Electronic Discovery Year in Review: Where We've Been, Where We are Going

Last year was explosive for the electronic discovery industry. From enormous jury verdicts to proposed changes in the federal rules, the legal and business landscape for e-discovery has never been more in flux. While more e-discovery vendors have entered the market this year, mergers have also consolidated the industry like never before. Meanwhile, case law continues to grow to include not just the very well publicized sanctions cases, but also opinions that have honed in on some of the technical challenges of e-discovery.

2005 Electronic Discovery Legal Developments

Litigation Holds

Although sanctions cases, such as Zubulake and Morgan Stanley, took center stage this year, the litigation hold was an issue of concern. Courts have also become mindful that the burden of implementation and enforcement of these holds extends to outside counsel. For example, in Heng Chan v. Triple 8 Palace, the court noted that:

'The preservation obligation runs first to counsel, who has 'a duty to advise his client of the type of information potentially relevant to the lawsuit and of the necessity of preventing its destruction …. Where the client is a business, its managers, in turn, are responsible for conveying to the employees the requirements for preserving evidence …. Thus, once a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a 'litigation hold' to ensure the preservation of relevant documents.' When the failure to meet these obligations results in the destruction of evidence, sanctions are warranted. And, though the nature of the sanction depends in part on the state of mind of the destroyer, some remedy may be appropriate even where the destruction is merely negligent.'

Similarly, in Clark Construction Co. v. City of Memphis, the court admonished the defendant for allowing a destruction of evidence by an employee in light of its
litigation hold obligations. The court found that the destruction of documents was grossly negligent and ordered a rebuttable adverse inference instruction.

Form of Production and Inaccessibility

As the proposed Federal Rules were passing through the Judicial Conference, a few cases offered a glimpse of what may come with respect to case law interpretation of some of the new terms found the rules. In Williams v. Sprint/United Management Co., the court held that when Excel spreadsheets are ordered to be produced in the form in which they are ordinarily maintained, a party must produce them with the metadata intact.

This case is the first of its kind to interpret language that is part of the new Rule 34, which outlines a default provision for the form of production of electronic information. That rule states that if a request does not specify the form or forms for producing electronically stored information, a responding party must produce the information in a form in which it is ordinarily maintained or in a form that is reasonably usable. While an argument can be made that the Williams holding should be limited to the production of Excel spreadsheets due to the unique characteristics of the metadata in those files, as technology changes, we will likely see more cases like this one interpreting 'ordinarily maintained' and other terminology.

Similarly, language that will ultimately be added to Rule 26(b) regarding undue burden and accessibility of data was at issue in at least one case this year. In United States of America v. Ameri-cagroup Illinois, Inc., the court held that the burden was on the responding party to prove by 'affirmative and compelling proof.' that producing e-mails on backup tapes constituted an undue burden. After reviewing the evidence, which showed that to restore the backup tapes would be costly in terms of 'expense, equipment and manpower' (18 weeks of manpower to complete the restoration), the court held that 'in the hierarchy of accessibility, it is clear that electronic data stored on media such as the backup tapes involved here is near the bottom.' Thus, even the current rules and case law, accessibility of data is already a consideration in the discovery context.

2006 Electronic Discovery Industry Predictions

Areas of Litigation

What is clear from the cases above is that all industries must be vigilant in their e-discovery process. Each one of these cases involves a different type of litigation and a different type of business. What is also apparent is that electronic discovery is here to stay. The proposed federal rules and commentary by judges this year have made it clear that parties ' and their lawyers ” must become educated about technology. No longer will courts tolerate an attorney who does not understand his or her client's IT systems, and judges will likely have less patience for the attorney who shows up to court unprepared to discuss the likes of 'accessibility' and 'backup tapes.'

The good news is that the legal profession ' even corporate counsel, long reliant upon outside counsel in matters of discovery ' is taking note. This was clear from several of the sessions on e-discovery and document retention at the Association of Corporate Counsel meeting held in October. The overall focus of that conference was on compliance, which corporate counsel now understands includes document retention and litigation preparedness with respect to electronic documents. In fact, a study of corporate general counsel conducted by Fulbright & Jaworski L.L.P. found that the largest growing litigation burden cited by general counsels from the U.S. was that of e-discovery. Twenty-six percent of the firms who participated in the study cited cost efficiency as the way they measure individual lawyer success. The costliest litigations cited were intellectual property and employment litigation, which are both on the rise. This has been confirmed by our own internal tracking metrics. For example, IP litigation, particularly patent infringement actions, is on the rise due to the widespread recognition of the increased value and importance of intellectual property assets, especially in the areas of biotech and pharmaceutical patents. Along these lines, it appears that patent infringement actions filed with the U.S. International Trade Commission are also on the rise.

Products liability and securities litigation are also growth practice areas. Products liability will continue to develop with growth in pharmaceutical, chemical and the medical device arena. Causes of action for lead paint are also expected to grow in 2006. After years of bringing lawsuits against landlords, the plaintiff's bar is starting to show some promise with respect to suing the manufacturers of the paint. Mealey's expects this trend to potentially be 'massive.' And although
securities litigation will continue to grow, its pace will not be as rapid as some other practice areas. There will, however, likely be an increase in antitrust merger and acquisition reviews under the Hart Scott Rodino Act and SEC investigations, which can include both civil and criminal implications.

Indeed, according to the National Center for State Courts (NCSC), state courts processed 96.2 million cases in 2002 (the most recent statistics which will be updated in 2006) in comparison to 250,000 federal filings. However, due to the passage of the Class Action Farness Act in February, no doubt federal actions will continue to be on the rise. This is especially true as more of the larger cases are consolidated under multidistrict litigation procedures.

The Applied Discovery study also found that while federal and state litigation is on the rise due in large part to employment and IP litigation, cases will continue to settle, dismiss or withdraw prior to trial completion. Despite the increase in cases filed, federal courts conducted fewer civil trials in 2002 than in 1962. The only exception to this is the number of securities cases that go to trial. According to the National Law Journal, this appears to be due to the size of settlements and the level of preparation of defense cases through such tools as mock trials.

What is common among all of these types of litigation is that they are all document intensive ' even the cases that ultimately settle. And the very real concern among corporate counsel for doing any discovery project correctly and at a reasonable cost will really drive the market in 2006 and beyond. Any litigator who does not have the ability address electronic discovery will no doubt be forced to in the near future.

E-discovery Marketplace

Waiting in the wings to handle all of these projects are a whole host of e-discovery providers who are vying for the business in a very competitive market. There are over 230 players in the e-discovery space, but in 2005, there was tremendous consolidation among the top third of the market. There was also, however, an increase in law firms using in-house solutions this year for smaller and mid-sized cases. This is probably a direct response to the cost concerns as in-house counsel began to take more control over the e-discovery process and continued to put pressure on outside counsel to cut litigation costs. But unless a firm is large enough to absorb all of the start-up costs of an in-house solution, for many, outsourcing is much more practicable.

To compete with this, 2005 saw major developments in functionality in the products offered by outside vendors. These functions help with overall cost savings through data reduction, such as the ability to de-duplicate
documents and bulk tag documents. Giving access rights to corporate counsel who can monitor progress and productivity of their outside counsel is also another feature aimed at cost reduction.

Functionality of workflow management will also be improved in 2006 with such elements as the ability to manage and monitor reviewers, offering templates for user profile, chain of custody tools, and discovery planners that combine best practices analyzers for early case assessment with cost estimators. In addition, the ability to use one set of data for a multitude of purposes by organizing the material into a variety of databases is a new innovation that allows greater flexibility and ultimate cost savings after initial processing. Using an online
e-discovery system as a method for production to another party through a separate database and access rights was another process that was used to a great extent last year ' especially in producing documents to the government in investigational matters.

Pricing was also stabilized last year. Before, comparing the pricing of e-discovery providers was like comparing apples to oranges. With many companies going to more standard pricing schemes like gigabyte pricing, it had become easier to determine the best value. Many of the top tier vendors began to offer full service packages along with their core e-discovery services, such as consulting services in the areas of data collection, backup tape restoration, forensic services, litigation preparedness and project management, essentially taking a corporation through the entire document management process from document retention policies through discovery.

There has also been a real move towards the integration of products into other solutions, such as e-mail archiving, paper scan and code, and case management. For example, Concordance is used by litigators and support staff to store, organize, manage and analyze vast quantities of documents produced in litigation. It is therefore crucial that any e-discovery offering be compatible with programs such as Concordance and other case management products, in order to provide clients with a total solution for managing litigation. Products must also be compatible with e-mail archiving. Driven by laws such as the SEC regulations that require certain companies to keep e-mail for a prescribed period of time, e-mail archiving is becoming a necessary part of any document management solution. E-discovery vendors can now use this archive in connection with proprietary software to make searching for relevant documents easier than ever before.

Conclusion

So, where are we going in 2006? Are we done with e-discovery and can we all go home now? Not likely. As fast as new lawsuits are filed, we are moving more and more to a world where we will no longer refer to the process as 'e-discovery' but as 'discovery.' Heading into 2006, it is likely that not only user interface, but high quality customer service will continue to be the focus as vendors work on their search capabilities and other functionality and compatibility to provide a painless discovery process to the industry. Corporate involvement, in not only the discovery process but in document management as a whole, will continue to grow. And as companies become more global, new challenges will arise such as how to manage documents under differing international records retention and privacy laws. These, along with changing technology that will provide more and more places for information to hide, will continue to drive the market and the case law that surrounds it.

Last year was explosive for the electronic discovery industry. From enormous jury verdicts to proposed changes in the federal rules, the legal and business landscape for e-discovery has never been more in flux. While more e-discovery vendors have entered the market this year, mergers have also consolidated the industry like never before. Meanwhile, case law continues to grow to include not just the very well publicized sanctions cases, but also opinions that have honed in on some of the technical challenges of e-discovery.

2005 Electronic Discovery Legal Developments

Litigation Holds

Although sanctions cases, such as Zubulake and Morgan Stanley, took center stage this year, the litigation hold was an issue of concern. Courts have also become mindful that the burden of implementation and enforcement of these holds extends to outside counsel. For example, in Heng Chan v. Triple 8 Palace, the court noted that:

'The preservation obligation runs first to counsel, who has 'a duty to advise his client of the type of information potentially relevant to the lawsuit and of the necessity of preventing its destruction …. Where the client is a business, its managers, in turn, are responsible for conveying to the employees the requirements for preserving evidence …. Thus, once a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a 'litigation hold' to ensure the preservation of relevant documents.' When the failure to meet these obligations results in the destruction of evidence, sanctions are warranted. And, though the nature of the sanction depends in part on the state of mind of the destroyer, some remedy may be appropriate even where the destruction is merely negligent.'

Similarly, in Clark Construction Co. v. City of Memphis, the court admonished the defendant for allowing a destruction of evidence by an employee in light of its
litigation hold obligations. The court found that the destruction of documents was grossly negligent and ordered a rebuttable adverse inference instruction.

Form of Production and Inaccessibility

As the proposed Federal Rules were passing through the Judicial Conference, a few cases offered a glimpse of what may come with respect to case law interpretation of some of the new terms found the rules. In Williams v. Sprint/United Management Co., the court held that when Excel spreadsheets are ordered to be produced in the form in which they are ordinarily maintained, a party must produce them with the metadata intact.

This case is the first of its kind to interpret language that is part of the new Rule 34, which outlines a default provision for the form of production of electronic information. That rule states that if a request does not specify the form or forms for producing electronically stored information, a responding party must produce the information in a form in which it is ordinarily maintained or in a form that is reasonably usable. While an argument can be made that the Williams holding should be limited to the production of Excel spreadsheets due to the unique characteristics of the metadata in those files, as technology changes, we will likely see more cases like this one interpreting 'ordinarily maintained' and other terminology.

Similarly, language that will ultimately be added to Rule 26(b) regarding undue burden and accessibility of data was at issue in at least one case this year. In United States of America v. Ameri-cagroup Illinois, Inc., the court held that the burden was on the responding party to prove by 'affirmative and compelling proof.' that producing e-mails on backup tapes constituted an undue burden. After reviewing the evidence, which showed that to restore the backup tapes would be costly in terms of 'expense, equipment and manpower' (18 weeks of manpower to complete the restoration), the court held that 'in the hierarchy of accessibility, it is clear that electronic data stored on media such as the backup tapes involved here is near the bottom.' Thus, even the current rules and case law, accessibility of data is already a consideration in the discovery context.

2006 Electronic Discovery Industry Predictions

Areas of Litigation

What is clear from the cases above is that all industries must be vigilant in their e-discovery process. Each one of these cases involves a different type of litigation and a different type of business. What is also apparent is that electronic discovery is here to stay. The proposed federal rules and commentary by judges this year have made it clear that parties ' and their lawyers ” must become educated about technology. No longer will courts tolerate an attorney who does not understand his or her client's IT systems, and judges will likely have less patience for the attorney who shows up to court unprepared to discuss the likes of 'accessibility' and 'backup tapes.'

The good news is that the legal profession ' even corporate counsel, long reliant upon outside counsel in matters of discovery ' is taking note. This was clear from several of the sessions on e-discovery and document retention at the Association of Corporate Counsel meeting held in October. The overall focus of that conference was on compliance, which corporate counsel now understands includes document retention and litigation preparedness with respect to electronic documents. In fact, a study of corporate general counsel conducted by Fulbright & Jaworski L.L.P. found that the largest growing litigation burden cited by general counsels from the U.S. was that of e-discovery. Twenty-six percent of the firms who participated in the study cited cost efficiency as the way they measure individual lawyer success. The costliest litigations cited were intellectual property and employment litigation, which are both on the rise. This has been confirmed by our own internal tracking metrics. For example, IP litigation, particularly patent infringement actions, is on the rise due to the widespread recognition of the increased value and importance of intellectual property assets, especially in the areas of biotech and pharmaceutical patents. Along these lines, it appears that patent infringement actions filed with the U.S. International Trade Commission are also on the rise.

Products liability and securities litigation are also growth practice areas. Products liability will continue to develop with growth in pharmaceutical, chemical and the medical device arena. Causes of action for lead paint are also expected to grow in 2006. After years of bringing lawsuits against landlords, the plaintiff's bar is starting to show some promise with respect to suing the manufacturers of the paint. Mealey's expects this trend to potentially be 'massive.' And although
securities litigation will continue to grow, its pace will not be as rapid as some other practice areas. There will, however, likely be an increase in antitrust merger and acquisition reviews under the Hart Scott Rodino Act and SEC investigations, which can include both civil and criminal implications.

Indeed, according to the National Center for State Courts (NCSC), state courts processed 96.2 million cases in 2002 (the most recent statistics which will be updated in 2006) in comparison to 250,000 federal filings. However, due to the passage of the Class Action Farness Act in February, no doubt federal actions will continue to be on the rise. This is especially true as more of the larger cases are consolidated under multidistrict litigation procedures.

The Applied Discovery study also found that while federal and state litigation is on the rise due in large part to employment and IP litigation, cases will continue to settle, dismiss or withdraw prior to trial completion. Despite the increase in cases filed, federal courts conducted fewer civil trials in 2002 than in 1962. The only exception to this is the number of securities cases that go to trial. According to the National Law Journal, this appears to be due to the size of settlements and the level of preparation of defense cases through such tools as mock trials.

What is common among all of these types of litigation is that they are all document intensive ' even the cases that ultimately settle. And the very real concern among corporate counsel for doing any discovery project correctly and at a reasonable cost will really drive the market in 2006 and beyond. Any litigator who does not have the ability address electronic discovery will no doubt be forced to in the near future.

E-discovery Marketplace

Waiting in the wings to handle all of these projects are a whole host of e-discovery providers who are vying for the business in a very competitive market. There are over 230 players in the e-discovery space, but in 2005, there was tremendous consolidation among the top third of the market. There was also, however, an increase in law firms using in-house solutions this year for smaller and mid-sized cases. This is probably a direct response to the cost concerns as in-house counsel began to take more control over the e-discovery process and continued to put pressure on outside counsel to cut litigation costs. But unless a firm is large enough to absorb all of the start-up costs of an in-house solution, for many, outsourcing is much more practicable.

To compete with this, 2005 saw major developments in functionality in the products offered by outside vendors. These functions help with overall cost savings through data reduction, such as the ability to de-duplicate
documents and bulk tag documents. Giving access rights to corporate counsel who can monitor progress and productivity of their outside counsel is also another feature aimed at cost reduction.

Functionality of workflow management will also be improved in 2006 with such elements as the ability to manage and monitor reviewers, offering templates for user profile, chain of custody tools, and discovery planners that combine best practices analyzers for early case assessment with cost estimators. In addition, the ability to use one set of data for a multitude of purposes by organizing the material into a variety of databases is a new innovation that allows greater flexibility and ultimate cost savings after initial processing. Using an online
e-discovery system as a method for production to another party through a separate database and access rights was another process that was used to a great extent last year ' especially in producing documents to the government in investigational matters.

Pricing was also stabilized last year. Before, comparing the pricing of e-discovery providers was like comparing apples to oranges. With many companies going to more standard pricing schemes like gigabyte pricing, it had become easier to determine the best value. Many of the top tier vendors began to offer full service packages along with their core e-discovery services, such as consulting services in the areas of data collection, backup tape restoration, forensic services, litigation preparedness and project management, essentially taking a corporation through the entire document management process from document retention policies through discovery.

There has also been a real move towards the integration of products into other solutions, such as e-mail archiving, paper scan and code, and case management. For example, Concordance is used by litigators and support staff to store, organize, manage and analyze vast quantities of documents produced in litigation. It is therefore crucial that any e-discovery offering be compatible with programs such as Concordance and other case management products, in order to provide clients with a total solution for managing litigation. Products must also be compatible with e-mail archiving. Driven by laws such as the SEC regulations that require certain companies to keep e-mail for a prescribed period of time, e-mail archiving is becoming a necessary part of any document management solution. E-discovery vendors can now use this archive in connection with proprietary software to make searching for relevant documents easier than ever before.

Conclusion

So, where are we going in 2006? Are we done with e-discovery and can we all go home now? Not likely. As fast as new lawsuits are filed, we are moving more and more to a world where we will no longer refer to the process as 'e-discovery' but as 'discovery.' Heading into 2006, it is likely that not only user interface, but high quality customer service will continue to be the focus as vendors work on their search capabilities and other functionality and compatibility to provide a painless discovery process to the industry. Corporate involvement, in not only the discovery process but in document management as a whole, will continue to grow. And as companies become more global, new challenges will arise such as how to manage documents under differing international records retention and privacy laws. These, along with changing technology that will provide more and more places for information to hide, will continue to drive the market and the case law that surrounds it.