E-DISCOVERY AND ELECTRONIC EVIDENCE:

A NEW CHALLENGE IN BUSINESS LITIGATION

William F. Codell

HARNED BACHERT & MCGEHEE PSC

324 East Tenth Avenue

Post Office Box 1270

Bowling Green, Kentucky 42102-1270

Telephone: (270) 782-3938

Facsimile: (270) 781-4737

www.hbmfirm.com

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Historical figure and Boston political boss Martin Lomasney was an individual that

understood the value of discretion. He is attributed with the famous quote: “Never write if

you can speak, never speak if you can nod, never nod if you can wink.” Recently, New York

Governor Eliot Spitzer put a modern twist on the famous quote. He is attributed with stating

that one should “never write when you can talk, never talk when you can nod, and never put

anything in an email.” While companies are generally not as susceptible as politicians to

damage from an unfortunate email, a basic understanding of electronic evidence is useful for

any company that may become subject to litigation.

As the volume of electronically stored information continues to expand, electronic

evidence is becoming increasingly important in business litigation. Common forms of

electronically stored information include emails, databases, spreadsheets, and word

processing documents. Current estimates provide that roughly 800 megabytes of

electronically stored information is created per person every year. A standard desktop

computer can store the equivalent of 40,000 typed pages of information. Many companies

have accumulated thousands of terabytes of electronically stored information. Considering

that 1 terabyte of electronically stored information equates to the amount of information in

approximately 1 million books, the task of managing electronic documents can be difficult

for any business.

Similar to a business working to handle new technology, the legal system is

undergoing several changes in an effort to manage electronic evidence. In the legal system,

particular attention is being given to the process of electronic discovery in the business

litigation context.

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The word “discovery” is generally defined in the legal environment as the process by

which attorneys reveal facts and develop evidence in preparation for a trial. Common

examples of discovery include a deposition in which an attorney may ask questions to a

witness and a request for production whereby an attorney may require a person or company

to provide certain documents. Traditionally, an attorney would use a discovery request for

production to get copies of correspondence, manuals, reports, blueprints, business records, or

any other documents that might be relevant to the dispute.

Companies involved in litigation are not only required to provide many documents to

an adversary’s attorney upon request, they are further required to preserve documents that

may be relevant to a dispute. Specifically, once a company is on notice of pending litigation,

a “litigation hold” must be implemented to retain documents that the company reasonably

believes to be discoverable or relevant to the dispute. In order to comply with the “litigation

hold” requirement, a business must take affirmative measures to preserve potential evidence

that might otherwise be destroyed in the ordinary course of business.

Several companies with a large volume of electronically stored information have

suffered painful consequences due to failure to properly preserve relevant electronic

documents after receiving notice of potential litigation. One case in which a company was

severely punished for failure to preserve relevant electronic evidence involved the

bankruptcy of an airline. A lawsuit arose out of the bankruptcy in connection with a

transaction that the airline’s Chief Financial Officer may have been involved.

The airline’s attorneys advised the company to implement a “litigation hold” to avoid

the destruction of electronic documents connected to the dispute. However, the airline’s

CFO attempted to delete multiple files on a company laptop computer after receiving the

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notice of the litigation hold. When confronted, the CFO claimed that he had deleted files

from the laptop in an effort to hide pornographic images downloaded from the internet. The

other party to the lawsuit asserted that some of the deleted electronic files contained

documents relevant to the case.

The judge for the case punished the company by issuing multiple adverse inferences

and a fee award. Generally, an adverse inference means that a party to the litigation does not

need to prove an element of its case and/or the jury can infer certain elements of the case.

For example, a judge could instruct a jury that certain email documents relevant to a dispute

were destroyed and the jury may infer that the emails were harmful to the party guilty of the

destruction.

Judges have wide discretion in resolving issues connected to discovery abuse.

Sanctions that may be imposed on a business for failure to preserve relevant evidence may

include the loss of certain defenses, payment of another company’s attorneys’ fees, and an

adverse inference instruction to the jury. Such an outcome in a legal fight can be devastating

to a business.

It is important to note that a company need not intentionally or maliciously destroy

relevant electronic documents in order to become subject to discovery sanctions from a

court. Reckless or negligent behavior may be adequate to warrant sanctions. Destruction of

relevant electronically stored information may be sanctionable in circumstances where the

company was not consciously aware of the destruction. The inadvertent destruction of

relevant electronic evidence after notice of pending litigation is highly feasible for

companies with a large volume of electronically stored information and a regular practice of

recycling old “back up” tapes with seemingly outdated files.

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The possibility of litigation sanctions arising from the destruction of electronic

documents combined with the accelerated rate at which electronically stored information is

generated presents a difficult dilemma for many companies. Despite the continued decrease

in the price of data storage, keeping every form of electronically stored information forever

is not practical for most businesses. A new amendment to the Federal Rules of Civil

Procedure provides one proposed solution.

Federal Rule of Civil Procedure 37(f), which covers all cases filed in Federal Court

after December 1, 2006, provides that “absent exceptional circumstances, a court may not

impose sanctions under these rules on a party for failing to provide electronically stored

information lost as a result of the routine, good-faith operation of an electronic information

system.” Federal Rule of Civil Procedure 37(f) is a “safe harbor” for companies regarding

electronically stored information. It appears that the Rule will protect genuinely routine

deletions of data with regard to litigation in Federal Court. The most important language in

the Rule emphasizes that protection from sanctions is available only for “the routine, good-

faith operation” of a computer system.

In order to gain the benefit of the Rule, a company in Federal Court litigation will

need to establish that it not only has a policy to deal with electronic document retention, but

also that the policy is followed by company officers and employees. As such, the existence

of an electronic document management policy can be critical for a business subject to

litigation. Due to the fact that every business is unique, no single plan or policy is

appropriate for every company. However, some basic standards regarding the management

of electronically stored information are equally applicable to almost every company. Four

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generally applicable principles regarding the management of electronically stored

information are as follows:

1. Every company should have a written record retention policy;

2. Every company should understand that it has a duty to preserve

records once it knows or should have known of potential litigation;

3. Every company should have a plan regarding how records will be

preserved once a dispute emerges; and

4. Every company should make efforts to identify likely difficulties with

preserving electronic evidence and prospective solutions.

Companies that wait until litigation arises before confronting electronic document

retention issues will face the potentially impossible task of cataloging and preserving

electronically stored information under court mandated deadlines. Such circumstances

constitute a formula for catastrophe and significantly increase the risk of painful monetary

and evidentiary sanctions. Moreover, an adversary that already has a well-designed policy

that can effectively and efficiently deal with electronic evidence issues will have a significant

competitive advantage in litigation.

The development of a good electronic document retention policy will not only benefit

a company after it becomes involved in litigation, it will additionally help officers and

employees better understand the business. Developing a policy to properly manage

electronically stored information will necessarily involve enhanced communication among

individuals from different areas of a company including human resources, information

technology, and management. In turn, a greater understanding of the methods of electronic

communication and document retention will increase a company’s ability to more efficiently

utilize future technological innovations. Current changes imposed on the legal system by

advancements in technology reflect new challenges and opportunities facing every business.

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In order to meet new challenges and take advantage of new opportunities, a company would

be well advised to continually develop and monitor its electronic document management

policy.