Investigators rely on the maxim, "Follow the money," but nowadays, "Dig through the data," may be more appropriate for corporate litigation. Whether e-mails, instant messages, electronic documents, spreadsheets or databases, all that digital data can potentially wind up as evidence at trial.
Because not only money but corporate reputations are at stake in high-profile lawsuits, managing both the exposures and costs of electronic discovery is quickly becoming a prime risk management concern.
"E-discovery is really a pervasive issue that all corporations, whether you have 10 employees or 10,000 employees, are currently facing," says Michele Lange, director of the Legal Technologies unit for Kroll Ontrack, the technology and consulting firm owned by Marsh & McLennan Cos. Inc. "This is one of the greatest risks that a corporation, or organization of any size, currently faces today."
It's not just a digital smoking gun that corporations have to worry about, but also escalating discovery costs and the risk of running afoul of the new federal court rules on e-discovery, which can result in costly court sanctions or adverse judgments.
To mitigate e-discovery exposures and combat rising costs, both insurers and brokers are taking steps to help their clients through the process. Among them, Marsh bought risk consulting firm Kroll Worldwide in 2004, bringing with it Kroll Ontrack, which specializes in e-discovery technology and consulting. Legal Technologies now accounts for about 60 percent of Kroll Ontrack's business.
In 2006, Aon Corp. launched a litigation consulting arm that provides e-discovery management services for clients. Aon's investment in e-discovery exceeds $20 million, including secure data centers to host client information.
This year, American International Group Inc. launched a suite of e-discovery products and services that include making independent consultants available at preferred rates to help clients manage e-discovery and providing $25,000 of coverage for consulting fees.
In addition, AIG's Lexington Insurance unit last year introduced a policy that reimburses companies for the costs of e-discovery work done in house.
THE WAY IT USED TO BE
Traditionally, legal discovery was handled by lawyers who sorted through reams of paper documents. With the advent of digital communications, the process has become much more technologically complex and expensive.
Today, 93 percent of all new information is stored in digital form, and most of that is never printed, according to the 2008 ESI Trends Report by Kroll Ontrack. On top of that, the volume of data is rising exponentially. Every day, some 36 billion e-mails are sent worldwide, and that number is rising by 20 percent a year, according to the Kroll survey.
Now, it's not just lawyers involved in discovery but technology consultants and forensic specialists who seek to retrieve data from deleted files, old and obsolete computer systems, and all kinds of media.
The costs of this digital sleuthing add up. "Discovery is hugely expensive," says Lange. It can account for roughly 50 percent to 90 percent of total litigation costs. "That's because it's usually the longest period of the case. Most discovery lasts upward of a year or more, and a vast majority of cases settle either in or shortly after discovery."
Besides the price of discovery, corporations must face the fact that litigation is an unavoidable part of business.
About one-third of U.S. corporations face at least 25 lawsuits, and nearly one in five face more than 100 actions in U.S. court, according to a 2007 survey of in-house counsel by New York law firm Fulbright & Jaworski LLP. In addition, the stakes are often high. About 40 percent of U.S. companies in the survey said they faced new lawsuits with more than $20 million at issue in the original complaint.
While any litigation today is likely to involve some form of electronic information, securities class actions, consumer class actions and employment practices actions, such as discrimination suits, are particularly heavy on e-discovery. In addition, firms may see a barrage of suits stemming from the subprime mortgage crisis.
"Certainly we have seen over the last few years a dramatic increase in the amount of multiparty and class actions," says Mark W. Ogilvie, an employment practices liability product line manager with Lexington Insurance Co. "It's pretty conservative to say that tens if not hundreds of millions of dollars per year are expended in the defense of these types of cases."
A substantial part of the cost comes down to the sheer volume of data involved.
"Electronic discovery costs are steadily increasing as a direct result of the explosion of data within the organization," says Regina Lee, global practice leader for Aon Litigation Management & Consulting Services. "Plaintiffs' counsel are becoming adept at putting into practice strategies that they know will be very costly for the defendants, knowing that e-discovery and data-review costs are directly proportional to volume of data."
With costs mounting, many corporations are unwilling to simply leave it to their lawyers and are seeking outside counsel and vendors to play a greater role in preparing for and managing the discovery process.
"You're seeing a trend of 'unbundling' e-discovery services as a result of corporate America realizing that the burden of responsibility for data management is now squarely with them, and they seek more control and involvement in the process," says Paul Graziano, chief executive officer of Aon's Forensic Accounting and Litigation Consulting Services practice.
Whether law firms stand to lose their advantage in the e-discovery business is another matter entirely.
"I think that what you'll find is that most of these organizations, from vendors to insurers to law firms, we all have our core competencies and then we all sort of add on a little bit around the edges," says Jonathan Sablone, a partner in the Boston office of Nixon Peabody.
Adding services "around the edges," and taking away the electronic-discovery business from the law firms wholesale are two different games, though Sablone admits he's not surprised insurance carriers and brokers are themselves trying to provide e-discovery services to reduce costs for clients.
Other lawyers caution that Fortune 500 companies that rely on brokers or carriers to conduct e-discovery run the risk of paying for nonlawyers to conduct a quasilegal process. Should that go awry, clients are stuck with double the costs: one bill for the initial bungled e-discovery, and another bill for a law firm to conduct the investigation properly.
FEDERAL COURTS STEP IN
Besides the sheer cost, companies have another very pressing incentive to get their e-discovery house in order. The Federal Rules of Civil Procedure, which lay out the procedure that attorneys must follow in federal courts, were amended in late 2006 to codify the e-discovery obligations of all parties in litigation and to specify when penalties may be imposed for discovery failures.
"With the new, amended Federal Rules of Civil Procedure, e-discovery is becoming quite a driver of those (litigation) expenses," says Lexington's Ogilvie.
The federal rules mandate that corporations preserve any potentially relevant documents as soon as litigation is reasonably anticipated. The attorneys for all sides then are expected to hammer out an e-discovery plan before trial and present that to the judge. The rules also provide a "safe harbor" for companies that make a good faith effort to comply with the requirements.
In a significant departure from traditional practice, the new federal rules also permit the costs of e-discovery to be shifted to the requesting party in cases where the information isn't readily accessible--for example from disaster recovery backup tapes--or where it would be too costly to retrieve.
"The courts have generally held that, if the backup tapes are held for disaster-recovery purposes and not used ordinarily by the business, then those will not be considered easily accessible information," says Lee."In these cases, if the opposing party demands information off that type of media, then they often have to bear the burden of those conversion costs. Backup tapes can become very, very expensive."
The failure to abide by the rules can also prove costly.
In January, for instance, a federal judge in California ordered mobile communications company Qualcomm, the plaintiff, to pay $8.6 million to rival Broadcom for failing to turn up 46,000 documents.
Courts also may allow juries to make an "adverse inference" by considering information that a party has failed to produce as being negative for its case. These adverse inferences can easily lead to very expensive adverse judgments.
The damage from discovery lapses, however, can go beyond just money.
"We've seen (corporate) reputations rise and fall on the mistakes made in litigation when it comes to discovering e-mail," Kroll's Lange says.
Despite the potential pitfalls, many companies remain unprepared for e-discovery. A Kroll survey found that only 25 percent of U.S. corporate in-house counsel claimed to be fully up to speed with all case-law developments and regulations relating to electronically stored information. About half of the respondents said their organizations did not have a policy regarding electronically stored information.
The challenge and expense of e-discovery stem from the fact that companies must first of all locate the information; preserve it and prevent it from being destroyed or modified, in what is known as spoliation; collect it and convert it into a form that can be reviewed by attorneys; have it reviewed by attorneys for relevance and privilege; and finally turn it over to opposing counsel.
Each of those steps poses problems, and costs money.
First of all, it may not be easy to locate the data, which may be on anything from a portable "thumb" drive, to a laptop or desktop hard drive or disaster-recovery backup tapes. Some of that media may be obsolete, or it may have been partially overwritten or even deleted and require the use of forensic data experts to retrieve.
Beyond simply finding and preserving data, corporations face two major hurdles in discovery: converting the data to a usable format for attorneys, and the attorney review of the documents. Vendors typically charge on a per-gigabyte basis for converting data, and attorneys often charge by the hour for review.
"One of the biggest cost factors in discovery in general and e-discovery in particular is the amount of documents coming out of the process that the attorneys ultimately have to review during their privilege and relevancy review," says Jim McQuaid, vice president of litigation management and panel counsel for AIG Domestic Claims, Financial Lines.
Because e-discovery costs are proportional to the volume of data, one major way to reduce that expense is to eliminate duplicate and irrelevant documents. The same e-mail, for instance, could exist in hundreds of places within the corporation. Another key to reducing costs is to reuse the document collections and attorney reviews for similar cases, rather than starting from the beginning every time.
"One way you drive down costs is by not rereviewing the same documents, by leveraging the old review," Aon's Lee says.
Even before litigation, companies need to make sure that they have an e-discovery strategy that includes a document retention program under which unneeded documents are deleted according to a schedule. This enables corporations to take advantage of the "safe harbor" provision of the federal rules, which states that companies may not be penalized for the destruction of documents in accordance with a regularly followed document retention policy that lays out a schedule of when unneeded documents are to be deleted from the computer system.
By taking a hard look at their e-discovery procedures and taking steps to rein in costs, companies not only mitigate their litigation risks, they also may be looked upon more favorably by insurers.
"Insurers like to hear that clients are thinking about their budgets and that they appreciate that they are spending what is ultimately the insurer's money, assuming it's a covered claim," Lee says. In addition, e-discovery concerns are likely to start showing up in policy language.
"You will begin to see insurance companies adding e-discovery language within some insurance policy endorsements in terms of what the client may be reimbursed for, or potentially requiring certain vendors or certain processes," Aon's Graziano says, "and making sure that the company has been very efficient in the use of e-discovery as part of the overall litigation cost."
As litigation and discovery costs rise, and corporations seek to better manage their litigation expense, e-discovery is emerging as a prime area of concern for corporate risk managers.
"This is the newest wave of how risk managers can deliver value to their organization and expand their roles in a way that makes sense with their traditional responsibilities," Lee says.
MICHAEL FITZPATRICK lives in New Jersey. Risk & Insurance® Senior Editor Dan Reynolds contributed to this report.
May 1, 2008
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