Rule 37 and the Supreme Court on Document Destruction

The Supreme Court articulated its policy on corporate document destruction in Arthur Andersen v. United States, 544 U.S. 696 (2005).  This case considered the appeal of the criminal conviction of Enron’s auditor, Arthur Andersen, once the biggest accounting firm in the world.  Arthur Andersen was convicted of obstruction of justice because it destroyed records pertaining to Enron, and did so knowing that a government investigation was imminent.  The “substantial destruction of paper and electronic documents” by Arthur Andersen was supposedly done in compliance with its records retention policy. Id. at 710.   It argued that had its policies been followed, these documents would already have been destroyed.  But, as the Supreme Court points out, in so doing, Arthur Andersen ignored other sections of its records retention policy prohibiting the destruction of relevant records when litigation is threatened.  Id. at pg. 700, fn. 4. 

There is little doubt that the accounting giant suddenly began to enforce its previously ignored record retention policies in order to prevent the government from getting information on its “creative” accounting services for Enron.  The Supreme Court even notes one incident where a document was destroyed by the firm’s senior accountant for Enron, David Duncan. This document had already been labeled, believe it or not, ”smoking gun,” and Duncan destroyed it with the comment ”we don’t need this.” Id. pg. 702 Fn. 6.

Arthur Andersen was convicted of obstruction of justice, and the conviction was affirmed by the Fifth Circuit Court of Appeals. How did the Supreme Court react?   It reversed in a unanimous opinion holding that the jury instruction was too stringent.  The Court had this to say on document destruction:

“Document retention policies,” which are created in part to keep certain information from getting into the hands of others, including the Government, are common in business. (citations omitted)  It is, of course, not wrongful for a manager to instruct his employees to comply with a valid document retention policy under ordinary circumstances.   . . . .

A ”knowingly … corrupt persuader” cannot be someone who persuades others to shred documents under a document retention policy when he does not have in contemplation any particular official proceeding in which those documents might be material.

Id. pgs.704, 708.

This same Court the next year (2006) approved all of the recent revisions to the Federal Rules of Civil Procedure, including Rule 37(f) which states:

Rule 37. Failure to Make Disclosures or Cooperate in Discovery; Sanctions
 * * * * *
(f) Electronically Stored Information. 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.

Considering the new rule on ESI destruction, and the Arthur Andersen opinion, you might wonder why some companies are so skittish about following their usual document retention policies.  I have heard some well known e-discovery experts go so far as to state that the entire pharmaceutical industry now never recycles their back-up tapes, instead they save them all forever, for fear of a later spoliation charge.  When I asked Kevin Esposito, the attorney in charge of Pfizer’s internal e-discovery team about this last month at the ABA First National Institute on E-Discovery, he told me that was untrue.  He said it was a matter of public record that Pfizer sticks  by its usual six week back-up tape recycling policies.  He said he is having success rebutting attacks by plaintiffs on this, noting that the courts have now caught on to this plaintiff’s lawyer trick to try to run up expenses and force settlements by frivolous demands for backup tape ESI that would be very expensive to try to restore, search and retrieve.

Most of the attorneys I have heard speak on this issue consider Rule 37(f) a very unsafe harbor, and many counsel unlimited backup tape retention, just to be safe.  They do so in spite of the many burdens, exposure and expenses that they acknowledge a “forever” retention policy will create.   As justification, they point out how difficult district courts have been on spoliation in general, even though there are no cases yet on the new Rule 37(f).  Many seem to forget the  Supreme Court’s strong endorsement of document destruction in Arthur Andersen.  Of course, the destruction must be done in accordance with prior policies, and performed before notice of actual or reasonably anticipated litigation.  (Also see the Rules Committee Commentary on Rule 37(f) quoted in full in the Rule 37 Page at the top of this Blog.)

But, even after notice, does a company have to go so far as to stop its usual recycling of backup tapes on the possibility that only these tapes might contain relevant information, that the relevant ESI is otherwise not available on the “live systems”? Pfizer apparently routinely argues that this is not necessary, and presses the courts for relief on this issue.  But what do the district courts say that causes many pundits to attack Pfizer’s position as too risky?  You have only to look to the opinions of Judge Scheindlin, whom all agree is one of the strictest and most knowledgeable judges in the Country on these issues.  Zubulake IV, an often overlooked opinion in the Zubulake saga, provides the answer.  Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 218 (S.D.N.Y. 2003):

The scope of a party’s preservation obligation can be described as follows: Once a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a litigation hold to ensure the preservation of relevant documents. As a general rule, that litigation hold does not apply to inaccessible backup tapes, for example, typically maintained solely for the purpose of disaster recovery, which may continue to be recycled on the schedule set forth in the company’s policy. On the other hand, if backup tapes are accessible, that is, they are actively used for information retrieval, then such tapes would likely be subject to the litigation hold. However, it does make sense to create one exception to this general rule. If a company can identify where particular employee documents are stored on backup tapes, then the tapes storing the documents of key players to the existing or threatened litigation should be preserved if the information contained on those tapes is not otherwise available. This exception applies to all backup tapes. (emphasis added)

So, according to Judge Scheindlin, some backup tapes should be preserved, and some need not, even after litigation.  If it is an “enterprise disaster recovery” type of backup tape, one that is very hard to access, then it does not have to be included in a litigation hold.  In other words, it can be destroyed by recycling if the normal procedures call for that.  The only exception is when the backup tapes allow for identification of particular records custodians, such as a particular Outlook user’s PST file, then the particular tape with the particular identified custodian must be included in the hold,  but even then, only “if the information contained on those tapes is not otherwise available.”  

On the other hand, if it is a more accessible type of backup tape, one for instance that is fully indexed and much more easy to search and retrieve, which is  really more like an archive than disaster recovery system, then these type of backup tapes should be included in a hold, even if you do not have evidence that “the information contained on those tapes is not otherwise available.”  

Bottom line, you really have to know and understand what type of backup tapes you are dealing with. Frequently an organization will have more than one kind of backup tapes.  Some may be the later type that are “actively used for information retrieval”, and others may not, they may be “disaster recovery type” that are seldom if ever so used. This later type is usually very expensive to restore and search for relevant evidence.  These inaccessible backup tapes need not be subject to a litigation hold on authority of Judge Scheindlin in Zubulake IV, the Supreme Court in Arthur Andersen and new Rule 37(f).  Nevertheless, until we get a little more guidance on this issue, you should probably still take them out of the normal recycle routine, at least until your opposing counsel agrees, or failing that, you obtain relief from the court on this issue.

Morgan Stanley Wins Two This Week

Morgan Stanley received two favorable rulings this week: one the well-known reversal of the $1.5 Billion Dollar Coleman judgment; and the other an order in an employment case by Arthiur Riel, the former head of Morgan Stanley’s Legal IT department.  Riel claims that he was made the scapegoat for the loss in Coleman and fired under pretext.  The facts alleged in Riel, especially as they pertain to discovery of the 1600 backup tapes that so disturbed the trial judge in Coleman, are especially interesting.  

The big win for Morgan Stanly was the reversal by Third District Court of Appeals in Florida.  Morgan Stanley & Co., Inc. v. Coleman (Parent) Holdings Inc., “Morgan Stanley II”, No. CA4D05-2606, Fla. Ct. App., 4th Dist. (March 21, 2007).  The decision said nothing at all about e-discovery, and only reversed because two out of three members of the panel felt that Coleman failed to prove damages.  There was a strong dissent and so Coleman will now almost certainly move for rehearing and en banc consideration.  Then whoever loses that will likely go to the Florida Supreme Court.  Although Morgan Stanley is no doubt greatly relieved by this reversal, the story is far from over.  Moreover, so far at least, the e-discovery aspects of the lower court’s rulings have not been reversed, or even commented on. ADDENDUM - The rehearings to the Fourth District Court of Appeal did not change their mind. As predicted, Coleman then appealed to the Florida Supreme Court. On December 12, 2007 the Florida Supreme Court denied Coleman (Parent) Holdings, Inc.’s petition for review. Coleman (Parent) Holdings, Inc. v. Morgan Stanley & Co. Inc., No. SC07-1251 (Fla. Dec. 12, 2007). There was never any discussion of e-discovery.

The other new Morgan Stanley decision comes from the suit by Arthur Riel, the former Executive Director of its “Law IT Department.”  Riel v. Morgan Stanley, 2007 U.S. Dist. LEXIS 11153 (S.D.N.Y. Feb. 16, 2007).  The facts of this case are what make it interesting, and will bear watching as the pared down suit continues.  Arthur Riel and his IT team developed a searchable email archive to capture all emails to and from Morgan Stanley from January 1, 2003, forward.  He was also asked to add all of Morgan Stanley’s earlier emails to this archive by restoring emails from 39,000 backup tapes.  The harvesting of the emails from the tapes was performed by an outside vendor, not Riel’s IT team.

During the course of Riel’s work, he and his team noticed some suspicious emails to and from a few management personnel wherein gifts, including sporting tickets, were offered by company vendors.  Although this was not part of his assigned task, Riel pursued an investigation of these email strings, and concluded that they revealed illegal misconduct, including the rigging of a technology contest.  In January 2004, Riel anonymously sent copies of the e-mails to Morgan Stanley’s Chief Financial Officer via interoffice mail with a post-it note that read: “Needs investigation.” Apparently Riel was not too adept at maintaining his anonymity because his supervisor later learned that these tips came from him.

A few months later, in April 2004, the Florida court in Coleman [Parent) Holdings, Inc. v. Morgan Stanley & Co., Inc., No. CA 03-5045 AI (Fla. Cir. Ct.), ordered Morgan Stanley to conduct a search of its e-mails dating back to 1988, to produce materials by May 16, 2004, and to certify, in writing, its compliance with the order.  In April 2004, the outside vendor harvesting emails from the 39,000 backup tapes became aware of still more backup tapes: a set of 1,423 “DLT” backup tapes found in a warehouse in Brooklyn, and another set of 177 old style 8-millimeter backup tapes. On June 7, 2004, Riel alleges that he sent an email to two Morgan Stanley in-house lawyers notifying them that these additional 1,600 backup tapes had been discovered, and that they could contain pre-2000 emails.

At the direction of the Morgan Stanley in-house counsel, the Riel team performed searches of the email archive. The search did not include the newly discovered 1600 backup tapes as they had not yet been added to the archive.  Riel was then called upon to sign a written certification prepared by Morgan Stanley’s in-house attorneys, which certified compliance with the court order to search and produce emails.  Riel’s complaint alleges the following concerning this certification:

73. Mr. Riel had no specific information concerning the Coleman Litigation and only general information concerning the search that his Law IT team conducted on the Archive. Nor did Mr. Riel, a non-lawyer, have any understanding of Morgan Stanley’s discovery obligations in the Coleman Litigation. Mr. Riel believed that the Certification operated as a confirmation that Morgan Stanley conducted a search of its Archive and that the responsive materials from that search were forwarded to Morgan Stanley’s lawyers for production.

74. At the time, Mr. Riel had no understanding that he was certifying,  in any sense, that all responsive e-mail from any Morgan Stanley source, including older back-up tapes, had been produced.

Still, Riel signed the erroneous court certification on June 23, 2004, and the rest, as they say, is history, leading to the $1.5 Billion Dollar judgment that was just reversed.

After this certification, Riel’s prior action to try to anonymously tip off the illegal conduct came back to bite him.  On August 18, 2004, Riel was placed on paid administrative leave while his supervisors investigated the propriety of his reading the content of emails of Morgan Stanley executives while performing his IT tasks.  There is no mention of an investigation into the alleged illegal activities the emails supposedly revealed.

Two months later, in October 2004, SEC investigators contacted Riel at home to question him regarding Morgan Stanley’s email retention practices.  Riel advised the SEC of the newly discovered 1600 backup tapes.  The SEC then provided Morgan Stanley with a “Wells Notice” advising that an action was imminent.  Carlson v. Xerox Corp., 392 F. Supp. 2d 267, 279 (D. Conn. 2005).  Morgan Stanley responded by blaming Riel and claiming that he never told them about these 1600 tapes. Apparently they never received the emails Riel claims he sent about the newly discovered tapes.

Later that year, on May 16, 2005, the Wall Street Journal published an article entitled, “How Morgan Stanley Botched a Big Case by Fumbling Emails.” This was about the Florida case. Riel claims that Morgan Stanley attempted, in what it said to the Journal, to lay the blame on Riel for problems with the Florida court arising from the handling of e-mails in the document production.

Finally, on September 27, 2005, Morgan Stanley sent Riel a termination letter stating that he was terminated for cause for reading other employees’ e-mails. Riel claims that this deprived him of 1,600 stock units and 5,000 vested stock options worth several hundred thousand dollars.

Riel sued, alleging eight counts including beach of contract, defamation in connection with the Wall Street Journal article, fraud and negligence.  Morgan Stanley moved to dismiss all counts except for Count Three. It alleges that Morgan Stanley breached its Executive Incentive Compensation Plan by firing Riel for cause, in bad faith, with the effect of depriving him of stock and options. Morgan Stanley’s motion was granted, and thus this action will continue solely on the breach of contract claim in Count Three. Like the much larger Coleman case, this is a victory for Morgan Stanley, but the saga continues. 

Apparently one of the key elements of Riel’s case going forward will be whether Riel in fact sent an email to Morgan Stanley’s attorneys advising them of the 1600 tapes.  This should be easily discoverable by the mail archive system that Riel himself established.  The metadata of these emails, if in fact they exist, should reveal the truth.

National e-Discovery Counsel and the 98% Rule

The faculty of judges, in-house counsel and attorneys at the BNA conference yesterday observed a new trend in legal practice, national e-discovery counsel.  Here one attorney or law firm serves as a corporation’s national counsel to handle or supervise the electronic discovery aspects of all of its cases around the country.  The corporation’s various local counsel handle all other aspects of the case.  The faculty said they are seeing this new model now more and more.  All agreed that it makes good sense, especially in view of the tremendous time and effort it takes for an attorney to learn the complexities of today’s typical IT environment.  It is far too expensive to try to educate all of a corporation’s various outside counsel.  Besides, most of them would not be up to the task.  The panelists noted that there are not that many lawyers with an IT background capable of learning these complex systems.  Most of the lawyers like that have already formed their own speciality IT firms, or have been hired by e-discovery vendors, which is now a Two Billion Dollar a year industry.

The panelists all agreed that there appears to be a sea shift going on in the litigation world, where the importance of discovery is coming to be recognized.  Merrill Lynch’s Jonathan Eisenberg noted that, for all practical purposes, discovery today means electronic discovery.  This is consistent with his experience, and is also consistent with recent studies of business practices indicating that 98% of all records today are ESI. 

The 98% statistic comes up again in the world of federal litigation.  The panel of judges noted that only 2% of their cases ever go to trial.  An astounding 98% of all cases in federal court settle.  The settlements occur after sufficient discovery has been conducted to allow the parties to assess their relative positions, and evaluate the strengths and weaknesses of their case. Therefore, most of the attorney fees and costs of litigation today are for discovery to evaluate and narrow the issues, and only a small amount to actually try the issues.  Litigators are, like it or not, not really trial lawyers at all; they are discovery lawyers, negotiators and mediators.  This means that the task of discovery, which used to be assigned to new associates, and was considered unimportant, is in reality the key task of litigation.  It is also the task that consumes the bulk of the attorney fees and costs.  

Clients are starting to realize this and to understand the importance of attorneys who specialize in and understand electronic discovery. Merrill Lynch and Halliburton are two good examples, but there are several others, including Verizon, WalMart and Pfizer.  Since 98% of the evidence today is in electronic form, and 98% of all cases settle, corporations need a national e-counsel to evaluate settlement on a cost efficient basis.  They are in the best position to address the client’s need for economic resolution of disputes. 

Practice Under the New Rules: an e-Discovery CLE by BNA

I attended the BNA/Kroll event in Orlando today called: “Practice Under the New E-Discovery Amendments: the battleground of conflict; the promise of resolution.” Basically, the CLE tried to devine the impact of the new rules on business and litigation in America, and in the process provided many excellent, advanced practice tips.

The speakers included Judge Hughes, whose Top Ten Tips I festured in my last blog; another magistrate in N. J. District Court, Judge Ronald Hedges; Magistrate Judge David Waxse of Kansas City who decided Sprint v. United; Judge James Rosenbaum, a District Court Judge in Minnesota; and Judge John Carroll, a former magistrate in District Court in Alabama, now a law professor at Cumberland.  These are among the preeminent e-discovery specialists on the federal bench, who have been studying and speaking on e-discovery issues for years.  Their view from the bench was very enlightening. 

So too was the contribution of other distinguished faculty, especially that of the two in-house counsel, Jonathan Eisenberg of Merrill Lynch and James Wright of Halliburton.  Actually, Jim is not an attorney, he is a project manager who serves as the leader of Halliburton’s e-discovery team.  Under his guidance, Halliburton has established one of the most advanced e-discovery teams in the country.  Jim provided a wealth of practical insights on the team process and procedures, noting among other things that the biggest cost in e-discovery is attorney review of documents.  That, in his experience, ranges in cost from $5.00 to $10.00 per file.  For that reason he manages the initial filtration of documents very aggressively to try to cull down the number of files to be reviewed.  He noted that outside counsel may not be as motivated to do so, since they are the ones performing and billing for these services.  Jim mentioned some new software tools and strategies to help keep the numbers down, including “clustering” search technologies, enhanced janitor software built into the document creation, and early agreements with opposing counsel on restricted date ranges, searches and file type exclusions.

Under Jonathan Eisenberg’s guidance Merrill Lynch has done the same in its field, providing a sharp contrast to their competitors such as UBS Warburg and Morgan Stanley.  Jon’s promotion and development of an internal e-discovery team arose out of his observation that in-house counsel without expertise in this area were rendered ineffective in modern securities cases.  Now, under his leadership, Merrill Lynch carries out what he described as an eight step process:  1) litigation hold procedures; 2) custom search software; 3) filtration before export to vendors; 4) document destruction policy; 5) dedicated in-house electronic discovery team; 6) Encase type software tools to search for non-email ESI; 7) pool of reliable contract lawyers to review pre-productions;  8) in-house forensic experts.

Jonathan then went on to provide detail on the litigation hold procedures his team has developed.  This is a seven-step process: 1) ID the custodians; 2) map the data sources; 3) send written notices and reminders; 4) monitor and enforce compliance; 5) interview key players; 6) collect information;  7) export data for production to outside counsel.  On the key mapping step, he noted that it takes many months to do properly, and is impossible if you wait do this in response to a case. Like every other speaker at the CLE, he emphasized that it is impossible to do e-discovery perfectly, that you should expect mistakes, and document a good faith effort. 

Finally, he mentioned a software program that both Merrill Lynch and Halliburton use to automate the litigation hold process:  Atlas LCC by PSS Systems.  It is tied into the HR databases, and notifies and implements direct transfers of data by custodians.  It also keeps a record of the whole process and so facilitates documentation of efforts and up to the minute status reports.

Judge Hughes’ Top Ten e-Discovery Tips

One of the better handouts at the ABA’s First Annual National Institute on e-Discovery last week was Judge John J. Hughes’ “Top Ten Tips for E-Discovery.” Judge Hughes is a District Court Judge in Trenton, New Jersey. Of course, I want to respect his copyright and that of the ABA, so what follows is a paraphrasing and elaboration of his ideas.  Any mistakes are entirely my own.

1. TALK TO YOUR CLIENT.  This is the key to the Zubulake Duty discussed in the blog page above. It means to talk to all the involved people in a client corporation: in-house counsel; IT on all levels; and the business players involved in the dispute. It also means to talk to your client about a records retention program, and the formation of an e-discovery team. It is good to see that Judge Hughes makes this his number one tip to improve e-discovery.

2. TALK TO OPPOSING COUNSEL.  The only way for e-discovery to work is for there to be full and open communication between counsel as to what you are doing, what you want to do, and why.  This is what Judge Hughes calls establishing the rules of the game before you start to play it.  The new rules of procedure are very bare bones; they are designed to start dialogues between counsel, rather than end them.   E-discovery requires a high degree of cooperation and transparency between attorneys; something that has been all too rare in the past.  The days of strong adversarial conduct in discovery are over.  “Hide the ball” tactics will inevitably lead you to trouble, not victory. 

3. ID AND TALK TO YOUR CLIENT’S TECHIES.  You need to get to know your client’s IT people, as the Judge puts it, to get on their “same wavelength”. This requires identifying the IT techs you need to locate, preserve, and harvest the ESI at issue in your case.  It also requires identify the techie among them you should prepare and produce for deposition on ESI related subjects.  Not all IT people make good deponents, to put it mildly. This tip emphasizes the importance of establishing lines of communication with your client’s techies.  If your client does not already have an e-discovery team formed, this step is especially critical, and often extremely challenging.  It is far better to have these lines of communication established well before a lawsuit hits. 

4. EDUCATE THE JUDGE.  Again the emphasis is full and open communication, this time with the presiding judge.  Let the judge know what is going on with e-discovery in the case.  If there are any issues, bring them to the judge’s attention as soon as possible.  Do not assume that the particular judge you have is familiar with e-discovery.  Some are, some are not.  Some judges may require full briefing on the subject, and almost all will require some education as to your client’s particular ESI situation.  Th complexity of most IT systems is beyond the experience of most judges, even technologically savvy ones, and this requires a detailed education process, including in some instances, testimony by your designated “talking techie.”

5. CONTINUING DISCLOSURE.   Followup with your clients on IT and be sure that all responsive ESI is being preserved, harvested and produced.  You need to be vigilant in preserving, and not just rely on a one time effort.  It is way too complicated, and the amount of ESI at issue in a typical case is too vast, for a single effort to succeed.  As a speaker at the ABA conference put it, never use the word “ALL” in e-discovery.  You will never be able to identify and produce ALL responsive ESI, you will never be able to do a perfect job in this area, and avoid ALL mistakes.  The best you can do is establish reasonable systems, and be diligent.  This diligence requires followup and reminders. As Judge Hughes put it, “assume somebody will forget to disclose their PDA.”

6. MAKE SPECIFIC DISCOVERY REQUESTS. Be specific and focused in your e-discovery requests. Judge Hughes says the days of saying “any and all’ and “in any form” are over.  Over-broad discovery is inappropriate and objections on that basis should be sustained.

7. SHOW “GOOD CAUSE” FOR PRODUCTION. You need to be prepared to establish a factual predicate for the production you request.  If an objection is made, be prepared to prove why it should be produced.  Never assume that the judge knows your case and why the ESI requested is imporant for you to prepare for trial.

8. EXPLAIN “UNDUE HARDSHIP” IN OPPOSITION. Again, prove your ESI discovery positions, offer evidence as to why the data requested is inaccessible. Do not assume the judge understands the burdens that a request may place upon your client.  As Judge Hughes puts it: “offer certifications as to precise cost in time/money/loss of productivity.”

9. CONNECT E-DISCOVERY WITH E-TRIAL.  The Judge here makes the valid point, which practitioners sometimes lose sight of, that the only legitimate purpose of e-discovery is to prepare for trial or negotiated settlement.  From the start, you should be thinking about how you will use and present the electronic evidence you uncover at mediation or trial. Further, e-discovery should never be an end in itself, and judges should not allow one party to use the threat of expensive e-discovery as a tool to force settlement.

10. BE PROFESSIONAL. Judge Hughes reminds us that our reputation is our most valuable asset, and as he puts it, “your most effective litigation skill.”  He also reminds us that although it takes time and consistent effort to build a good reputation, it is easily and quickly lost.

ABA 1st Annual National Institute on E-Discovery

I attended this ABA event in Chicago yesterday at the Hotel Intercontinental.  There was a big turnout for this e-discovery event by the ABA’s Section on Litigation.  It was an experienced crowd of lawyers to be sure, but there were not that many young lawyers, and I had the feeling the room was not exactly filled with bloggers, techies and web 2.0 aficionados.   All of the speakers were pretty good, and this was a quality event.  Some were even quite funny, although a few admitted that they knew nothing about e-discovery, and did not even want to know how computers and ESI worked.  Apparently they were there because they were experts or professors on ethics, litigation and the like.  One of them kept opening and closing a lap top on the podium and then looked around confused, wondering where the sounds were coming from (it had a hibernation sound), until a friendly moderator finally came to the rescue.  Oh well.   This same speaker advised everyone to affiliate with lawyers 32 years old or younger on e-discovery issues, on the presumption that only they could figure this all out. In fact, he said lawyers had an ethical duty to bring in competent techie lawyers, if they could not themselves understand the technologies involved in the ESI search.  That much I agreed with.

Three of the faculty that the ABA Section of Litigation assembled for this event stood out as particularly good: Andrea Zopp, the keynote luncheon speaker; Kevin Esposito, a panelist on the ”Cost Reduction Strategies” segment;  and Judge Paul Grimm, a  panelist on the last session on ethics.

Ms. Zopp was the general counsel for Sears for many years, and is now serving as the head of human resources for Exelon Corp., Chicago’s power company.  Her presentation was entitled: “We Have To Do What? The In-House Perspective.” The speech was as funny as the title and provided a rare, frank glimpse into the mind of in-house counsel on a number of subjects, not just e-discovery.  She was very blunt in saying that is is absolutely imperative that outside counsel personally meet with their in-house counsel clients and closely question and educate them on e-discovery issues. She explained that most in-house do not really understand e-discovery, nor do they want to.  They like “shiny things” and want all of them, but could care less how or why they work. She also jokingly said not to trust what in-house counsel tell you, not because they are ill intentioned, but because they are so future oriented, always focusing on the next task at hand, that they do not remember things in the past that well.  Also, she pointed out that corporate departments are tribal, and even the larger IT tribe has various sub-tribes within it, and you should never assume that the various tribes and sub-tribes in a company ever speak to each other or know what they are doing. So when you meet with IT people, you have to meet with all departments and levels of IT.

This message was emphasized by Kevin Esposito, in-house counsel for Pfizer who heads up its e-discovery team.  Kevin was a great speaker who really livened up the panel, and got the most laughs with his imitations of what many IT geeks sound and act like.  As a true geek lawyer himself he spoke with authenticity and sympathy for the IT techies that we must all depend on in the world of e-discovery.  He had some good suggestions on how to communicate with them, pointing out how challenging that always is.  He advised working with them closely before the 26(f) conferences, but to never actually bring them to the conference.  They are likely to speak out of turn and volunteer information that could get you into a lot of trouble.  Mr. Esposito made clear that you have to meet in person with a company’s IT staff, and not just the CIO, but all levels, especially the “lowest” level of the help desk and back-up technicians.  Only the “rubber meets the road” techs actually know what is going on in IT, and what the ESI storage practices really are.  Otherwise you risk falling victim to the old “telephone” game, where the one who receives the final message (the trial lawyer) gets it all wrong.  

All of the panelists on the Cost Reduction Strategies panel  agreed that the key to costs savings was to spend more up front to create an effective ESI response team, to map the data, and set up sound processes and procedures for preservation, identification and collection.  Conversely, they stated the “worst enemy of cost control is the poorly organized and poorly prepared” internal e-discovery response team.  This is all the stuff I regularly preach, so it was reaffirming to hear all of the panelists agree.  In fact, this was one of the underlying themes of the whole conference.

The last presentation was “E-Ethics: Practical Consideration and Ethical Issues in Electronic Discovery.”  Here Magistrate Judge Paul Grimm of Baltimore, Maryland, made a strong impression with his practical approach. Judge Grimm has gone far deeper than most judges in the area of e-discovery, and has even helped developed a set of e-discovery protocols  for the proper conduct of counsel in Maryland.  I suggest you take a look at these well considered local rules.  As Judge Grimm said, they make a good checklist to be sure you cover everything.  The ethics panel all agreed that the “Zubulake Duty” (discussed in the blog page above) is inherent in the new rules, and sets a new standard of care for all attorneys to follow.  They called this a “sea change” in discovery duty and responsibility.  The distinguished panel, including the current head of the ABA’s Litigation Section,  agreed that outside counsel has a duty to sit down and meet with the general counsel and IT personnel, that it is not sufficient to just call and write. As Judge Grimm put it, the “empty head, pure heart” defense just won’t cut it any more.

Rule 37(f) Safe Harbor Requires Routines That Most Companies Lack

New Rule 37(f) creates a “safe harbor” for a company to destroy ESI as part of its routine electronic records management practices.  Unfortunately, this harbor is beyond the reach of most companies because they lack established routines for ESI retention and destruction.  The rule states:

(f) Electronically stored information. 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.

The routine good faith operation of an electronic records storage system can be proven by reference to a company’s written records retention policy.  That is the document, usually very long and complicated, that tells you when to save records, and for how long, and when to delete them.  If the deletion of ESI was in accordance with the company’s written manual on the subject, then you may be able to prove the loss of evidence was the result of routine and good faith operations.  This assumes, however, that: a) the company has such a manual; and, b) the book is routinely followed.  In reality, a company’s records retention policies are often ignored, and seldom enforced.  That makes the routine needed for Rule 37(f) safe harbor protection a difficult element for most companies to prove.

There are many reason for this, including that the records manual is usually too long and incomprehensible, and everyone finds this whole subject too boring and unimportant to deal with. So people just do what they want with the records they control.  This seems to be especially true of IT employees, who, it seems, frequently follow their own rules based on the “we know better principle.” For instance, the book may say to recycle backup tapes every three years, but in reality you may have tapes going back for decades.  The tapes are probably unlabeled, and no one has any real idea what is on them,  much less how to restore them.  Still, the company may have to produce these tapes someday, and pay experts a small fourtune to restore them to try to find missing evidence.

In the event a written records retention policy is not uniformly followed, a court will look to actual practices of a company to determine its “routine, good faith operation. ” Although a written manual will have consistent operation procedures specified, when you turn to actual practices by employees in a large company, consistency is rare. What is routine for one part of the IT department may be different from another part. It is worse when comparing individual employees, some of whom may be organized pack rats, and keep everything, and others may delete everything as soon as they read it. Playboy Enterprises, Inc. v. Welles, 60 F.Supp.2d 1050 (S.D.Ca. 1999) (Playmate explained that she had no emails to produce because she always deleted an email right after she read it.)

The result is that it is hard, if not difficult for most companies today to take advantage of the “safe harbor” provided by Rule 37(f). They cannot do so because they do not have routines. About the only thing that is likely to fall within the purview of the rule for most companies is the automatic “janitor”programs that delete things without need for any human intervention at all.  For instance, if a file is not used within a set time period, it will be automatically deleted. In fact, this is a common practice for ESI, but impossible for paper records. (Xerox has, however, recently invented a new kind of printer and paper wherein the document automatically erases itself after a few days.)

Even in the case of automatic ESI destruction, the defense will only work if the electronic janitor did its job before the human in IT was, or should have been, told by legal that there was a lawsuit brewing, and the auto-destruction routines should be placed on hold.  If a litigation hold was not implemented when it should have been, then the practice lacks the good faith needed for the safe harbor, even if it has the routine.

This is made clear by the rules commentary, which states:

The good faith requirement of Rule 37(f) means that a party is not permitted to exploit the routine operation of an information system to thwart discovery obligations by allowing that operation to continue in order to destroy specific stored information that it is required to preserve. When a party is under a duty to preserve information because of pending or reasonably anticipated litigation, intervention in the routine operation of an information system is one aspect of
what is often called a “litigation hold.”

As mentioned, unlike paper records, ESI can automatically throw itself away. This distinction between paper and electronic records is the genesis behind Rule 37(f).  The commentary to the new rule, which is quoted in full in the above Blog Page on Rule 37, explains the difference between paper records and ESI this way:

The “routine operation” of computer systems includes the alteration and overwriting of information, often without the operator’s specific direction or awareness, a feature with no direct counterpart in hard-copy documents. Such features are essential to the operation of electronic information systems.

On the other hand, if paper evidence is destroyed, it is frequently evidence of culpable conduct.  For instance, one tech company apparently began preparing for patent litigation by getting rid of evidence that might make its cases more difficult. Rambus, Inc. v. Infineon Tech. AG, 220 F.R.D. 264, 284 (E.D. Va. 2004); Rambus, Inc. v. Infineon Techs. AG, 155 F.Supp.2d 668, 680-83 (E.D.Va.2001); Rambus, Inc. v. Infineon Techs. AG, 222 F.R.D. 280, 286 (E.D.Va.2004); Samsung Electronics Co., Ltd. v. Rambus, Inc., 439 F.Supp.2d 524 (E.D.Va., July 18, 2006).  The company began its records destruction campaign by establishing a new records “retention” policy.  It began to implement the new policy with what it called “Shred Days,” where, I kid you not, they gave every employee a burlap bag to fill up with papers to be shredded, followed by pizza parties. They managed to destroy 2.7 million pages of documents this way, but the strategy failed in the end, and resulted in spoliation sanctions instead.