Data duty: federal courts insist companies police their recordkeeping.

STARTING DECEMBER 1, the federal courts will impose new rules of procedure on business litigants requiring that companies create, handle and store their business records with one eye on their business needs and the other on the legal system. Why? Because the courts want companies to produce evidence with minimal delay and fuss when they become involved in litigation.

The immediate target of these new rules is the legal profession; the courts want lawyers to adapt to the computer age. But business will do the heavy lifting to enable lawyers to comply with the new rules, and a good-sized public company, in an extreme case, might have to spend millions revamping its IT infrastructure and support to deal with the new amendments.

The problem stems from the ease with which businesses collect records in the computer age. In the past, faced with the burden of keeping paper records, businesses limited their recordkeeping to essential documents, and the courts found it relatively easy to determine the authenticity of such records as came into evidence. In the computer age, on the other hand, it is easy to store, alter, lose or even destroy records because they are, after all, merely electronic pulses stashed in one or another of many places--on a server, a work station, a laptop, a flash drive, even a phone.

The consequence is that companies not strictly policing the process keep altogether too many "records," and they can't easily distinguish wheat from chaff when they must go to court.

The courts want businesses to get on top of this problem by developing comprehensive policies designed to store, catalog and preserve electronic records so that they can produce reliable evidence on demand with a minimum of fuss and bother.

In the long run, the new rules may cut costs from companies' legal bills, but at present the discovery process in complex litigation--that is, the process of sifting through company records to find those that are relevant to the issue at hand--can run into hundreds of thousands and sometimes millions of dollars. In the short run, companies may run up big tabs to overhaul their record systems, although it's impossible to put numbers to the effort at the moment since only the biggest companies appear to have begun the effort and many of them haven't finished.

For companies that haven't begun the process, getting into compliance before December I may prove difficult, according to Richard Battista, CEO of Gemstar-TV Guide International. "Companies that have significant experience with complex litigation may have an advantage in being better prepared because they have dealt with large electronic discovery projects and are more likely to appreciate the implications of the new rules for them," Battista says. "But those companies whose counsel has not already begun evaluating the rules changes in conjunction with their IT departments may find themselves in a difficult position in 2007."

This is not to say, however, that businesses must make it their chief goal to keep the courts happy, according to Ron Naves, who, as senior vice president of legal affairs and litigation, oversees Gem-star-TV Guide's efforts to comply with the new rules. Businesses must carry out their legal duty to produce evidence for the courts, Naves says, but not at the expense of business itself.

"Sometimes a misunderstanding about what the legal requirements actually are can add unnecessary complexity and expense to litigation," says Naves. "For example, do you need to keep 10 years' worth of backup tapes? It is hard to imagine a good business reason for that."

Put another way, companies should discard data in the absence of a good business or legal reason to keep it--and stand guard over what they keep. This means policing data to ensure its security; developing ways to file, search and retrieve data by subject matter and indexing; training employees to follow proper recordkeeping procedures; and monitoring the entire process so as to demonstrate the reliability of the evidence companies produce in court. At present, the new rules apply only to litigants in federal court, but it is only a matter of time before the state courts impose similar rules.

Getting into compliance with the new rules of evidence is a good idea for one other reason--namely, that not doing so could be disastrous. Last year, in fighting fraud charges brought against it by investor Ronald Perelman, Morgan Stanley showed itself to be so sloppy in its email recordkeeping that the judge in the matter ruled that the investment banking house had acted in bad faith. The result? A $1.45 billion verdict in Perelman's favor.

Michael A. Gold ([e-mail]) is a partner in the Los Angeles law firm Jeffer Mangels, Butler & Marmaro. He is co-chair of the firm's Discovery Technology Group.

Nevin Sanli ([e-mail]), ASA, is president and co-founder of the Los Angeles business valuation firm Sanli Pastore & Hill.