On Dec. 1, 2006, the Federal Rules of
Civil Procedures were amended to formally include a section on discovery of electronically stored information (ESI).
“Higher-lever management and IT people
must become educated on what this change
really means well in advance of any litigation
being filed by or against their company,” says
Ronald S. Hodges, a partner and head of the
litigation department at Shulman Hodges &
Bastian LLP. “Consequences could be dire if
they do not comply with this new statute.”
Smart Business talked to Hodges about
those ‘dire consequences.’
What challenges face corporate managers?
The overwhelming majority of companies
interviewed in surveys appear to be grossly
unprepared to meet the standards enunciated under this code section. They either do
not know about it or they know about it but
do not have the systems in place, or they
know about it, have the systems in place, but
do not know what is required of them in case
of potential or actual litigation.
The important thing for higher management to understand is that there are severe
consequences if it does not have systems in
place to address this issue once the company
has reason to believe a claim is possible. The
compliance standard is whether litigation is
reasonably foreseeable. It is not triggered by
the filing of a lawsuit; it is triggered by an
event that a reasonable person would believe
may lead to a lawsuit.
From a preventive standpoint, upper-level
management must meet with inside general
counsel who has litigation experience, or an
outside litigation firm that has federal court
experience. The particular statute that is
wreaking the most havoc pertains to federal
court litigation, but California has similar provisions for issues relating to e-discovery.
What are some of the ‘dire consequences’ to
which you refer?
Many executives are putting their heads in
the sand, claiming it is just not cost-effective
to implement the procedures necessary to
comply. But frankly, those costs are a drop in
the bucket compared to the potential consequences; to wit:
- A party that does not comply may be
responsible for paying the other side’s attorney fees for the time incurred obtaining information that was not properly maintained. - In the case itself, a judge may rule that the
party complying with rules gets certain inferences drawn in its favor over the party that
has not complied. - If there’s intentional destruction of information or an intentional ignoring of this code
section, the court can ultimately dismiss the
claim or rule in favor of the other side.
What are some sanctions that the court may
impose?
In the Coleman case against Morgan
Stanley, which didn’t comply with this particular code section, the court allowed adverse-inference sanctions, which resulted in the
jury awarding the plaintiff $1.4 billion.
It is very important to keep in mind that the
sanctions are not limited to findings against
the company. Courts also have held upper-level management personally liable for some
of these sanctions. For instance, in a case
against Phillip Morris, executives were sanctioned $2.75 million, and each executive was
personally sanctioned $250,000.
How can CEOs and senior-level management
be proactive?
First, protocol involving ESI should always
be specified in the employee handbook.
Keep in mind that it is still appropriate to
dispose of ESI in the ordinary course of business. The issue is making sure that you have
an ‘ordinary course of business’ or a normal
protocol. The more you can show to the
court that you have mechanisms in place,
along with checks and balances, the better
you will be able to demonstrate that you’ve
acted reasonably in attempting to maintain
these documents. There also must be a periodic audit of the company’s IT department —
by general or outside counsel — to ensure
compliance and to monitor the system.
What should a company do if a lawsuit is
filed against it tomorrow?
When notified of pending litigation, a company should immediately issue a litigation
hold memo or hold letter to all employees.
The memo should state that all documents
relating to that issue be preserved and that
electronically stored documents not be deleted. Further, it should direct the IT person to
not deviate from normal document-retention
policies and to disarm automatic delete features so as to preserve the relevant ESI.
Certainly, general or outside counsel should
at least review the memorandum to assure
that the necessary legal language is included
and that the warnings are sufficiently stern.
What effect has this had on litigation?
The e-discovery section is being used as a
strategic sword. Frankly, you will be colored
in a very unfavorable light from the onset of
the case if opposing counsel is able to prove
that you have either intentionally destroyed
electronically stored documents or have
failed to make any effort to preserve them.
Because this amendment has been in effect
for a year and a half, companies can no
longer claim ignorance with any level of reasonableness. As is often said, ignorance of
the law is not an excuse for not obeying it.
RONALD S. HODGES is a partner and head of the litigation department at Shulman Hodges & Bastian LLP. Reach him at
[email protected] or (949) 340-3400.