The Fourth Circuit relied heavily on the analysis in Race Tires in denying a majority of the prevailing party’s ediscovery costs in Country Vintner of North Carolina, LLC v. E. & J. Gallo Winery, Inc.  The Fourth Circuit affirmed the lower court’s decision that only costs for the conversion of native files to TIFF or PDF and the transfer of files onto CDs constituted “making copies” as contemplated by Section 1920(4).  In so holding, the Fourth Circuit found that costs for flattening and indexing ESI, searching and extracting data, bates numbering, and management tasks are not recoverable.  The Court reasoned that the Supreme Court has found that taxable costs are “limited to relatively minor, incidental expenses” that “almost always amount to less than the successful litigant’s total expenses.”

Like Race Tires, the Fourth Circuit also found that parties who believe they have compelling equitable reasons to seek protection from the burden or expense of electronic can seek a Protective Order (and appeal any denial thereof) in the course of the litigation, but cannot obtain this protection retroactively from Section 1920 which “impose[s] rigid controls on cost-shifting in the federal courts.”  We expect decisions from at least the Federal Circuit and Ninth Circuit in the coming months addressing this issue.  Stay tuned as we continue to follow the trends of this often times million dollar question.

The mere fact that predictive coding is an available tool doesn’t mean that it should be applied to every document in a client’s possession, custody or control. Rather, it can be ok – defensible, even – to use it only on a subset of what is identified as potentially relevant. The open question is how and when to create the universe of documents subject to machine learning.

In Biomet, the defendant identified nearly 20 million documents for possible review, and then reduced that universe by using keyword searches. After deduping, that left 2.5 million documents and attachments.

Biomet did some random sampling on the excluded universe and determined that less than 1.33 percent of that universe would be responsive. It then used Axelerate, a predictive coding tool by Recommind, on the remaining 2.5 million.

Some predictive-coding experts, like Ralph Losey, have opined that keyword searching has a critical place in the predictive coding module. He calls it “multimodal because, although the predictive coding type of searches predominate. . . other modes of search are also employed.”

But the Plaintiff’s Steering Committee in Biomet contended that the initial use of keywords “tainted” the results, because key words typically only capture about 20 percent of the responsive documents. Thus, by using key words in the first instance, Biomet excluded documents from the predictive coding universe.

The Steering Committee, who faulted Biomet for starting the process before the cases were centralized, wanted Biomet to go back to the original 19.5 million documents (which the Court called Square 2, since Square 1 was everything within the four walls of the company) and use predictive coding there. Biomet’s discovery costs already topped $1 million, and Square 2 review would have cost a seven-figure sum.

Judge Robert L. Miller Jr. looked at numerous Sedona Conference papers, the Seventh Circuit Principles Relating to the Discovery of Electronically Stored Information, and the rules themselves and concluded that Biomet fully complied with its discovery obligations and its approach was proportionate given the issues at stake in the case.

“Even in light of the needs of the hundreds of plaintiffs in this case, the very large amount in controversy, the parties’ resources, the importance of the issues at stake, and the importance of this discovery in resolving the issues, I can’t find that the likely benefits of the discovery proposed by the Steering Committee equals or outweighs its additional burden on, and additional expense to, Biomet,” the Court wrote.

Further, the duty of cooperation does not require “counsel from both sides to sit in adjoining seats while rummaging through millions of files.”

The Court concluded that if the Steering Committee wanted more, it was going to have to pay for it.

(On a side note, one issue apparently not argued by the parties, as it is not addressed in the opinion, is that Biomet used eight contract attorneys to educate the machine about the case. The usual predictive coding workflow is to have subject-matter experts about the case, usually a senior associate or junior partner, making decisions on the seed set. Even Axelerate’s website says that the tool requires “input from a case expert.”  The opinion doesn’t say whether the contract attorneys were trained to be experts on the case, but we hope they have long contracts. We are firm believers that subject-matter experts must be involved for predictive coding to be at its best.)

After the defendant’s 30(b)(6) witness was unable to describe the Chinese entities’ computer and back-up systems, what searches were performed, or the Chinese entity’s document retention policy, the plaintiff sought sanctions. 

Magistrate Judge Cox’s decision covers a lot of territory, including where the corporate representative could be deposed.  But the most interesting part of this concise ruling concerns sanctions and her straightforward conclusion that a corporate representative can’t dodge questions concerning the preservation and collection of corporate records by saying pointing to the discovery vendor. Judge Cox held:

Such a hands-off approach is insufficient.  Because of the control or “close coordination” between the two companies, defendants were required to produce the requested information.  Defendants cannot place the burden of compliance on an outside vendor and have no knowledge, or claim no control, over the process.

As litigants become increasingly dependent on vendors to assist with the discovery process, they must still understand, direct and approvethe vendors’ activities.

Courts will have limited patience for attorney claims that they simply don’t understand technology.  The recently revised comments to ABA Model Rule 1.1 state, “[t]o maintain the requisite knowledge and skill, a lawyer should keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology.” 

In fact, this is not the first time a court has rejected attempts to blame vendors for issues arising in a document production.  See Thorncreek Apartments III, LLC v. Village of Park Forest, 2011 3489828 (N.D. Ill. Aug. 9, 2011) (party waived privilege claim where it blindly relied on vendor to withhold documents tagged “privileged”); Rosenthal Collins Group, LLC v. Trading Techs. Int’l, Inc., 2011 WL 722467 (N.D. Ill. Feb. 23, 2011) (sanctioning a party for its vendor’s misconduct).

Bottom line - Peerless reminds attorneys, both in house and outside, of the importance of working closely with your vendor.  Because at the end of the day, if your client’s discovery obligations have not been satisfied, we suspect that judges will carefully evaluate the involvement of counsel before shifting the blame to vendors.

Those of a certain age may recall the television show The Electric Company’s leading superhero, Letterman.  He could resolve nearly any crisis by deleting, adding, or changing a letter, all while grooving to funky 70s’ music.  Maybe that’s how we ended up with “eDiscovery.” Troubled by the legal profession’s lack of attention to electronically stored information, Letterman took the “e” from his chest and, well, you know the rest.

Initially, Letterman’s action had a positive effect.  Lawyers began to focus on ESI. The Federal Rules Committee made clear that discovery included the “e.”

But, like most superhero interventions, there were some unintended consequences.

The “e” became expensive.  It gave rise to a multi-billion-dollar industry. And some began to correlate the “e” with a litigation support function that was far removed from litigation and advocacy.  As a result, many litigators relegated the “e” to tech professionals and LegalTech attendees.

Letterman, you are needed again. Take back that “e!”! Federal and state procedural rules make clear that all discovery includes relevant ESI.  And all litigators should understand that before they deploy amazing and welcome technologies to cut the costs of document review, they can deploy old-school advocacy techniques to reduce the amount of information that must be reviewed.

The only alternatives are not “exhaustive manual review” and “technology assisted review.”  How about “Litigator-Assisted Review” (LAR)? This patent-pending process involves lawyers focusing on, and cooperating concerning, the limited number of sources that are most likely to yield information that is not merely relevant, but that is needed to resolve matters in dispute.  These lawyers will have preserved broadly so they can go to more sources if needed.

The lawyers who put advocacy first will be the true superheroes of this story.

As a user, student and proponent of TAR in the right cases, I hope we can sharpen the discussion at LegalTech TAR 2013.  Along those lines, permit me a few (hopefully) constructive suggestions:

(1)        Please don’t describe five cases, including orders that range from detailed to handwritten, as an unassailable judicial endorsement of TAR.  Da Silva Moore, Kleen Products, Global Aerospace, Actos and EORHB are all interesting, but they have just begun the judicial discussion on the use of TAR.  Far more interesting uses of TAR are occurring in cases that have not required judicial attention (or in which the parties have sought to avoid the sideshow of public dissection of their protocols).

And while Global Aerospace is being held out as the first judicial approval of the results of TAR, I hardly feel emboldened to walk into another court holding a half-handwritten one-page order approving the use of the technology along with a statement that the Court later approved the results after there was no objection by the requesting party. 

(2)        Please don’t base return on investment discussions on an outdated baseline that does not account for iterative and focused identification of custodians and other sources of electronically stored information (“ESI”).   In discovery involving large amounts of ESI, there seems to be a growing appreciation that we should focus less on finding every document that meets the extremely broad definition of relevance (an impossibility) and, instead, focus on the search for ESI that is not merely relevant, but relevant to resolving matters that are actually in dispute.  Savvy practitioners who, through interviews, negotiation and advocacy, develop a focused, iterative approach to the selection of custodians and sources for review, and the identification of relevant documents, would benefit from an ROI analysis that begins with more nuanced assumptions as to the starting data set.

(3)        Please adapt your analysis and discussion of recall and precision to focus on ESI that really matters.  This is really a variation of the last point, but practitioners would benefit from an analysis of recall and precision – and the efficiencies of achieving desired levels of recall and precision — that is focused on important documents rather than merely relevant documents.  It is understandable that the meaningful discussion of TAR began with a focus on exhaustive manual review and comparison of humans and machines in identifying all relevant documents (recall) and only relevant documents (precision).  Now we need a deeper understanding of recall and precision focused, instead, on meaningfully relevant documents (those that matter to resolving issues that are actually in dispute or are likely to lead to such documents).  At the end of the day, only a few binders of documents will be used in supporting even the most complex motions, and even documents are likely to be admitted as exhibits at trial. In the TAR v. human debate, is there a clear winner in finding those documents?

I look forward to attending all 22 sessions discussing TAR next week!

Communications between spouses are typically accorded a “marital communications privilege” because they are “regarded as so essential to the preservation of the marriage relationship as to outweigh the disadvantages to the administration of justice which the privilege entails.”  But marital communications to or from a workplace computer just became less privileged – at least in the Fourth Circuit.

In United States v. Hamilton, the Fourth Circuit considered Phillip Hamilton’s challenge to his conviction for bribery and extortion under color of official right.  A jury concluded that, “while a state legislator, Hamilton secured state funding for a public university in exchange for employment by the university.” 

Email that Hamilton sent to his wife from his part-time consulting job at the Newport News public school system was key evidence in his conviction.  On appeal, Hamiltonargued that his email exchanges with his wife were subject to the marital communication privilege and were improperly admitted into evidence.  Why did a three-judge panel of the Fourth Circuit disagree?

The Fourth Circuit concluded:

• a marital communication is “publicly disclosed” and, therefore, the privilege is waived when the communication is stored on a workplace computer and the workplace computer use policy provides that there is “no expectation of privacy” in the use of the device;
• it did not matter that the email at issue predated the adoption of the workplace computer use policy because Hamilton“did not take any steps to protect the emails in question, even after he was on notice of his employer’s policy permitting inspection of emails stored on the system at the employer’s discretion.”

Hamilton, supported by amicus Electronic Privacy Information Center (EPIC), argued that there is generally a reasonable expectation of privacy in the use of email.  But the Fourth Circuit concluded that that expectation ends in the face of a policy that states otherwise.  The Court likened the workplace computer to a stenographer and suggested, “just as spouses can ‘conveniently communicate without’ use of a stenographer, they can also ‘conveniently communicate without’ using a work email account on an office computer.”

EPIC amicus brief suggested that the lower court’s evidentiary ruling was out of step with modern workplace communications technology – and it may be that Hamilton and EPIC will now point to the Fourth Circuit’s example likening an email system to a stenographer as further evidence of a decision that reaches into the past rather than focusing on the modern workplace.

EPIC focused on the eroding distinction between business and personal communications in the modern workplace.  Indeed, much has been written about “bring your own device” policies where an employee supplies her own smart phone or tablet and the device is also set up for workplace communications.

But the Fourth Circuit was not faced with that fact pattern and EPIC’s arguments may yet find traction if a question arises about a communication stored on a device with mixed personal and business attributes.  But even in that situation, an employee should be careful to separate business communications on a work account from personal communications on a personal account.

This case continues to emphasize that employees who consider their communications on workplace devicesprivate– even, for example, when they access personal email accounts on workplace computers – put themselves at risk.  This issue sometimes arises when an employee contacts counsel from a workplace computer that is later the subject of discovery in a case brought by that employee against the employer.

Finally, as I prepare to participate in a panel today on technology in the board room with my colleague Suzanne Hanselman, I also see some warnings from Hamilton that are relevant to modern, mobile directors and the companies on whose boards they serve.  Think carefully about how sensitive information is communicated to outside directors.  If such information is accessed from the director’s day job, it may remain on that workplace computer and be subject to later discovery.

• Generally assigns responsibility for the document preservation process to IRS Collection Advisors and agency counsel;
• Expansively describes “potentially relevant information” subject to preservation, specifically listing extensive categories of electronically stored information and paper documents that IRS employees must preserve; and .
• Signals that the agency views preservation of potentially relevant information as a higher priority than in prior guidance.

The Memorandum specifies relatively early dates in the dispute development process when the IRS believes its obligation to preserve documents attach.  We have previously noted the complications that can arise in determining the point in the development of a tax dispute when the IRS and taxpayers “reasonably anticipate” litigation and are required to take action to preserve potentially relevant documents.  The recent Memorandum clarifies that the obligation to preserve arises no later than the date that IRS refers a matter to the Justice Department for filing of suit.  An example in the Memorandum clarifies that the obligation to preserve can arise earlier, such as where the taxpayer presents an administrative claim and indicates that it will litigate if the claim is denied.

The Memorandum identifies “Collection Advisors” and agency counsel as the principal actors responsible for coordinating E-discovery compliance.  Agency counsel is responsible for determining when to issue a litigation hold in response to filed or reasonably anticipated litigation.  That determination is generally communicated to the relevant Collection Advisor, who is then responsible for identifying and contacting all potentially relevant IRS employees and instructing them on their document and file preservation responsibilities.

The Memorandum expansively describes the documents to be preserved.  In addition to contemplating extensive efforts to identify IRS employees familiar with aspects of a dispute, the Memorandum broadly describes the information that must be preserved.  Collection employees are instructed that all electronic materials “relating to a particular taxpayer’s case must be preserved” and explains that privilege or relevancy determinations are to be made by counsel, not field employees.  The Memorandum goes on to provide a lengthy (but non-exhaustive) list of documentation to be preserved including e-mail, word-processing documents, spreadsheets, telephone logs, case history reports, research materials, and related metadata.  It further requires review of hard drives, portable thumb drives, internet data, and back-up or archived material.

Two potential gaps in this listing are worthy of note.  First, because collection activity often involves multiple targets (e.g., a corporation and its officers or transferees), the definition of “taxpayer” applied will be important.  If IRS treats each target as a separate taxpayer, it might not preserve important information associated with other targets of the same collection activity if it limits preservation to a narrowly-defined “taxpayer.”  Second, the Memorandum reflects an IRS expectation that e-mail communications amongst IRS employees will be preserved by having the individual recipients print copies of the e-mail, place the paper copy in the official file, and delete the original e-mail.  Given that studies have shown that relatively few e-mails are ever printed or otherwise preserved, placing principal reliance upon paper copies of e-mail communication may be less than optimal.

The Memorandum emphasizes document preservation procedures instead of compliance cost containment.   In our prior post on the September 2012 Office of Chief Counsel Notice on e-discovery compliance, we noted that the scope of preservation adopted in that Notice was not in step with the law on preservation.  That Notice had suggested that “it may be appropriate to forego . . . litigation hold procedures” (emphasis added) where potentially relevant information was information that the agency viewed as “not reasonably accessible” due to cost or burden.”  In fact, as previously noted, the rules-based right not to search or produce potentially information identified to an opposing party as not reasonably accessible due to burden or cost –a claim later subject to proof if challenged – is an issue of production, not preservation.  The Memorandum does not contain this guidance and, in fact, correctly differentiates between the scope of preservation and production:

All ESI is subject to discovery if it is relevant to the case. For purposes of determining relevancy, the nature of the litigation or anticipated litigation, including the time periods involved, the allegations made by the parties, and the subject matter of the litigation, must be considered. While all potentially relevant ESI must be preserved, this does not mean that the information must be or will be produced in litigation.

Of course, the Memorandum explicitly applies only to personnel in the IRS Collection function, but its issuance was coordinated with the IRS Office of Chief Counsel.   As Chief Counsel is the IRS component responsible for establishing agency-wide procedures on document retention, the helpful guidance in the Memorandum hopefully reflects that the agency is moving in a positive direction in addressing e-discovery issues.

Gil will also be presenting this week at the Symantec Transparent Predictive Coding and eDiscovery Lab and Georgetown’s Advanced E-Discovery Institute .

Determining when litigation is “reasonably anticipated” is particularly difficult in the context of tax controversies.

A well-advised taxpayer considering a potential transaction or reporting methodology should be considering the possibility that the IRS will look askance at the taxpayer’s actions from nearly the first moment that the transaction or reporting position is proposed.  Later, the possibility of a dispute with the IRS may be reevaluated many times–when the taxpayer files its return, when its financial auditors and tax counsel opine upon the potential issue, when an audit begins, when the IRS first proposes an adjustment, when the taxpayer files an administrative appeal of the proposed adjustment, and when the taxpayer files suit.  At what point in this progression does a potential dispute rise to the level of a “reasonable anticipation of litigation,” thereby triggering a duty to preserve?

There is very little guidance answering this question in the context of tax controversies.  One case addressing the issue, Consolidated Edison Co. v. United States, 90 Fed. Cl. 228, 259-63 (2009) (appeal pending on merits only), rejected a government charge of spoliation based upon the taxpayer’s destruction of documents after an audit had begun but before an adjustment had been proposed.  More recently, the IRS Chief Counsel issued directions to agency lawyers that they must issue litigation hold letters to ensure preservation of evidence generally in conjunction with the institution of a law suit or assignment of the case to trial counsel—a relatively late step in the development of a dispute into litigation.       

More useful guidance has been developed in the context of taxpayer assertion of claims for work product protection of tax accrual workpapers in response to IRS summonses.  Those cases apply a seemingly identical “reasonable anticipation of litigation” standard in evaluating the claim for work product protection.  For example, in SIANI v. State University of N.Y., a discrimination case, Magistrate Judge Wall in the E.D.N.Y. analyzed whether the “reasonable anticipation of litigation” trigger for work product protection also triggered a legal hold duty, and concluded, “the common sense conclusion that if the litigation was reasonably foreseeable for one purpose in January 2008, it was reasonably foreseeable for all purposes.”

Taxpayers typically claim that the workpapers were prepared in reasonable anticipation of litigation because an IRS challenge to the transactions was inevitable, while IRS takes the view that the workpapers are not protected by work product privilege because they were prepared too early in the development of the dispute to have been prepared in reasonable anticipation of litigation.  The courts are divided on the issue.  Compare, for example, the D.C. Circuit’s  conclusion in Deloitte LLP   that workpapers can be protected work product prepared in anticipation of litigation,  with the First Circuit’s ruling in Textron that workpapers are not protected work product.  The government continues to litigate the issue in other circuits.  

The bottom line is that there is no clear rule on when litigation is reasonably anticipated and the duty to preserve is triggered in tax controversies.  But several things are clear.  First, the duty to preserve relevant evidence applies equally to both IRS and taxpayers involved in tax controversies; both taxpayers and IRS (along with their counsel) must address their own compliance with the duty to preserve in all developing controversies. Second, counsel for both IRS and taxpayers can find easily find themselves advocating inconsistent positions from case-to-case and from issue-to-issue; establishment of an early date for when litigation is reasonably anticipated will benefit the IRS in some instances and taxpayers in other instances.  Third, a litigant’s treatment of work product privilege and the duty to preserve need to be considered together because of what courts may treat as a common legal standard; no party wants to successfully assert a work product claim only to later find that the victory is pyrrhic because it triggered a duty to preserve that it cannot satisfy.  Most important, so long as debate persists upon the legal standard, well advised clients will consult counsel before taking a position on when litigation is reasonably anticipated in tax controversies and when they have a duty to preserve.