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 firstname.lastname@example.org or (949) 340-3400.