The Snitch In The System

Vermont Microsystems Inc. (VMI) is no corporate Sam Spade. But the high-tech company, based in Winooski, Vt., is pretty good at playing detective. Consider how the company got a judge to award it $25.5 million in December in a trade-secrets action VMI brought against Autodesk Inc. VMI didn't rely on the typical eyewitness or incriminating memo to beat the Sausalito (Calif.)-based software developer. Instead, VMI crafted its case out of bits and bytes.

VMI argued that electronic messages, for instance, showed that Autodesk management had reason to suspect that a program developed by an ex-VMI engineer who had joined Autodesk was similar to one he had created for VMI. On Autodesk computers, VMI says it turned up the same names VMI chose to label internal directories used in product development. Perhaps most damaging of all, VMI found evidence that certain files had been permanently deleted from the engineer's computers. "There's no question in my mind that the E-mail and evidence that files had been wiped convinced the judge that there had been hanky-panky," says VMI's lawyer, Robert D. Rachlin.

Autodesk has appealed the judgment and argues that the electronic information was misused by the plaintiffs and misunderstood by the judge. "A lot of technical jargon was used to imply that something improper had been done," says Autodesk's defense counsel, D. Bruce Sewell. "We think the judge made a lot of errors."

TICKING TAPE. Still, Autodesk got stung by what's fast becoming the newest, most potent weapon in litigation. While the technology revolution has been a boon to corporations for years, it's only now beginning to show the costly damage it can also do. More and more, jilted employees, angry business rivals, and injured consumers are waging legal wars with floppy disks and hard drives.

And they're winning. That's because most companies have lost control over the voluminous data they can now generate and then store on tapes that fit into the palm of a hand. One 8mm tape can hold as much as 1,500 banker's boxes of information. "Every single company that has a computer will in the next five years be impacted by the use of electronic data in litigation," says John H. Jessen, the managing director of Electronic Evidence Discovery Inc. in Seattle. "The boogeyman is coming."

Companies simply haven't figured out yet how to manage electronic data the way they manage more conventional paperwork. Paper is either filed systematically or shredded when deemed worthless. But electronic information is organized according to each user's personal system and deleted only when that individual chooses to do so. Even when files are deleted, savvy computer experts can often re-create the erased material. This means that everything from birthday greetings sent from one worker to another to coveted smoking-gun-type documents are being preserved by companies as never before. "It's like having on video everything that happened in a company," says Michael J. Patrick, a computer-evidence expert at a Palo Alto (Calif.) law firm, Fenwick & West.

Plaintiffs' lawyers have already pledged to go after a broad array of electronic evidence in cases such as the massive class action brought against the tobacco industry. But so far, they have capitalized most on the cafdid, unfiltered nature of intra-office E-mail. Messages such as "this is highly illegal, but let's do it anyway" and "please destroy evidence" have already turned up in litigation, forcing companies to settle cases that they might have once contested.

These kinds of damning notes will only proliferate. By next year, more than 35 million people are expected to communicate via E-mail, up from 18 million in 1994, estimates Yankee Group Inc., a market research firm in Boston. "If you find one message that supports your case, even if written as a joke, it can be worth $500,000," says Joan E. Feldman, president of Seattle-based Computer Forensics Inc.

LOOSE LIPS. Chevron Corp., while denying the charges, paid $2.2 million in February to settle a sexual harassment case brought against it by four women. The plaintiffs claimed, among other things, that they were subjected to offensive electronic messages, including one listing 25 reasons why beer is better than women. One example: "Beer doesn't demand equality."

Off-the-cuff electronic remarks can also sour business deals. Siemens Solar Industries is suing Arco for fraud in connection with Siemens' 1990 purchase of an Arco solar energy subsidiary. The lawsuit refers to more than 10 electronic messages sent prior to the acquisition that allegedly reveal the shortcomings of the subsidiary's main solar energy product. One note reads: "As it appears that TFS [thin film silicon] is a pipe dream, let Siemens have the pipe," according to the suit. Arco says the messages were taken out of context and that it "will show that Siemens was fully informed about the technology it was buying."

That such potentially incriminating comments would be preserved years after they were made suggests that companies don't know what's in their information systems. Such ignorance creates expensive problems for businesses when they must unearth information requested in litigation. Jessen of Electronic Evidence Discovery says one of his corporate clients embroiled in a massive product-liability dispute has spent more than $2 million looking through electronic evidence and is only 10% of the way through the search.

Intuit Inc. has had its share of headaches responding to a 76-page request for data stemming from the Justice Dept.'s analysis of the company's merger with Microsoft Corp. Patrick, Intuit's counsel, says the company went through approximately 200 hard disks, each containing about 300 megabytes of data--the equivalent of up to 15 million pages of text. And that was before Intuit even got to some 80,000 electronic messages. "Ninety-eight percent of the documents that companies keep don't need to be kept," says Eric Bochner, another lawyer for Intuit. "But there is never a spring cleaning day at the office."

HISTORIC PHONE CALL. Some companies are changing their pack-rat ways. Toyota Motor Sales USA Inc. hopes to have a new policy concerning its computer information in place by the end of the year. And Univar Corp. recently underwent an electronic-data audit of sorts. The company came to realize that a number of its employees were saving voice mails indefinitely. One woman had kept her two-year-old grandson's first telephone call. "It's very sweet, but you don't want employees to have that much discretion," says Feldman, who performed the review.

Of course, companies shouldn't be allowed to deep-six evidence of wrongdoing, either. Over time, gaining control over their information can only help companies fend off litigation. But for the moment, they're spending more time in court than they are preventing future electronic nightmares. "This is plaintiffs' heaven," says Patrick. And that's a place no company wants to visit.

Legal Perils On the C:Drive


messages and voice mail, candid and relatively casual forms of corporate communication, increasingly are providing the most incriminating evidence used against companies in litigation.

CORPORATE PACK RATS Using tiny disks and tapes to store information has enabled companies to save virtually all data they generate. The result is costly searches for information requested in litigation.

LOSS OF CONFIDENTIALITY Sensitive company material is easily duplicated and transmitted via computer, opening the door to the loss of trade secrets, proprietary technology, and other damaging business data.

COPYRIGHT VIOLATIONS Employees who download unauthorized material from the Internet or misappropriate software may expose companies to charges of copyright violations or other wrongdoing.

Before it's here, it's on the Bloomberg Terminal.