Is Your Business Ready for Court Action ?
(Many small and medium-sized businesses who are contemplating filing law suits may not meet the new state and federal court rules with respect to the storage and accessibility of electronic data and could be hit with large penalties, fines, and even lose their court cases before the merits are heard.)
By Randy Boyer
While most small and medium-sized companies have been going about their normal business, a major set of regulatory rules have been instituted during the last 3 years that could determine the outcome of any lawsuit before the merits are adjudicated; and could cause fines well in excess of US$50,000 (or more!)
During December 2006, Congress passed sweeping changes to the Federal Rules of Civil Procedure (FRCP) that for the first time regulated electronically stored information (ESI)1. Under these new rules litigants in federal court are required to provide all relevant information including ESI (e.g. any electronic data or metadata on any media from mainframes to notebooks from CDs and DVD’s to phones and thumb drives) or risk losing the case before the case is even tried!2 And if the litigant’s inattention to its ESI is egregious enough, the court has the power to slap the litigant with huge fees to pay for the process of getting access to the ESI.3
What makes matters worse is that within the last 2 years, 25 states4 have adopted the same or similar rules of civil procedure to the new Federal Rules and most of the rest are likely to adopt the new rules in the next 2-3 years. As a consequence of these new regulations, nearly every company, regardless of size, that has ESI must follow the requirements under the rules or else the consequences could be extremely severe.
For example, the new rules require early disclosure about all of your ESI that is relevant to the case being litigated5. This means by the time of the first pre-trial conference the litigant needs to have a copy of or a detailed description by category and location of all the ESI that is relevant to the case6. And within 2 weeks after a pre-trial conference focused on ESI, the litigant needs to be able to disclose the actual information or files to the opposition7 or risk serious repercussions.
Under Rule 37, if you don’t follow the rules, the court has the power to rule in favor of the other party even without adjudicating the merits8. The decision could be based solely on the litigant’s noncompliance with these new rules.
Over the last 3 years, state and federal courts have ruled against litigants who used thumb9, hard disk10 and even tape drives11 for back-up who overwrote the information on the drive and also ruled against those who under certain product liability circumstances didn’t keep information for 18 years because they should have known there would be a possibility of a law suit12. (The new rules require that you must stop any process of automatically deleting information as soon as there is a reasonable likelihood of litigation that concerns the information that you are deleting13.) For many companies in litigious industries this means that you have to virtually save all ESI that you create.
And not only do you have to save the ESI but you need reasonable access to the ESI – you need to know where the information is and you need to be able to provide it to the opposition in a form that they can use (e.g. access, read and search)14.
The vast majority of small and medium-sized businesses have not instituted the appropriate processes of archiving ESI, identifying the location of ESI, and having the ESI in an unalterable yet accessible state in order to maximize their chances of meeting these new requirements.
The good news is that there are now cost-effective storage solutions (under US$5,000) that will help small and medium-sized business deal with these new rules. There are archiving and storage solutions such as Centurion DiscHub Workgroup
that provide large amounts of direct network-accessible storage on unalterable media (DVD-R/Blu-ray BD-R).
You know that your business is going to sue or be sued in state and federal court sooner or later.
Is your business ready ?
1 The amendments to Rules 16, 26, 33, 34 and 37 to the Federal Rules of Civil Procedure (FRCP) with regard to electronic data were passed by Congress and made effective in December 2006.
2 Rule 37 and decisions interpreting Rule 37 gives the court the power to issue summary judgment for willfully circumventing the rules or for gross negligence. See also Pension Comm. Of University of Montreal Pension Plan v. Bank of Am. Secs., LLC, 685 F. Supp. 2d 456 (S.D.N.Y. 2010)
3 Rule 37 also gives the court the power to assess fees to pay for the process of providing access to ESI to the offending party.
4 Since the adoption of the 2006 FRCP amendments, at least the following 25 states have passed the same or similar rules to the FRCP with regard to electronic data: Alabama, Alaska, Arizona, Arkansas, California, Idaho, Iowa, Kansas, Louisiana, Maine, Maryland, Michigan, Minnesota, Montana, Nebraska, New Jersey, New Mexico, North Dakota, Ohio, Tennessee, Utah, Vermont, Virginia and Wyoming. Several additional states are in various stages of the process of passing similar legislation.
8 FRCP 37 where the rule provides the court the power to “render… a default judgment against the disobedient party.” See also Aliki Foods, LLC v. Otter Valley Foods, Inc., 2010 WL 2982989 (D. Conn. July 7, 2010).
9 SeeWilson v. Thorn Energy, LLC, 2010 WL 1712236 (S.D.N.Y. Mar. 15, 2010).
10 See Medcorp, Inc. v. Pinpoint Tech., Inc., 2010 WL 2500301 (D. Colo. June 15, 2010).
11 See Pension Comm. Of University of Montreal Pension Plan v. Bank of Am. Secs., LLC, 685 F. Supp. 2d 456 (S.D.N.Y. 2010).
12 See Takeda Pharm. Co., Ltd. v. Teva Pharm. USA, Inc., 2010 WL 2640492 (D. Del. June 21, 2010)
13 See Pension Comm. Of University of Montreal Pension Plan v. Bank of Am. Secs., LLC, 685 F. Supp. 2d 456 (S.D.N.Y. 2010).
14 See Pension Comm. Of University of Montreal Pension Plan v. Bank of Am. Secs., LLC, 685 F. Supp. 2d 456 (S.D.N.Y. 2010); See also Accessdata Corp. v. ALSTE Tech. GMBH,2010 WL 318477 (D. Utah Jan. 21, 2010