August 15, 2006

Electronic Data Retention and Discovery – The New Rules

Holland & Knight Alert
Roger B. Coven

Every day, paper documents lose significance, and electronic “documents,” stored data and the like become more important. Many respected organizations have created “best practice” guidelines to provide a standard which companies can cite if their document retention policies and the accuracy and completeness of their document productions in court are ever questioned.

The stakes are huge. A critical fact in the demise of Arthur Andersen was its document policies. Morgan Stanley had a billion dollar default judgment rendered against it premised on document issues. A key to successful resolution of these challenges is not only the adoption of certain practices, but a sensitivity to the political issues that corporations and in-house counsel sometimes must face internally when they seek to assemble comprehensively the data necessary to respond in a court case.

These issues have now reached the level of amendments to the Federal Rules of Civil Procedure (FRCP). Effective December 1, 2006, the FRCP will for the first time address electronic document discovery in detail. These rules will necessarily influence the conduct of all state litigation as well.

The New Rules Require the Parties to Focus on Electronically Stored Information Very Early in Every Lawsuit Filed in Federal Court
In federal court practice, litigants are required by the provisions of Rule 26 of the FRCP to disclose certain information and produce documents to the other side in the initial stages of every civil action. Generally, in these initial disclosures, parties are required to identify the witnesses and documents that support their claims. Technically, the requirement to disclose documents has included electronic documents for quite some time, but the new rules make this explicit.

The amendment to Rule 26(a)(1) adds to the required initial disclosures a copy of, or a description by category and location of, all “electronically stored information” that the disclosing party may use to support its claims or defenses. Also, the amendment to Rule 26(f) requires counsel, at the so-called conference of parties held about three months into a case, to discuss issues related to “preserving discoverable information” and to include in their proposed discovery plan “any issue relating to disclosure or discovery of electronically stored information, including the form or forms in which it should be produced.” The agreements reached on the discovery of electronically stored information are then included in the court’s scheduling order issued pursuant to Rule 16(b).

As a result of these changes, all parties in every lawsuit filed in federal court are required to give attention to the discovery of electronically stored information almost immediately after the case is filed. It seems inevitable that these rule changes will result in significant increases in both the production of electronically stored information in parties’ initial disclosures and the demands made for additional electronic information after the initial disclosures are made. In fact, for large companies with significant IT systems and in cases where particularly complex or information intensive litigation is anticipated, it would be wise, if not necessary, to focus on these issues before litigation is commenced.

Parties Must Also Discuss the Form in Which Electronically Stored Information Is to Be Produced
The form in which data are produced can be extremely important. Consider, for example, a large volume of data, such as detailed financial or sales information, that may be critical to a case and must be analyzed and understood. If printed, such data might fill thousands of pages. The party being asked to produce this information might offer it in a form that cannot be manipulated, such as Adobe PDF files, to make it more difficult for the other party to perform necessary analyses. The party who needs to analyze this information, however, might prefer to receive in it a commercially available database or perhaps in Excel spreadsheets. Under the new rules, these issues must be discussed in the early conference of parties, and disputes over the form of production may ultimately be presented to the court for resolution.

Initially, a Party Is Not Required to Produce Electronically Stored Information That Is Not “Reasonably Accessible,” But Even These Data Must Be Identified and, in Some Circumstances, Will Have to Be Produced
Where information responsive to a discovery request may be contained in electronically stored information that would be very difficult to access, the new rules would allow a party to respond to such a discovery request by identifying the electronically stored information as “not reasonably accessible because of undue burden or cost.” If discovery from that source is still sought, however, the responding party will be required to prove what it has asserted – that the information, in fact, is not reasonably accessible because of undue burden or cost. Even if that burden is met, however, the court can order the discovery on a showing of good cause by the requesting party, with or without conditions. This rule is generally referred to as the “two-tier” system under which counsel first produce information from easily accessed sources, and then negotiate (or litigate) the necessity of searching difficult to access sources.

What electronically stored information is, and what is not, “reasonably accessible,” will vary from case to case. Generally, active data purposely stored for future business use, and thus easily retrieved, will be considered to be reasonably accessible, while disaster recovery back-up tapes and data that can be retrieved only by forensic experts will not. In a particular case, however, for example where email communications between the parties are likely to hold the smoking gun, a party might be successful in getting a court to order the discovery of all retrievable data, whether reasonably accessible or not. Then, the issue will be the allocation of the cost of such discovery, and that cost can be very substantial.

Because a Thorough, Pre-Production Review of Large Volumes of Electronically Stored Information May Be Impossible, the New Rules Provide a Procedure to Recover Privileged Information Inadvertently Produced
The amendments to the FRCP also recognize that, with increased production of data in electronic form, sometimes amounting to the equivalent of thousands or even hundreds of thousands of pages, the risk of inadvertent production of information protected from disclosure by the attorney-client privilege will increase significantly. Accordingly, the new rules require the parties to discuss this issue in the early conference of the parties, and provide for the inclusion of an agreed upon procedure in the court’s scheduling order. If the parties do not design their own, the new rules provide a procedure for the retrieval by the producing party of inadvertently produced privileged electronically stored information.

The New Rules Provide a “Safe Harbor” for the Destruction of Electronically Stored Information by Routine Business Operations
Once litigation begins, or even earlier in some cases, parties have an obligation to protect from destruction or disposal information and documents that may pertain to the subject matter of the lawsuit. A party’s position in a lawsuit can be seriously prejudiced by the discovery that the party had destroyed relevant information to prevent it from disclosure. Courts often impose sanctions for such spoliation of evidence, including issuing sanctions that may in fact dictate the result of a lawsuit. Recognizing that many electronic systems dispose of information automatically after a certain period of time for valid reasons, the new rules provide that, except in extraordinary circumstances, sanctions cannot be imposed for the loss of information “as a result of the routine, good-faith operation of an electronic information system.” 

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