E-Discovery: Taking Client and Counsel to Task

Non-Disclosure May Result in Sanctions

By John J. Coughlin

October 23, 2006

Do you understand the following sentence? "The computer system in Schack's office was configured in such a way that the desktop workstations did not have a 'drive mapping' to that partitioned section of the hard drive." Perhaps the defendants and their counsel in Phoenix Four, Inc. v. Strategic Resources Corp., 2006 U.S. Dist. LEXIS 32211 (S.D.N.Y.) didn't know what it meant until it was too late, since they failed to timely produce data from the aforementioned "partitioned section of the hard drive," even though they asserted in discovery that all responsive sources of data and documents were searched.

The next quote is easier to understand: "The discovery delinquencies of the SRC defendants and their counsel have resulted in the late production of 200-300 boxes of documents.... The SRC defendants and [counsel] are ordered to reimburse Phoenix equally for any statutory costs and attorneys' fees associated with this motion ... [and] they are also ordered to pay $10,000 each for the redepositions of [witnesses] for the limited purpose of inquiring into issues raised by the document recovered from the server." The court also explicitly required the SRC defendants to pay the sanction on their own and prohibited payment by their insurance carriers.

The revision to various Court Rules, notably the Federal Rules of Civil Procedure, effective December 1, 2006, as well as the trends in case law demonstrate the efforts of American jurisprudence to keep up with a world where studies show that as much as 90 percent of all business communications are conveyed by e-mail. Despite the best efforts of sophisticated clients and highly competent counsel, headlines in both legal trades and The Wall Street Journal continue to blare cautionary tales, such as the ultimate $29 million verdict for plaintiff in Zubulake v. UBS Warburg, and the $1.3 billion verdict for financier Ronald Perelman against investment giant Morgan Stanley in Coleman Holdings v. Morgan Stanley. Both verdicts included substantial recovery for punitive damages and flow directly from judicial sanctions imposed for the loss of electronic evidence caused by miscommunications between sophisticated clients and equally competent counsel.

The most recent opinion in Phoenix Four comes from the Southern District of New York, as did the oft-quoted Zubulake decisions. Judge Baer quoted extensively from Zubulake V, 229 F.R.D. 422 (S.D.N.Y. 2004), emphasizing the duty of counsel to "properly communicate with its client to ensure that all sources of relevant information [are] discovered ... [and to] become fully familiar with ... client's data retention architecture." The court concluded that the revised Federal Rules, particularly Rule 26, "essentially codify the teaching of Zubulake IV and V, of which ... [counsel] should have been well aware."

To be sure, revised Rule 26, effective December 1, 2006, does not explicitly require counsel to become fluent in "network architecture," and one might question whether the drafters of Rule 26 were trying to codify so explicit an obligation. Rule 26(f)(3) simply requires parties to discuss during initial disclosure "any issues relating to disclosure of electronically stored information including the form or forms in which it would be produced." Section (b)(2) requires the parties to identify sources of data which support the case or defenses and includes sources of data which are "not reasonably accessible."

Still, it's a gamble to assume that either Phoenix Four or Zubulake V is an aberration and it's not unrealistic for courts to expect IT personnel to become a regular part of a client's litigation team. Consider L.Civ.R. 26.1(d) of the Local Rules of the U.S. District Court, District of New Jersey. This rule, in effect since 2003, explicitly requires the following of counsel and clients who litigate in New Jersey's federal courts:

Prior to a Fed.R.Civ.P. 26(f) conference, counsel shall review with the client the client's information management systems including computer-based and other digital systems, in order to understand how information is stored and how it can be retrieved ... including currently maintained computer files as well as historical, archival, backup and legacy computer files.

The rule also requires counsel to locate an "IT witness":

Counsel shall also identify a person or persons with knowledge about the client's information management systems, including computer-based and other digital systems, with the ability to facilitate, through counsel, reasonably anticipated discovery.

Other jurisdictions that explicitly require interaction between counsel and an IT "liaison" or impose duties of knowledge that make such interaction implicit include the federal district courts for the districts of Delaware, Kansas and Wyoming. In addition, many jurisdictions have revised or soon will revise their rules to address the procedures for electronic discovery, including all federal district courts within the Ninth Circuit, and state courts of California, Illinois and Mississippi.

Potential litigants who do not expect suits in these jurisdictions should take heed from the developments rather than breathe a sigh of relief. Gone are the days when counsel could accept at face value a client's representation that the contents of a box or more of paper compose "the file," or some other category of documents. Under the paper regime, counsel would rarely, if ever, find it necessary to confer with the client's file room or document clerk to verify that a box, folder or redweld was not misplaced somewhere between request and delivery. In the world of electronic discovery, the failure to meet with IT personnel and discuss the origins and completeness of discovery could be met with sanctions such as those imposed on litigants and counsel in Phoenix Four, Inc. or, even worse, avoidable adverse verdicts as a result of those sanctions, such as in Zubulake and Coleman Holdings.

The volume and complexity of electronic evidence requires proactive planning and policies that will enable clients and counsel to manage the potentially discoverable facts and data before litigation takes place. Such a plan can best be accomplished if the legal and IT departments have worked through and properly addressed their needs with the business people and vetted those procedures with knowledgeable counsel.