Failure to Manage Electronic Discovery Proves Costly for
National Developer

The headline screamed “Georgia Judge orders sanctions against Pulte for wiping evidence; Plaintiffs’ lawyer seeks $400,000 in attorney fees and costs from home developer”.  A jury wasn’t quite as reserved; it awarded $2.5 million several months later at trial where the destruction of electronically stored evidence by company executives took on a prominent role.

We live in an electronic age where access to and storage of data is part of our busy professional and personal lives.  One need only consider the enormous number of e-mails sent or received over a typical week to appreciate that – for better or worse – our decisions and work flow are documented in cyberspace.

The failure to preserve evidence, to include electronically stored evidence, is playing an increasingly significant role in modern litigation.  The term “spoliation of evidence” refers to the intentional or negligent withholding, hiding, altering or destroying of evidence relevant to a legal proceeding.  In most jurisdictions, the failure to preserve evidence once a party is put on notice of pending litigation can give rise to serious civil and criminal penalties and monetary sanctions.  Judges are given wide latitude on how to handle such situations, which can range from finding a party in civil or even criminal contempt, striking a party’s pleadings, or instructing the jury at trial that they may infer that the spoliated evidence would have been harmful to the spoliator.  As indicated above, awards of substantial attorney fees are also becoming increasingly common for failure to preserve electronically stored evidence or “ESI”.  According to one study presented in the Duke Law Journal, sanction awards have increased dramatically over the last five years across the country with failure to produce ESI the most common basis for sanctions.  In short, the failure to preserve ESI can have a dramatic impact on the outcome of the litigation, as well as a litigants’ and its counsel’s reputation.  

Hiding and destroying evidence is nothing new.  Indeed, the history of “lost” of evidence likely dates back to the first trial. What is increasingly significant, however, is the manner in which Courts address the handling of “E-Discovery” and how electronically stored information can be recovered.  The Federal Rules of Civil Procedure address discovery of documents and electronic data.  Federal Rules of Procedure Rules 26 and 34(a) are intended to recover information “stored in any medium” and, in some instances, require that the information be translated into usable form.  Because data can be stored in a variety of mediums and in multiple locations the recovery, review and production of ESI can dramatically increase the cost of litigation.

Concurrent with the rapid expansion of “E-Discovery” has been the need for qualified Forensic Computer Analysts to search ESI for discoverable documents.  Forensic Computer Analysts are often able to recover metadata from computer hard drives, servers, and mobile data storage devices that is relevant to the litigation.  Metadata (i.e. data about data) can be particularly helpful in the course of litigation.  Hidden within virtually all electronically stored information are bits of data that identify when and by whom the document was created, altered, sent to a third party, read by a party, etcetera.  Blank denials of “I’ve never seen that document before!” and the like don’t stand up in the face of metadata mined using computer forensics.  Further, because e-mail virtually always involves two or more parties it is possible to use embedded metadata to identify other custodians of the document and assist in the recovery efforts.  

According to Neil Broom, President of Technical Resource Center, Inc., “computer forensics is the application of computer data investigation and analyses techniques utilized in the process of identifying potential evidence.  Computer forensic specialists can draw on an array of methods for discovering and analyzing data that resides in a computer system, or recovering deleted, encrypted or damaged file information.”   Short of taking your laptop on a “deep sea fishing trip” chances are the information being sought can be recovered through the use of computer forensics.      

MANAGING ELECTRONIC DATA STORAGE & PLANNING FOR E-DISCOVERY

Every business should have a plan to manage data storage that incorporates ESI.  Given the enormous volume of information generated it is prudent to develop a document management system that meets the specific needs of the company.  Such needs will vary given the nature of the business and any legal requirements that may dictate what documents need to be retained and for how long.  For example, the company should have appropriate plans for financial and tax related information that may differ from other data management protocols.  However, in most instances data from laptops, servers, external tapes, thumb drives and other mobile devices do not need to be kept forever, provided a legal hold has not yet been issued or litigation commenced.  Once a data and records management plan is developed information can be processed, archived and retrieved, as necessary.       

Understanding the benefits and limitations of in-house technology is critical. Common challenges include system capacity, security, access, and search capability.  The company should develop appropriate policies and procedures that incorporate both the appropriate means for data retention and destruction.  Information Technology Professionals in conjunction with Forensic Computer Analysts and knowledgeable counsel can often assist in developing a cogent approach to this issue.            

When pending or actual litigation becomes a reality it is critical that the company have a well formulated litigation response plan in place to address the increasingly complex responsibilities imposed by state and federal pretrial discovery rules.  A litigation response plan and a formal plan to initiate a company-wide “Legal Hold” are critical to avoid discovery sanctions or worse.  The company’s policy should include clear communications from counsel to management and staff concerning the scope of the Legal Hold and the significance of non-compliance to the company and individual employee. According to TRC’s Neil Broom, “It is critical to define clear objectives for the discovery process, and develop effective discovery demands based on the client’s needs.  By determining the optimal balance between legal and technical strategies, a case-specific plan for discovery can be developed quickly and cost effectively.”  See www.trcglobal.com

Perhaps the most comprehensive legal treatise on the matter is “The Sedona Principles:  Best Practices, Recommendation & Principles for Addressing Electronic Document Production” (the “Sedona Principals”).   The Sedona Principals address such areas as Document Retention Policy implementation and enforcement, the role of Key Custodians, Network Servers, Email Servers, Hard Drives, and data that may be stored on Non-Company computers. The Sedona Conference has developed a Working Groups that are actively focused on the areas of 1) electronic document retention and production; and 2) protective orders, confidentiality, and public access and similar areas.  Such “Best Practices” will likely become the standard for evaluating whether a company has undertaken all reasonable measures to preserve evidence and avoid harsh sanctions.  

CLOSING THOUGHTS

Significant sanctions for the failure to preserve ESI are increasingly commonplace in litigation.  The ability to recover “deleted” electronic evidence through computer forensics can undo attempts to destroy, alter or hide documents and support serious sanctions against the offending party.  Prudent companies and their counsel will take heed in this trend and review existing document retention policies and procedures to insure that they incorporate ESI.  Consider reviewing and referencing the Sedona Principles as a source for developing a company-wide document retention policy.  If litigation does occur, a process for instituting Legal Holds that anticipates the effect of E-Discovery on the company’s ability to recover its business records should be promptly initiated.  After all, no company wants its name forever associated with sanctions for wiping evidence.

By Michael  P. Carvalho, Esq.
CARVALHO & ASSOCIATES, P.C.
Published in Retail Law Strategist
October 2011

MICHAEL CARVALHO is an environmental attorney and President and Shareholder at Carvalho & Associates, P.C., headquartered in Marietta, GA. He practices law in Massachusetts, Georgia, Michigan and Washington, D.C. His national practice includes litigation, regulatory enforcement matters, and transactional issues associated with the re-development of environmentally impaired real property.  He is a former environmental consultant and nationally recognized expert in Brownfield Redevelopment.  He can be reached at (678) 354-0066 or by e-mail.