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January 2006 www.IFLR.com iFLR INTERNATIONAL FINANCIAL LAW REVIEW Multinationals face e-discovery challenges Steven Bennett and Sam Millar compare the different approaches to e-discovery in the US and the UK, highlighting the difficulties

SLIDE 1

iFLR

INTERNATIONAL FINANCIAL LAW REVIEW

Multinationals face e-discovery challenges

Steven Bennett and Sam Millar compare the different approaches to e-discovery in the US and the UK, highlighting the difficulties that international businesses face

January 2006 www.IFLR.com

SLIDE 2 2 IFLR/January 2006 www.iflr.com Discovery

ntil the 1990s, companies largely relied on paper as the medium by which their activities and data were documented. Hard copy invoices, let- ters and faxes between parties – filed, as a matter of best practice, in folders and files and produced in hard copy form – told the story of a deal or evidenced a course of con- tractual dealing. Over the last 10 years, however, the development of new technologies has caused businesses in the developed world to move increasingly away from paper as the medium by which their activities are documented, and towards electronic storage and transmission of business records. With the advent of email, the internet and sophisticated mobile devices, the longstanding reliance by business on paper has given way to a widespread reliance document on electronic storage

f data and a digital trail.

Although evidence of a business practice

r activity derived from an email is no dif-

ferent in substance from evidence derived from a letter or memorandum, electronic documents have certain distinctive properties, which have raised a new set of issues in litigation. Those issues can be particu- larly tricky in the international context. Electronic data is distinctive in: (i) its rela- tive volume (multiple drafts or copies of emails can be stored easily); (ii) its duplic- ability (emails can be circulated easily to large numbers of recipients); (iii) its dynamic and changeable content (such as email, which can be amended and for- warded easily); (iv) the existence of metadata, that is, information about a particular data set, which might describe, for example, how, when, and by whom the data was received, created, accessed, for- matted and/or modified; (v) its durability (even deleted copies of electronic documents can be recovered using forensic recovery techniques). These distinctive properties of electronic data have given rise to the following practical issues with which courts and tri- bunals across the developed world are now grappling: (i) How is the volume of electronic data to be successfully and proportionate- ly managed? (ii) How is relevant electronic data to be determined? (iii) How is the importance and rele- vance of metadata to be determined? (iv) How should archived and deleted data be handled? (v) Who should bear the costs and bur- dens of e-discovery? (vi) To what extent, if at all, should the normal rules of privilege be affected by electronic data? (vii) Spoiling and the destruction of

evidence. How does one deal with the

fact that many electronic records are not designed to be permanent? The good news is that, to a greater or lesser extent, these practical issues apply across the large number of jurisdictions in which typical multinational businesses

perate. Many

jurisdictions, moreover, are actively developing local rules to deal sensibly with such

issues. The bad

news is that, at present, there is no universal or multi- jurisdictional standard for addressing and resolving such

issues. A business operating in the US

and the UK (by way of example) is sub- ject to different rules with respect to: (i) the preservation and disclosure of electronic data in the context of court proceedings; and (ii) the preservation and disclosure of electronic data as required by particular regulatory regimes, such as EU data protection and privacy legisla- tion and the US Sarbanes-Oxley Act. Consequently, a business operating in two or more countries must comply with a multitude of different (and sometimes contradictory) e-disclosure obligations, depending on the nature of the matters in issue and the forum in which those matters are to be aired. Although the current lack of a universal approach to these issues in itself imposes a burden on an international business (there are costs associated with complying with differing obligations imposed by different jurisdictions), other problems can arise. For example, the

bligations imposed by one country may

conflict with the obligations imposed by

another. The US courts, for example,

might require discovery of electronic data by a French domiciled company that is not required of the company by French courts, and may even be considered

unlawful. Further, the obligation to dis-

close electronic data in multiple jurisdictions in itself can constitute a significant burden on the operation of a multinational business. The US approach At a national level, the US is a common law jurisdiction with permissive pre-trial

discovery. Rule 26(b)(1) of the Federal

Rules of Civil Procedure permits discovery

f “any matter, not privileged, that is rele-

vant to the claim or defense of any party....”. With the exception of Louisiana (the sole civil code system in the US) the individual states also embrace the common law tradition. State civil procedure systems generally follow the liberal discovery princi- ples outlined in the Federal Rules

f Civil Procedure.

Nevertheless, because of the existence of the federal system there can be significant divergence in the law relating to disclosure of electronic data in individual jurisdictions. Indeed, rulings on e-discovery issues have varied from state to state and from federal district to federal district. Under the national rules, as a general proposition, relevant information need not be admissible at trial if the discovery appears “reasonably calculated to lead to the discovery of admissible evidence”. The Federal Rules of Civil Procedure provide a full range of pre-trial discovery devices, including: discovery of specialist

pinions, depositions, interrogatories,

production of documents, inspections and requests for admissions. Under Rule

Multinationals face e-discovery challenges

Steven Bennett and Sam Millar compare the different approaches to e-discovery in the US and the UK, highlighting the difficulties that international businesses face The bad news is that, at present, there is no universal or multi- jurisdictional standard for addressing and resolving e-discovery issues

SLIDE 3 www.iflr.com IFLR/January 2006 3 Discovery 26, limits on discovery (and e-discovery in particular) generally turn on whether “the burden or expense of the proposed ... discovery outweighs its likely benefit, taking into account the needs of the case, the amount in controversy, the parties’ resources, the importance of the issues at stake in the litigation, and the importance of the proposed discovery in resolving the issues”. In the context of e- discovery, various formulations of the burden versus benefit standard have been

suggested. The case of Zubulake v UBS

Warburg sets out one of the clearest formulations to date. In Zubulake, an employment discrimi- nation case, a key issue was plaintiff Zubulake’s request for production by UBS Warburg of documents, including electronic documents and emails, concerning “any communication by or between UBS employees concerning Plaintiff (Zubulake)”. UBS Warburg produced 100 pages of emails, which it acknowledged were relevant, but claimed that the cost of searching back-up tapes prohibited further production of docu-

ments. The US District Court for the

Southern District of New York compelled discovery and set out a test to assist in deciding what information should be treated as accessible and which party should pay the costs of producing data deemed inaccessible according to princi- ples of proportionality. The duties of counsel and parties to disclose electronic documents in the course of litigation were made clear. The Zubulake decision suggests that the answer to the question of production in any particular case should depend on balancing the probative value of the data being sought against the cost and burden

f disclosure. On the facts, the Zubulake

court carried out the balancing exercise based on a small sample of the potentially relevant data. The Zubulake court, in a series of sub- sequent decisions, also outlined a number

f fundamental rules regarding the con-

duct of electronic discovery:

Parties have an obligation to preserve

documents and other tangible information, once litigation is reasonably

anticipated. This obligation requires

reasonable efforts to preserve materials that may be related to actual, or antic- ipated, litigation.

The obligation to preserve informa-

tion includes, but is not limited to, the requirement that a party suspend any automatic systems for deletion of emails and other electronic informa-

tion. The obligation does not, howev-

er, require a business to shut down its information processing functions, or preserve every scrap of information it creates.

Extraordinary measures to preserve

and produce information may call for the shifting of the costs of discovery to the requesting party. Fee-shifting depends, in the first instance, on whether the information requested is readily accessible. Inaccessible information (back-up tapes, fragmentary data, outmoded software and the like) can be produced at the requesting party’s expense, depending on a host

f factors (importance of the informa-

tion to the dispute, availability of

ther pertinent information, relative

costs, and other issues).

Sanctions for

failure to preserve and produce requested information might be imposed on the responding party, depending on the degree of cul- pability, the extent of preju- dice to the requesting party, and the ability of the court to repair the loss through alternative discovery.

Sanctions might include: orders direct-

ing alternative discovery, award of costs to the requesting party, adverse inference presumptions or instructions to the jury, orders of preclusion, and/or striking of pleadings and default judgment. The Zubulake series of decisions has been heavily studied in the US. Legal research groups, such as the Sedona Conference, have modelled many of their best practice e-discovery suggestions on the lessons of

Zubulake. The framers of proposed

amendments to the Federal Rules of Civil Procedure have also been influenced by the Zubulake rulings. The England and Wales approach The rules governing discovery, or disclosure as it is now termed, in England and Wales are known as the Civil Procedure Rules (CPR). They were originally intended to govern disclosure of paper documents only and provide little guidance on the issue of electronic disclosure. In practice, courts in England and Wales have determined the specific requirements of electronic disclosure on a case-by-case basis. CPR part 1.1(1) states that cases must be dealt with in accordance with “the

verriding objective of enabling a court

to deal with cases justly”. This is accom- plished by balancing a series of factors to achieve reasonableness and proportionali-

ty. Although this lack of specificity in the

CPR can create problems between parties to litigation because of different under- standings of disclosure obligations, a recent UK government committee report has approved the existing ad hoc system

n the basis that the flexibility inherent

in such a system allows disclosure in individual cases to achieve the aims of reasonableness and proportionality. CPR 31.6 limits standard disclosure to documents. Standard disclosure requires a party to disclose only: (a) the documents on which it relies; and (b) the documents which: (i) adversely affect its own case, (ii) adversely affect another party’s case,

r (iii) support

another party’s case; and (c) the documents which it is required to disclose by any relevant court practice direction. As of October 2005, new guidance forming part of the CPR dictates that parties to litigation in England and Wales must make a disclosure statement con- firming that they have completed a search

f their electronic data, and setting out

the extent of that search. This new guidance follows the example of recent English Commercial Court practice (which developed as a result of the report

f Justice Cresswell in October 2004)

and makes clear that parties are expected to discuss issues relating to searches for and the preservation of electronic documents at an early stage of proceedings. The guidance also confirms for the first time that the word “document” in the CPR includes electronic documents. Significantly, parties must confirm in the new form of disclosure statement what media searches they have not con-

ducted. There are 17 categories of

electronic documents referred to in revised Form N265, including back-up tapes, mobile phones, PDA devices, portable data storage media, off-site storage and handheld devices. In addition to The US courts might require discovery of electronic data by a French domiciled company that is not required of the company by French courts, and may even be considered unlawful

SLIDE 4 4 IFLR/January 2006 www.iflr.com Discovery identifying the types of electronic documents for which they have not searched, parties must now indicate whether they have conducted particular searches by ref- erence to keywords or concepts, listing the search terms used. If a party is put on notice by its oppo- nent in litigation that specific keyword searches on certain types of electronic documents are expected, the responding party’s failure to carry out those searches (without good reason) may give the

pponent a prima facie case for a success-

ful application to the court for specific disclosure. Parties may need to provide information to the English courts about their data storage systems and document retention policies. In light of this new guidance, parties to English litigation must know the scope of their electronic storage systems and must be prepared to justify to a court any decision not to conduct certain data searches. A party will be required to understand its information technology systems and must have a good working knowledge of where and how its electronic data is stored. Data held not only on central servers and personal computers but also on personal digital assistants and other electronic devices could be relevant (and therefore disclosable) in English litigation. The new guidance has wide implica- tions for a party’s document management and retention policies. Any party with established document management and retention policies that include e-documents is likely to find this new e-disclosure practice in English litigation more manageable, and potentially cheap- er, than a party without such systems. Overall, however, one may predict that the costs of the disclosure process for parties in English litigation will increase as parties may seek to take tactical advan- tage of the new rules to challenge the adequacy of disclosure provided. Towards international best practices There is, unfortunately, no gold standard when it comes to the obligations imposed

n international business to disclose elec-

tronic information in the context of litigation or regulatory investigations arising in multiple jurisdictions. Different jurisdictions, and different regulatory regimes within the same jurisdiction, may deal with the issues in different ways. This disparity presents great challenges to those

perating in the international business
arena. Although it is tempting for an

international business to put off until tomorrow what does not require attention today, e-discovery is a business issue that is here to stay and will undoubtedly present ever greater challenges in the future as the globalization of business continues apace. Sensible international businesses will take steps now to ensure that when litigation or regulatory investigations arise in the different jurisdictions in which they oper- ate, they are prepared to meet the relevant e-discovery obligations. This will necessari- ly involve the adoption of practical electronic document storage and retention policies that suit the needs of the business in each jurisdiction in which the business operates. The recent experi- ences of Arthur Andersen should be enough to remind businesses that costs incurred in the course of such an exercise will not be wasted. There is no one-size-fits-all electronic document storage and retention policy that will cover every business regardless of configuration, size, industry or sphere of

peration. What one can say is that an

effective document retention policy must be carefully crafted and should endeavour to strike a balance between keeping all information forever and not keeping crit- ical information for “the relevant period

f its usefulness”. A well-drafted and

properly implemented policy will help manage the potential risks associated with relevant disclosure obligations arising in the course of court proceedings or regulatory investigations in all jurisdictions relevant to the particular business. The key elements of an effective document retention policy include: (i) a simple, well-considered, structured and consistent approach that takes into account an organization’s business needs and the relevant rules and regulatory regimes in the jurisdictions in which the

rganization operates;

(ii) effective identification and prioriti- zation of important documents; (iii) appropriate referencing of the concept of legal privilege (insofar as the concept may be relevant in applicable jurisdictions), as certain documents may be protected by legal privilege; (iv) inclusion of suitable retention and destruction schedules that address all cat- egories of documents and comply with applicable laws and regulations. As with anything, preparation is key. A business that: (i) takes a team approach and involves high level executives and administrators in the general area of e- disclosure compliance; (ii) works closely with its advisers to isolate relevant legal

bligations (regarding e-discovery) in the

jurisdictions in which it operates; and (iii) prepares adequately pre-litigation by drawing up policies to meet those obligations; will be well placed to face existing and future challenges in the area of electronic discovery. Steven Bennett is a partner with Jones Day in New York, Sam Millar is a senior associate with the firm’s London office The Zubulakedecision suggests that the answer to the question of production in any particular case should depend on balancing the probative value of the data being sought against the cost and burden of disclosure