e-Discovery Compliance As Domestic And Foreign Litigation Grows

Monday, December 1, 2008 - 01:00

Editor: Some have likened the impact of the financial crisis to the mushroom cloud of a nuclear bomb, with the financial services industry at the point of impact. Has that radioactive cloud of litigation spread to other industries?

Mack: We are now seeing an impact on businesses outside the financial sector. A company in any business with, say, 5,000 employees has multiple exposures to the financial crisis - with many of them presenting litigation possibilities. Companies of this size may invest their surplus cash in commercial paper and any reserves in longer-term debt instruments or in stocks. They may borrow from financial institutions to meet their long- and short-term needs. Their pension plan may also make investments, possibly in toxic securities like collateralized loan obligations (CLOs) or collateralized debt obligations (CDOs) or in the stocks or bonds of companies in the financial services industry. Those companies may bring litigation to recoup some of their losses, which might take the form of class or individual actions. And, they might be sued by their stockholders or pensioners for making unwise investments.

Larger companies could have more direct involvement through a finance subsidiary that may have originated subprime mortgages or bought, sold or even packaged toxic CLOs and CDOs. Mergers and acquisitions may fail or needed capital equipment may be impossible to acquire because lenders are unable or unwilling to fulfill their undertaking to supply the cash needed to complete the transaction - leading to potential litigation.

Employment litigation is reaching all-time highs as companies lay off employees, cut benefits or engage in reductions in force. Bankruptcies and reorganizations will become more common, generating even more litigation. There's a climate of extreme business stress that is moving into the potential for much more litigation - litigation for survival and litigation to clean up the mess after a corporate death.

The TARP bailout plan itself leads to uncertainties that can trigger litigation. New regulations relating to the use of the bailout funds will impose requirements that must be complied with. Congressional oversight will be intense - take, for example, the congressional scrutiny of the $400,000 expenditure by AIG for a meeting of its sales representatives. With government money being spent, oversight and investigations are to be expected.

Editor: What are the e-discovery implications of that spreading cloud of litigation?

Mack: From an e-discovery and compliance standpoint, you should anticipate the onslaught of litigation by being sure that your legal hold and your data collection practices are state of the art. Involve trained data collection people so someone doesn't inadvertently mess up the data. By "mess up" I mean change dates and other aspects of your data. For example, if you are simply looking at a spreadsheet in a deskside review, you might trip an automatic date, which populates the document with "today's date." In other words, the document is no longer as it was before. That inadvertent mistake may also further pollute the data by updating it with other information such as the London Interbank Offered Rate (LIBOR) or the current credit status of the customer.

Before going into somebody's desktop to look at what could be needed later as potential evidence, you should be sure that a data collection protocol is in place and that those accessing the desktop are trained to follow it. Most large corporations will already have such protocols in place and will have trained their personnel in response to the demands of existing litigation. Litigation and government investigations growing out of the financial crisis will also affect companies that may not yet have taken steps to be sure that their data collection and preservation practices are sound - and are robust enough to respond very quickly. With the climate today, companies need to be concerned not only about civil litigation and investigations, but also about criminal proceedings.

In civil lawsuits, the danger is spoliation of electronically stored evidence - not producing, changing or destroying it. Spoliation can lead to a monetary penalty or adverse inference or just weaken your case because such behavior casts doubt on your evidence.

In criminal proceedings, the same practices are not called spoliation; they are called obstruction of justice - something a lot more serious. It's a whole different ballgame, and really calls on the compliance and e-discovery people to talk with each other and make sure that their procedures are robust.

Electronic discovery, because it most frequently accompanies litigation, is a very reactive process, whereas compliance is more proactive. Collaboration between both fields is required in the areas of legal hold and data preservation and collection. Training employees (particularly officers and directors and managers) in the art of keeping information required for litigation or investigation purposes is critical.

Editor: Some people have said that the financial crisis will trigger a feast of investigation by state legislatures, Congress and various regulatory agencies. Do the considerations you have been talking about apply to an investigation, even if there isn't any civil or criminal proceeding taking place at the time?

Mack: Yes. Investigations are generally on a short time fuse; nevertheless, the same degree of care needs to be taken in investigations as in litigation because information developed through e-discovery in connection with an investigation may be needed in a later civil or criminal suit. One of the questions you hear in a deposition is, "Have you ever produced this material before and, if so, to whom?" Another party may want to seek that same material and will argue that it's not burdensome to produce it again. Issue mapping can narrow the response and reduce costs.

Editor: Do you expect to see more SEC- and securities-related proceedings in 2009?

Mack. Yes, particularly those relating to the financial crisis. The SEC got a political bruising for the perception that it was being too soft on the financial industry. In fact, there is some talk about merging the SEC and the CFTC. It's highly likely that under the new administration, the SEC will considerably step up its activities. Also, the financial crisis and market downturns have already triggered an increase in securities class actions and derivative suits, not only against financial institutions, but also against other corporations.

Editor: The rest of the world is also gripped by the financial and economic crisis. Does the mushroom cloud of litigation also darken the rest of the world? If so, what are the implications for e-discovery?

Mack: The economic and financial crisis is global. The intensified litigation activity spurred by the crisis here will be replicated to some extent elsewhere in the world, even though we continue to hold our title as the world's most litigious country by far. And, at present, e-discovery in civil proceedings is significant only in the common law countries. But, with the increased application of criminal sanctions to corporate behavior, we are going to see increasing access by criminal authorities throughout the world to electronically stored information.

In the case of any large company with subsidiaries and divisions scattered throughout the world there is an increasing flow of electronic data across borders, triggering issues in U.S. courts about the discovery of such information irrespective of national boundaries (including information that may be protected by the privacy or blocking laws of particular countries - such as employee emails). If a foreign-based corporation tries to recover in a U.S. court, they're going to need to get up to speed very quickly on the American discovery rules and practices. For more information on the issues surrounding international e-discovery, see my interview on page 19 of the September 2008 issue of The Metropolitan Corporate Counsel .

Your service providers should be conversant with questions relating to e-discovery of electronically stored information (ESI) located outside the U.S.

Editor: With increased globalization, what steps can a company take now to address data privacy and other international e-discovery issues?

Mack: We recommend as a first step that an assessment be done by us or another e-discovery service provider with international capabilities, which looks at where the company does business, the nature of its litigation portfolio and its exposure to future litigation involving compliance with foreign laws governing e-discovery. If that assessment indicates that outside expertise is required with respect to setting up an international e-discovery compliance program, or with respect to a specific compliance issue relating to discovery of ESI involving international issues, an experienced consultant should be retained to provide such advice.

Ken Rashbaum and Cynthia Bateman, two highly skilled members of Fios' consulting team, are available to help. Ken, with 30 years of experience as a litigator, served as a partner and electronic discovery co-chair with the AmLaw 200 law firm Sedgwick, Detert, Moran & Arnold. He has vast experience counseling multinational corporations in the U.S., Europe and Asia on privacy and data protection matters as they pertain to cross-border data preservation, collection and production of electronically stored information. Cynthia joined Fios after spending more than 13 years with Georgia-Pacific, most recently serving as its global privacy and e-discovery director.

Editor: What about the language issue?

Mack: When managing ESI in a litigation or investigation that comes from international parties, being able to address foreign language issues is critical. Fios helps clients collect, process and host foreign language ESI as part of the discovery process. With increasing globalization, due in part to the financial services crisis, demand for this expertise and service has spiked over the past year and will continue to do so for the foreseeable future.

Please email the interviewee at mmack@fiosinc.com with questions about this interview. Her blog is Sound Evidence, hosted on DiscoveryResources.org.