Avoiding an E-Discovery Disaster

This summer the whole country, particularly those of us living on the gulf coast, anxiously watched the seemingly endless images of oil leaking into the Gulf of Mexico following the deadly explosion on the BP oil rig Deepwater Horizon.  While the leak has only recently been capped, litigation stemming from the oil spill has already commenced.

In a recent article on law.com, Fred Blum and Nader Mehizadeh noted that much of the litigation stemming from the BP oil spill will depend on volumes of electronically stored information in BP's control.  After noting the potential e-discovery disaster that may come upon BP if its electronically-stored information (ESI) is not properly handled, the authors outlined the following six factors that can help anyone avoid an e-discovery disaster:

1.  Preserve Relevant ESI. 

2.  Confer with your opponent.

3.  Collect Data Intelligently.

4.  Rely on your vendor.

5.  Consider using hosted databases.

6.  If all else fails, go to court.

The underlying principle behind all six factors is that retention and production of relevant ESI is something that parties in litigation simply cannot afford to ignore.  The risks are simply too high.  However, electronic discovery disasters can be averted if parties are willing to take the time, and expense, to ensure that relevant information is preserved, communicate with the opposing party and experts in the field, and utilize technology to their advantage. 

 

 

Compliance Officer Found Liable for Failing to Preserve Data

A recent ruling of the Securities and Exchange Commission (“SEC”) should serve as a yet another reminder of the importance of adequately preserving electronically stored data.

On July 2, 2010, the SEC ruled that vFinance Investments Inc., a Florida based broker dealer, violated securities laws by failing to preserve and produce electronic communications requested by the SEC as required by Section 17(a) of the Securities Exchange Act of 1934. In re vFinance Investments Inc., SEC, Admin. Proc. File No. 3-12918, 7/2/10.

 

In addition, as another example of the growing trend of blaming corporate executives for e-discovery failures, the SEC held that the firm’s former chief compliance officer, Richard Campanella, was liable for willfully aiding and abetting vFinance’s violations. The SEC sustained an administrative law judge’s decision censuring the Campanella and assessing penalties of $100,000 and $30,000 against the firm and Campanella, respectively. The SEC also barred Campanella from the industry for two years.

 

The penalties stemmed from vFinance’s failure to preserve and produce electronic communications of a branch manager at one of the firm’s offices. In July of 2005, the Enforcement Division of the SEC contacted Campanella to alert him regarding a forthcoming document request regarding Lexington Resources, Inc. -- the branch manager acted as a market maker for its stock. Although it was obvious to Campanella that the branch manager would not produce the requested documents, he waited almost six months after the division’s request to threaten to fire the branch manager for not doing so. In spite of the manager’s noncompliance, Campanella never followed through on the termination threat, giving the branch manager time to destroy the documents sought by the Enforcement Division. In addition, while Campanella was aware that the branch manager was sending and receiving email relating to Lexington Resources from a personal email account, he never implemented a system to preserve such email.  Because Campanella failed to act when he had a duty to do so, the SEC found him liable for aiding and abetting vFinance’s violations.  

 

Campanella was found liable for aiding and abetting vFinance’s violations even though he did not have actual knowledge that his failure to act constituted a violation. At oral argument before the SEC, Campanella’s counsel argued that in order to ensure certainty in the law, the standard for aiding and abetting in SEC administrative actions should be the same as in federal district courts, where actual knowledge is required. The SEC disagreed, holding that “recklessness is sufficient to establish aiding and abetting liability, and here we find Campanella’s conduct was variously knowing and extremely reckless.” 

 

There are two important implications here:  (1) corporate executives are not immune from e-discovery sanctions by virtue of being a few corporate steps removed from the process; and (2) the standard for liability in SEC actions is lower than in district courts -- recklessness rather than actual knowledge.

 

Making Sense of Third-Party Discovery

It would be so nice if something made sense for a change!

- Alice, “Alice’s Adventures in Wonderland” by Lewis Carroll
 

What happens when, out of nowhere, the “other side” in a litigation matter wants electronic information during discovery not from you, but from a third-party who has worked directly with your company? Yikes! What about all that confidential information you provided them, never imagining that anyone else would have access to such electronic information? Alternatively, what if those third parties have purged their files and no longer have the requested information? Is there a duty to maintain electronic documentation which is out of your immediate control? 

The issue was addressed by United States Magistrate Judge Paul W. Grimm in his decision Goodman v. Praxair Servs., Inc., 2009 WL 1955805 (D. Md. July 7, 2009), where the Plaintiff asked that consultants to Praxair Services turn over their electronic documents in discovery.  The Plaintiff alleged that the Defendants violated their duty to preserve evidence when they failed to implement a litigation hold on the third party, resulting in a significant loss of data, including the contents of hard drives and emails relevant to the dispute at issue.

The Court found there was no duty to preserve third party evidence.  Although Fed. R. Civ. P. 34(a) does provide that documents are considered to be under a party's control when that party has “the right, authority, or practical ability to obtain the documents from a non-party to the action,”  the Court determined that Praxair did not have “the sufficient legal authority or the practical ability” to ensure the preservation of documents prepared by its third-party consultants or "any legal control" over those documents.  Accordingly, the Court held that Praxair had no duty to preserve any of the documents prepared by the third-party consultants.  Absent any duty to preserve evidence under a party’s control, there could be no finding that spoliation of evidence had occurred. 

This is a holding that makes perfectly good sense.  Alice would be delighted.

Tax-exempt organizations - the IRS wants you to think about record retention policies

Commenting on tax forms, Albert Einstein once said, "This is too difficult for a mathematician. It takes a philosopher."

Einstein might appreciate the latest changes in filing for tax-exempt organizations. In an attempt to foster transparency and ease the filing organization's administrative burden, the IRS recently redesigned the Form 990 (the annual information return that most tax-exempt organizations are required to file). The redesign asks a variety of questions regarding the filing organization's governance, including the question, "Does the organization have a written document retention and destruction policy?"

Although a portion of the new governance section "asks [for] information about policies and practices that are not required by federal law," the Sarbanes Oxley Act imposes criminal liability on organizations, including tax-exempt organizations, that destroy records with the intent to obstruct a federal investigation. Many tax-exempt organizations have responded to the Sarbanes Oxley Act by adopting and implementing record retention policies. The IRS recommended that organizations  "review[...] the new governance questions, which generally must be answered based on policies and practices in place on or before the last day of the 2008 tax year."

If your organization must check the "no" box for 2008 , consider implementing a policy for the 2009 tax year. Whether your organization deals with mathematicians, philosophers or neither, it's good business practice for your tax-exempt organization.

Ode to E-Discovery in 2008

Flooding the internet, they consistently accrue:
Blawgs offering e-discovery 'Year in Review's;
But these go on about facts and case histories too,
Before getting to the point of what you can and can't do.

Why not cut to the chase? Why not give it up straight?
Stripped below are the basics of two thousand and eight.
We'll start off with the general dos and the don'ts;
The haven'ts, the shouldn'ts, the emphatically won'ts.

Quite instructive are Canon's and Keithley's examples
Of "lackadaisical attitude" of defendants. As samples:
Do not find that hard drive behind the client's home door,
When discovery has been ongoing for a year or for more.

Do not stumble on computer reports you said "did not exist"
In an e-folder marked "Reports" that you for some reason missed.
And periodically remind clients and their IT personnel
Of the need to preserve the source code that was written on that Dell.

When you don't produce e-mails, the court said in Peskoff
Explain your search method and why, at production, you scoffed.
But if you contributed to information deletion or loss
And the court orders recovery, you won't get your costs!

Do not say you've e-searched when it's just a tall tale:
This was sanctioned under Rule 26 in R&R Sails.
There were costs sanctions also in Ajaxo, among a larger plethora.
And sanction of termination in Arteria and also Pandora.

In Keithley sanctions were imposed even on a party pro se
And in Schwarzenegger for "foot dragging" and a "litany of delays."
But take heed, warned O'Keefe -- don't request termination on whim.
Do not "strike at a king" unless you're sure you'll "kill him."

O'Keefe (plus Equity, Victor) gave lawyers heart attacks.
For saying that search term effectiveness is for experts to crack;
And that if lawyers pick and evaluate the key words instead
They are moving toward places "where angels fear to tread."

The courts warned that when using a method of searching
Learn first of its weaknesses through prior researching.
This was why D'Onofrio rejected what both experts said
And created a brand new search protocol method instead.

Rule 502 on preventing waiver through "reasonable steps"
Saw decisions pronouncing judgment on various missteps.
Alcon acknowledged that the Rule's very recent debut
Was designed to avoid "expensive, painstaking review."

Despite this pronouncement, some courts have cried "waived"
As to attempts made in hindsight to have privilege saved.
Rhoads found possible waiver for documents mistakenly produced
If they were not in the privilege log – there could be no excuse.

And failure to take measures that could prevent waiver
Like claw-back agreements, or Sedona-type saviors
Led to Victor’s conclusion, which uncommonly held
That the attorney-based privilege at issue was quelled.

Moving on, Mancia addressed the Rule 26 obligation
To meet early on regarding e-preservation,
Proclaiming "adversarial conduct" in e-discovery condemned
As a "burden to the American judicial system."

Some courts dove in early to prevent such discord,
Ordering forensic exams to preserve evidentiary records.
To conserve ephemeral info in Xpel, it was fair;
And when defendants were evading service, it was ordered in Allcare.

Other examples included when a party was unable
or unwilling (in Canon) to preserve/produce on the table.
Just remember: as emphasized in Sterle and Square D
Do not interfere with a court-ordered forensic decree.

Rodman, Reinhard and Younessi addressed nonparty subpoenas
And the protection of confidential, trade secret arenas.
Where nonparties are concerned and offer up much resistance
In-house searches are fine, or neutral expert assistance.

The debates continue on metadata versus non-native tracks
And Aquilar labeled metadata as being "the new black."
That court ordered re-production of non-natives with meta
Though the recipient was required to pay costs, as pro rata.

But not all courts required conversion to a metadata mode.
Extra burden led D'Onofrio to an "only if necessary" ode.
And Autotech said doc requests must actually require "native" --
You can't ask for it in hindsight by getting creative.

Yet if e-documents already exist in original native form
And the requests do not contain any language that informs,
White condemned the conversion to non-native in litigation
Since this is done just to increase the opponent's frustration.

Finally, social networks are making an appearance in law
And becoming a most popular e-discovery draw.
The field is wide open on the extent to which these
Are discoverable and admissible, or cannot be seized.

Flagg required defendants to give ISPs consent
And to produce ISP-retrieved records of texts that it sent.
And in Australia a court made clients even more nervous
By allowing Facebook to be used as a method of service!

We hope you've enjoyed this short "Year in Review"
And that all of this knowledge is useful to you.
We await more developments in two thousand and nine;
And wonder whether and where courts will draw any lines.

 

**For a complete list of the cases discussed above, please contact the author.
 

Not Just Another "Auld Lang Syne"

On New Year's Eve, we typically gather in a glitter-and-confetti whirl to toast the New Year with champagne…or maybe you're a stay-by-the-fire-and-watch-Times Square type. Whatever your preference to usher in the New Year, you may be interested to know that the singing of the Scottish folk song "Auld Lang Syne" at midnight is not as traditional as you believed - it did not come to yearly use until 1929, when Guy Lombardo's orchestra played it at midnight at the Hotel Roosevelt in New York City, then released a record of it and continued playing it every New Year's Eve afterward.

By the same token, a century from now law firms will no doubt wonder at our tizzy in getting used to electronic document discovery instead of our "traditional" means of producing documents via hard copy. But for now, clinging to the old ways and not making sure that document retention policies are not only up to date but adhered to is costing our clients a mint. As reported by Sheri Qualters in The National Law Journal on December 17, 2008, Kroll Ontrack analyzed 138 reported cases from January to October 2008 and reported that ONE QUARTER of the reported electronic discovery opinions in that period resulted in sanctions issues, while 13 percent addressed preservation and spoliation, 12 percent involved computer forensics protocols and experts, 11 percent, admissibility, and 7 percent, privilege considerations. In one case in the Northern District of California, defendants were sanctioned to the tune of more than a quarter million dollars. Keithley v. The Home Store.Com Inc., No. 3:03-cv-04447 (N.D. Calif., Aug. 12, 2008). That buys a LOT of champagne!

 

It's clear that doing things the way they were done in "old times past" - the literal translation of Auld Lang Syne - will get legal clients in trouble with the Court and could result in heavy financial sanctions. The Court has no "cup of kindness" when it comes to electronic discovery issues. So this New Year, no matter your celebratory preference, resolve to pay attention to your document retention and e-discovery policies, or if you do not have such policies, it's a New Year - a great time to implement a formal policy.