Lawyer e-discovery malpractice, cost-taxing among game-changers that began reshaping landscape in 2011

December 22, 2011

By Robert Hilson 

This is the first of a two-part review of major e-discovery developments in 2011. The second part will run on December 29 at ACEDS.org.

Every year as January 1 approaches, bloggers and commentators from various corners of the e-discovery terrain predict what the next year will bring. They prognosticate technological advances, judicial trends, industry movements and other events that will affect lawyers, litigation support professionals, records managers, IT specialists, knowledge officers and others in this far-flung field.

Forecasting may have its value for some, but perhaps it is more beneficial to look back on the year that was. The speed with which e-discovery is advancing makes it easy to forget or overlook major events that are shaping the practices, costs, judicial opinions, technology and other disciplines and areas that deal with electronically stored information. Looking back provides valuable insight on what the future holds. Here are the first five of the 10 most important electronic discovery events in 2011, in the opinion of ACEDS.

US law and rule “taxing” case losers with e-discovery costs emerged as big cost-shifting catalyst   

An obscure federal law permitting the “taxation of costs” on parties in litigation, at Title 28, US Code Section 1920, is neither new nor mandatory. The statute allows judges and court clerks to reimburse prevailing parties upon the filing of a bill of costs. In 2008, Congress amended Subsection (4) of the law, which permits reimbursement for “fees for exemplification and the costs of making copies of any materials where the costs are necessarily obtained for use in the case.” By giving a broad definition to the terms in that provision, some courts have allowed prevailing parties to recoup e-discovery expenses. While application of this law varies among federal courts, judges are increasingly approving the awarding of some e-discovery costs under the new language. The law works in tandem with Federal Rule of Civil Procedure 54(d), which allows costs, other than attorney’s fees, to be awarded to "prevailing parties." As a result, many millions of dollars have shifted from losers to winners, as requesting parties increasingly find themselves stuck with their adversary’s tab.

The trend was accelerated in May when federal Judge Terrence McVerry, of the Western District of Pennsylvania, in Pittsburgh, taxed $367,000 in e-discovery costs on a losing plaintiff in Race Tires America v. Hoosier Racing Tire Corp. The plaintiff has appealed to the Third Circuit Court of Appeals, which heard oral arguments on Dec. 12. The plaintiff is arguing that several e-discovery activities relating to preservation, keyword searching, and scanning and copying of electronic documents should not be taxable under Subsection (4).

More recently, on Order of Michael Kunz, the Clerk of Court of the US district court in the Eastern District of Pennsylvania, in Philadelphia, the losing plaintiffs were taxed $567,000 in e-discovery costs in an antitrust suit over the sugar substitute, Aspartame. His 70-page opinion awarding the large sum is believed to have been the first of its kind in the district.

As some parties begrudgingly pay their opponent’s bill and others await appeal, varying judicial interpretations lead to speculation that the statute needs Congressional fine tuning to make clear its applicability to e-discovery. “The question is, what exactly are [appropriate taxable] costs?” says Anthony Diana, a partner at Mayer Brown, in New York, adding, “It’s a spectrum, and it’s not clear where the line is going to be drawn.”

(Note: The ACEDS Annual Conference on April 2-4, 2012 will dissect the issue of taxation of e-discovery costs in a panel, “Paying your opponent’s e-discovery bills – Facing and navigating the risks of the US ‘Taxation of Costs’ laws.” Four speakers, including the Clerk of Court for the US Western District of Pennsylvania, will participate. Visit the Conference Programs and Panels page of ACEDS.org for further information.)

Lawsuit against McDermott puts e-discovery malpractice fears on center stage

Clients sue lawyers and their firms for malpractice frequently, but the complaint filed against international megafirm, McDermott Will & Emery, on June 1 in Los Angeles Superior Court had a new bent. The plaintiff, J-M Manufacturing, a Los Angeles pipe producer, charged its former counsel with e-discovery malpractice through the wrongful disclosure to the US government and other adverse parties of 3,900 purported privileged documents and the failure to supervise outside contract attorneys and other service providers who conducted a large-scale electronic document review. The e-discovery malpractice suit is the first of its kind.

J-M also alleges that McDermott held its papers hostage pending payment of a $530,477 legal bill, thereby withholding them from the successor law firm, Sheppard Mullin, also a megafirm. McDermott has vigorously denied the accusations, warning its former client that its "interests could be seriously compromised by a full and complete airing of the facts which [McDermott] will be forced to disclose in defending this ill-advised action.” Now, after a brief removal to federal court, the case has settled in the state Superior Court where it began. It is set to resume in January.

The privileged documents -- now in the hands of plaintiffs opposing JM who won’t return them -- and McDermott’s departure have forced J-M to scramble in the False Claims Act case in which the alleged malpractice arose. In July, a federal judge disqualified Sheppard Mullin based on the conflict of interest of representing one of the plaintiffs in the case in unrelated matters. The resulting discovery brawl over the documents that McDermott produced has delayed the trial while a Los Angeles federal court determines if J-M can recover them through a prior clawback agreement.

The bigger ripples of the case, however, are those reverberating throughout the legal community in the United States and the vendors of technology and professional services that work in the e-discovery field. The risks brought to light by the J-M suit against McDermott are also causing malpractice insurance companies, litigation support professionals, law firm risk administrators and others to focus on the progress of the case, which will probably reach a conclusion in 2012.

(Note: A panel at the ACEDS Annual Conference on April 2-4, 2012, will focus on lawyer and vendor e-discovery malpractice. It is entitled “E-discovery malpractice – Preventing the new risk lawyers face, cutting malpractice insurance costs and protecting reputation.” One of the speakers will be the lawyer who filed the McDermott lawsuit in Los Angeles. Visit the Conference Programs and Panels page for further information.)

Government e-discovery woes continue as courts and adversaries press failings

In February, the National Archives and Records Administration (NARA), the US government's records keeper, reported that 95 percent of the 270 government agencies it surveyed kept records that had a “high or moderate” risk of being improperly deleted. The government’s records management and e-discovery shortcomings materialized in several high-profile cases in 2011 in which parties and judges took federal agencies to task for e-discovery failings. On February 7, US district Judge Shira Scheindlin, of the Southern District of New York, issued an opinion scolding the US Immigration and Customs Enforcement agency for producing unsearchable records in response to requests under the Freedom of Information Act that did not contain metadata.

“The Government would not tolerate such a production when it is a receiving party, and it should not be permitted to make such a production when it is a producing party,” Scheindlin wrote. She withdrew the opinion in June stating that it “was not based on a full and developed record.” 

In July a whistleblower inside the Securities and Exchange Commission told Congress the agency had been systematically destroying documents of its investigations once the cases had been closed. Over 17 years or more, according to the complaint by SEC attorney Darcy Flynn, the SEC had deleted data in about 18,000 investigations. They included documents from the Madoff case, a financial fraud at Bank of America and Wells Fargo, and insider trading at Goldman Sachs.  The SEC had agreed with NARA that it must maintain these records for 25 years. It subsequently suspended its destruction policy in the face of an internal investigation by the SEC Inspector General, who concluded that the destruction of records was improper. 

While the SEC affair ensued, the Department of Justice fended off several allegations of e-discovery abuses, including the failure to preserve documents, spoliation, promoting inaccurate testimony, withholding exculpatory evidence, and failing to issue a litigation hold in an ongoing False Claims Act action against Honeywell International. The aerospace giant, which is a major government contractor, and faces a government claim that it sold defective body armor to law enforcement and military agencies, says “the United States failed in all areas of document discovery….” It has called for court-imposed sanctions and reimbursement of attorneys’ fees from the government, among other penalties. The case is a long way from resolution and the e-discovery battles has been assigned to US magistrate Judge John Facciola to resolve. 

The Justice Department cites the scope of document production -- more than 2.9 million pages from 77 document repositories in 40 agencies -- in defending its actions. It has said interagency miscommunications and “misunderstandings” with its technology vendor, Labat-Anderson, have resulted in production lapses. Originally set for October 2009, the discovery deadline has been extended to June 2012. Honeywell has asserted that the Justice Department did not mention the terms “Honeywell” or the subject body armor, “Z-Shield,” in its preservation instructions to the federal agencies. Honeywell describes the Justice Department's litigation hold as “the height of recklessness.” 

The case has brought to light the e-discovery problems unique to government agencies. Andrew Grosso, a former Assistant United States Attorney, who left the Justice Department in 1994 and represents clients in False Claims Act litigation that involve the Justice Department and other agencies, told ACEDS:

“The government has problems that private entities don't have. Laws about maintaining, archiving and producing records originally designed for the paper era have now been carried over to the electronic era, and I'm not sure they work…. E-discovery failures by the government are not necessarily nefarious…. The problem for government attorneys is that they don’t have command over the niches where information is stored. The government keeps everything. Just because you keep it doesn't mean you can find it…. I can tell you horror stories about data getting lost…. It is a very, very awkward system.”

Vendor consolidation continues, competition of technology firms continues at hot pace

In 2007, I recall, those of us who work in the e-discovery field were saying that e-discovery would be a $4 billion industry in 2011. We were only off by $7 billion,” writes Navigant director Shawnna Childress in a recent article at ACEDS.org. The industry moves more than $11 billion annually, according to Childress, and a spurt of mergers and acquisitions suggest market maturation and a clue that companies in the corporate technology field will embrace e-discovery for the revenue it brings. Following the 2010 acquisitions of legal process outsourcer Pangea3 by Thomson Reuters, and Kroll OnTrack by Altegrity for $1.13 billion, big spenders again emerged in 2011 despite continued weakness in the broader economy.

The list is a long one but a handful of "bombshell" deals, as eDiscovery Journal called them, stood out. In May, infrastructure leader Autonomy purchased Iron Mountain’s e-discovery, online backup and digital archiving businesses for $380 million. The acquisition brought more than six petabytes (or 6,000 terabytes) of data under Autonomy management, according to ZDNet. Days later, Symantec, a large producer of security software, purchased Clearwell Systems for $390 million, or roughly eight times Clearwell’s annual revenue.

Navigant acquired Ignited Discovery for an undisclosed sum in July, but these deals were a mere lead-up to the splash Hewlett Packard made in August when the PC giant paid $10.3 billion for Autonomy. The price reflected valuations of roughly 8.5 times Autonomy revenue. The steep prices underscore the willingness of companies to enter the e-discovery and information governance fields because of their revenues and profitability.

(Note: the 2012 ACEDS Conference, on April 2-4, will tackle e-discovery vendor selection with a 75-minute panel, “Asking the right questions, getting the right answers – A how-to guide on buying products and services.” Visit the Conference Programs and Panels page for further information.)

Computer-assisted review inches toward mainstream

If the term “predictive coding” hasn’t already saturated the e-discovery lexicon, its proponents say it will be all but inescapable in the near future. “There is no doubt that it will be refined to the point where it replaces large rooms of review lawyers,” says attorney William Latham, partner at Nelson Mullins Riley & Scarborough, in Columbia, South Carolina. “It’s only a matter of time.”

The document review process, often referred to as computer-assisted review or intelligent review, refers to the use of complex algorithms to determine the relevance of documents based on input from a human reviewer. The computer “learns” what documents are responsive and unresponsive and extrapolates the results of a search of a sample of representative documents to the entire collection.

Its description alone is daunting, and Jay Leib, Chief Strategy Officer at kCura, said in an ACEDS podcast that the process must still overcome a “black box” stigma. For computer-assisted review to realize its mainstream potential, say the experts, its purveyors must also reconcile a premium price tag and settle questions of legal defensibility. Although studies have shown that computer-assisted review outperforms manual processes in accuracy and efficiency, predictive coding has not received the endorsement of a federal judge. This is the rub, as litigants must show they took reasonable steps to prevent disclosure of privileged or other sensitive materials in case a document review goes awry. The modicum of uncertainty that remains has given some cold feet. 

“There will be case in the next two years that judges the technology straight on its merits,” says Seth Row, an attorney at Parsons Farnell & Grein, in Portland, Oregon. “I would not like to be the guinea pig.”

(Note: the 2012 ACEDS Conference on April 2-4, in Hollywood, Florida, will dissect computer-assisted review in a panel titled “How predictive coding and other forms of ‘intelligent review’ are altering the e-discovery landscape.” Visit the Conference Programs and Panels page for further information.)