1) Electronic evidence is becoming increasingly important in business litigation as the volume of electronically stored information continues to expand. Companies involved in litigation must preserve documents that may be relevant and implement a "litigation hold" once litigation is anticipated. 2) Failure to properly preserve electronic documents can result in severe consequences like sanctions, adverse inferences by the jury, payment of legal fees, and loss of defenses. Even inadvertent destruction of relevant electronic evidence can warrant sanctions. 3) Federal Rule 37(f) provides a "safe harbor" protecting the routine deletion of electronic data, but a company must show it follows a documented electronic document retention policy in good faith. Developing such a policy helps companies better manage electronic information

1. E-DISCOVERY AND ELECTRONIC EVIDENCE:
A NEW CHALLENGE IN BUSINESS LITIGATION
William F. Codell
HARNED BACHERT & MCGEHEE PSC
324 East Tenth Avenue
Post Office Box 1270
Bowling Green, Kentucky 42102-1270
Telephone: (270) 782-3938
Facsimile: (270) 781-4737
www.hbmfirm.com

2. Historical figure and Boston political boss Martin Lomasney was an individual that
understood the value of discretion. He is attributed with the famous quote: “Never write if
you can speak, never speak if you can nod, never nod if you can wink.” Recently, New York
Governor Eliot Spitzer put a modern twist on the famous quote. He is attributed with stating
that one should “never write when you can talk, never talk when you can nod, and never put
anything in an email.” While companies are generally not as susceptible as politicians to
damage from an unfortunate email, a basic understanding of electronic evidence is useful for
any company that may become subject to litigation.
As the volume of electronically stored information continues to expand, electronic
evidence is becoming increasingly important in business litigation. Common forms of
electronically stored information include emails, databases, spreadsheets, and word
processing documents. Current estimates provide that roughly 800 megabytes of
electronically stored information is created per person every year. A standard desktop
computer can store the equivalent of 40,000 typed pages of information. Many companies
have accumulated thousands of terabytes of electronically stored information. Considering
that 1 terabyte of electronically stored information equates to the amount of information in
approximately 1 million books, the task of managing electronic documents can be difficult
for any business.
Similar to a business working to handle new technology, the legal system is
undergoing several changes in an effort to manage electronic evidence. In the legal system,
particular attention is being given to the process of electronic discovery in the business
litigation context.
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3. The word “discovery” is generally defined in the legal environment as the process by
which attorneys reveal facts and develop evidence in preparation for a trial. Common
examples of discovery include a deposition in which an attorney may ask questions to a
witness and a request for production whereby an attorney may require a person or company
to provide certain documents. Traditionally, an attorney would use a discovery request for
production to get copies of correspondence, manuals, reports, blueprints, business records, or
any other documents that might be relevant to the dispute.
Companies involved in litigation are not only required to provide many documents to
an adversary’s attorney upon request, they are further required to preserve documents that
may be relevant to a dispute. Specifically, once a company is on notice of pending litigation,
a “litigation hold” must be implemented to retain documents that the company reasonably
believes to be discoverable or relevant to the dispute. In order to comply with the “litigation
hold” requirement, a business must take affirmative measures to preserve potential evidence
that might otherwise be destroyed in the ordinary course of business.
Several companies with a large volume of electronically stored information have
suffered painful consequences due to failure to properly preserve relevant electronic
documents after receiving notice of potential litigation. One case in which a company was
severely punished for failure to preserve relevant electronic evidence involved the
bankruptcy of an airline. A lawsuit arose out of the bankruptcy in connection with a
transaction that the airline’s Chief Financial Officer may have been involved.
The airline’s attorneys advised the company to implement a “litigation hold” to avoid
the destruction of electronic documents connected to the dispute. However, the airline’s
CFO attempted to delete multiple files on a company laptop computer after receiving the
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4. notice of the litigation hold. When confronted, the CFO claimed that he had deleted files
from the laptop in an effort to hide pornographic images downloaded from the internet. The
other party to the lawsuit asserted that some of the deleted electronic files contained
documents relevant to the case.
The judge for the case punished the company by issuing multiple adverse inferences
and a fee award. Generally, an adverse inference means that a party to the litigation does not
need to prove an element of its case and/or the jury can infer certain elements of the case.
For example, a judge could instruct a jury that certain email documents relevant to a dispute
were destroyed and the jury may infer that the emails were harmful to the party guilty of the
destruction.
Judges have wide discretion in resolving issues connected to discovery abuse.
Sanctions that may be imposed on a business for failure to preserve relevant evidence may
include the loss of certain defenses, payment of another company’s attorneys’ fees, and an
adverse inference instruction to the jury. Such an outcome in a legal fight can be devastating
to a business.
It is important to note that a company need not intentionally or maliciously destroy
relevant electronic documents in order to become subject to discovery sanctions from a
court. Reckless or negligent behavior may be adequate to warrant sanctions. Destruction of
relevant electronically stored information may be sanctionable in circumstances where the
company was not consciously aware of the destruction. The inadvertent destruction of
relevant electronic evidence after notice of pending litigation is highly feasible for
companies with a large volume of electronically stored information and a regular practice of
recycling old “back up” tapes with seemingly outdated files.
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5. The possibility of litigation sanctions arising from the destruction of electronic
documents combined with the accelerated rate at which electronically stored information is
generated presents a difficult dilemma for many companies. Despite the continued decrease
in the price of data storage, keeping every form of electronically stored information forever
is not practical for most businesses. A new amendment to the Federal Rules of Civil
Procedure provides one proposed solution.
Federal Rule of Civil Procedure 37(f), which covers all cases filed in Federal Court
after December 1, 2006, provides that “absent exceptional circumstances, a court may not
impose sanctions under these rules on a party for failing to provide electronically stored
information lost as a result of the routine, good-faith operation of an electronic information
system.” Federal Rule of Civil Procedure 37(f) is a “safe harbor” for companies regarding
electronically stored information. It appears that the Rule will protect genuinely routine
deletions of data with regard to litigation in Federal Court. The most important language in
the Rule emphasizes that protection from sanctions is available only for “the routine, good-
faith operation” of a computer system.
In order to gain the benefit of the Rule, a company in Federal Court litigation will
need to establish that it not only has a policy to deal with electronic document retention, but
also that the policy is followed by company officers and employees. As such, the existence
of an electronic document management policy can be critical for a business subject to
litigation. Due to the fact that every business is unique, no single plan or policy is
appropriate for every company. However, some basic standards regarding the management
of electronically stored information are equally applicable to almost every company. Four
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6. generally applicable principles regarding the management of electronically stored
information are as follows:
1. Every company should have a written record retention policy;
2. Every company should understand that it has a duty to preserve
records once it knows or should have known of potential litigation;
3. Every company should have a plan regarding how records will be
preserved once a dispute emerges; and
4. Every company should make efforts to identify likely difficulties with
preserving electronic evidence and prospective solutions.
Companies that wait until litigation arises before confronting electronic document
retention issues will face the potentially impossible task of cataloging and preserving
electronically stored information under court mandated deadlines. Such circumstances
constitute a formula for catastrophe and significantly increase the risk of painful monetary
and evidentiary sanctions. Moreover, an adversary that already has a well-designed policy
that can effectively and efficiently deal with electronic evidence issues will have a significant
competitive advantage in litigation.
The development of a good electronic document retention policy will not only benefit
a company after it becomes involved in litigation, it will additionally help officers and
employees better understand the business. Developing a policy to properly manage
electronically stored information will necessarily involve enhanced communication among
individuals from different areas of a company including human resources, information
technology, and management. In turn, a greater understanding of the methods of electronic
communication and document retention will increase a company’s ability to more efficiently
utilize future technological innovations. Current changes imposed on the legal system by
advancements in technology reflect new challenges and opportunities facing every business.
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7. In order to meet new challenges and take advantage of new opportunities, a company would
be well advised to continually develop and monitor its electronic document management
policy.
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