Special Report on e-Discovery: Making e-Discovery Cost-Effective for Smaller Companies

In the days of only paper documents, smaller companies could afford to wait until they became involved in a lawsuit to worry about pre-trial discovery, but today's reliance on digital information makes that a risky and unnecessarily expensive strategy. To meet the requirements of the amendments to the Federal Rules of Civil Procedure concerning electronic discovery that went into effect on Dec. 1, 2006, companies need to plan and prepare ahead of time. Although these rules present a new set of challenges for small companies, the good news is that developing and implementing an e-discovery strategy does not always have to be an expensive project. By taking a handful of cost-effective steps, companies can save both time and money in litigation costs in the long run.

Meeting the Legal Obligations Of New Technology

As is widely known, technology has become a great equalizer. Even the smallest companies have the same powerful communication tools at their disposal as the largest enterprises. From e-mail to instant messaging, voice mail, electronic documents, databases, and spreadsheets, information technology is readily available at a reasonable cost to businesses of every size. In fact, the availability of such powerful technology has allowed even small companies to reach and serve customers around the world and, in some cases, to become extraordinarily successful.

While technology has given even small companies access to global communications capabilities, it also has laden them with new legal obligations. No matter what their size, all companies involved in federal court cases have an equal duty to abide by the Federal Rules. Further, given the ubiquity of digital information in commerce today, state legislatures and courts will almost certainly eventually follow suit.

At the heart of the Federal Rules for e-discovery are the obligations to be able to locate, preserve, and produce in a timely manner digital information that is relevant to the subject matter of a lawsuit. While the amended Federal rules do allow the courts to consider the relative abilities of both parties to bear the costs of electronic discovery and to shift the costs in some circumstances, smaller companies still have to take reasonable pre-litigation measures to comply with the law. Those companies that fail to make a reasonable effort to meet the e-discovery standards risk not only incurring higher than necessary e-discovery costs, they also expose themselves to damaging court sanctions.

These measures do not necessarily have to involve large investments. A common sense approach to managing digital information combined with the establishment of proper policies and procedures can go a very long way to meeting companies' e-discovery obligations. In addition, by taking reasonable measures ahead of time, smaller companies increase their chances of being able to successfully argue that the costs of e-discovery should be shifted to the requesting party in certain cases. That argument is likely to be most persuasive when such party is much larger than the prospective producing party.

Although some executives in smaller companies may believe that their companies' exposure to e-discovery is minimal, it is worth noting that one of the most highly contested areas of federal court litigation today involves intellectual property, particularly patents, trademarks, and copyrights. A company's ability to protect its intellectual property, which is often its most valuable property, may depend on its ability to successfully navigate e-discovery issues in federal court. In an intellectual property action involving a smaller company and a much larger company, the bigger company will almost certainly seek to take advantage of every opportunity, including exploiting the e-discovery deficiencies of the smaller organization.

Keeping e-Discovery Costs Manageable

When it comes to e-discovery, preparation is key, and much of this advance work should really be a regular part of business operations. A failure to plan and prepare is one of the largest drivers of e-discovery costs as companies waste money and time to come up with ad hoc solutions that often disrupt their IT operations, their management team, and their business. Among the key issues in planning are simply knowing what kind of information the company collects and keeps, how it is stored, where it is stored, and how it is backed up. This kind of information inventory should be a standard part of all companies' overall corporate risk management strategy.

The next step is to develop, implement, and adhere to a regular document retention plan that sets out a schedule for the routine destruction of unneeded digital information. Companies then need to put in place the capabilities to preserve information when litigation ensues and a litigation hold is implemented. Litigation hold policies and procedures must be effective in preserving electronic information as well as the associated 'meta-data' that tracks when the information was created, edited and/or deleted and by whom. All employees, whether executives or hourly workers, need to be strongly advised not to attempt to destroy electronic or other information when a litigation hold is in place.

All of these steps are essential to taking advantage of the 'safe harbor' afforded by the Federal Rules for e-discovery. This safe harbor provision, contained in Rule 37(f) and derived from a ruling by the U.S. Supreme Court in a case involving accounting firm Arthur Andersen, recognizes that not every bit of data created can or should be saved. The rule thus provides an exemption for material that is lost as a result of the 'routine, good-faith operation of an electronic information system.' A company that does not have an established document retention plan or suddenly reinstitutes a lapsed plan when litigation is threatened will have a hard time reaching this safe harbor.

Another critical reason for small companies to take these steps ahead of time is to better position the company for e-discovery disputes involving information that is difficult and expensive to retrieve, for instance, copies of e-mails that exist only on disaster recovery back-up tapes. Federal Rule 26(b)(2)(B) provides an exemption for electronic information that is 'not reasonably accessible because of undue burden or cost.' In addition, the Federal Rules allow courts to provide for the shifting of discovery costs to the requesting party when certain requirements are met.

A small company seeking to shift the cost to its larger adversary, however, will need a more effective argument than mere size. Given their size disparities, it will be expected that the smaller company is dealing with a smaller quantity of digital information in a more limited number of locations, both physical and virtual, than its larger adversary. The smaller company will have to be able to demonstrate that the data is not reasonably accessible and that the cost or burden in man-hours would be excessive in the context of the litigation. The smaller company's in-house and outside counsel will need to have a detailed knowledge of the company's IT system to do this effectively. If a smaller company is successful in shifting costs, however, and it later emerges that it did not take reasonable care to properly preserve information, potentially significant negative ramifications are likely to ensue.

Shrinking the Document Universe

When it comes to producing requested documents, companies should be aware that one of the largest drivers of unnecessary costs is duplication. While limited numbers of paper documents typically exist, there may be dozens if not hundreds of copies of electronic documents. A prime example is an e-mail sent from a manager to a large group of employees, who may all retain copies. There is no need for a company to produce more than one copy of that e-mail provided it is unaltered. To control costs, companies may consider limiting the kinds of electronic information they create, for example, by prohibiting or curtailing text and instant messaging and thus avoiding the expense of having to archive and possibly retrieve that information.

Considering the hundreds of thousands or millions of pages that may be involved in a commercial litigation, a key means of reducing the cost of e-discovery is to simply reduce the universe of documents that must be preserved and reviewed. There are a variety of off-the-shelf software tools that eliminate duplicate documents and quickly pay for themselves in cost savings.

Once duplicate documents have been weeded out, companies can also seek to save costs by eliminating duplicate layers of review for documents, whether it be by legal assistants, junior associates, senior associates, or senior partners. Having the review performed by the person with the right level of expertise to make an appropriate judgment will save the potential costs of having to do the review over again pursuant to a court order.

Communicating with Opposing Counsel

Another critical, cost-effective and too-often-overlooked means of limiting e-discovery costs is open communication with opposing counsel from the earliest stages of the case. Often, two relatively small companies will find it to their mutual advantage to reach amicable discovery agreements in order to avoid costly battles. Absent some overriding strategy consideration to the contrary, opportunities to resolve discovery disputes should be embraced as early as possible. Being prepared ahead of time should also strengthen a company's position in early discussions because it lessens the opportunity for opposing counsel to try to exploit deficiencies in document retention procedures.

Among the issues to be negotiated in pre-trial conferences is the form in which the information is to be produced. Companies are bound only to produce information in one format, typically the format in which it is ordinarily maintained. Counsel will want to take into consideration cost factors when deciding how material is to be produced. Agreeing to accept material such as e-mails in printed form may add to costs later on if those printed e-mails must be collated with their printed attachments. Typically, the courts will require parties to a litigation to live by the electronic discovery agreements they reach in pre-trial conferences. Preparation plays a key role in another significant means of keeping costs under control ' avoiding having to do things all over again, such as having to pay for a forensic expert to examine the company's computer servers under a court order during a search for information.

Litigation is by its very nature unpredictable and may strike a company, regardless of its size, at the most inconvenient time. A lack of preparation that leaves a company unable to produce crucial documents during discovery can lead to significant adverse judgments as well as lasting damage to the company's reputation and business. While, at present, the electronic discovery rules are principally limited to federal courts, state legislatures and courts can be expected to adopt similar rules in time. Preparing now enables companies to make electronic discovery a more manageable and predictable part of their legal expense and to limit their exposure to adverse court rulings and judgments.

Richard B. Friedman ([email protected]) is a partner in the Litigation Department at Dreier LLP with extensive experience in commercial litigation and arbitration. He is co-chair of the Corporate Litigation Counsel Committee of the Commercial and Federal Litigation Section of the New York State Bar Association.

In the days of only paper documents, smaller companies could afford to wait until they became involved in a lawsuit to worry about pre-trial discovery, but today's reliance on digital information makes that a risky and unnecessarily expensive strategy. To meet the requirements of the amendments to the Federal Rules of Civil Procedure concerning electronic discovery that went into effect on Dec. 1, 2006, companies need to plan and prepare ahead of time. Although these rules present a new set of challenges for small companies, the good news is that developing and implementing an e-discovery strategy does not always have to be an expensive project. By taking a handful of cost-effective steps, companies can save both time and money in litigation costs in the long run.

Meeting the Legal Obligations Of New Technology

As is widely known, technology has become a great equalizer. Even the smallest companies have the same powerful communication tools at their disposal as the largest enterprises. From e-mail to instant messaging, voice mail, electronic documents, databases, and spreadsheets, information technology is readily available at a reasonable cost to businesses of every size. In fact, the availability of such powerful technology has allowed even small companies to reach and serve customers around the world and, in some cases, to become extraordinarily successful.

While technology has given even small companies access to global communications capabilities, it also has laden them with new legal obligations. No matter what their size, all companies involved in federal court cases have an equal duty to abide by the Federal Rules. Further, given the ubiquity of digital information in commerce today, state legislatures and courts will almost certainly eventually follow suit.

At the heart of the Federal Rules for e-discovery are the obligations to be able to locate, preserve, and produce in a timely manner digital information that is relevant to the subject matter of a lawsuit. While the amended Federal rules do allow the courts to consider the relative abilities of both parties to bear the costs of electronic discovery and to shift the costs in some circumstances, smaller companies still have to take reasonable pre-litigation measures to comply with the law. Those companies that fail to make a reasonable effort to meet the e-discovery standards risk not only incurring higher than necessary e-discovery costs, they also expose themselves to damaging court sanctions.

These measures do not necessarily have to involve large investments. A common sense approach to managing digital information combined with the establishment of proper policies and procedures can go a very long way to meeting companies' e-discovery obligations. In addition, by taking reasonable measures ahead of time, smaller companies increase their chances of being able to successfully argue that the costs of e-discovery should be shifted to the requesting party in certain cases. That argument is likely to be most persuasive when such party is much larger than the prospective producing party.

Although some executives in smaller companies may believe that their companies' exposure to e-discovery is minimal, it is worth noting that one of the most highly contested areas of federal court litigation today involves intellectual property, particularly patents, trademarks, and copyrights. A company's ability to protect its intellectual property, which is often its most valuable property, may depend on its ability to successfully navigate e-discovery issues in federal court. In an intellectual property action involving a smaller company and a much larger company, the bigger company will almost certainly seek to take advantage of every opportunity, including exploiting the e-discovery deficiencies of the smaller organization.

Keeping e-Discovery Costs Manageable

When it comes to e-discovery, preparation is key, and much of this advance work should really be a regular part of business operations. A failure to plan and prepare is one of the largest drivers of e-discovery costs as companies waste money and time to come up with ad hoc solutions that often disrupt their IT operations, their management team, and their business. Among the key issues in planning are simply knowing what kind of information the company collects and keeps, how it is stored, where it is stored, and how it is backed up. This kind of information inventory should be a standard part of all companies' overall corporate risk management strategy.

The next step is to develop, implement, and adhere to a regular document retention plan that sets out a schedule for the routine destruction of unneeded digital information. Companies then need to put in place the capabilities to preserve information when litigation ensues and a litigation hold is implemented. Litigation hold policies and procedures must be effective in preserving electronic information as well as the associated 'meta-data' that tracks when the information was created, edited and/or deleted and by whom. All employees, whether executives or hourly workers, need to be strongly advised not to attempt to destroy electronic or other information when a litigation hold is in place.

All of these steps are essential to taking advantage of the 'safe harbor' afforded by the Federal Rules for e-discovery. This safe harbor provision, contained in Rule 37(f) and derived from a ruling by the U.S. Supreme Court in a case involving accounting firm Arthur Andersen, recognizes that not every bit of data created can or should be saved. The rule thus provides an exemption for material that is lost as a result of the 'routine, good-faith operation of an electronic information system.' A company that does not have an established document retention plan or suddenly reinstitutes a lapsed plan when litigation is threatened will have a hard time reaching this safe harbor.

Another critical reason for small companies to take these steps ahead of time is to better position the company for e-discovery disputes involving information that is difficult and expensive to retrieve, for instance, copies of e-mails that exist only on disaster recovery back-up tapes. Federal Rule 26(b)(2)(B) provides an exemption for electronic information that is 'not reasonably accessible because of undue burden or cost.' In addition, the Federal Rules allow courts to provide for the shifting of discovery costs to the requesting party when certain requirements are met.

A small company seeking to shift the cost to its larger adversary, however, will need a more effective argument than mere size. Given their size disparities, it will be expected that the smaller company is dealing with a smaller quantity of digital information in a more limited number of locations, both physical and virtual, than its larger adversary. The smaller company will have to be able to demonstrate that the data is not reasonably accessible and that the cost or burden in man-hours would be excessive in the context of the litigation. The smaller company's in-house and outside counsel will need to have a detailed knowledge of the company's IT system to do this effectively. If a smaller company is successful in shifting costs, however, and it later emerges that it did not take reasonable care to properly preserve information, potentially significant negative ramifications are likely to ensue.

Shrinking the Document Universe

When it comes to producing requested documents, companies should be aware that one of the largest drivers of unnecessary costs is duplication. While limited numbers of paper documents typically exist, there may be dozens if not hundreds of copies of electronic documents. A prime example is an e-mail sent from a manager to a large group of employees, who may all retain copies. There is no need for a company to produce more than one copy of that e-mail provided it is unaltered. To control costs, companies may consider limiting the kinds of electronic information they create, for example, by prohibiting or curtailing text and instant messaging and thus avoiding the expense of having to archive and possibly retrieve that information.

Considering the hundreds of thousands or millions of pages that may be involved in a commercial litigation, a key means of reducing the cost of e-discovery is to simply reduce the universe of documents that must be preserved and reviewed. There are a variety of off-the-shelf software tools that eliminate duplicate documents and quickly pay for themselves in cost savings.

Once duplicate documents have been weeded out, companies can also seek to save costs by eliminating duplicate layers of review for documents, whether it be by legal assistants, junior associates, senior associates, or senior partners. Having the review performed by the person with the right level of expertise to make an appropriate judgment will save the potential costs of having to do the review over again pursuant to a court order.

Communicating with Opposing Counsel

Another critical, cost-effective and too-often-overlooked means of limiting e-discovery costs is open communication with opposing counsel from the earliest stages of the case. Often, two relatively small companies will find it to their mutual advantage to reach amicable discovery agreements in order to avoid costly battles. Absent some overriding strategy consideration to the contrary, opportunities to resolve discovery disputes should be embraced as early as possible. Being prepared ahead of time should also strengthen a company's position in early discussions because it lessens the opportunity for opposing counsel to try to exploit deficiencies in document retention procedures.

Among the issues to be negotiated in pre-trial conferences is the form in which the information is to be produced. Companies are bound only to produce information in one format, typically the format in which it is ordinarily maintained. Counsel will want to take into consideration cost factors when deciding how material is to be produced. Agreeing to accept material such as e-mails in printed form may add to costs later on if those printed e-mails must be collated with their printed attachments. Typically, the courts will require parties to a litigation to live by the electronic discovery agreements they reach in pre-trial conferences. Preparation plays a key role in another significant means of keeping costs under control ' avoiding having to do things all over again, such as having to pay for a forensic expert to examine the company's computer servers under a court order during a search for information.

Litigation is by its very nature unpredictable and may strike a company, regardless of its size, at the most inconvenient time. A lack of preparation that leaves a company unable to produce crucial documents during discovery can lead to significant adverse judgments as well as lasting damage to the company's reputation and business. While, at present, the electronic discovery rules are principally limited to federal courts, state legislatures and courts can be expected to adopt similar rules in time. Preparing now enables companies to make electronic discovery a more manageable and predictable part of their legal expense and to limit their exposure to adverse court rulings and judgments.

Richard B. Friedman ([email protected]) is a partner in the Litigation Department at Dreier LLP with extensive experience in commercial litigation and arbitration. He is co-chair of the Corporate Litigation Counsel Committee of the Commercial and Federal Litigation Section of the New York State Bar Association.