Electronic Discovery: The New Cost of Litigation?
How this affects CPA firms.
November 9, 2009
Through the “discovery” process of a civil lawsuit, court rules typically permit one litigant to obtain from the other “any non-privileged matter that is relevant to any party’s claim or defense.” (Federal Rule of Civil Procedure 26(a).) This means that if your company is involved in litigation, it may be required to turn over information — including internal communications and data — to the other side. Electronic discovery or e-discovery has surged in the past decade and can create significant advantages or disadvantages for companies.
What Is E-Discovery and Why Does It Matter?
E-discovery involves the production and review of e-mail and other electronically stored information (ESI). This can include anything from spreadsheet information in Excel, financial statements stored on a CFO’s hard drive or client information kept on an offsite server.
With the proliferation of electronic communication, ESI now often constitutes the bulk of discovery materials in a lawsuit (this makes sense given that a majority of today’s business communication, including the delivery of this article, takes place by e-mail rather than letter). In contrast, a decade ago, litigants responding to discovery requests would copy materials stored in physical files; nowadays, responding to discovery requests is becoming more and more challenging. This is because the responsive information is not always kept in one place or even one office and it is otherwise not always segregated or easily accessible.
ESI also includes metadata, which is essentially data about other data. For example, when a document is created on the computer, embedded in the electronic “document” may be information about when, where and by whom the document was created. This information can be significant in a lawsuit. In a contract dispute, for example, it might be important to determine when a document was last modified. Similarly, the time that an e-mail was sent or received might determine when a party became aware of certain critical facts.
Since ESI is included in the type of information that can be “discovered” in the course of a lawsuit, it is fair game for opposing parties. And your company may also be on the receiving end of discovery requests as a third party (through a subpoena). For example, as a client’s CPA in a business dispute, certain information about the client may be subpoenaed and your firm may be required to search for and produce ESI.
The Cost of E-Discovery
Depending on a company’s computer system, it can take hundreds of hours to gather and review ESI. Moreover, “deleted” items are not immediately erased, but instead are often stored in the computer’s memory or on back-up tapes. Recovering such data is often expensive, not only because of the amount of time it can take, but because often it requires the assistance of outside data recovery experts. (If anyone still needs a reminder to be careful about what they say in an e-mail, the fact that an e-mail may be accessible and produced in a lawsuit long after being “deleted” should be it.)
Even after existing or lost data is retrieved, mining this data can be expensive. Because of the extent of electronic information, it can often take days, sometimes months, to review. Moreover, if the lawsuit involves a significant transaction that generated thousands or perhaps millions of pages of documents, even where the information is in hardcopy format, it is often easier to manage electronically. Thus, even hard copy documents may be loaded onto a document or information management system, which allows the user to track, mark, segregate or otherwise manage large amounts of data. This process can have considerable costs and the right choice for managing ESI will depend on the volume of information, the litigation stakes and other factors.
Another common issue in the e-discovery process concerns the format in which electronic information needs to be produced. For example, will all e-mails be printed and produced in hardcopy form or will they be electronically transferred to a disc for production? And if e-mails or other documents are in a format that allows them to be easily searched (by key word, for example), must they be produced in that searchable format?
Particularly when costs are significant, litigants will also argue over who needs to pay for gathering or producing the information. For example, if a party is requesting that its opponent restore deleted data from back-up tapes, who must pay for the work, the party requesting the data or the party whose data is being requested? These issues are being regularly debated in the courts.
While CPA firms and other businesses often have document retention/destruction policies for client files, these policies do not always address ESI. It is good practice to review and update these policies, with ESI specifically in mind. If your company has an IT department, involve them in the process. If possible, include lawyers who are familiar with what needs to be preserved and when — particularly if a business becomes involved in litigation — it will need to have appropriate policies in place to preserve relevant documents. Advance planning makes all of this much easier.
Moreover, being able to efficiently respond to e-discovery requests puts your company in an advantageous litigation position. Similarly, companies must know what ESI they should be requesting from opposing parties and how to best manage it.
Courts across the country are still grappling with these issues and as more decisions are issued applying existing rules to e-discovery issues, litigants may have more guidance and predictability on these issues. Courts are also continuing to develop their own rules to address electronic discovery. For example, view last month’s Seventh Circuit Electronic Discovery Pilot Program (PDF) that began in Chicago federal courts. The purpose of the Pilot Program “is to try to develop procedures and practices to minimize the burden of e-discovery while maintaining the fairness and justice all parties deserve.” Similar efforts are underway in other jurisdictions.
Given the frequency of electronic communication these days, ESI is becoming more and more the focus of the litigation process. An entire industry has developed to assist attorneys and litigants in managing and processing electronic discovery; sometimes outsourcing makes sense, although other times it does not. Given the pitfalls and costs that can result from improper handling of electronic discovery, careful thought needs to be given to this aspect of any litigation. And while the issues are too broad to confine the discussion to this article, any company involved in litigation needs to be aware of how electronic discovery is changing the landscape.