by David A. Chaumette
Business leaders and corporate litigators watched closely earlier this year when a Florida jury awarded Coleman executive Ron Perelman millions of dollars in damages from investment giant Morgan Stanley. Among the most compelling aspects of the case was Judge Elizabeth Maass’ instructions to the jury, which directed them to assume Morgan Stanley’s intent was to defraud investors because it was unable to produce requested electronic records to the contrary during the discovery phase of the suit.
In essence, Judge Maass’ decree applied electronic data discovery (EDD) standards of 2005 to actions Morgan Stanley took in 2001 – suggesting that the defendant should have recognised in 2001 which items it would be required to produce four years later. In doing so, Judge Maass followed the trend of other recent cases and put Corporate America on notice, alerting those in charge of corporate record retention and archives that they will need to assume the role of fortune-teller in order to successfully defend their companies in future litigation.
While this particular facet of the case alone will have far-reaching ramifications for business leaders and their corporate attorneys, it is not the only harbinger of amplified expectations regarding EDD. Modifications to the Federal Rules of Civil Procedure that were adopted in June 2005 will change how firms retain records, while sweeping advances in technology will make it possible to retrieve more information from more sources than previously. Retention and retrieval policies key to future accessibility demands.
In order to avoid the plight of Morgan Stanley, EDD professionals will need to divine the future, and implement visionary record retention policies, practices, and strategies to protect corporate communications of all types against legal action that may be brought years later.
To date, EDD has been viewed as an effort to expose smoking guns during the course of suits against corporate entities. The goal of this inquiry has been the memorandum admitting fault or some other damaging document. However, this archetype no longer represents the current state of affairs. Increasingly, the state of the records themselves – not their content – is being used to prove, or disprove, that a company acted reasonably and responsibly at the time the alleged incident occurred.
The manner in which the firm preserved relevant records is now at the center of more litigation than ever. The recent amendments to the federal rules of civil procedure adopted by the Standing Committee on Rules and Procedure in June 2005 are a case in point. They were adopted to clarify how corporations can effectively approach the management of the tremendous volumes of materials generated from year to year through the use of these new technologies. Further, they establish parameters governing litigation involving all corporations, particularly with regard to their responsibility on document management and production issues (eg, early meetings between plaintiffs and defendants regarding existence and availability of electronic records; safe harbors addressing policies dealing with regular, automatic corporate document destruction).
However, the new rules are not a complete solution. In fact, the Standing Committee may have also opened a potential Pandora’s Box about the definition of accessibility as it relates to electronic data discovery and the configuration of systems that a company might construct to archive data files. Many experts in business litigation foresee extended battles to determine whether defendants implemented corporate policies with the sincere intent to foster accessibility – or if their guidelines were instead shrewdly designed to actually hamper requests that records be produced. Unfortunately, these discovery fights will be expensive, uncertain, and largely unrelated to the substantive issues of the specific case – hardly an attractive proposition to most companies. Technology changes drive expectations for EDD.
Leaders in EDD need no clairvoyant powers, on the other hand, to discern the immense effect of technological changes on their obligations regarding archival and retention. Standards change quickly, as methods like non-native data restoration make data previously deemed irretrievable to be considered viable.
Forward-looking corporate executives and litigators have already identified the next area of probable vulnerability: instant messaging (IM). Once identified only as a communication method for homebound teenagers, today professions like commodities trading and several others increasingly rely on IM as a way of doing business. But that reliance may create the potential for significant exposure. IMs can be captured, and, as such, information technology leaders who fail to institute and implement policies regulating the use and storage or records generated via IM run the risk of potential exposure. CFO Europe magazine, for example, reported in its May 2005 edition (http://www.cfoeurope.com/displayStory.cfm/3929272) that 48 percent of executives know that IM is being used by its agents to conduct daily business. However, only 28 percent have introduced policies to govern the use of this technology. This gap may be problematic in the future.
Similarly, voicemail is another technology that has changed in the past decade. Today, many companies are moving toward digitising voicemail for several reasons, including ease of use and portability. The challenge for companies will be how to maintain, retain, and properly destroy voicemail messages without potentially exposing the company to EDD sanctions. For example, most companies delete voicemails after thirty days or some similar period. If there is a dispute related to a certain voicemail at a later point, however, that voicemail may have been routinely deleted two years earlier.
This problem is further complicated since no software exists today to automatically (and reliably) translate these records for permanent storage. Conceivably, the voicemails in question could be transcribed, although this might be prohibitively expensive. In short, there is no guarantee that future claimants may not require this sort of extensive effort. A future court will sit in judgment of a company’s decision on these issues.
In today’s volatile EDD environment, any of these situations could be the next discovery battle waiting to happen. And, if recent past is prologue, the courts will refuse to accept the absence of records or the absence of policies as a defense to motions to compel production.
In this regard, those tasked with data retention and archives must assume the role of police officer as well as fortune-teller – recognising the swift and sweeping technology changes affecting corporate communications and monitoring how these changes are being assimilated not only in their organisation, but elsewhere as well. They must then predict the potential impact of these changes and prepare their company to address them. Defending policy and practice during times of change.
In many regards, EDD leaders recognise that the issues surrounding data retention and retrieval are similar to those that enveloped the question of employee handbooks 20 years ago. These handbooks described a code of conduct and procedures, if even the company had no history of bad acts. At the same time that these policies were devised and evolved, court cases developed and defined the bounds of culpability. Over time, standards became better understood, and human resource executives oversaw efforts to ensure that infractions were limited if possible, and that response was timely and consistent.
It is likely that EDD policies and practices will follow a similarly predictable path. In the meantime, information technology leaders and corporate attorneys should strongly consider acting to protect their interests by instituting efforts that anticipate data retention and retrieval challenges. These steps should include practices like:
Ensuring that a legacy system’s data is still accessible, even after a new computer system or piece of software has been introduced.
Considering whether to make an image (e.g., Ghost or Encasement) of a computer every time an employee is issued a new unit.
Cataloguing the systems used by each employee, particularly departing employees.
Understanding the processes should litigation or the threat of litigation arise.
In today’s EDD world, there are no magic bullets. However, with proper planning the risks of distraction and additional costs can be reduced.
David A. Chaumette is a specialist in business litigation with Shook, Hardy & Bacon L.L.P in Houston, Texas.
Reprinted with permission from Digital Discovery & e-Evidence, Volume 5, Number 8, pages 2-4, published by Pike and Fischer. Copyright 2005 by IOMA, Inc. For more information on Digital Discovery & e-Evidence, call 1-800-255-8131 ext 248.
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