Tort reform is a hot topic again. Taking advantage of the most favorable political climate in years, business lobbyists are pushing for new federal laws that would mop up the asbestos mess, cap medical malpractice damages, and help companies steer class actions out of hostile state courts.
But there's another legal reform campaign that has attracted much less attention -- yet could be more significant than any of these measures. It is Corporate America's effort to get the Judicial Conference of the U.S. (JCU), the obscure group that makes the rules governing lawsuits, to enact special new procedures for electronic evidence. This broad category of digital information includes spreadsheets, databases, memos, letters, PowerPoint presentations -- and most important, the e-mail messages that have recently plagued so many companies in court.
Unlike some of the higher-profile items on this year's tort-reform agenda, which would affect a comparatively small number of companies, the JCU's proposed "e-discovery" reforms would influence nearly every big business in America. Digital evidence has revolutionized the litigation battlefield. It makes or breaks many lawsuits -- and has increasingly turned early tactical skirmishes over custody of computer hard drives into some of the most important battles in a case.
That's why business and tort lawyers alike are amping up the rhetoric. Pro-reformers, including Microsoft (MSFT), Wyeth (WYE), Exxon Mobil (XOM), and several business groups, argue that e-discovery costs are spiraling out of control. Plaintiffs' attorneys insist that money has nothing to do with it. "A lot of material that emerged in cases like Enron would never have seen the light of day if these rules had been in effect," says Boston plaintiffs' attorney Anthony Tarricone. "The rules will undermine the essential purpose of litigation, which is to uncover the truth."
The proposed rules would give defense counsel a variety of new weapons. For instance, if a company accidentally turned over an e-mail covered by attorney-client privilege -- a growing problem in today's massive data dumps -- it would be easier to have the message erased from the record. And if digital information was deleted because of routine data-storage policies, companies would be shielded from punishment in most cases. This so-called safe harbor for what are often euphemistically called "document retention" programs is by far the most controversial proposal.
The soonest these provisions could be enacted is December, 2005. The tortuous JCU approval process, which has been going on for nearly two years already, has several stages still to go. A series of public hearings is set to begin in San Francisco in January. And any new rules require the approval of the U.S. Supreme Court and Congress -- though both bodies have a history of rubber-stamping JCU recommendations with little scrutiny.
Unsuccessful in the early stages of the process, plaintiffs' attorneys plan to step up their counterattack. If the safe-harbor rule is adopted, they insist, companies will set their computer systems to automatically destroy electronic documents on frequent cycles and thereby insulate themselves from legal liability. They cite a recent incident involving Altria Group Inc. (MO) subsidiary Philip Morris USA Inc. (MO), which had a policy of deleting most e-mail messages more than 60 days old. U.S. District Court Judge Gladys Kessler determined that this resulted in the destruction of records relevant to the federal government's ongoing corruption case against the tobacco industry -- and in July levied a $2.75 million fine. The new rules would not punish Philip Morris' actions, say many plaintiffs' attorneys. "Under the guise of document retention, companies are going to get rid of a lot of the big evidence problems they have had in the past," says Washington (D.C.) class-action lawyer Richard T. Seymour.
Coming at the end of a long period of business scandals, that sounds like a powerful battle cry. The main reason it hasn't flown so far with the JCU subcommittee studying e-discovery is because companies also have a compelling story. Electronic discovery has proven to be much more expensive than old-fashioned paper discovery. The reason for this counterintuitive phenomenon: People are producing a whole lot more information than ever before.
Executives who a decade ago kept all of their files in a few cabinets now have hundreds of times that amount of material stored in the computer. In many cases, e-mails have replaced hallway conversations. Then there's instant messages, Web sites, and many other types of new evidence that never existed before. A high proportion of this information is saved because it can be so cheaply stored. "It costs you more to think about whether to delete something than simply to leave it on your computer," says Microsoft Corp. deputy general counsel Tom Burt.
OLD TAPES, BIG HEADACHE
Theoretically, all of this information should be easily retrieved, but that's rarely the case. Old data are generally stored on old technology. Companies often have to hunt down archaic backup tapes in storage warehouses -- then buy outdated machinery to read them. In extreme cases such efforts can cost several million dollars, says George J. Socha Jr., a former attorney and e-discovery consultant in Minneapolis.
Another big expense arises when judges order companies to preserve data created by certain executives -- say, a pharmaceutical company's research-and-development staff in a defective-drug class action. That common practice requires managers to stop recycling backup tapes -- something that can become quite expensive for large organizations with thousands of lawsuits and hundreds of computer servers. At an e-discovery conference in New York in February, one MobilExxon lawyer complained that the company spends $1.9 million a month on extra backup tapes for litigation -- a sum that doesn't include either the cost of storage or administrative hassle.
Gathering the material is only the initial expenditure. The real money starts to pile up when lawyers have to review the tidal wave of data created by the Information Age. The overall bill is often so expensive, says New York attorney Adam Cohen, that he has "settled cases with no merit solely because of the costs of e-discovery." That's an increasingly common complaint among corporate litigators. So far they're winning their quiet war for e-discovery reform. But this fight still has a few more rounds.
By Mike France in New York