Minimizing eDiscovery risks

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

The main objective for a corporation’s law department is to mitigate risk throughout the company, while keeping costs under control. This is why litigation can be so frustrating. It is expensive and the results are unpredictable. In the past decade or so, companies have also found new risks in the litigation process. As technology has changed and more and more documents are created and stored electronically, discovery costs have skyrocketed, while judges have cracked down on litigants that have mismanaged the process.

Risks and repercussionsIn 2006, the US Supreme Court reacted to these changes in technology by approving

amendments to the Federal Rules of Civil Procedure. These amendments address

how litigants should handle electronic discovery (eDiscovery) and electronically stored

information (ESI). Many states have similar rules. While it has always been true

that electronic documents are subject to the same discovery requirements as paper

documents, the 2006 amendments clarify the issue.

In addition to the rules, judges have been weighing in on eDiscovery more and more

frequently. Overall, the number of electronic discovery opinions almost doubled in

2009 from 2008. Sanctions were awarded in 70 percent of those cases and in 10

cases, “terminating sanctions” ended the offending party’s participation in the case

by default.1

In some cases, judges and juries have issued staggeringly large monetary sanctions

against litigants who have bungled the electronic discovery process. In 2005, a jury

found that Morgan Stanley did not conduct adequate electronic discovery because

it failed to produce emails in a timely fashion. In that case, Coleman v. Morgan

Stanley2, the jury initially granted an eye-popping $800 million in punitive damages

to Coleman (the plaintiff). While that award was eventually overturned, the cost,

effort and negative publicity involved still made it a very expensive lesson for

Morgan Stanley.

Companies have sometimes avoided sanctions by claiming ignorance or showing

they did not act in bad faith. Today, this is no longer a viable defense. In Pension

Committee of the University of Montreal Pension Plan v. Banc of America Securities3,

District Court Judge Shira A. Scheindlin found that the plaintiffs were “careless

and indifferent” about preserving and collecting data, and ignorance is no defense.

“In the discovery context, the standards have been set by years of judicial decisions

analyzing allegations of misconduct and reaching a determination as to what a party

must do to meet its obligation to participate meaningfully and fairly in the discovery

phase of a judicial proceeding,” she wrote in her ruling. “A failure to conform to this

standard is negligent even if it results from a pure heart and an empty head.”

1 Gibson Dunn Publications, January 15, 20102 Coleman (Parent) Holdings, Inc. v. Morgan

Stanley & Co., Inc., 2005 WL 679071 (Fla. Cir. Ct. Mar. 1, 2005)

3 2010 WL 184312 (S.D.N.Y. Jan. 15, 2010) (Amended Order)

…the best strategy is to put proper resources behind discovery early in order to mitigate these risks.

Minimizing eDiscovery risks 2

Biggest risks occur early While the lawyers jump in as soon as a lawsuit is filed, they don’t always intervene in

the early stages of eDiscovery. A vast majority of lawsuits – 80 to 92 percent4 – settle

and spending money on discovery early when the case might settle or be withdrawn

seems like a waste of resources. However, not all matters that settle do so prior to

discovery. In those cases, not acting quickly can cause substantial additional risk.

While the details for each discovery project may vary, the basic process does not.

The following are the six major steps that take place in most every project5:

As it turns out, the biggest risks of mishandling or losing data typically occur in the

first three phases: Identification, Preservation and Collection. These three phases

generally take place inside the corporation before outside counsel is heavily involved.

The relative cost of these phases is much lower than the final three, although any

spend on those phases might be considered unnecessary if the matter settles early.

It is important to keep in mind, however, that it is during these three phases where

the most risk of sanctions and adverse inference orders typically occur.

For example, in the Morgan Stanley case, Morgan Stanley was cited for not properly

preserving evidence; they overwrote potentially relevant emails despite obligations

under discovery rules and regulations by the US Securities and Exchange Commission

to retain those emails. In the Pension Committee case, a lawsuit was filed in 2004,

but the plaintiffs did not issue written litigation hold notices until 2007—three years

too late. In both cases, and in many others, judges and juries found those errors to

be inexcusable. These results are common – almost all sanctions or adverse inference

instructions related to electronic discovery are due to errors in identification,

preservation and collection of evidence. As such, the best strategy is to put proper

resources behind discovery early in order to mitigate these risks.

4 Glater, Jonathan D., “Study Finds Settling Is Better Than Going to Trial,” The New York Times, August 7, 2008 at http://www.nytimes.com/2008/08/08/business/08law.html

5 www.edrm.net

Identification Locating potential sources of ESI and determining

its scope, breadth and depth

Preservation Ensuring that ESI is protected against inappropriate

alteration or destruction

Collection Gathering ESI for further use in the eDiscovery process

Processing Reducing the volume of ESI and converting it,

if necessary, to forms more suitable for review

and analysis

Review Evaluating ESI for relevance and privilege

Production Delivering ESI to others in appropriate forms and using

appropriate delivery mechanismsThe earliest phases of

eDiscovery may be the

riskiest, but they are

also less expensive than

the later phases when

the data is processed,

reviewed and produced

to the other side.

Minimizing eDiscovery risks 3

Benefits of a litigation holdThe problems in Morgan Stanley could have been avoided with proper implementa-

tion of a litigation hold. Once a lawsuit is filed or an organization expects that one

may be filed, those who may have relevant information must be identified and then

asked to submit that data for legal review. The organization must stop its routine

data destruction. The simple process of copying an electronic file can alter its meta-

data, which is data about the data, which can be viewed as spoiling the evidence.

(“Spoliation” is the legal term.) To ensure that line employees or technical staff

properly preserve all potential evidence, legal departments issue what is known as a

“litigation hold.”

Issuing a litigation hold seems simple, but it is rife with risk if an unsophisticated

approach is taken. The legal team may simply send out an email to employees who

could have important data, describe the terms of the litigation hold notice and

then rely on employees to comprehend what to do and follow through. While this

approach is much cheaper and more streamlined than bringing in tools and hiring

outside consultants to oversee the process, it is also highly prone to errors and

reduces the ability to defend the process in court if necessary. Employees may not

understand their obligations to identify, preserve and collect ESI or how to do so.

They may inadvertently alter data while trying to save it. They may be too busy to

respond appropriately and send everything they can find or nothing at all.

A solid litigation hold process includes communication of the hold to all employees

who may have related documents (“custodians”) including IT personnel who

manage corporate servers; follow-up and monitoring procedures; a system to receive

confirmation from custodians that the hold is understood and being followed;

continued monitoring to ensure the hold remains in effect and any newly created

evidence is being preserved; communication to release the hold and subject the

documents to the company’s regular records retention procedures upon resolution

of the matter.6 Furthermore, some documents are subject to more than one hold.

It is easy to imagine how simply sending out an email is not nearly enough if a case

ends up being contentious.

While spending money as soon as litigation is expected may seem imprudent, the risk

mitigation makes it worthwhile. The earliest phases of eDiscovery may be the riskiest,

but good practices during these phases will save during the later phases when the

data is processed, reviewed and produced to the other side. Organizations should be

sure to prioritize the earlier phases and not underestimate the risks involved.

Early action also reduces costsEffective early planning and action does more than reduce risk. It can also reduce

the cost of electronic discovery substantially. Through early case assessments,

organizations can determine what information is truly relevant and minimize the

amount of unnecessary data they must collect and review.

As an example, a litigant in a recent case collected 2,324 gigabytes worth of

data, representing approximately 11.6 million documents. Applying an early case

6 Gercken, Glenn P., “Recommendations for Managing the Litigation Hold Process,” e-LegalTechnology.org at http://www.e-legaltechnology.org/member-articles/article-detail.php?id=33

Minimizing eDiscovery risks 4

…judges and juries

now expect that

organizations will

respond appropriately

to the identification,

preservation and

collection of potentially

relevant information.

Delay can quickly

lead to additional

expense or harm to the

organization’s finances,

case and reputation.

assessment process that included analysis, indexing, culling, filtering, de-duplication and keyword

filtering, reduced the review set to about 410,000 documents. These processes saved the litigant more

than 223,000 billable hours and between $13 and $40 million.7

An early case assessment can also help an organization take a strategic approach to the lawsuit,

offering valuable insights into whether it makes sense to fight the lawsuit or settle as soon as possible.

Avoiding a bad outcome is sometimes the biggest cost saver of all.

Once a lawsuit is filed, an organization should be ready to act decisively and accept the fact that

they must invest time and money in the process. It may be natural to ignore litigation and hope it

goes away, but judges and juries now expect that organizations will respond appropriately to the

identification, preservation and collection of potentially relevant information. Delay can quickly lead

to additional expense or harm to the organization’s finances, case and reputation.

Organizations should also consider how they might be able to work with their insurance companies to

facilitate early action. A policy that specifically states that discovery costs are covered and provides for

spending pre-retention can make it much easier to spend early and reduce the risk of sanctions

or worse.

7 Assuming review speeds of 50 documents per hour and hourly rates of between $60 and $185 per hour

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