New Rules Require Businesses to Keep Better Tabs on e-Documents

Companies that help businesses track and search their e-mails and other electronic data are experiencing a surge of interest in the wake of federal rule changes that clarify requirements to produce such evidence in lawsuits.

Roger Matus, chief executive of Concord, Mass.-based InBoxer Inc., said Friday his company is getting at least five times as many inquiries as it did six months ago for software that can accelerate the search and retrieval of electronic information.

“Companies used to be focused on how they store information,” Matus said. “Now they’re focusing on how to retrieve it.”

The new rules, which took effect Friday, require U.S. companies to keep better track of their employees’ e-mails, instant messages and other electronic documents in the event the companies are sued, legal experts say. They are part of amendments to federal rules governing civil litigation and were approved by the Supreme Court’s administrative arm in April after a five-year review.

Companies and other parties involved in federal litigation must now produce “electronically stored information” as part of discovery, the process by which both sides share evidence before a trial. Federal and state courts have increasingly been requiring the production of such evidence in individual cases, and the new rules clarify that the data will be required in federal lawsuits.

Under the new rules, an information technology employee who routinely copies over a backup computer tape could be committing “virtual shredding” once a lawsuit has been filed, said Alvin F. Lindsay, a partner at Hogan & Hartson LLP and expert on technology and litigation.

Companies still could routinely purge their archives if the data aren’t relevant to cases companies have pending or expect to face, though specific sectors such as financial services remain governed by other data-retention rules.

Company lawyers and information-technology staff will have to work more closely together to ensure that routine erasing of backup data doesn’t pose legal problems, Lindsay said, while also ensuring that lawyers know where their company’s data are stored.

The new rules make it more important for companies to know what electronic information they have and where, especially because of a provision that requires lawyers to provide information much earlier in a lawsuit than before.

Many large companies “don’t know what they have” and are therefore unprepared if they are sued, said Marie-Charlotte Patterson, vice president of market strategy for AXS-One Inc., a Rutherford, N.J.-based records compliance management firm.

Without a better sense of what data they have and where, some companies settle lawsuits in order to avoid the costs of electronic discovery, she said. Better organization of the data can lower that cost and enable companies to avoid settling.

“The need from the get-go to better manage that electronic data has become paramount,” she said.

Some companies have paid a steep price for failure to preserve electronic information. In one high-profile case last year, former UBS AG equities trader Laura Zubulake won a $29 million award in a federal gender discrimination suit. The presiding judge penalized UBS for failing to recognize that missing e-mails would end up being relevant to future litigation.

Large companies are likely to face higher costs from organizing their data, said James Wright, director of electronic discovery at Halliburton Co. Besides e-mail, he said, companies also will need to know about things more difficult to track, like digital photos of work sites on employee cell phones and information on removable memory cards.

There are hundreds of “e-discovery vendors” and these businesses raked in approximately $1.6 billion in 2006, Wright said. That figure could double in 2007, he added.

Lawyers may have to spend time reviewing electronic documents before turning them over, Lindsay said. Although electronic searches can help narrow the amount of data, some high-paid lawyers will still have to sift through casual e-mails about subjects like “office birthday parties in the pantry” to find the relevant information, he added.

But Martha Dawson, a Preston Gates & Ellis LLP partner who specializes in electronic discovery, said companies will not have to alter how they retain their electronic documents. Rather, she said, they will have to do an “inventory of their IT system” in order to know better where the documents are.

The new rules also provide better guidance on how electronic evidence is to be handled in federal litigation, including guidelines on how companies can seek exemptions from providing data that isn’t “reasonably accessible,” she said. This could actually reduce the burden of electronic discovery, she said.