minimizing ediscovery risks - zurich...
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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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