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Lyde Platt, Jr., stumbled upon the mother lode. In the fall of 1998 the Seattle-based plaintiffs attorney was getting ready to send his first set of discovery requests to The Boeing Company. He was suing the corporation for securities fraud on behalf of a national group of shareholders. But during one of his last prediscovery depositions, Platt unearthed something that made him rethink his plan. “Boeing told us it had 14,000 e-mail backup tapes stored in a warehouse out in central Washington,” recalls Platt. “And they had no real record of what was on them.” Boeing didn’t want to turn the tapes over. But Platt pushed the issue, and after a series of discussions, the company reluctantly agreed to produce a chunk of the e-mails. As it turns out, Boeing’s hesitation was justified: Among the e-mails were several that the attorney thought showed stock fraud. In Platt’s opinion, the e-mails helped him extract a “very good” settlement. “Boeing’s electronic data was in disarray,” says Platt. “They held on to documents that were outside the scope of their document retention policy, and they paid for it.” Boeing doesn’t refute Platt’s tale. In fact, the aerospace giant concedes that fulfilling document requests has only gotten harder. “The infinite scope of many discovery requests often requires the collection of data from multiple mixed mediums,” says a company spokesperson. “The challenge to fulfill the requests in an efficient manner will always be there.” Boeing is not alone. Corporate America, in large part, has lost control of its electronic data. E-mails, Microsoft Word memos, Excel spreadsheets, and PowerPoint presentations are filling up corporate servers and laptop hard drives at a breakneck pace. Companies are struggling with ways to contain that data and, more pointedly, wrestling with ways to rid their files of ill-advised documents and other possible smoking guns. Confusion over electronic data isn’t new to American business. In a 2000 American Bar Association membership survey, a whopping 83 percent of the respondents said their corporate clients had no established protocol to deal with discovery requests for electronic data, while 75 percent thought their clients were not even aware that electronic records were discoverable in litigation. And the chaos isn’t new to courts, either. For example, in 2000, a federal court in New York ordered Wal-Mart Stores, Inc., to pay a plaintiff’s expenses and legal fees after the retailer inadvertently destroyed discoverable computer files. But the Enron Corp. and Arthur Andersen LLP document-shredding imbroglios have ratcheted up the stakes. Today the plaintiffs bar is going after electronic data with an unprecedented zeal. Courts and regulators are starting to punish corporate defendants who can’t get their arms around the clutter. And experts think it’s only going to get worse. Earlier this year, a federal court asked why the largest U.S. maker of PCs, Dell Computer Corporation, seemed to possess such an “extreme lack of knowledge and control over its own files and procedures,” before it ordered the company to turn over e-mails from senior executives. This August the SEC levied $10 million in fines on six securities firms, including Citigroup Inc.’s Salomon Smith Barney Holdings Inc., Morgan Stanley, and The Goldman Sachs Group, Inc., when the firms proved unable to produce e-mails in the course of SEC investigations. Rulings like these are prompting some in-house counsel to lobby for mandated cost-splitting when discovery gets pricey and for more stringent rules on what plaintiffs can obtain in the discovery process. Despite unfavorable rulings, too many in-house counsel aren’t doing enough. Says Jonathan Redgrave, of counsel in the Washington, D.C., office of Jones, Day, Reavis & Pogue and a member of the firm’s e-discovery committee: “Many companies and in-house departments are only just starting to learn how much they don’t know about their own electronic data.” Which might explain why only a few corporate counsel are willing to talk about it. Almost universally, in-house counsel clam up when asked about the state of their electronic documents. “It’s a classic case of the emperor’s new clothes,” says Robert Williams, the president of Chicago-based Cohasset Associates Inc., a consulting firm specializing in information management. “No company wants to draw attention to the fact that it’s naked. And right now most are running around in nothing but their skivvies.” But with diligence, money, and maybe a little help from outside vendors, businesses can protect themselves. About ten years ago, the legal department at E.I. du Pont de Nemours and Company devised a comprehensive electronic data discovery (EDD) program, one of the first in the country. The system revolves around a well-oiled document retention policy. According to James Michalowicz, DuPont’s manager of legal services, EDD has saved the company time, labor, and money through the years, primarily by slashing the volume of documents the company’s lawyers need to wade through when DuPont gets sued. The new system also has allowed the corporation to move closer to the day when every document is produced either via the Web or on CD-ROM. (DuPont would not disclose how much it has spent on the EDD program to date.) Although DuPont is way ahead, other organizations, like Hewlett-Packard Company, are taking baby steps toward digital enlightenment. During the review of HP’s recent merger with Compaq Computer Corp., HP sent all its documents to the Federal Trade Commission via a secure Web site [see "A Happy Ending: HP 1, FedEx 0," page 84]. A handful of other corporations are turning to electronic discovery vendors, either to help them launch DuPont-like data organization initiatives or to help them process data on a litigation-by-litigation basis. A lively industry is developing, one made up of both specialized mom-and-pop companies and larger outfits like the Big Four accounting firms [see "Who Ya Gonna Call?" page 88]. wenty years ago, when corporate America lived in a paper world, document retention policies were relatively easy to follow. Anything that didn’t get tucked in a file drawer got pitched. The rise of the desktop office computer in the mid-1980s made it easier to create charts, tables, and typed documents, so data started piling up. But the real surge didn’t hit until the mid-1990s e-mail boom. In-house lawyers typically treated the earliest e-mails nonchalantly-as little more than informal, innocuous (and often ungrammatical) snippets of chitchat. The e-mails used against Bill Gates in the Microsoft Corporation antitrust trial put lawyers on notice. But even then, few companies instituted (or enforced) stern rules on what employees needed to save. So in-boxes continued to swell, especially after Microsoft and other e-mail software makers made it easier to organize and save messages. Today, companies sit atop mountains of bits and bytes. According to Adam Bendell, president of the San Francisco-based legal technology consultant SV Technology Inc., over 80 percent of all corporate data is created and stored electronically. “And the vast majority of that data never gets converted to paper,” he says. So what happens to it? A lot of the time, it just piles up. Electronic storage-hard disks, Zip drives, CD-ROMs, and the like-has never been cheaper. It’s turned corporate headquarters into technology silos. According to John Rosenthal, a partner in Howrey Simon White & Arnold’s Washington, D.C., office, a company with 40,000 employees might employ 750 servers, two dozen mainframe computers, and over 20,000 laptops and desktops. “And that’s not to mention other storage devices like BlackBerrys, PDAs, CD-ROMs, and Zip drives,” he says. Left unchecked, the volume of data can grow to dizzying heights. SV Technology’s Bendell says a recent client had several employees who had “literally tens of thousands of e-mails” stored in Outlook folders that, in turn, were stored on corporate servers. “It was ugly,” Bendell recalls. “You can’t imagine what kind of headache it would cause if [that company] got caught up in big litigation.” ompounding the problem is the fact that a lot of companies’ technology platforms are a jumble of stopgap solutions, aborted software pilots, and outdated systems. So for many IT departments, trying to pinpoint the right files in large document requests leads to little more than a hazy exercise in guesswork. Take Boeing. Platt says his requests gave the corporation’s lawyers fits. “The company had several different e-mail systems and a global IT department that was made up entirely of fiefdoms,” he says. “At times, I honestly think they were as frustrated with their systems as we were.” And if IT departments can’t finger the right data, forget about the in-house lawyers. A lot of them don’t know a server from a mouse pad. “[Our lawyers] are very uncomfortable with the technical side of what we do,” admits a senior lawyer at one Fortune 50 company, who requested anonymity. The lawyer confesses to running his in-house department as if it were “still servicing a mid-1990s, paper-based” organization. “And that’s simply unac- ceptable. We absolutely need to start realigning our department so we have more technical expertise.” ncreasingly, companies that don’t regularly purge their electronic files are paying the price. Plaintiffs lawyers are starting to use hardball techniques to obtain e-mails and other data. They’re bringing IT specialists to prediscovery depositions, hiring consultants to help devise discovery strategies, and filing motions to compel in droves. Defendants that don’t comply often regret it. Last April, Dell revealed that it had mistakenly destroyed records and that it had failed to spot over 44,000 boxes of documents and “a large number” of backup tapes nine months after the plaintiff sent its document request. Although the court chose not to impose sanctions on Dell, it ordered the company to turn over the e-mails and re-create the destroyed records. “If you come in acting like a Dell Computer and don’t have your act together, you. . .run the risk of getting punished,” says Kenneth Withers, a research associate at the Federal Judicial Center in Washington, D.C., and an electronic discovery expert. That’s the worst-case scenario. Usually the nastiest battles between plaintiffs and defendants involve access to backup tapes. Plaintiffs know that big companies guard against power failures, earthquakes, and terrorist attacks by regularly shipping copies of their data to off-site storage firms. So tapes are often among the first things plaintiffs ask courts to compel defendants to produce. But businesses typically resist. The problem, according to BASF Corporation general counsel Thomas Allman, is that backup tapes are made for disaster recovery, not archiving. So the data is stored in a space-saving way that’s cumbersome and expensive to unpack. Withers says that restoring and reviewing a fleet of backup tapes can “easily run into seven figures.” Recently, federal courts in New York, Louisiana, and Illinois ordered plaintiffs to help shoulder the cost of expensive productions. But those rulings are more the exception than the rule. Adverse court rulings, in many states, are prompting a lot of general counsel, like BASF’s Allman, to push for changes to the civil discovery rules. Allman recently argued before a federal rules advisory panel that the rules should mandate that plaintiffs pick up the discovery costs when satisfying their requests requires a huge investment. Allman also thinks the rules should prohibit plaintiffs from getting backup tapes in all but the most extreme cases, like when a defendant is suspected of shredding discoverable documents. So far, the panel has taken no official action. But the message is getting out. In late 1998 the Texas Supreme Court changed the state’s discovery rules to allow for cost-shifting when a request of electronic materials demands nothing short of heroic measures, regardless of what the discovery turns up. But unless Congress and other states follow Texas’s lead, “the economic burden will stay on the defendants 99 percent of the time,” says John Jessen, the chief executive of Seattle-based Electronic Evidence Discovery, Inc., a leading EDD vendor. “Companies that don’t start reducing their risk are being foolish.” aw departments looking for inspiration need look no farther than DuPont, which has made winnowing data a top priority. About ten years ago, during a U.S. Department of Justice investigation, legal services manager Michalowicz realized that the company didn’t have a streamlined process for locating responsive documents. Michalowicz-and DuPont-operated under the assumption that businesses are under no legal obligation to be pack rats. “As long as you comply with financial, legal, and government requirements and hang on to what you need for your business operations, you absolutely have the right to destroy records,” says Michalowicz. As part of the EDD process, DuPont made every employee read and sign off on an updated records retention guide. Then it appointed a “records champion” for each department and started holding periodic audits of every division to keep tabs on the cleanup. When e-mail boomed in the late 1990s, the company set its programs to flag all e-mails that were over 60 days old. If an employee could show that an e-mail fit into one of the retention guide’s categories, the e-mail was kept. Otherwise, it was deleted from the employee’s in-box and hard drive. The initial program wasn’t without costs. Michalowicz says DuPont devoted “untold dollars” and 20 full-time employees to the project for well over a year. He and others also had to listen to the grumbling. “Nobody likes to be told what they can and can’t keep,” Michalowicz says, “and scientists like to keep everything.” Even at DuPont, compliance is less than perfect. Michalowicz says that some employees store documents on floppy disks and on home computers. “It’s actually one of our biggest problems,” he adds. A few years ago, the chemical leader went even further. The company conducted a comprehensive study of its backup tapes, and slashed the retention period on backups from 90 to 14 days. It developed metrics to study its cost savings, and took painstaking notes on how it complied with the civil rules in each of its litigations. Michalowicz says the streamlining saves the company “at least $300,000″ in every case involving backup tapes. lectronic discovery tools aren’t limited to litigation and investigations. They have proactive uses, too. During the review of its merger with Compaq, Hewlett-Packard replied to the FTC’s document requests not by firing off a pallet of bankers’ boxes crammed with paper, but by setting up a Web site with links to every document. And AT&T Broadband recently used an electronic vendor, Fios, Inc., to help cull documents for a government investigation. “It was vastly more efficient than doing it all by hand,” says Scott Goettelman, a senior attorney with the telecom company. “Someday this is going to become the norm.” A global move toward document organization might eventually have a chilling effect on plaintiffs. EED’s Jessen says that a few of his clients have seen a drop in litigation since putting their electronic houses in order. “Knowing a company is on top of things is like seeing the blinking red light on the inside of a car,” he says. “It says to plaintiffs that ‘if you want an easy target, it’s not us.’ “ But at far too many companies the dashboards are still dark.

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