Manage risks, avoid pitfalls

By Carolena Gordon
Illustration: Mike Constable

Professionals and businesses need to develop appropriate policies to manage, preserve and destroy electronic documents

In a relatively short period of time, technological advancements have revolutionized the way we do business. In the US, a large company has the technological capacity to receive 250 million to 300 million e-mails a month, demonstrating the power of the technology and the old adage “build it and they shall come.” Companies increasingly use and depend on electronic communication as a primary mode of communication. Professional practices are no different. CAs and other professionals have found that the use of electronic documents have improved efficiency and production in their practices, allowing them to better manage practices. While technological advancements have helped business be more efficient and profitable, electronic documents have also presented business with the challenge of managing the technology and the risks associated with their use.

Often businesses are faced with managing risks without warning and when confronted with litigation. In such a scenario, they are in a crisis situation, scrambling to locate, organize and manage a wealth of information that is invaluable to their case. Having a document management, retention and destruction policy will go a long way in preparing for litigation and avoiding the pitfalls and costs of electronic document discovery in litigation.

For accountants, the challenge is not only to advise and assist clients but also to apply the same rigour to their own practices. Managing technology risks is a significant challenge: the use of new and evolving technologies is constant and the risks associated with use are different and evolve quickly. Electronic documents are different than paper ones. A paper letter will say the date it was sent, who signed it, perhaps who typed it and the content will be evidenced therein. That document in electronic form will provide the same information plus who created it, when it was created, how many times it was modified and by whom. An electronic document gives a more complete story. Under scrutiny by forensic technology specialists and consultants, the history and analysis of electronic documents has become a business unto its own and a powerful tool in litigation. In the US, it is estimated that electronic discovery cost US$1.3 billion in 2005 and those costs are expected to continue to rise. In Canada, electronic discovery is increasing-ly at issue in litigation. Lawyers and the judiciary are grappling with a host of legal, technical and cost issues and our jurisprudence is slowly developing. For example, Ontario’s Task Force on the Discovery Process recently adopted the Guide to Electronic Discovery in Ontario, which has set out a series of principles to help guide both lawyers and judges in resolving electronic discovery disputes.

Electronic documents are generally defined as documents that can only be read by a computer and include word processing documents, e-mail, spreadsheets, databases and Web pages. In litigation it is generally accepted that the parties may request that electronic documents be provided as part of the discovery process. A host of issues are raised in this regard. Electronic documents that are discoverable are usually restricted to your active data, i.e., data that is currently on your computer hard drive and server. However, archival data (for record keeping) or even backup data (for system crashes or disaster recovery) may also be the object of discovery orders. An excellent example of this is found in the US Federal Court, Southern District of New York decision in Zubulake v. UBS Walburg where the parties got into significant disputes creating a wealth of jurisprudence, including whether backup tapes could be the object of discovery and in the affirmative, who would pay the costs of retrieving and producing them.

Zubulake sued her former employer for sex discrimination and illegal retaliation. She had obtained a “smoking gun” e-mail in which it had been stated that she should be fired before a particular date so that she would be ineligible for bonuses. Zubulake used this e-mail to argue that the court should force UBS to provide her with e-mail from backup tapes. UBS had previously provided e-mail from its active data but refused to verify backup tapes, indicating that the technical and legal costs, estimated at US$300,000, were prohibitive. The court ordered a sample of the tapes and once Zubulake reviewed them and cited relevant e-mail for the court, the judge ultimately ordered that all the backup tapes for a relevant period of time be restored. The court noted that discovery rules are broad and that any relevant document may be discovered, as long as it is not privileged, but that the breadth of discovery is limited by proportionality. In its judgement, the court developed criteria for consideration to ensure that the burden does not outweigh the benefit and that the information is not available from other sources, amongst other criteria. The court also dealt with who was to bear the costs of the discovery, as the backup tapes needed to be restored and reviewed by UBS counsel before they were given to Zubulake. Normally, the responding party to a discovery order bears the costs of same. However, the court held that cost shifting was in order given the particularities of this case, and UBS was ordered to pay 75% of the costs and Zubulake 25%.

It is important to note that costs are normally dealt with at the end of litigation in Canada. Thus, US jurisprudence ordering cost shifting should be approached with caution in Canada.

Any document preservation and destruction policy may include regular destruction of documents that the business no longer needs. In Arthur Andersen v. United States, the US Supreme Court rec-ognized the right of businesses in the US to engage in good faith destruction of documents and information under ordinary circumstances. In that case, the court considered, without decidingthe issue, Arthur Andersen’s decision to follow its document destruction policy by the book after the Enron scandal had been uncovered.

Ordinary destruction of documents must stop once litigation becomes reasonably foreseeable. The Guide to Electronic Dis-covery in Ontario (largely inspired by the Zubulake decisions from the US Federal Court) states that litigation may be reasonably foreseeable even before a demand letter is sent. Once litigation becomes reasonably foreseeable, the destruction of all relevant documents must cease. Depending on the nature of the liti-gation, a litigation hold may be very broad. All personnel, including in-house and external IT consultants and lawyers, should be consulted to ensure that the litigation hold is successful.

The costs of litigating electronic discovery disputes may be significant. If a business’ document retention and destruction policy is ineffective in properly organizing documents or preserving them, it will spend a great deal of money on consultants to retrieve relevant electronic documents and may spend a great deal litigating the issues. In cases where electronic documents are destroyed, a party can find itself embroiled in a debate concerning the destruction of evidence, known as spoliation of evidence.

In Danis v. USN Communications, the parties spent in excess ofUS$750,000 each litigating a motion that dealt with the spoliation of evidence, including electronic documents, following the institution of a misrepresentation class action against USN. It is particularly noteworthy that the president and CEO was chastised by the court in the judgment for his failure to ensure that documents were preserved once litigation had ensued. This illustrates the prohibitive costs that can occur when document retention and destruction policies are ineffective in ensuring that a litigation hold is undertaken to preserve documents.

The scope or breadth of discovery may also be surprising. In CIBC v. Genuity, CIBC aided by forensic experts undertook an extensive review of the BlackBerries and electronic communications exchanged by various former employees who left to start Genuity. The forensic review revealed breaches of duties of loyalty and theft of confidential information according to CIBC and this evidence formed the cornerstone of its action against these individuals and their new enterprise. CIBC ultimately obtained access to the defendants’ home computers and other electronic devices in discovery orders obtained in the case.

Jurisprudence is developing in Canada and many questions remain unanswered, thus paving the way for disputes concerning many of these issues. Businesses and professionals need to develop appropriate policies to manage, preserve and destroy electronic documents. Privacy legislation should be considered and accountants should pay attention to legislation and regulations relevant to their profession, including specific regulations that deal with document retention. Proper policies, including consideration for litigation holds to ensure that documents are preserved, will go a long way towards better preparing accountants and their clients for litigation and will help to ensure proper risk management.

For more information, see Sedona guidelines at sedonaconference.org and Ontario Guide to Electronic Discovery at commonwealthlegal.com.

Carolena Gordon, BCL, LLB, is partner at Nicholl Paskell-Mede in Montreal

Technical editor: Mindy Paskell-Mede, BCL, LLB, Nicholl Paskell-Mede