Electronic Disclosure and How it Could Affect your Company

Have you ever thought about the volume of business-sensitive and potentially embarrassing information that your company stores? Most companies store email and other general files for periods of anything between six months and many years in PCs, tapes, archives and even phones. Embedded within this sea of data are many unguarded or embarrassing revelations of a personal and commercial nature that you may not wish to have aired in public.

How many of us would wish our emails to be audited? For directors of companies this is now a real and ever present possibility. It is very typical in commercial litigation for the directors of the company to be targeted with disclosure orders – putting them increasingly at risk of having their laptop, desktop, phone and backup archives explored by a court. Aside from the risk of damaging disclosures, the costs of complying with an e-disclosure order can have a serious impact on the course of the litigation if you have not planned ahead to minimise the risks.

What is Electronic Disclosure?

Disclosure is the preservation, collection, processing and presentation of information relevant to a commercial litigation or criminal investigation. Traditionally the term has been applied to paper documents, and electronic disclosure applies the same concept to the wide array of electronic files, emails, financial transactions and even phone texts that are stored within electronic systems and media – and which now proliferate within every organisation. When filed with an electronic disclosure order, a company needs to move quickly to preserve relevant data. Failure to do so risks a breach and could damage the chances of successful litigation. Ensuring preservation of relevant data in the first hours or days after an order from the court may mean, for example:

• rapidly instituting a change in company policy for how emails are archived or deleted,
• changing procedures for how backup tapes are handled, or
• creating ‘forensic images’ of the PCs of named individuals.

Few companies have adequate procedures in place to deal with such orders and it is often a case of ‘all hands to the pump’ in IT, accounting and legal departments simply to work out what systems may be affected.

Is this Likely to Affect your Company?

In the US, electronic disclosure is now involved in the majority of commercial lawsuits. Smart or well-advised litigants realise the costs and benefits of electronic disclosure and have not been above filing extravagant disclosure requests as a way of strong-arming opponents into settlement. They bank on companies preferring to settle rather than to incur the potentially substantial costs of fighting the case.

To counter the threat, many US companies are now putting in place governance procedures to defend against such claims and to improve their ability to react when e-disclosure is required. They are also increasingly using professional third party consultants to help them develop their governance processes and manage their e-disclosure requirements in the event of litigation.

The UK is not far behind in this race with many of the larger or more complex UK-based litigations now involving e-disclosure. Information-rich global industries, such as financial services, telecoms or media, are already seeing e-disclosure becoming a common instrument in unravelling claims over royalties, fees and other data-based services.

Be Prepared for E-disclosure Compliance

If a company is not well prepared for e-disclosure the costs can be substantial:

• The cost of a lost lawsuit – if a company is not able to demonstrate its records were correct, and not able to manage its disclosure to the satisfaction of the court it risks losing the case. Also, cases have had to be settled out of court because companies saw disclosure costs escalating beyond the value of the dispute.
• The effort required to satisfy an e-disclosure request – preserving, collecting and processing information for a case – typically involving finance, IT, legal, HR and other functions and many or all business units of an organization.
• Disruption and lost productivity – in IT, and across the business, normal processes are delayed or suspended where e-disclosure orders are poorly implemented or have not been planned for.
• Loss of management focus on other key business areas – e-disclosure typically puts a particular strain on directors of the company who are often the ones drawn into an investigation.

When served with an order for e-disclosure, it is critical that an audit log is maintained of how information is handled and processed. To ensure that you can demonstrate that the data has not been amended in the process, it is usual to forensically examine hard drives and backups – keeping the source drive intact and taking an exact image for examination. This is why it is often helpful to employ external consultants to assist with the collection and processing of relevant data and to ensure that an independent audit is maintained.

Another good reason to call in help is to have the data processed effectively to remove information not relevant to the investigation. The company is not required to hand over to the court any data that is not relevant to the enquiry. This means it is very important to process the data, remove duplication (a typical email may turn up many times in different archives), and search for specific items of relevance. A third party consultancy will work closely with the legal team to deliver a refined set of relevant data with non-relevant information ‘redacted’ or blacked out to avoid accidental disclosure of commercially or personally embarrassing information that has no relevance.

Processing, and subsequent legal review of the data can be an intense and time consuming task culminating with the production of the final set of relevant documents to the court and to interested third parties. It is quite common for the court to issue tight timelines on the process. Assistance from external law firms and professional consultants specialising in litigation support can accelerate and augment the efforts of the internal legal department at this critical stage.

Address the Risk before it Happens

Company directors should act now to reduce the potential risks and costs from e-disclosure. We advocate a three-phase process, which is ideally tackled well ahead of any potential litigation:

Phase I:Identifying relevant sources of electronic data throughout the business. Identify where your company is storing archives, email, files and documents and ensure that these records comply with legal requirements. Identify potential or real litigation threat scenarios and consider the disclosure needs these could generate. The results of this process will set the scope of the electronic discovery management effort as well as provide a complete inventory of the company’s systems, data elements contained within those systems, storage procedures and other key facts necessary to implement an electronic discovery management process.

Phase II: Developing legally defensible information retention procedures. Typically, businesses develop their storage and archiving procedures for sound business reasons and have not taken into account the potential for e-disclosure. The procedures adopted by IT, finance, functional departments and business units all need to be reviewed for their impact on e-disclosure costs and risks in the event of a disclosure order. These policies need to ensure that the company is providing for retention of data in line with legal requirements.

Phase III: Developing litigation hold processes. The company must have in place ‘litigation hold’ or ‘preservation’ procedures that safeguard potentially relevant material once litigation is contemplated. Based on the data systems’ inventory and scope setting efforts, you need to develop reasonable and defendable litigation hold processes that are consistent for each business unit and discuss these processes with outside counsel to ensure they comply with legal requirements. There are many ways that costs can be managed by early consideration of what the e-disclosure process would entail.

Conclusion

The need for businesses to take stock of their data retention and litigation hold processes is real and urgent, as the number of litigations involving e-disclosure grows rapidly. By planning ahead, and putting in place simple procedures to manage effectively the preservation and collection of information, a company can ensure that it is in a position to deal with this increasingly difficult aspect of lawsuits – and reduce the business impact and cost of complying with e-disclosure orders.