eDiscovery relates to the preservation and production of electronically stored information (ESI) that may be relevant to a dispute, a lawsuit, or a regulatory or criminal proceeding — together or individually, “litigation.”¹ The need to preserve and produce documents and information in litigation is not new. Spoliation claims — claims for the intentional or negligent loss of evidence — are nearly as old as common law. What is new is the breadth and proliferation of documents and information, which might be evidence in this electronic-information age, and the spate of cases, dating from roughly 2004, holding parties and their counsel responsible for failing to adequately preserve ESI. In December 2006, the Federal Rules of Civil Procedure were modified to deal with ESI expressly. State rules are certain to follow.

ESI includes e-mails, of course; but it also includes electronic voice records (Dictaphone™ recordings, voicemail and VoIP) and other audio files, electronic spreadsheets and databases, speed dial registers and call logs,² text messages, logs, documents and other electronic information stored in printers, copiers and facsimile machines, in PDAs (Blackberrys™ and TREOs™), employee laptops, home computers, CDs, DVDs, thumb drives, memory sticks and other removable memory devices. ESI is found on servers and archived backup tapes. It is found on old, unused tapes, disks or electronic cards, for which no systems might be readily available to read the information (legacy systems).

In short, ESI is found nearly everywhere you can imagine and then some. Various sources estimate that 92-97% of corporate information is now created electronically and 80% or more of corporate communications are by e-mail. The Equipment Leasing & Finance Association reported on April 23, 2007 that “100 leasing and finance professionals from 47 companies attended Equipment Leasing & Finance Foundation’s Web seminar, ‘Paperless Transactions: The Competitive Edge’” (See Logical Progression: A Forward-Looking View at Paperless Transactions in the Industry). The amount of ESI is only going to increase.

Notwithstanding the explosive growth in ESI and the number of places it might be found, the developing case law has made clear that the custodians of ESI — the companies, including lenders, creating it and maintaining it — and their counsel are going to be responsible for preserving it and producing it, where it might be relevant or evidence in litigation. Recent cases have imposed significant sanctions on corporations, which have failed to take adequate steps to preserve or assure complete production of ESI, including multi-million dollar fines, dismissal of a party’s lawsuit or the ultimate grant of multi-million dollar judgments based on even the inadvertent destruction of relevant documents or ESI where a party did not use due care to preserve the documents or ESI.

In an extreme case, Coleman (Parent) Holdings, Inc. v. Morgan Stanley & Co., Inc., the court found the loss of ESI, coupled with conduct of the company and its lawyers, so egregious, that it essentially told the jury it should accept as true that Morgan Stanley had participated in fraud. The jury then returned a $1.59 billion verdict against Morgan Stanley. Although the decision was recently overturned on appeal, it was on different grounds. The appellate court did not decide that the trial court erred in issuing what was effectively a $1.6 billion sanction for eDiscovery abuse. Coleman is an extreme case, but as pointed out by the American Bar Association’s 2006 Electronic Evidence & Discovery Handbook, fines for eDiscovery abuses “exceeding $1 million are no longer rare.”

In a world where ESI can be lost with the push of a button — how can a careful lender protect itself from the inadvertent loss of ESI resulting in sanctions?

The Federal Rules of Civil Procedure (the federal rules) were modified, effective December 1, 2006, to provide some clarification and guidance. Two things stand out and they provide both burden and opportunity: 1.) the careful lender needs to have a thought-out, written policy for preserving ESI (and other documents) when it knows or reasonably should know of a dispute for which the ESI might be relevant evidence (the litigation hold policy), and 2.) the careful lender should prepare an inventory and “defense” of its ESI (the ESI inventory).

The purpose of these two suggested actions is: 1.) to reduce the likelihood of loss of ESI (and other evidence), 2.) to reduce the opportunity for a finding of culpability in any loss, 3.) to require an opposing party to make a showing of prejudice in seeking sanctions for any loss and/or 4.) to avoid or minimize sanctions for any inadvertent loss. The most effective and least expensive means of preparing a litigation hold policy and an ESI inventory is to prepare them, or substantially prepare them, in advance of litigation.³

Once litigation is threatened or filed, the lender’s and its counsel’s focus should be on the specifics of the litigation, the substance of the claim(s), not on building the necessary infrastructure and communications necessary to identify, preserve and produce ESI and other related evidence. Getting involved in setting up the necessary infrastructure after litigation is pending is going to be much more expensive and allow more room for error. Perhaps as important, a major benefit of having a thoughtful, written policy in advance of litigation is to demonstrate to the court, as necessary, your institution’s good intentions and “good faith.” An ad hoc litigation hold policy developed in the face of actual or threatened litigation runs the risk of being or looking self-serving and manipulative. It may be better than no litigation hold policy, but it will not be as effective or as cost effective as a litigation hold policy developed in advance.

Litigation Hold Policy — The Requirements
A litigation hold policy must be an exception, or carve out, to your normal document destruction or retention policy.⁴ Although specific statutes or regulations may require the maintenance of certain documents or records, in the absence of such statutes or regulations, a lender is entitled to decide for itself what documents and information, including ESI, to keep, and what to throw away.

Time and again courts have rejected suggestions or arguments that would require parties to keep “everything” as impractical and not legally justifiable. This is even more true in the age of burgeoning ESI. However, common law has long held that a party with notice of a claim or litigation, or the possibility of a claim or litigation, must take reasonable steps to preserve any documents, information or tangible things that might be relevant to the issues presented.

To be relevant for these purposes, the documents or information need not actually be evidence, but may be relevant if they simply point to evidence that may be admissible at trial on the matter. Accordingly, the scope of the duty to protect and preserve can be broad. ESI, which has been lost because of a routine destruction policy, has been held to be sanctionable in the absence of an appropriate litigation hold policy designed to prevent the destruction. So, for example, if the lender’s policy is to “recycle” archive tapes of e-mails after six months, that policy must be put on hold when it would be likely to result in the destruction of relevant or potentially relevant e-mails.

In a more difficult scenario, a litigation hold policy has to take into account that the routine use of a computer or other electronic devices might cause the computer to erase or overwrite relevant, but previously deleted files or information that was otherwise recoverable.⁵ A routinely deleted file is not truly erased, but merely “hidden” and its name is changed. It can generally be recovered with special software until the computer overwrites the portion of the disk where the file is located. This is often not done until the computer needs additional disk space.

In this age of multi‑gigabyte hard drives it is conceivable to have a deleted file be recoverable for months or years after “deletion.” While at the same time, it is possible that the very next use of the computer will overwrite the previously recoverable file making it impossible or much more difficult to recover. Your litigation hold policy needs to at least consider protecting previously deleted files or data and other “recoverable” data that may be relevant to the litigation.

Extraordinary measures to protect all ESI may only be necessary in extreme cases, but the risks must be carefully weighed and decisions made deliberately, not through omission. The greater the seriousness of the claim and the greater the allegations of culpability, the more attention that must be given to preserving all potential evidence. Accordingly, where fraud, breach of fiduciary duty, culpable personal injury or criminal conduct is or may be alleged, the costs of preserving evidence must be given a back seat to the obligation to preserve evidence. It may be that the hard drives of key players need to be forensically copied before they are allowed to be used again. Whereas in a simple breach of contract case, even the careful lender might choose to take the risk that use of the computer(s) will overwrite one or more previously deleted files. But, this is a risk that must be weighed carefully and deliberately.

The courts also tend to view the loss of potential evidence on a “sliding scale.” The more important the evidence was likely to be, the greater the need for protections. Indeed, courts have sanctioned parties for losing ESI through mere negligence where it was shown the loss substantially prejudiced the other party. The goal of the sanction is supposed to be to put the innocent party back on an even level with where it was before the loss, but often it seems the sanction poses an insurmountable hurdle for the sanctioned party.

Accordingly, setting up an appropriate system to avoid the loss of ESI is important. Absent actual pending or threatened litigation, the careful lender can not know exactly what it needs to preserve, but it can have a system in place. The elements of a proper litigation hold policy include:

A Senior Officer in Charge
A proper litigation hold policy must have a “litigation hold officer” with the authority, smarts and wherewithal to evaluate the risks and benefits, make the necessary decisions, allocate budgets or funding, command the troops, and streamline the process to save money and assure the overall effectiveness of the litigation hold policy. This usually means a senior officer or executive, someone in the GC’s office, the CIO’s office or the CFO’s office. This person needs to be able to interact with and command or lead resources from counsel, IT, business units and headquarters functions.

The two biggest decisions the litigation hold officer will usually have to make are: 1.) when is it necessary to initiate a litigation hold and 2.) what is the proper scope of that hold. These decisions will generally be made in consultation with counsel. The decisions once made must be documented, communicated, revisited, and documented and communicated again. As further discussed below, the litigation hold officer should also have the responsibility and resources to prepare and maintain the ESI inventory. The ESI inventory is integral to an effective litigation hold. It is also a virtual necessity in successfully navigating the new Federal Rules related to ESI.

Having a senior officer as the litigation hold officer should not only provide the necessary smarts and muscle for an effective program, it should carry weight with the court in demonstrating good faith efforts should the need arise.

Established Protocol for Communication
Your IT people and possible key players or custodians of information should have an idea what to expect when a litigation hold order is issued. More important, the appropriate people need to know to communicate to the litigation hold officer any and all threats of litigation or notice of actual litigation.

The litigation hold officer should have an established protocol of what to communicate to whom in response. The communications to the litigation hold officer of threatened or actual litigation can be ambiguous. So long as the appropriate people know to communicate the possibility of litigation to the identified litigation hold officer, he or she can investigate to determine if a litigation hold is necessary.

Once the litigation hold officer determines that a litigation hold is necessary, he or she should have a helpful protocol for identifying the key players and for communicating to IT and to the key players and custodians the need for a litigation hold. This will often involve not only informing the appropriate persons of what to preserve, but often also of how to preserve it.

For example, if relevant ESI would be lost or modified because of the use of systems, the initial communication should inform the custodian whether it is okay to turn off or to continue to use, his or her computer. It should also inform the custodian what will happen to the computer, when he or she can expect to have it back and other necessary or helpful information.

Depending upon the training available to the particular key players or custodians, the initial communication might need to stress the importance of compliance and the consequences of non-compliance. Having protocols for these communications established in advance will be much more effective in preventing the inadvertent loss of ESI than trying to establish the protocols at the same time you are trying to decide what information to preserve and how to preserve it.

ESI Inventory
An ESI inventory is a listing of all your ESI by categories and its repositories. It should include information on the media on which the ESI is kept, the form in which it is kept, and notes on the costs of recovering or converting the ESI to other forms, as appropriate. It should also note what metadata the ESI contains or is associated with the file.⁶

Moreover, properly constructed as part of your litigation hold policy, the ESI inventory should also have information on any known “dangers” to the ESI. That is, it should contain information on any scheduled or routine destruction or recycling of the media or information under your document destruction or retention policy. It should also contain information on what will happen to the information in the absence of affirmative efforts to preserve the information (i.e., how often it will “roll over” if left to its own devices).

For example, electronic call logs may be limited to the last 100 callers, so that they “roll over” on any given day as to the number of calls made that day, and the log information on that number of calls is lost if not backed up. In some cases, it may be necessary for the litigation hold to require that such call logs are backed up daily or otherwise preserved. Or, it may be that any relevant information is already irretrievably lost (e.g., where the matters at issue are four to five years old), and so there is no need to back up the call logs.

An ESI inventory, properly done, should alert the litigation hold officer to this need and help him or her with this decision. As further discussed, below, to be especially useful your ESI inventory should be prepared in advance of litigation, and should be regularly updated.

Written Documentation of Policy, Implementation and Enforcement
It should go without saying that where part of the purpose for your litigation hold policy is to evidence your institution’s good faith efforts to preserve evidence, a written policy, which is consistently enforced, is the best practice. If you have a written document policy that does not include a litigation hold policy, update it. If it does not account for ESI, update it. Then keep it up to date, enforce it and document your efforts to enforce it.

You will improve your chances of not losing any ESI (or other documents or information). Almost as important, if you manage to lose some ESI despite your best efforts, you are more likely to avoid sanctions for the loss.

ESI Inventory — The Requirements
Changes to the Federal Rules, effective December 1, 2006, directly address ESI, and are likely to be followed by most if not all of the state courts. Many of the state courts already model their rules on the Federal Rules, so it is just a matter of time for those states. Additionally a committee on uniform laws is proposing “Uniform Rules Relating to the Discovery of Electronically Stored Information,” which largely mirror the changes to the Federal Rules.

Several of the changes to the Federal Rules make the preparation of a proper ESI inventory, including a defense of “reasonably inaccessible” ESI in advance of litigation a virtual necessity for any lender that wants to get a leg up in the discovery process and minimize or avoid the opportunity for strategic behavior by opposing parties or their counsel.

The changes to Rule 26 of the Federal Rules expressly require that each party provide to the other parties, “without awaiting discovery” certain “initial disclosures,” including:

These disclosures generally must be made at or within 14 days of a meet-and-confer between counsel for the parties required under Rule 26(f). This provision alone might not mandate a full ESI inventory in advance of litigation; however, the meet-and-confer provision of Rule 26(f) expressly requires the parties’ counsel to negotiate “any issues relating to disclosure or discovery of electronically stored information, including the form or forms in which it should be produced.”

The meet-and-confer is generally to be within 69 days of the defendant’s appearance (not less than 21 days before the Rule 16 conference with the judge, which is to be within 90 days of the appearance).⁷ These meet-and-confer provisions require that the parties and counsel be well versed in ESI and cover a lot of ground in a short time after a lawsuit is filed. The issues are complicated. The party with a comprehensive ESI inventory prepared before litigation will have a big leg up in these negotiations.

Amended Rule 34 allows the requesting party to request a particular “form” for the ESI. For example, the requesting party may request that the ESI be produced in its “native format” with all metadata. This would require the producing party to produce the data file of an application, say Word® or Excel®, as it exists on the producing party’s computers or servers (as it is ordinarily maintained), with all the formulas, revisions and ability to manipulate data the producing party would have, plus the metadata not readily viewable by user. This may be a relatively easy and inexpensive way to produce information, but it lacks substantial controls and may raise authenticity issues with respect to the genuineness of “documents” produced.

On the other hand, the requesting party might request that all ESI be printed out onto paper. As ESI runs in the gigabytes, this could involve literally millions of pages.⁸ This “form” would likely be more expensive — imagine printing out years of emails for dozens of key players. Moreover, the available search functions and metadata would be lost. But, it would allow for Bates-labeling and other controls on authenticity. Sensible compromises must be reached. Rule 34 allows the producing party to object to the form requested by the requesting party and suggest its own form.⁹ Of course, the objecting party must be prepared to defend its objection.

Having the bases for such objections prepared in advance would be a big advantage in negotiations or litigation of the issue. Under Rule 34, if no form is specified by the requesting party, the producing party must produce the ESI either in its ordinary form, or a form that is “reasonably useable,” and the producing party must specify the form in which it intends to produce its ESI. Again, knowing your preferences in advance of litigation is the key to success.

Back to Rule 26. Rule 26, as amended, provides that a party need not produce ESI that the party identifies as “not reasonably accessible.” It further provides that the burden is on the party so claiming to show that the information is “not reasonably accessible” due to undue burden or cost. The cases show that vague and unsupported assertions will not suffice.

A party claiming that information is not reasonably accessible will have to offer specifics and perhaps admissible evidence, to show why the recovery or production of the ESI is burdensome and what the costs are expected to be. Even then, if the ESI appears important enough, and the case at issue justifies it, the court may still order its production. Rule 26 expressly allows the court to “specify conditions” for the production, which may include cost sharing or cost shifting.

The time and place to negotiate all of this is going to be at the Rule 26 meet-and-confer, or sooner. Early agreements or partial agreements can substantially reduce the preservation burdens. The party that is prepared for these meetings will have the edge in negotiations.

The party that has prepared before litigation an inventory of its ESI, including an understanding of the form(s) in which its ESI can be readily produced, the cost of any conversion(s), the identification of files and data that are not “readily accessible,” and the defense of that identification, will be prepared to negotiate with opposing party’s counsel. The party can say: “Here is what we can do, here is what we cannot do, here is why,” and, if necessary, to defend their views to the court. We make no promises that you will always win.

But, if the ESI inventory is fully and properly prepared, you will have the advantage in negotiations and resort to the court will often not be necessary. As in most negotiations, success is one-tenth inspiration and nine-tenths preparation. The time to prepare for the eDiscovery meet-and-confer is before the lawsuit is ever filed. Only then can the careful lender hope for a full understanding of its ESI and the defense of the limits and constraints of its production.

Conclusion
If you are a careful lender and your document retention or destruction policy has not been recently reviewed or revised to assure it will adequately preserve ESI if and when a lawsuit is filed, now is the time to do it. If you do not have a prepared ESI inventory, including a justification for the form of production and a defense of “not reasonably accessible” ESI, now is the time to do it. The careful lender knows litigation is coming and prepares for it, in advance.

Jeffrey G. Close is a partner in Chapman and Cutler’s Special Litigation, Bankruptcy and Workout Group. Chapman and Cutler concentrates in helping lenders and financial institutions with a wide range of legal solutions.

Close is a seasoned litigator, having represented lenders, utilities and international manufacturers in jurisdictions throughout the United States. In addition to providing advice, counseling, and litigation and trial services to creditor-side clients in the financial services area, Close served as U.S. counsel on product liability matters to a European insurer and its customers, and has represented clients in insurance coverage disputes, the prosecution and defense of business torts, and on governance issues, proxy and control contests and eDiscovery issues in and out of litigation.

The views expressed herein are the views of the author, and do not necessarily reflect the views of Chapman and Cutler.