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EDI 2009 E Discovery Issues In Business Closings, Downsizings And Bankruptcy
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EDI 2009 E Discovery Issues In Business Closings, Downsizings And Bankruptcy


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  • 1. Moderator: Martin J. Jaron, Jr. Panelists: Hon. Judith K. Fitzgerald Robert J. Koch Mark E. Michels The 6 th Annual Advanced E-Discovery Institute November 12-13, 2009
  • 2. Introduction - Topics
    • E-Discovery Issues in Bankruptcy
    • Problem Areas & Solutions – E-Discovery & Data Preservation Issues in Business Closings & Downsizings
    • Questions
    Advanced E-Discovery Institute  November 13, 2009
  • 3. Bankruptcy & E-Discovery
    • Are e-discovery issues and concerns different in BR court?
    • What’s different?
    • What’s not different?
  • 4. Bankruptcy & E-Discovery
    • Timing
    • Proportionality
    • Adversary proceedings; Bifurcation
    • Evidence issues
    • Trustees & privilege issues
    • Fiduciary obligations & e-discovery
    • Chapter 7 Liquidation
    • Chapter 11 Reorganization
    • Plan confirmation issues
    • Delay
  • 5. Downsizings & Business Closings
    • Worst economy since the Great Depression
    • Businesses are downsizing, cutting back, jettisoning entire divisions or subsidiaries, or in some cases closing down completely.
    • At the end of the line, bankruptcy court is often a necessary choice for reorganization (Chapter 11) or liquidation (Chapter 7).
  • 6. Layoffs
    • Employee layoffs, often mass layoffs of hundreds of employees at one time, are common.
    • Unemployment statistics paint a stark and depressing picture. As of October, 2009, the U.S. Department of Labor calculated the unemployment rate at 10.2%, surpassing 10% for the first time since 1983.
  • 7. Confusion & Breakdown
    • Preservation, collection, and processing of ESI often breaks down in a troubled business that is downsizing or terminating operations.
    • Compliance with legal holds can get lost in the tangled mess of altered or abandoned priorities which downsizing or closing a business creates.
  • 8. Risk of Spoliation
    • The risk of spoliation of data increases sharply.
    • Failure to preserve data subject to a duty to preserve can lead to sanctions ranging from fines, adverse inference instructions, striking claims or defenses, to default judgment for intentional or negligent destruction of relevant data.
    • That risk is magnified in the chaotic environment that often accompanies drastic downsizing or cutbacks in the operations of a company
  • 9. No Excuses
    • No exception to the affirmative obligation to preserve ESI when a business that is subject to a legal hold downsizes or ceases operations.
    • Courts are not likely to be sympathetic to the argument that important ESI evidence was lost or destroyed because an employee or group of employees were fired or let go as part of a general company downsizing.
    • Instead, the court is likely to ask why adequate preservation actions were not taken when the downsizing or business closing occurred.
  • 10. Risk Management
    • How can a business in trouble manage or at least minimize the risk of destruction of data when downsizing?
    • Assess each departing employee’s data.
    • Determine whether each departing employee is subject to legal holds.
    • Make sure that that computer equipment that is reassigned or taken out of service is checked first for relevant ESI, and that such ESI is preserved.
    • Make sure that departing employees are not walking out the door with the company’s ESI, including trade secrets and confidential business information.
  • 11. It takes a thief . . .
    • A study by The Ponemon Institute found that 59% of employees who leave or are asked to leave a company are stealing company data, and that 79% of those employees understood that their employer did not permit them to leave with company data.
    • These are stunning statistics.
    • When data walks out the door, specifically data required to be preserved by a litigation hold, it can be gone forever if adequate copies or backups do not exist.
    • Data Loss Risks During Downsizing – As Employees Exit So Does Company Data , Ponemon Institute LLC, Feb. 23, 2009.
  • 12. More bad news
    • To make matters worse, theft of ESI can do great damage to a business if trade secrets or confidential business information is taken and given to competitors.
    • That’s the last thing a company needs when it is already suffering with the financial and other problems that led to downsizing in the first place.
  • 13. Key Players - 1
    • Departing Employees
    • When an employee gets a pink slip because a company is downsizing or closing, preservation of ESI and compliance with legal holds he or she has received in the past immediately drops to the bottom of that person’s to-do list or, more likely, disappears completely.
    • This quite natural reaction sets the stage for the other players who must now step in to make sure that relevant ESI is preserved.
  • 14. Key Players - 2
    • Legal Hold Administrators
    • For companies who have, as they should, designated staff to handle implementing legal holds, their jobs will be much more difficult when a company is downsizing.
    • Whether it is general counsel, associate general counsel, paralegals, or other designated staff who handle this responsibility, it is easy to lose focus when critical financial decisions are being made, larger legal issues are present, and a company’s survival is at stake.
  • 15. Key Players - 3
    • IT staff - often critical to the preservation of a company’s ESI.
    • Many IT departments routinely wipe or reimage hard drives for storage or reassignment, and those practices need to be coordinated with litigation holds and the preservation of ESI when necessary and especially during downsizing.
    • Layoffs of IT staff are common when companies downsize, and cutbacks in IT staff can result in mistakes in ESI preservation as job responsibilities are altered.
    • If a company's IT services are outsourced to a third party, they must be brought into the mix where their cooperation or actions are necessary for preservation. And, for companies who use SaaS or store data in the "cloud", special effort must be undertaken to collect and preserve relevant ESI subject to legal hold.
  • 16. Key Players - 4
    • Human Resources Staff
    • HR staff have a central role in handling departing employees when companies downsize, dealing with typical HR issues such as severance, benefit continuation, unemployment compensation, outplacement services, and similar matters.
    • They also typically deal with the added stress of employees who remain who likely will have increased job responsibilities and duties, and concerns about their own job security.
    • While HR staff can play a key role in making sure that ESI preservation is not lost in the shuffle, it is not likely to be naturally high on their list of priorities.
  • 17. Key Players - 5
    • Management
    • Likewise, when a business is downsizing, key management personnel are typically occupied with big picture concerns – survival of the business, doing more with less, controlling costs, increasing revenues – that do not extend down to the level of insuring compliance with legal holds and preservation of ESI.
    • But, leadership from the top can be critical to the effective preservation of ESI and should be seen as one additional and important area of concern for managers when a company downsizes.
  • 18. Key Players - 6
    • Outside Vendors
    • When outside e-discovery vendors are involved in the preservation, collection and processing of a company's ESI, they need to be advised of downsizing actions taken so that, when necessary, proper coordination can take place and alternative methods or strategies for ESI collection and preservation can be implemented.
  • 19. Actions to Preserve ESI During Downsizing
    • What are the actions a company can take to make sure that ESI is preserved when required?
    • How can a company make sure that trade secrets are not pirated by departing employees, during the turmoil of mass layoffs and downsizing?
    • Here is a list of practical tips for consideration . . .
  • 20. Tip 1 – Notice, Contact, & Support
    • Distribute a general notice that all legal holds remain in place during and after downsizing.
    • Appoint a contact or "point" person to address questions about legal holds and preservation of ESI.
    • Management should emphasize that this is a priority activity and that it has support from the top.
  • 21. Tip 2 – Cross Reference Legal Holds with Departing Employees
    • Before layoffs occur, if possible, review each and every legal hold in place, and cross-reference the names of all likely departing employees with existing legal holds to identify recipients and where attention will be needed.
  • 22. Tip 3 – Modify Legal Holds
    • Review and modify all legal holds where departing employees were subject to the hold, and revise the hold to include the new custodian now responsible for the former employee's ESI.
    • It is also important to modify existing legal holds to make sure they take into account the company’s revised operations and structure after downsizing, as that can also change.
  • 23. Tip 4 – ESI Exit Interview
    • For each departing employee, assign someone to conduct a personal interview (either as part of the exit interview process, or, preferably, earlier) to review:
    • past compliance with legal holds the employee was subject to,
    • preservation actions that have been taken,
    • the location of data required to be preserved,
    • new or recently created data that might have to be preserved.
  • 24. Tip 5 – Enforce Confidentiality Agreements, Restrictive Covenants
    • As part of the interview, review any covenants not to compete, confidentiality agreements, or non-disclosure agreements (NDAs) the employee has signed, and remind them that the agreement[s] remain in place and the duration.
    • Go over the employee's specific future obligations under the agreements and, if possible, get the employee to sign a statement acknowledging receipt of the additional copy of the agreements[s] provided in the interview.
  • 25. Tip 6 – Ask The Right Question
    • As part of the interview, ask specifically if the employee has ever, during their tenure, copied any company ESI to any home or personal computer, thumb drive, DVD, CD or other storage medium.
    • Get them to sign a certification that they have not done so, or itemize what the employee admits has been copied and make arrangements for the return of the material.
  • 26. Tip 7 – See no evil?
    • Beware of the "see no evil/hear not evil" approach to these interviews – that can come back to haunt you in the future.
    • Ask the hard questions now, it will help you in defending against future claims that relevant ESI is missing, was destroyed, or was not produced.
  • 27. Tip 8 – Follow Up
    • Based on the information gathered from the departing employee in the exit interview, for each departing employee who is subject to a legal hold, appoint someone who will be responsible to inventory, collect and preserve that person's ESI.
    • Document the actions taken and make a record that can be relied upon later if necessary.
  • 28. Tip 9 – Big Brother is watching . . .
    • Monitor the departing employee's conduct after his or her receipt of the termination notice, including computer activity, if company policies permit (most do).
    • Block access to trade secret information or other sensitive material if you are suspicious or just cautious
  • 29. Tip 10 – Stay or go?
    • Consider whether you really need the departing employee to be present at your company for the usual two week notice period.
    • Would immediate removal from the workplace make more sense for some employees where you suspect there is a risk of data being taken, or some other destructive behavior?
    • Balance that with the information that can be gained from the interviews recommended, above.
  • 30. Tip 11 – The “Frog March”
    • If possible, avoid the "frog march" where departing employees are immediately escorted from the building, as that will usually foreclose the opportunity to conduct an interview and gather information on ESI in an orderly manner.
    • On the other hand, if you suspect that the risk of ESI being destroyed or taken is high, an escorted and prompt exit from the building may be warranted.
    • However, in that case other arrangements for securing and preserving the departing employee's ESI must be made.
  • 31. Tip 12 – Make a List
    • Prepare a check list of company items (including computer equipment and storage devices and media) returned upon termination and have the departing employee acknowledge the form.
  • 32. Tip 13 – Get It In Writing
    • Obtain a signed certification from the employee upon termination attesting to his/her return of all company materials and ESI and – importantly – that he or she has not retained any electronic or hard copies.
    • This can be very useful in the future to show good faith in defending against future claims that ESI exists outside the company and should be produced, as well as prosecuting future claims for theft of trade secrets or proprietary business information.
  • 33. Tip 14 – Block Access
    • Disable passwords and remote access capability of all departing employees
  • 34. Tip 15 – Make Image Copies
    • When necessary (always a judgment call), make forensic image copies of the hard drives of computers of departing employees, especially employees who are at the center of a dispute subject to a litigation hold.
    • Hard drive costs are dropping, and a 1 TB drive can now be purchased for less than $100. Imaging the hard drives of key employees in disputes is inexpensive and can be good insurance.
  • 35. Tip 16 – First Do No Harm
    • Make sure that any IT department practice or company policy to wipe or reimage hard drives and redistribute computer equipment to other employees does not result in the destruction of ESI subject to litigation hold and a duty to preserve.
  • 36. Tip 17 – Protect Trade Secrets
    • Designate your proprietary and trade secret material and mark it appropriately.
    • Make sure that any ESI or other material that leaves the company can be identified as your own.
    • Copyright or trademark your property in advance when you are able to do so.
  • 37. Tip 18 – Privacy?
    • Consider adopting a policy that, if the company permits employees to work from home, the employee acknowledges that he or she has no expectation of privacy with regard to company data stored on their home computer[s].
  • 38. Tip 19 – Control Storage Devices
    • Consider providing company owned USB thumb and portable hard drives for employees to use, and prohibit the use of personal USB drives and storage devices for company data.
  • 39. Tip 20 – Be Flexible
    • Finally, be smart and be flexible about responding to particular situations that arise in connection with the preservation of ESI of departing employees.
    • In a mass layoff situation, there are likely to be situations unique to each company that require fast reaction with little advance warning.
    • Think ahead about the consequences of ESI that may be destroyed, and document your preservation efforts – it's good insurance.
  • 40. Conclusion
    • Handling employee terminations in connection with business downsizing or closing takes place in an emotionally charged atmosphere with normal employee assigned responsibilities in a confused state, which adds to the degree of difficulty when a company tries, in good faith, to meet its duty to preserve relevant ESI.
    • While there are no simple solutions here, the consequences of destruction of ESI - whether inadvertent, negligent, or intentional - can make a bad situation worse and endanger the company's future ability to survive.
    • That risk can be reduced if a company treats preservation of ESI which is subject to a legal hold or critical to the future operations of the company as an essential component of how to properly manage a business downsizing or closing.