another murky area for debate.  For example, it could be argued that preservation pains (i.e., costs) are only really significant for organizations that haven’t deployed state of the art information governance solutions (e.g., legal hold solutions, email archives, records retention software, etc.) to make the requisite tasks less manual.

5. And finally, even assuming that the FRCP is magically re-jiggered to ease preservation costs, this would only impact organizations with litigation in Federal court. This leaves many still exposed to varying standards for the preservation trigger, scope and associated sanctions.

So, in the end, it’s unclear what the future holds for an amended FRCP landscape.  Given the range of divergent perspectives, differing viewpoints on potential solutions and the time necessary to navigate the Rules Enabling Act, the only thing that’s clear is that the cavalry isn’t coming to the rescue any time soon.  This means that organizations with significant preservation pains should endeavor to better utilize the rules that are on the books and deploy enabling technologies where possible.

It is axiomatic that the law helps those who help themselves.  Perhaps nowhere is that truism more applicable than in the context of electronic discovery.  The organization that implements an effective information governance strategy – including developing reasonable data retention policies – will likely avoid court sanctions and reduce its legal costs.  This was confirmed in a recent industry survey, which found that organizations “help themselves” when they develop information retention policies.  According to the survey, better retention practices drive dramatically better outcomes in litigation, particularly in the context of retention and preservation.

Such a finding is echoed by a recent case issued from the District of Indiana.  In Haraburda v. Arcelor Mittal U.S.A., Inc. (D. Ind. June 28, 2011), the court tied a litigant’s preservation duty to its document retention efforts.  In order to discharge its duty to reactively preserve evidence, the court reasoned that enterprises must proactively create “a ‘comprehensive’ document retention policy that will ensure that relevant documents are retained.”  Failing to implement a retention policy often results in a loss of key information.  And this, opined the court, may result in sanctions.

Such a finding is not limited to an isolated case.  Court decisions from across the United States in 2011 have found the same connection; better data retention practices yield more successful document preservation results.  For example, in the E.I. du Pont de Nemours v. Kolon Industries (E.D. Va. April 27, 2011), the plaintiff manufacturer defeated a sanctions motion due to its effective information retention procedures.   The manufacturer implemented a document retention policy that typically kept emails from former employee accounts for 60 days, after which the emails were overwritten and deleted.   Among the emails deleted pursuant to that policy were several that the defendant argued were relevant to its counter-claims.  The DuPont court declined to impose sanctions, however, since the emails in question were overwritten before the duty to preserve was triggered.  Instead, the court lauded the manufacturer’s preservation efforts, finding that it “took positive steps reasonably calculated to ensure that information . . . was preserved for litigation.”  Because the manufacturer faithfully observed its established retention policy, it reduced a stockpile of email, made relevant documents unavailable for discovery and was still protected from court sanctions.

Similarly, in Viramontes v. U.S. Bancorp (N.D.Ill. Jan. 27, 2011), the defendant bank relied on its data retention protocols to stave off a sanctions motion after deleting several years of email.  Because those emails were destroyed pursuant to a neutral retention policy before a preservation duty attached, the bank was protected from sanctions under the Federal Rule of Civil Procedure 37(e) safe harbor for the destruction of electronic information.

The converse, of course, is also true.  Those organizations that failed to implement effective retention policies have fared poorly in discovery because they have not preserved relevant ESI.  Take the defendant, for instance, in Northington v. H & M International (N.D.Ill. Jan. 12, 2011).  The court issued an adverse inference jury instruction against that company because it spoliated significant emails and other data.  The genesis of this spoliation was the company’s failure to establish a formal document retention policy.  Instead of having a thoughtful, top-down approach, “data retention . . . was evidently handled on an ad hoc, case-by-case basis.”  The company’s failure to develop a pre-litigation information retention policy eventually led to the loss of key information and the court’s sanctions award.

These recent cases and others confirm the correlation between retention and preservation.  Simply put, proactive retention leads to better preservation in eDiscovery.  Anything less could be disastrous in litigation.

Symantec today issued the findings of its second annual Information Retention and eDiscovery Survey, which examined how enterprises are coping with the tsunami of electronically stored information (ESI) that we see expanding by the minute.  Perhaps counter intuitively, the survey of legal and IT personnel at 2,000 enterprises found that email is no longer the primary source of ESI companies produced in response to eDiscovery requests.  In fact, email came in third place (58%) to files/documents (67%) and database/application data (61%).  Marking a departure from the landscape as recently as a few years ago, the survey reveals that email does not axiomatically equal eDiscovery any longer.

Some may react incredulously to these results. For instance, noted eDiscovery expert Ralph Losey continues to stress the paramount importance of email: “In the world of employment litigation it is all about email and attachments and other informal communications. That is not to say databases aren’t also sometimes important. They can be, especially in class actions. But, the focus of eDiscovery remains squarely on email.”   While it’s hard to argue with Ralph, the real takeaway should be less about the relative descent of email’s importance, and more about the ascendency of other data types (including social media), which now have an unquestioned seat at the table.

The primary ramification is that organizations need to prepare for eDiscovery and governmental inquires by casting a wider ESI net, including social media, cloud data, instant messaging and structured data systems.  Forward-thinking companies should map out where all ESI resides company-wide so that these important sources do not go unrecognized.  Once these sources of potentially responsive ESI are accounted for, the right eDiscovery tools need to be deployed so that these disparate types of ESI can be defensibly collected and processed for review in a singular, efficient and auditable environment.

The survey also found that companies which employ best practices such as implementing information retention plans, automating the enforcement of legal holds and leveraging archiving tools instead of relying on backups, fare dramatically better when it comes to responding to eDiscovery requests. Companies in the survey with good information governance hygiene were:

• 81% more likely to have a formal retention plan in place
• 63% more likely to automate legal holds
• 50% more likely to use a formal archiving tool

These top-tier companies in the survey were able to respond much faster and more successfully to an eDiscovery request, often suffering fewer negative consequences:

• 78% less likely to be sanctioned
• 47% less likely to lead to a compromised legal position
• 45% less likely to disclose too much information

This last bullet (disclosing too much information) has a number of negative ramifications beyond just giving the opposition more ammo than is strictly necessary.  Since much of the eDiscovery process is volume-based, particularly the eyes-on review component, every extra gigabyte of produced information costs the organization in both seen and unseen ways.  Some have estimated that it costs between $3-5 a document for manual attorney review – and at 50,000 pages to a gigabyte, these data-related expenses can really add up quickly.

On the other side of the coin, there were those companies with bad information governance hygiene.  While this isn’t terribly surprising, it is shocking to see how many entities fail to connect the dots between information governance and risk reduction.  Despite the numerous risks, the survey found nearly half of the respondents did not have an information retention plan in place, and of this group, only 30% were discussing how to do so.  Most shockingly, 14% appear to be ostriches with their heads in the sand and have no plans to implement any retention plan whatsoever.  When asked why folks weren’t taking action, respondents indicated lack of need (41%), too costly (38%), nobody has been chartered with that responsibility (27%), don’t have time (26%) and lack of expertise (21%) as top reasons.  While I get the cost issue, particularly in these tough economic times, it’s bewildering to think that so many companies feel immune from the requirements of having even a basic retention plan.

As the saying goes, “You don’t need to be a weatherman to tell which way the wind blows.”  And, the winds of change are upon us.  Treating eDiscovery as a repeatable business process isn’t a Herculean task, but it is one that cannot be accomplished without good information governance hygiene and the profound recognition that email isn’t the only game in town.

For more information regarding good records management hygiene, check out this informative video blog and Contoural article.