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Avoiding Gotcha! Are You Ready for the New Rules on Preserving Electronic Information?

The Amendments to The Federal Rules of Civil Procedure

New Federal Rules of Civil Procedure regarding electronic discovery, effective December 1, 2006, may induce employers who are unprepared for today's litigation to settle otherwise defensible claims, since the costs of electronic discovery can be considerable, the failure to preserve electronic information can result in severe sanctions, and the publicity given the new rules will heighten the plaintiff bar's awareness of defendants' information retention requirements. The new rules have received widespread coverage in legal, HR and the traditional news media, so their impact is expected to be considerable, even though they do not substantively change an employers' obligation to appropriately preserve information (electronic, paper or otherwise) when notified of a potential claim.  As we discuss below, the rules therefore provide an important incentive for employers to implement practical electronic information retention policy, design and deploy effective litigation hold procedures and conduct supervisory and staff training to ensure policy compliance.

The Federal Rules amendments address six key points by:

• Defining a new form of information covered by discovery called Electronically Stored Information (ESI), which a party must preserve and consider in discovery;
• Requiring parties to discuss electronic discovery issues during the initial case planning conference;
• Providing that ESI will be produced as it is "ordinarily maintained or reasonably usable" absent agreement to the contrary);
• Creating a limited exception to discovery, when ESI is "not accessible because of undue burden or cost;"

• Establishing a safe harbor from sanctions where a party fails to preserve ESI as a result of the routine, good-faith operation of its electronic information systems; and

• Adding protection in case of inadvertently disclosed privileged information contained in ESI.

While these rules apply only to federal cases, the new rules also will apply in states which follow the federal rules in state civil procedure and will provide a model for the remaining states.

The Costs of E-Discovery

According to some studies, over 90 percent of business information is maintained in an electronic rather than paper form.  E-discovery is further complicated by the fact that many organizations do not maintain all electronic information in a formal organized manner where it can be easily preserved and retrieved.  Not surprisingly, expanding discovery information by several fold can significantly increase the costs associated with the discovery process.

Indeed, even before the new rules became effective, the potential costs of e-discovery were enormous.  These costs fall into two categories: (1) the direct financial cost associated with preserving, identifying, searching and managing e-discovery, and (2) penalties imposed on employers who failed to preserve e-discovery. 

The direct financial cost of electronic discovery can be huge in terms of time and money.  The cost of restoring one backup tape may exceed $1,000 and the cost of extensive e-discovery in a single case will be in the tens of thousands of dollars.  A recent survey indicates that the global costs of e-discovery in 2008 will exceed $1 billion.¹  Another survey indicates the costs for a company with $1 billion in sales will be between $2.5 and $4 million per year.²  These costs will certainly grow with the increased focus on e-discovery from the new federal rules.

The cost of failing to produce relevant electronic evidence when an employer is on notice of a potential claim can be catastrophic.  For example, in several highly-publicized cases, trial courts have directed verdicts against organizational defendants which resulted in verdicts as high as $1.5 billion.  Several other less publicized cases have also resulted in penalties ranging from a jury instruction that the loss of evidence should result in an adverse inference against the party failing to produce the evidence that it would have been harmful to the party's case to a requirement that the organizational defendant pay attorneys' fees or expert witness costs.

Best Practices for Reducing the Risk and Cost of E-Discovery

Ten years ago and more, most organizations recognized the issues associated with sexual and other unlawful harassment.  Five years ago, most organizations recognized the issues associated with unethical conduct and ineffective compliance programs.  The key to addressing these issues was to implement effective systems, training and investigation procedures to minimize risk and identify problems early.

As with harassment and compliance issues, the way to reduce this newer risk is to implement systems to address e-discovery and train appropriate staff on such systems.  Proactive steps now can reduce the total cost of e-discovery and reduce the risk of spoliation or destruction of evidence and attendant sanctions.

1. Electronic Information Systems

   Update Technology/Electronic Communications Policies

   Technology changes rapidly. Many companies, however, are using electronic communication policies that do not properly reflect today's technology.  Up to date policies are critical to make appropriate and prudent use of an employer's technology systems and to reduce employees' expectations of privacy when using companies' systems. 

   Organizations should review and update their technology use/electronic communications policies to ensure they are tailored to the company in terms of operations, technology advancements and culture.  For example, many policies today do not address instant messaging, use of networks to access personal web-based email voicemail, blogging, instant messaging, flash drives, pdas, other portable storage devices, use of home computers to conduct business, or remote access, often wireless, from public areas such as coffee shops.  Each of these electronic capabilities exposes the employer to the inappropriate use of systems by employees and potentially expands the universe of e-discovery obligations.  Moreover, information technology (IT) safeguards must be in place to enforce compliance with policies, i.e., if instant messaging is not permitted under the written policy, networks should be configured to block access to common instant messaging systems.

   Establish – and Follow – an Electronic Information Retention and Destruction Policy

   There is no one-size-fits-all electronic information retention and destruction policy.  Such policies must be tailored to each organization's operations, culture and legal obligations.  The most effective policies are developed through a team approach which has senior leadership buy-in and includes legal (inside and/or outside counsel), IT, human resources (HR), finance, and operations staff.  The need for IT involvement is vital, for only IT can ensure that electronic information: (i) is maintained in an easily accessible manner that can reduce e-discovery costs; and (ii) is truly deleted from electronic information systems.

   The team should assess the universe of available information (potentially physical and electronic information), and determine what records should be kept for legal and/or operational reasons.  It  also should decide how long and in what form such records should be maintained.  The team  should address methods for destruction of information, as well.   The need for destruction protocols is underscored by the growth of federal and state statutes forcing employers to destroy certain personal information, such as social security numbers, in order to protect employees and others from identity theft.  As discussed below, the policy should also identify the need to preserve electronic information during a "litigation hold," discussed below.  After completing this analysis, the team should prepare an electronic information retention and destruction policy which accurately reflects how the company will operate.  This policy should be supplemented by detailed internal procedures.  Further, to the extent feasible, companies should automate the retention process.

   An effective Electronic Information Retention and Destruction Policy is a vital action item under the new e-discovery rules.  The rules specifically provide that "[a]bsent exceptional circumstances, a court may not impose sanctions … 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."   Thus, for example, if an employer determines that certain business records or internal communications do not need to be maintained past a certain period of time due to legal or operational requirements, such information should be regularly deleted from the systems.  This will result in lower production costs and possibly limit the scope of information that employees could gather through the discovery process to support their claims against the employer.

   Establish a Formalized Litigation Hold Procedure

   Companies have the obligation to preserve relevant evidence when they are on notice of actual or anticipated litigation.  Complaints or demand letters obviously put a company on such notice but companies also are on notice when relevant managers actually anticipate litigation even in the absence of a lawsuit, charge or attorney demand letter.  Once an organization is on notice, the litigation hold procedure should be initiated.

   A formalized litigation hold procedure is a critical system necessary to fall within the safe harbor provisions of the Federal rules.  A litigation hold procedure should also be an efficient way of handling electronic information on a routine basis.  Indeed, in the vast majority of cases, opposing parties will likely be satisfied with a company's preservation efforts when it can demonstrate that it has followed a routine and reasonable litigation hold procedure.

   While litigation hold procedures should be tailored to an individual company's needs, there are elements which should be included in most cases.  In addition, as with the development of an electronic information policy, a litigation hold procedure is generally most effective when a company uses a team approach involving IT, legal, HR and key business leaders.  Other key elements of a litigation hold procedure generally include:

   • Records of team meetings;
   • Records of actions by relevant custodians to suspend the destruction of relevant electronic and paper information;
   • Written communications to relevant employees to preserve information – including ongoing relevant information;
   • Records of what evidence has been preserved; and
   • Cessation of the litigation hold when litigation no longer is anticipated.

   In many cases, it may be appropriate to establish a dedicated server for the purpose of archiving litigation hold information.  Some organizations routinely face similar litigation and it may also make sense to establish an archive of relevant materials in advance of litigation.  For example, many employers maintain historical records of employee handbooks and policies to establish the relevant policies at a given point in time.

2. Training Issues

   Most employers include technology/electronic communication policies in employee manuals and many require employees to sign acknowledgements of such policies.  Far fewer companies, however, include electronic information retention policies in employee manuals. We recommend they do so.  These policies should also be distributed throughout an organization periodically through email reminders.

   Employers also should consider providing workplace training specifically to address technology/electronic communications and electronic information retention policies.   Unfortunately, the casual and seemingly personal nature of e-mail often leads employees to send e-mails containing messages that they would not make in a meeting or in a more formal communication.  Such inappropriate e-mails frequently are used as evidence of improper conduct or motive and can result in significant monetary judgments.  Such training can also emphasize the important of complying with information retention policies.

3. Audits and Investigations

   Audits and investigations are important to any compliance system, including a system to handle e-discovery procedures.  Employers should routinely audit their practices to verify they are complying with information retention policies and litigation hold procedures.  Investigations are also appropriate to identify and correct problems as well as to demonstrate a company's good faith.

   An audit of backup tapes can be particularly cost-effective.  Most companies have established rotations of backup tapes which are regularly recycled and reused.  Still, in many companies, dozens of backup tapes which are no longer in the "rotation" are sitting in the computer room collecting dust.  These excess backup tapes may not be properly labeled and may contain information in a format no longer in use.  The cost of restoring and examining such tapes can be extremely expensive and companies should audit their IT departments to determine whether there are excess backup tapes.  If the information on those backup tapes is not needed because of business reasons or anticipated litigation, companies should catalogue the nature of information on the backup tape and strongly consider destroying the tapes.

Jackson Lewis Initiatives to Address E-Discovery Issues

Jackson Lewis has invested significant resources to be a leader in helping organizations navigate through  e-discovery and law-related workplace technology issues.   Our national workplace law firm has established an E-discovery and Workplace Technology practice group dedicated to assisting employers in establishing practical electronic information retention policies, in implementing effective litigation hold procedures and in handling complex and/or emergent e-discovery matters.  The Firm's E-discovery and Workplace Technology practice group also provides ongoing internal training through the Jackson Lewis E-Discovery U™ program so that our attorneys and other professional staff are fully prepared to handle e-discovery and digital evidence. 

We know that most of the cost of litigation is incurred during the discovery process. We have invested in the latest litigation support technology to handle litigation and other workplace law matters in the most efficient way possible.  We have an enterprise license for Summation®, the industry leading litigation support programs and numerous licenses of CaseMap® and Trial Director®.  Our systems are capable of handling routine employment matters as well as more complex matters involving millions of documents.

We are also highly experienced in using technology in the courtroom and have tried cases requiring electronic exhibits, bar coded exhibits, wireless secured networks in the courtroom, synchronized video depositions, and other ways of presenting evidence through the latest technology.

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¹ According to the Socha-Gelbmann 2005 Electronic Discovery Survey, the cost of e-discovery in 2005 was projected at $1.28 billion, a 55 percent increase over 2004.

²  Cohasset Associates, Inc., April 2005.