E-Discovery: It Can Make or Break a Lawsuit

May 2011

E-Discovery: It Can Make or Break a Lawsuit

Harsh lessons and useful guidelines to help companies preserve data that that could be used as evidence in litigation

If you are a party to a lawsuit, it is very likely that you will be asked to produce e-mails, Excel spreadsheets, Word documents and other electronically stored information (ESI), as those types of files are routinely requested as evidence in litigation. It is critical that you and the people who have access to such data understand that destroying it, or failing to produce it during the discovery process, can generate harsh consequences.

A 2008 case illustrates misconduct during e-discovery. In Victor Stanley, Inc. v. Creative Pipe, Inc. 2008 WL 222184 (D. Md. May 29, 2008), the defendant was found to have deleted, destroyed and otherwise failed to preserve electronically stored information – despite an order from the court that the information be produced. In its ruling, the court found that evidence was intentionally destroyed and ultimately entered a default judgment in favor of the plaintiff.

For the defendant, the pain did not stop there. Finding that the defendant engaged in “the single most egregious” case of discovery misconduct that the court had seen, and that the defendant’s “pervasive and willful violation” of court orders was serious enough to constitute contempt of court, the court ordered the defendant to be imprisoned for up to two years, unless and until he paid the plaintiff’s attorney fees and costs.

Guidelines. In its opinion, the court sought to provide a larger framework to help resolve the issues surrounding the preservation of electronically stored data. Guidelines for complying with e-discovery were set out in another earlier case, where the court ruled that:

Attorneys should issue a “litigation hold” when a suit appears to be imminent. This means instructing their clients that evidence is to be preserved until discovery is complete. The litigation hold should be periodically re-issued so that new employees remain aware of it.
Key players should be made to understand what the hold instruction entails. (“Key players” are persons who likely have access to information relevant to a case.)
All employees should be instructed to (a) produce electronic copies of their relevant active files and (b) ensure that all tapes or copies are identified and stored safely. This may even require keeping potential evidence in a separate location to eliminate the possibility that backup tapes could be accidentally recycled.

In the Victor Stanley case, the court cited several instances of delaying tactics that resulted in “spoliation” – the intentional or negligent withholding, hiding, altering or destroying of evidence relevant to a lawsuit.

Warning. The Victor Stanley decision delivers a warning that businesses must be prepared in the event of litigation. Business owners and managers should work with their law firms and information technology professionals to exercise best practices in e-discovery, with the residual benefit of becoming more efficient and cost-effective in the way the company electronically stores and preserves information.

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.