Ask Jeffrey J. Greenbaum, a litigation partner at Sills Cummis Epstein & Gross PC, to describe the new electronic-discovery statutes recently added to the Federal Rules of Civil Procedure, and he doesn’t hesitate. “It’s a wake-up call for corporations,” he says, “particularly those that have yet to grasp their obligations to produce electronic documents.”
The rules, which took effect on December 1, make electronic discovery a standard part of federal legal proceedings. That means a company must recognize, declare, and produce E-documents whenever it is involved in civil litigation.
In the past, courts were likely to accept incompetence or computer problems as an excuse for failing to meet E-discovery requests. Not anymore. Indeed, attorneys say judges are increasingly likely to view noncompliance as a sign that a company has something to hide.
Greenbaum says the rules cover just about anything that can be construed as electronic communication. “[The statutes] include more than just E-mail; they address anything that can be stored in any type of electronic manner,” he says.
The sweeping changes have created a big compliance headache for all but the most forward-thinking managers. The rules hit hardest at companies with haphazard document-storage and -tracking practices — which is to say most companies. Those outfits will have to begin building a compliance framework from square one. “If nothing else, this is a real eye-opener,” says Julie Gable, president of Gable Consulting, a company that specializes in document-management services. “The mandates are certainly much broader than what’s required under Sarbanes-Oxley.”
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The penalties will likely be stiffer, too. In a preview of what awaits archiving laggards, a judge in 2005 hit financial giant Morgan Stanley with a $1.45 billion judgment in a suit brought by financier Ronald Perelman. The award was due in part to the firm’s failure to retain and deliver specific E-mails. “That verdict was broken down into $604 million in compensatory damages and $850 million in punitive damages,” says Greenbaum. “Those are numbers that should get people’s attention.”
The new E-discovery rules mandate a range of policies and procedures. The statutes, which do not apply to criminal cases, require a conference between parties to discuss the handling of archived data. After attorneys seeking information present their needs, a business is expected to disclose what information is available and where it is stored, how the files can be accessed, and why any relevant data may be missing. All sides are also expected to reach a consensus on information that is not reasonably accessible.
To meet the new requirements, businesses must offer up a detailed inventory of their data assets, systems, retention policies, and backup strategies (for example, storing via third parties, on optical drives, on data cubes, and the like). “The basic idea is to simply understand your own information system and to be aware of who knows what is inside those information stores,” says Gable.
But not everything is simple: the new guidelines don’t address the basic question of which electronic documents must be kept and for how long, an issue that has long bedeviled corporate executives. Some managers, concerned about landing on the wrong side of the new rules, may try to take advantage of increasingly cheap storage costs and save everything forever. Cautions Gable: “That’s foolish and will cost a fortune over time.”