It isn’t often that the Judicial Conference, the most important policymaking body for U.S. courts, revises its rules governing discovery practices. Since the Federal Rules of Civil Procedure became law in 1938, the Conference has altered the rules just six times–twice in the 21st Century. The first time was in 2000, when, on the brink of recommending a series of amendments, the Conference’s Committee on Rules of Practice and Procedure realized it made a terrible oversight–it had failed to address the myriad problems of electronic discovery.

“[W]hen the 2000 proposals were recommended for adoption following the public comment period, the Committee fully understood that its work was incomplete,” the Committee wrote in 2005.

After considerable urging from lawyers and litigants, the Committee decided to dust off the rules and take another stab at making them reflect the reality of new technologies and new types of data. These latest amendments, which the Supreme Court approved in April, go into effect Dec. 1, 2006.

Within the legal community, much ink has been spilled and many words uttered about the doom and gloom of the rules changes.

“Most in-house counsel I’ve talked to are very worried,” says Carl Roberts, a partner at Ballard Spahr Andrews & Ingersoll in Philadelphia. “They’re extremely concerned about the potential cost and potential for e-discovery to take over their cases.”

For the most part, though, the rules merely codify recent case law. In litigation ranging from the high-stakes Perelman v. Morgan Stanley to the single-plaintiff employment case of Zubulake v. UBS Warburg, the federal courts have defined best (and worst) practices in e-discovery. The latest amendments, experts say, simply provide a framework for meeting these standards and clarify some of the courts’ expectations for parties engaged in litigation.

“Conceptually, this is not something new,” says Michael Flynn, senior vice president and senior counsel at World Savings, a financial services company in Oakland, Calif. “In-house counsel should not panic. This is manageable.”

Manageable as they are, there are a handful of rule changes that require some careful treading and creative thinking. If addressed properly, some of these changes could even work to the legal department’s benefit.

Meeting The Requirements

One of the most sweeping changes is an amendment to Rule 26(f), which requires parties to meet within 99 days of the filing to craft a discovery plan. The new language specifically instructs counsel to address electronic discovery at this early juncture, a change that represents an important shift in how parties handle e-discovery. Historically, plaintiffs and defendants have avoided discussing e-discovery until the case was well underway. When e-discovery issues eventually surfaced, it typically meant a one- to two-year detour away from the merits of the case.

“Lawyers have engaged in a ‘don’t ask, don’t tell’ policy with regard to electronic discovery,” says David Axelrod, director of forensic and dispute services at Deloitte Financial Advisory Services.

Now, these so-called “meet and confer” sessions will require companies to reveal where and how they have stored pertinent electronic information, reach preliminary agreements on the form in which they will produce data, address preservation of relevant evidence and agree on procedures for asserting privilege. Accordingly, companies and their legal departments will have to know more about their systems and strategies–and all much earlier in the game.

To prepare, Flynn says, in-house counsel should work with the IT department to conduct an audit of the company’s data sources. This will help counsel learn what data their company has, how long it’s preserved, what format it’s in and how difficult it is to retrieve.

“You have to know your systems,” Flynn says. “For instance, if you’re an insurance company, you better know what claims records are stored within your company and who stores them.”

The more legal knows about its company’s data, the more leverage it has to narrow the scope of discovery and save money at the meet and confer stage. If a legal department finds out from IT that it would take one person a full year to review a single custodian’s e-mails, it might share this with the requesting party to work out a compromise.

“Real numbers help sober everybody up,” says Scott Carlson, who leads the e-discovery practice at Seyfarth Shaw. “Sit down with your opponent and say, ‘Can we agree on dates that are relevant?’ If they’re sophisticated, they’ll understand it benefits both parties.”

Broader Requests

At the same time rule 26(f) requires a deeper knowledge of data systems up front, another rule makes this task more daunting. Amended Rule 26(a) adds the category of “electronically stored information” (ESI) to the list of required disclosures parties must make during discovery. Far broader than the earlier rule that required disclosure of “data compilations,” this new language makes room for everything from computer backup tapes to e-mails, instant messages and voicemail.

“[This new definition] dramatically increases the amount of data legal departments need to pay attention to,” says Mary Mack, technology counsel for Fios Inc., a Portland, Ore.-based electronic discovery services firm.

And not all of this information is easy to understand. Experts recommend in-house counsel work with their IT departments to bone up on their companies’ computer and voicemail technologies, learn about file formats and gain a better understanding of metadata, information that conveys an electronic file’s history or tracking.

“This used to be the language of litigation support, but it’s going to have to be the language of in-house counsel,” Carlson says. “They don’t have to be experts, but they have to understand it.”

Some of the information that falls into the new ESI category also poses challenges to preservation. Most companies do not yet have the means to collect and store newer data types, especially off-site communications from laptops, BlackBerries and cell phones. Until document-retention systems catch up with these new technologies, providing requestors with such data will be a difficult, if not impossible, task for companies.

Old And Forgotten

The rules give companies little to no guidance on how they are supposed to preserve and produce new kinds of discoverable data, but they do cut them some slack when it comes to data from outdated, outmoded systems.

Rule 26(b)(2) allows a party to respond to a discovery request by claiming that certain electronic information is “not reasonably accessible because of undue burden or cost.” In its report on the changes, the rules committee said this might include information stored on backup tapes that are not catalogued or indexed or data from obsolete systems that are now unreadable. These difficult-to-access repositories of information may contain responsive information, but would take considerable time and money to explore.

In effect, the amended rule creates a “two-tier” system of discovery: Counsel should first determine what might be responsive in their more easily accessed data sources and then consider whether it would be important to sort through the more inaccessible data.

If a company considers ahead of time which data falls into the “not reasonably accessible” category, it stands to save money in discovery. But being consistent and communicating such strategy decisions to outside counsel is the secret to making this work.

“How you’re going to address data from an accessibility standpoint cannot change from litigation to litigation,” says Paul Neale, executive vice president at DOAR Litigation Consulting, a Lynbrook, N.Y.-based provider of electronic discovery and other legal services. “You wouldn’t want Sidley Austin doing one thing in an employment litigation and Milberg Weiss doing something else in a securities litigation.”

Of course, the burden rests on the responding party to show the data is not reasonably accessible, and it is no longer sufficient to say that all of one kind of data is inaccessible. The revised rule directs companies to be more specific about what data they are not providing to the requesting party and why.

“You can’t just say that backup tapes are inaccessible anymore,” Mack says. “You now need to go further and tell the other side what’s on the tapes.”

Mack warns that claiming inaccessibility is never a sure thing. Under the new rule, even a finding that certain information is “not reasonably accessible” does not preclude a court from ordering production of that information for “good cause.”

A Safety Net

Another amendment with the potential to give in-house counsel a false sense of security is Rule 37(f), which says that a court cannot impose sanctions on a party for failing to provide ESI that is “lost as a result of the routine, good-faith operation of an electronic information system.”

In proposing this amended section, the rules committee had hoped to acknowledge that electronic information systems, unlike hard-copy documents, have automatic features that regularly overwrite or discard information to function properly. While this so-called “safe harbor” rule provides some protection, experts say companies should not rely on it too heavily.

“Rule 37(f) is very limited and narrow,” Roberts says. The rule, he explains, in no way shields companies that manipulate their routine information systems to intentionally destroy data to avoid having to produce it in discovery. Even when the data is not intentionally destroyed, there is some debate as to whether the safe harbor rule would actually protect companies. Although the rules give some guidance on what “good faith” entails, using this standard in discovery practice may be more difficult than it seems.

“‘Good faith’ requires extraordinary procedures,” Axelrod says. “Good due diligence and compliance with legal holds are crucial.”

Having a legally defensible preservation process, in particular, goes a long way toward showing good faith.

“The safe harbor rule is supposed to be pro-company if applied correctly,” says John Patzakis, vice chairman and CLO at Guidance Software, an electronic discovery software provider in Pasadena, Calif. “But if you don’t have a process, you can forget about invoking [it].”

House Rules

More and more, legal departments are finding that acting in “good faith”–and reaping the rewards of such behavior during litigation–means taking control of the e-discovery process in-house. As the new rules increase the volume of discoverable data and require early attention to e-discovery, this move seems more prudent than ever.

“The federal rules give further justification to bring the process in-house,” Patzakis says.

Companies pay outside technology firms millions of dollars each year to handle their data collection, processing and review, but it doesn’t have to be that way. Patzakis says larger companies, in particular, should be able to handle the front-end of the process–collection and processing–with in-house computer software and some IT-savvy employees.

“You can spend $20 million on outsourcing or hire two people that know how to operate these systems,” he says. Patzakis adds that bringing people with legal and IT know-how into the department is important under the new rules.

“If a company doesn’t have a dedicated electronic-discovery attorney, they need to get one,” he says. “Hiring an attorney who intimately understands electronic discovery is critical.”

While outside e-discovery firms may be helpful for smaller or midsized companies without limited manpower and expertise, Roberts says most legal departments should be taking the reins if they expect to get a handle on their discovery strategies and costs.

“The ownership of this has to be in the company and not dumped on consultants to magically deal with,” he says.