Securities and Exchange Commission v. Schroeder, 2009 U.S. Dist. LEXIS 39378 (N.D. Cal. Apr. 27, 2009).
This case was featured in the June 2009 Applied Discovery Case Summary Alert, a complimentary monthly e-mail service for registered users of AppliedDiscovery.com

A motion to compel production of internal notes and draft memoranda of a non-party law firm generated during preparation of a special committee report on a company’s stock option practices was denied. The law firm documents had not been disclosed outside the law firm, and the defendant executive in the stock option backdating case did not demonstrate that the law firm materials were crucial to his defense.

The retired chief executive officer of a company was named in an SEC enforcement action alleging improper backdating of stock options at the retired CEO’s company. He sought an order compelling the company and its law firm, including individual attorneys at the firm, to produce documents. The company and the law firm, which prepared a report on stock option backdating for a special committee of the company, were not named as parties in the SEC action against the retired CEO. The law firm opposed the retired CEO’s motion for a production order on the ground that the retired CEO already had received pertinent documents from the SEC and on the ground that documents were protected from disclosure by the attorney client privilege and the work product doctrine.

The court held that the law firm did not have to produce notes and draft memoranda used in producing the special committee report. Internal notes of the law firm following interviews of employees of the company and draft memoranda were disclosed only to attorneys within the firm. Also, the retired CEO had not shown that access to the internal law firm materials was crucial to his defense in the SEC action because the executive would in effect use the materials only to cross-check information already provided to him by the SEC. The court separately held that the law firm’s communications with the special committee were protected by the attorney client privilege and that the law firm’s communications with its forensic accounting expert concerned opinion work product that did not have to be disclosed to the retired CEO.

 

by Virginia Henschel, Vice President of E-Discovery Affairs
May 13 , 2009

We are watching a significant body of case law developing over the failure of parties to design search terms and keywords that will reasonably lead to relevant documents. In Gross Construction Associates, Inc., v. American Mfrs. Mut. Ins. Co., 2009 U.S. Dist. LEXIS 22903 (S.D.N.Y. Mar. 19, 2009), Magistrate Judge Peck cautioned members of the New York Bar to adopt discovery practices reasonably designed to retrieve relevant electonically stored information (ESI). When using keyword searches for ESI retrieval, "they at a minimum must carefully craft the appropriate keywords, with input from the ESI's custodians as to the words and abbreviations they use, and the proposed methodology must be quality control tested to assure accuracy in retrieval and eliminations of 'false positives'".

The opinion in Gross Construction arose from a multi-million dollar dispute over alleged defects and delays in the construction of the Bronx Criminal Court Complex. The non-party current construction management company sought to produce relevant ESI without producing its entire email database. The parties had suggested such ubiquitous construction terms as “sidewalk”, “driveway” and “budget”, as reasonable search terms! However, the non-party failed in its own obligation to suggest a set of more reasonable search terms based upon its knowledge of employee nomenclature and abbreviations.

Judge Peck refers members of the New York Bar to prior seminal decisions discussing the critical importance of transparency and agreement on search methodology, including: Victor Stanley, Inc. v. Creative Pipe, Inc., 250 F.R.D. 251 (D. Md. May 29, 2008); United States v. O'Keefe, 537 F. Supp. 2d 14 (D.D.C. 2008); and Equity Analytics, LLC v. Lundin, 248 F.R.D. 331 (D.D.C. 2008).

The failure to perform basic discovery tasks, such as interviewing key custodians about their communication practices, is inexcusable. Without substantive knowledge, the parties are unable to engage in a meaningful Rule 26 meet and confer process. Malpractice plaintiff's attorneys will be reading these same cases for guidance on the minimum expectations for effective discovery representation. Inexperienced counsel can reach out to skilled e-discovery solution providers to appropriately manage the retrieval of relevant ESI and to assist in developing data sampling subsets.

 

 

Courts continue to be beset and baffled by attorney misconduct in the production of ESI. It is well documented that the entry of sanctions for an attorney, law firm or client due to incompetence or willful misrepresentation to a court is probable. Qualcomm was the bellwether case that alerted litigants to the consequences of failing to understand the obligations for transparency and disclosure pertaining to electronic discovery.

A new addition to the law library this month is the Bray case evidencing egregious attorney conduct during the discovery phase of trial. In Bray, the attorney and his law firm were held jointly and severally liable for defendant’s costs, including attorney and expert fees, for failing to produce ESI with metadata intact as requested by the defendant.

Plaintiff chose instead to produce over 800,000 TIFF images without prior negotiation or discussion with the defendant. Accordingly, defendant was granted an order compelling a second production with intact metadata. Plaintiff falsely asserted the burden of a costly privilege review as a justification for its failure to comply with defendant’s original request. Plaintiff misrepresented to the Court material facts about information in an existing litigation management database and falsely blamed a third party for lack of cooperation. The potential waiver of privilege, as an additional sanction requested by the defendant, is pending determination by the court.

The inexcusable cost and inconvenience to clients for failure to abide by meet and confer obligations is the minimum consequence; whereas, waiver of privilege for attorney/client communications and work product, adverse inference instructions and the entry of judgment against the sanctioned party all rise to the level of malpractice. Continuing cases in this vein will undoubtedly lead to a certification requirement for attorneys to practice in the area of electronic discovery. This is an area in which the technical expertise of your e-discovery solution provider can help clients avoid misrepresentations about the format and accessibility of the requested ESI.

 

Independent Newspapers, Inc. v. Brodie, 2009 Md. LEXIS 18 (Md. Feb. 27, 2009).
This case was featured in the April 2009 Applied Discovery Case Summary Alert, a complimentary monthly e-mail service for registered users of AppliedDiscovery.com

In a case of first impression, the Court of Appeals of Maryland sets forth a process for balancing an individual’s First Amendment right to speak anonymously on the internet against a plaintiff’s right to seek judicial redress for defamation. Independent Newspapers, Inc. v. Brodie, 2009 Md. LEXIS 18 (Md. Feb. 27, 2009). In this well-reasoned opinion, the Court surveys the balancing tests adopted by federal courts and sister state courts. The Court discusses the distinction between libel per se and libel per quod and reviews the standard for establishing a prima facie case of defamation.

The balancing factors set forth by the Maryland Court of Appeals in the context of a trial court confronted with a defamation action in which anonymous speakers or pseudonyms are involved, include:

Independent Newspapers, 2009 Md. LEXIS 18, at *66-67.

This is a rigorous balancing analysis in deference to “the panoply of protections that the First Amendment, U.S. Const. amend. 1, provides [to] the right of an individual to speak anonymously” while acknowledging that the right “is not absolute and may be limited by defamation considerations.” Independent Newspapers, 2009 Md. LEXIS 18, at *21.

Cases balancing internet anonymity in the face of music copyright infringement have been de rigueur for several years. Universities are routinely complying with subpoenas to disclose the identities of students using an internet protocol address to share music files. See the featured case this month of Virgin Records America, Inc. v. Doe, 2009 U.S. Dist. LEXIS 21701 (E.D.N.C. Mar. 16, 2009). The Court in the Independent Newpapers case provides an engaging review of case law regarding internet communication resources including instant messaging, chat rooms and discussion forums.

Judge Adkins concurs in most of the Independent Newspapers opinion by Judge Battaglia, but believes the balancing test is unnecessary and needlessly complicated, asserting that the summary judgment test is itself the balance. Independent Newspapers, 2009 Md. LEXIS 18, at *70. Judge Adkins states “[t]his ‘anything goes’ mindset, coupled with the virtually unlimited circulation available to bloggers at minimal cost, heightens the danger of injury to the subject of the communication from false or exaggerated statements. I would venture to guess that on the Internet, defamation occurs more frequently and is broadcast to more people than via any other medium, past or present.” Id. at *69. The issue of imposing limitations on internet anonymity is gaining prominence as social networking sites impact job applications and offers. Many individuals have lost jobs or had job offers rescinded based upon anonymous postings about them. Speech on social networking sites often encompasses the posting of compromising photographs; whether those photographs are defamatory is likely to depend upon the authenticity of the photograph.

Searching and collecting communications beyond an organization’s servers is commonplace in electronic discovery. The frequency with which the ‘unguarded’ communication over the internet becomes a central piece of evidence in an investigation or litigated matter is on the rise. Anonymous postings by employees may have an intended or an unintended impact on their own organization or a competitor. Courts have consistently set a lower threshold to breach anonymity in the context of commercial speech. This is an evolving body of law; internet host providers and users need to be aware that anonymity may not be guaranteed in the face of reckless disregard for the truth of their postings.

 

by Virginia Henschel, Vice President of E-Discovery Affairs
March 11, 2009

I hope you were able to join us on February 25th for the first of the Applied Discovery 2009 Webinar Series: SEC Enforcement Guidelines: Best Practices for E-Discovery, (Missed the program? View the Archive now!). During the program, our panelists discussed the previous practice of the SEC and other government enforcement agencies requiring respondents to waive attorney-client and work product privileges as a prerequisite to obtaining good faith cooperation credit with the government. The newly issued SEC Enforcement Manual sets forth in Section 4.3 that privilege waivers are no longer required to obtain cooperation credit, however, the disclosure of all relevant facts is still a requirement.

Senator Arlen Specter, R-Pa, ranking minority member of the Senate Judiciary Committee, has addressed this topic by introducing the Attorney-Client Protection Act of 2009, S.445.

On the Senate floor, Specter stated that legislation is necessary to avoid a “recurrence of prosecutorial abuses and attorney-client privilege waiver demands.” Corporations and their employees will welcome this protective legislation that re-establishes a balance in the investigative process. Under the proposed Act, voluntary and unsolicited waivers are still an option for corporations (and other organizations, employees, officers, directors and agents, as defined in the Act) but may not be considered by the enforcement agency in making civil or criminal charging or enforcement decisions or in determining whether the responding party is cooperating with the government.

The definition of what constitutes privileged attorney work product will, in most cases, be determined by the trial court, as in S.E.C. v. Collins & Aikman, Corp. Counsel should be attentive to the trend in recent cases eroding the scope of the attorney work product privilege when dealing with electronic document collections. It is prudent to review current trial preparation practices to ensure work product is being adequately segregated and protected.

 

 

Grand River Enterprises Six Nations, Ltd. v. King, 2009 U.S. Dist. LEXIS 12940 (S.D.N.Y. Feb. 9, 2009).
This case was featured in the March 2009 Applied Discovery Case Summary Alert, a complimentary monthly e-mail service for registered users of AppliedDiscovery.com

In this month’s featured case, Grand River Enterprises Six Nations, Ltd. v. Troy King, Judge John F. Keenan issued a decision that deals with a litigation topic near and dear to the hearts of corporate counsel: the protection of proprietary or confidential business information. In my prior corporate practice, I often found that it could be an uphill battle to ensure that our own counsel sought protection of proprietary corporate information. Because the engine of corporate America runs on the competitive edge derived from proprietary data, it is critical that outside counsel seek this protection with the same fervor typically reserved for the protection of attorney-client and work product privilege.

In Grand River, the District Court upheld the Magistrate Judge’s order allowing state agency defendants to withhold from discovery econometric data previously submitted to the Federal Trade Commission by cigarette manufacturers. The data had been developed over ten years by the manufacturers and was submitted during three arbitrations in 2005 among the cigarette manufacturers and the defendants. Plaintiff’s central argument for production of the econometric data in this litigation was plaintiff’s inability to calculate net wholesale prices without the data.

Plaintiff objected to the Magistrate Judge’s order because it: 1) presumed that the disclosure of the FTC data and computer programs required to analyze the data would harm the cigarette manufacturers, 2) withheld the subject data even from plaintiff’s counsel and experts, 3) considered failure of plaintiff’s experts to agree to onerous confidentiality requirements, 4) considered the costs incurred by the cigarette manufacturers in assembling the FTC data, and 5) deprived plaintiff of evidence relevant to its claims.

After in camera review, the Magistrate Judge concluded that the FTC data was extremely competitively sensitive and plaintiff’s alleged need for it was outweighed by the risks to the cigarette manufacturers of disclosure. Plaintiff argued that its experts would not exploit the knowledge gained from reviewing the commercially sensitive materials but would “compartmentalize” whatever they learned. The District Court had previously rejected this argument in an earlier dispute that withheld R.J. Reynolds Tobacco Company’s operating and strategic plans from discovery. As Magistrate Judge Eaton stated: “Expert witnesses do not merely write reports; they have numerous discussions with attorneys for current litigants and prospective litigants… ‘[They] have worked for other fourth-tier competitors in the past and may do so again in the future. The competitive insights they gain and conclusions they draw from their review…, including what they learn about each [cigarette manufacturer’s] respective competitive strengths and vulnerabilities constitute a bell that cannot be “unrung” in their future work, no matter how scrupulous their compliance with the [confidentiality order].’”

Grand River is essential reading for every corporate counsel charged with the protection of a company’s hard earned competitive edge. Courts routinely recognize and give deference to the proprietary nature of intellectual property. It is more difficult for courts to recognize the necessity to protect the proprietary nature of an organization’s analysis of its industry from which the organization derives its competitive edge. Additionally, the existence of a joint defense agreement may be inadequate in the eyes of the organization to protect the exchange of confidential business information for use by joint defense experts.

by Virginia Henschel, Vice President of E-Discovery Affairs
February 17, 2009

Our highlighted case this month, S.E.C. v. Collins & Aikman, Corp., ("Collins"), dovetails with Applied Discovery's recently issued white paper on the e-discovery guidelines set forth in the SEC Enforcement Manual. In Collins, the SEC failed to follow common protocols for electronic document production, while in the agency's Enforcement Manual the SEC imposes those common protocols on responding parties. Judge Scheindlin's decision serves to remind the SEC that "what is good for the goose is good for the gander." The SEC was willing to engage in a "data dump," in a manner that the SEC does not tolerate in productions made to the agency. Judge Scheindlin determines that the organization of responsive documents into electronic file folders can not be construed as protected work product. This finding promotes the Court's overall goal of achieving a cooperative and efficient exchange of electronic documents during the discovery phase of trial.

The Collins case is illustrative of the need to emphasize cooperation by parties throughout the discovery phase of trial. Judge Facciola echoed this call for cooperation in his keynote presentation at the 2009 LegalTech Conference in New York City. There is a consensus building among the courts, as evidenced in current case law, that non-cooperation and gamesmanship will no longer be tolerated. Given discrepancies between the parties in terms of their e-discovery experience, an uneven playing field may arise that is expensive for the parties and time consuming for the courts.

Also, this month, we make available for your review the much "blogged" case of In re Fannie Mae Securities Litigation. Six million dollars, equivalent to nine percent of the third-party's annual budget, was not expended effectively on electronic document review and, accordingly, was insufficient to satisfy their discovery obligations. The circumstances of this case clearly arose from discrepancies in e-discovery experience. Failure to sample keywords on a subset of data led to the volume of documents that had to be further reviewed and culled. The volume led to the delay in producing complete privilege logs, which then resulted in a sanction requiring production of privileged documents, without waiver, to the defendant's counsel for review. Experienced e-discovery counsel should be encouraged by the courts to step forward during the meet and confer process and advocate the sampling of data prior to agreement on search protocols.

 

SEC v. Collins & Aikman Corp., 2009 U.S. Dist. LEXIS 3367 (S.D.N.Y. Jan. 13, 2009)
This case was featured in the February 2009 Applied Discovery Case Summary Alert, a complimentary monthly e-mail service for registered users of AppliedDiscovery.com

The Honorable Shira Scheindlin issued the decision we are featuring for February, S.E.C. v. Collins & Aikman Corp., 2009 U.S. Dist. LEXIS 3367 (S.D.N.Y. Jan. 13, 2009). This opinion joins a growing number of decisions that are further refining the definition of 'work product privilege' in an era of electronic document production. Additionally, this decision illustrates the judiciary's adherence to standards of cooperation and fairness in electronic document production. This opinion is also instructive for entities responding to SEC investigations or inquiries and should be read together with Applied Discovery's white paper on recent revisions to the SEC Enforcement Manual, available for download at our website.

The SEC elected to respond to defendants request for production of documents identified in 54 separate categories with a 1.7 million electronic document data dump, equivalent to 10.6 million pages. Additionally, the "dump" derived from 36 separate Concordance databases, many of which used different metadata protocols. Defendants objected to the form of production on the bases that: 1) SEC failed to identify which documents or document ranges were responsive to particular factual allegations of the SEC's complaint, as requested by defendants; 2) the SEC unilaterally limited its search to three divisions and further limited the search to centralized compilations of non-privileged documents, based upon the SEC's evaluation of undue burden; 3) the SEC asserted "deliberative process privilege" with regard to certain documents, and; 4) failed to search its own emails and attachments, on the assertion that "most" would be privileged.

The Court rejected the SEC's asserted that data dump was acceptable under Fed.R.Civ.P R 34(b)(2)(E)(ii), as the form in which the documents were kept in the ordinary course of business. The Court determined that documents organized for trial or investigation into Concordance databases is not an "ordinary course of business", such as a business entity that routinely creates databases for the operation of the business.

Noting that the SEC had already delineated the responsive documents into 175 electronic files, the Court order those files be produced. The Court further refused to attach any work product or deliberative process privilege to the SEC compilations of documents, stating that 'would result in impermissible gamesmanship and an unwarranted expansion of the work product doctrine." Judge Scheindlin also references the Sedona Conference Cooperation Proclamation as a mandate for counsel to act cooperatively to stem the cost of discovery disputes. The parties had failed to hold an R 26(f) conference, as the SEC had refused to negotiate workable search protocols. The Court additionally rejected the SEC's blanket refusal to produce any emails. The parties were ordered to conduct sampling of search terms "to test the cost and yield" of locating responsive, non-privileged emails. The parties were directed to complete the meet and confer process by February 13th, at which time the Court will determine if the appointment of a Special Master is required to moderate further discovery disputes.

 

by Virginia Henschel, Vice President of E-Discovery Affairs
January 22, 2009

 

Most corporations have already implemented some form or variation of a corporate email policy that is presented to new employees during orientation and is periodically reinforced thereafter. Many corporate policies have at their core a premise as basic as "don't send anything you don't want to see printed in the front page of the New York Times, the Wall Street Journal or the National Enquirer." This sentiment is simple, direct and generally effective in achieving two main objectives: demonstrating to employees that they should have a limited expectation of privacy and encouraging them to communicate responsibly.

While I was litigation counsel at a Fortune 100 corporation, though, I realized that I could leverage the email policy to achieve another objective: help to reduce litigation costs in general and the cost of e-discovery review and production in particular.

How? In-house counsel may want to consider implementing specific directives on acceptable email practices, both for internal and external communications, that will help to reduce the number of potentially relevant documents for review, including:

Recent case law has reinforced the practical implications of these best practices. For example, in Rhoads Industries, Inc. v. Building Materials Corp. of America (Rhoads II), the court clarified its earlier opinion, focusing on which portions of email strings were subject to privilege waiver. The court indicated that this required an analysis of prior privilege logs to determine if earlier portions of the "email string" were specified on prior submissions of the privilege log. This is an arduous and time consuming task that can be minimized, if not completely avoided, by implementing best practices such as those listed above.

Unfettered external communications increase the risk for front page embarrassment; likewise, unfettered internal communications contribute to the proliferation of unnecessary emails and therefore exponentially increase the costs of e-discovery and increase exposure. A strong corporate email policy will help reduce overall legal spend, and, as a practical matter, will encourage just plain good business communication practices.

 

Cintas Corp. No. 2 v. Transcontinental Granite, Inc., 2008 Va. Cir. LEXIS 153 (Va. Cir. Ct. Oct. 27, 2008).
This case was featured in the January 2009 Applied Discovery Case Summary Alert, a complimentary monthly e-mail service for registered users of AppliedDiscovery.com

This month we feature a Virginia Circuit Court opinion that highlights the nuances of "work product privilege", which is instructive for in-house counsel who work with experts and colleagues on legal/ business issues that may, or may not, become litigated matters. This issue dovetails with the considerations on developing specific email guidance on "string emails" and attention to distribution lists in order to avoid inadvertently impairing the work product privilege, as the documents in dispute include "string emails".

In Cintas Corp. No. 2 v. Transcontinental Granite, Inc., the Court clarifies that work product protection applies to documents prepared in anticipation of any litigation, rather than in anticipation of only the litigation for which the work product protection was asserted. The language of Va. Sup. Ct. R. 4:1(b)(3) mirrors that of Fed. R. Civ. P. 26(b)(3). In Cintas, the issue arose in the context of real estate litigation, however, the same documents concerning remediation and environmental inspection could forseeably be at issue before federal or state environmental agencies in future matters and it is important to preserve the privilege.

The Court is very specific on its consideration of each of the 18 documents reviewed in camera. Only three documents were clearly prepared in anticipation of litigation; within this group was a memorandum prepared by the remediation company at the direction of counsel and addressed solely to counsel — the 'gold standard' for work product privilege. A "suggestion of litigation" in a document addressed to in-house counsel and an employee of the remediation company was not sufficient to sustain the privilege.

Labeling a document with "Confidential Work Product" can not create the privilege where the document was not prepared by, or at the direction of, counsel. The Court queries whether litigation or trial preparation materials should ever be shared with employees of an outside company (absent engaging such employees as litigation experts.) The Court examines an email string among numerous parties discussing remediation work and finds the portion relating to communications with counsel for adverse parties to be insufficient to assert the privilege. The written opinion is instructive and succinct; we recommend it to in-house counsel for review within the legal group.

Note also that the Court expressed dissatisfaction with Cintas' preparation of its privilege log and ordered that an updated version be filed removing redundancies, discrepancies and ensuring documents were readily identifiable. Other courts may not be as forgiving of a sloppy privilege log.