Averting potentially costly electronic discovery lapses: while lawyers have been concerned about the implications of electronic discovery for some time, recent court judgments--including a $1.45 billion verdict--have made this a significant financial issue.

As has been widely covered in the press, a Florida jury earlier this year awarded $1.45 billion in compensatory and punitive damages to Ronald Perelman in his lawsuit against Morgan Stanley. The decision can be traced to a series of strongly worded instructions from the judge, along with a partial default judgment shortly before the start of the trial.

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In press reports, this high-profile and controversial judgment was said to be largely the result of repeated discovery issues over the course of a year. Those culminated in the company's stating on the eve of trial that it had found records that it had previously said it did not have.

This case is but one example--albeit a large and highly publicized one--of the results of glitches in responding to a discovery request, particularly when it comes to electronic document retention, location of relevant files and the searching of electronic records. Planning ahead for discovery can save a company considerable sums of money, both in employee time and in risk management and risk reduction.

As many people know, discovery, from a legal perspective, takes place in the course of litigation when one side asks that the opposing side disclose all documents related to a specific topic. This is generally the lawyers' responsibility, involving financial executives only when the subject of the discovery request includes documents in their possession and/or control. In the wake of Arthur Andersen and Morgan Stanley--two high-profile examples--the retention and disclosure of electronic records is no longer solely a legal concern. The stakes have been raised for the company as a whole.

Potential civil verdicts are not the only consequences of lapses in electronic discovery. Effective document production is critical to conducting a successful internal investigation, should one become necessary. The more reliable the internal process, the better the chances of mitigating or preventing external inquiries.

Further, several provisions within the Sarbanes-Oxley Act of 2002 include implications for document retention that could later become of issue in discovery. The act significantly increases criminal penalties for improper destruction of documents that would impede, obstruct or influence official procedures.

It does no good, however, to have the correct documents stored if the company cannot find them, review them and disclose them when necessary. Under common judicial practices, the court permits the fact finder (either judge or jury) to draw an adverse inference against a party that fails to produce documents that a reasonable person could have produced. Regulators can be even stricter.

Given all of these factors, proper handling of discovery requests cannot begin when a request is made. It must start much earlier, with company executives working together to develop a litigation-hold program and a plan for responding to discovery.

Developing such a program involves various degrees of difficulty, depending on the structure of the information technology (IT) system. An organization with a single consistent, well-documented IT structure would have a considerably easier time in setting up a hold program than would a company that has grown by acquisition over years and whose systems vary by department.

Preparation Is Critical

Regardless of the complexity, however, preparation for document preservation and production is critical to reducing the cost and risk associated with litigation. For example, corporations have tended to rely on their outside lawyers in individual cases to determine proper responses to discovery requests. However, because most companies have different law firms handling different litigation matters, the risk arises that the company will respond differently to similar discovery requests.

This could lead to discovery disputes, which could, in turn, result in increased legal fees because of prolonged litigation. It also raises the threat of greater judgments being awarded against the company.

Modern computer systems produce vast quantities of data, much of which is the result of automatic functioning of computer networks and is completely irrelevant to discovery requests or the underlying issues. Accordingly, it is not economically feasible, nor would it make sense, for a corporation to preserve absolutely everything.

However, recent case law and changes to the Federal Rules of Civil Procedure suggest that if a dispute arises and the company can demonstrate that the way it handled its records and responses to the requests was reasonable and consistent with its previous handling of such requests in other matters, the likelihood of sanctions is considerably lower.

Thus, it is in the company's best interests to establish an enterprisewide records retention and litigation hold policy, and to train those people in its legal, IT and records management departments in the policies and procedures designed to facilitate consistent and effective document preservation and production.

This can seem a daunting undertaking, and in some cases, it is. The first step is building the team. Individuals from the company's legal, IT, records management and compliance departments must be involved. Cooperation among these groups will help to ensure that all of the bases are covered if and when it comes time to place a hold on documents.

In the Zubulake v. UBS Warburg case, Judge Shira Scheindlin's opinion requires lawyers to fully understand the company's IT system. In many cases, the corporate IT team does not understand the legal considerations well enough to effectively educate the attorneys. Therefore, an outside party that understands both technology matters and the litigation process can help provide lawyers with the confidence they must have in their understanding of the technology as it pertains to potential litigation.

Once the planning committee is assembled, it first reviews the various information systems, the records that they contain, and their operating and backup procedures. Based on this information, the company then identifies the strategic and tactical requirements to improve its ability to manage, search and produce electronic records.

Finally, the committee must develop a plan to bridge the gaps. These solutions can include software to aid in document management, new procedures on how to issue and follow up on litigation hold notices, or even changes to the information systems structure itself to ease response to preservation orders.

When a request comes in or litigation is threatened, the first step is data preservation. Once litigation has been filed--or appears reasonably likely--the lawyers must ensure that all relevant data is held, based on the Zubulake decision. They will decide what must be retained and direct those affected accordingly.

If a particular person or small group is likely to have many relevant documents, the legal team may have "forensic images" made of their hard drives. This is the only way to fully preserve the data residing there. It is not economically or practically feasible to image every employee's computer, so a line will be drawn.

No matter how many hard drives are imaged, a hold notice will be issued to all people who potentially possess relevant documents, as determined by counsel in the context of the discovery request, or as negotiated with opposing counsel. The notice should tell them to preserve any information they have (in either paper or electronic format) that might be relevant to the issues in dispute, including network files, voice mails or hard-copy documents.

The lawyers also must follow up with the individual recipients to ensure that they are retaining the potentially responsive records. Additionally, the follow-up plan often includes interviews with the individual notice recipients. The interviews would focus on how the person uses email and other electronic tools so that the attorneys can ascertain whether the preservation notice, if followed to the letter, will result in the preservation of all potentially relevant information.

As the litigation proceeds, the lawyers will then collect the data that the individuals have retained in order to review it and eventually to produce those records that are responsive to the request.

The goal of this entire process is to increase efficiency in document production associated with litigation and to reduce the company's risk. This risk can take the form of legal fees, as well as the potential for a huge judgment if errors occur.

If done correctly, an upfront investment of time and dollars to establish a plan and streamline data collection can save millions, if not billions, in litigation fees and judgments.

Eric Schwarz ([e-mail]) is National Leader of the Legal Technology practice within Ernst & Young's Investigative & Dispute Services practice. David Wetmore ([e-mail]) is a Principal in Ernst & Young's Investigative & Dispute Services practice.

RELATED ARTICLE: Effective Preparation For Litigation Holds Includes:

* A team in place that includes legal, IT, records and compliance specialists familiar with the hold policies and procedures and prepared to respond

* A database of all information available within the company, where it is kept and how long records are retained before being destroyed. (This will help ensure consistent answers to questions related to document retention within the company.)

* Pre-set procedures for discovery response that occur with each request--the same notice goes out to potential information custodians, follow-up procedures are dictated and followed and levels of escalation are determined for those who do not reply.

RELATED ARTICLE: takeaways

* Discovery, from a legal perspective, takes place in the course of litigation when one side asks that the opposing side disclose all documents related to a specific topic.

* In the event of a lawsuit, effective document production is critical to conducting a successful investigation, and the more reliable the internal process, the better the chances of mitigating or preventing external inquiries.

* Preparation for litigation holds includes: a team familiar with the policies and procedures and prepared to respond; a database of all company information; and preset procedures for discovery response for each request.