Posted on May 6, 2013 by Sandro G. Ocasio

Update of Proposed Rule Changes: A Universal Federal Sanctions Standard for the Failure to Preserve ESI Could be a Reality

The United States Courts’ Advisory Committee on Civil Rules (“the Committee”) has proposed various amendments to the Federal Rules of Civil Procedure that, if adopted, will profoundly affect the range and scope of sanctions a court may impose for failures to preserve electronically stored information (“ESI”). F.R.C.P. 37(e), which currently addresses sanctions in those instances, is one of several rules slated for amendment.

The current rule prohibits a court from imposing sanctions on a party that fails to provide ESI that was lost as a result of the “routine, good-faith operation of an electronic information system” absent exceptional circumstances. The federal courts have applied the rule differently with prevailing culpability standards currently ranging from negligence to willfulness or bad faith (this blog has commented on such disparate cases including New York, New Jersey, and Arizona.) The Committee seeks to address these discrepancies by adopting a single standard.

The proposed rule states that sanctions may be ordered in two limited instances -- when the failure to preserve: 1) “was willful or in bad faith and caused substantial prejudice in the litigation” or 2) “irreparably deprived a party of any meaningful opportunity to present a claim or defense.” Thus, the proposed rule rejects case law precedent in some jurisdictions that mere negligence constitutes a sufficient culpability to support sanctions. The proposed rule adds an adverse-inference charge to the jury to the list of sanctions already available -- like issue preclusion and outright dismissal -- under referenced F.R.C.P. 37(b)(2)(A).

The proposed rule also identifies factors a court may examine to determine whether the party failing to preserve ESI acted with the requisite culpability, including the extent to which a party was on notice that litigation was likely, the reasonableness of a party’s preservation efforts, the issuance of litigation holds, the proportionality of the preservation efforts to any anticipated or ongoing litigation, and whether the party sought guidance from the court regarding unresolved disputes concerning ESI preservation.

According to the minutes from the Committee meeting held this past January, “the proposed amendment is designed to provide more significant protection against inappropriate sanctions, and also to reassure those who might in its absence be inclined to overpreserve to guard against the risk that they would confront serious sanctions.”

Indeed, parties may find some relief in the fact that, under the proposed rule, negligent behavior would no longer be punishable. However, practitioners must be mindful of the interpretation of “willfulness” and “bad faith” in their jurisdiction because the proposed rule does not clarify those terms. According to the Committee Notes “courts have considerable experience dealing with these concepts, and efforts to capture that experience in Note language seemed more likely to produce problems than provide help.”

Furthermore, application of the proposed factors, particularly factors such as “reasonableness,” will vary from jurisdiction to jurisdiction. Thus, although the level culpability may be standardized, the rule will undoubtedly be interpreted and applied differently among the federal courts.

Publication of the proposed amendments is expected late this year providing they are approved by the Standing Committee at their June meeting. Stay tuned to this blog for updates on these critical developments.


Sandro G. Ocasio is an Associate in the Gibbons Real Property & Environmental Department and a member of the Gibbons E-Discovery Task Force.
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Posted on March 18, 2013 by Sandro G. Ocasio

An International Standard for E-Discovery?

The International Organization for Standardization (“ISO”) is forming a new e-discovery committee tasked with the development of standards for e-discovery processes and procedures. The international standard “would provide guidance on measures, spanning from initial creation of [electronically stored information] through its final disposition which an organization can undertake to mitigate risk and expense should electronic discovery become an issue” according to a draft committee charter.

ISO is the world’s largest developer of voluntary international standards comprised of a network of standards bodies in more than 160 countries. Since its inception over 60 years ago, ISO has created more than 19,500 international standards for nearly every aspect of technology and businesses.

The proposed standard would cite ISO 9001, a part of the ISO 9000 family of standards that sets forth an internationally accepted consensus on good quality management practices. ISO 9001 defines minimum requirements for a company’s Quality Management System and is used by more than 1 million businesses in over 180 countries.

Reactions to the concept of promulgating an international e-discovery standard are mixed. Opponents contend that such a standard is not feasible in light of the rapidly changing landscape of e-discovery and the unpredictable nature of litigation. Supporters argue that e-discovery is a technology and engineering issue that can be standardized. All critics seem to agree, however, that e-discovery standardization is a central need for the industry as a whole.

Indeed, the potential benefits of a uniform standard would inure to practitioners, clients and the judicial system. Creation of such a standard should significantly reduce, if not eliminate, disputes regarding how e-discovery should proceed, thereby significantly reducing litigation costs and promoting judicial economy. E-discovery software companies may also be able to differentiate themselves from their competitors by meeting the standard and branding their products as standards-compliant.

The establishment of the committee appears to be a certainty with support from the United States, Italy, Japan, South Africa and the U.K. Should the project move forward, a draft report would be submitted sometime in July, followed by a comment period beginning in August. This blog will continue to track the progress of this important e-discovery development.


Sandro G. Ocasio is an Associate in the Gibbons Real Property & Environmental Department and a member of the Gibbons E-Discovery Task Force.
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Posted on January 18, 2013 by Elizabeth Ann Fitzwater

Netflix Case Illustrates Potential Social Media Pitfalls Facing Public Companies

As we reported in the Gibbons E-Discovery Law Alert in May 2012, “Reg FD” could present a potential pitfall for those that post material non-public information via social media platforms. In early December 2012, that “pitfall” became a reality for Netflix Inc. CEO Reed Hastings. In July 2012 Hastings published on his public Facebook page a 43-word post concerning viewership statistics, including that Netflix subscribers had watched one billion hours of video the previous month.

The post presents at least two questions. First, whether Hastings’s statement constitutes “material” information falling within the purview of Reg FD. As a reminder, Reg FD mandates that, when an issuer, or a person acting on behalf of the issuer, discloses material non-public information to certain enumerated persons (generally, securities market professionals and security holders who may trade on the basis of the information), it must make public disclosure of that information simultaneously (for intentional disclosures), or promptly (for non-intentional disclosures).

The second -- and far more novel -- issue is whether posting to over 200,000 people constitutes a “public” disclosure. The SEC staff does not seem to think so. On December 6, 2012, Hastings disclosed in an SEC filing that Netflix had received a “Wells notice” from the SEC staff, recommending that the agency bring an enforcement action against Netflix over the July post. Specifically, the SEC is concerned that Hastings’s post violated Reg FD in that a post on Facebook is not a disclosure to all investors at the same time. The Wells notice does not mean the SEC will actually prosecute Netflix. Moreover, such a prosecution would likely face serious challenges because a lynchpin is proving that a public posting on Facebook is not public dissemination. That said, a company like Netflix that has struggled to maintain relevancy in an increasingly digital age nonetheless felt the sting of a decreasing stock price in the wake of the announcement of the Wells notice.

While regulators and public companies find their footing in applying a 12 year old rule to new technologies, it is still a good idea to: (i) ensure that their message is being simultaneously delivered to a wider audience instead of to a fraction of subscribers to a particular social media platform; and (ii) have documented policies and procedures concerning the use of social media. Otherwise, a public company may find itself under unwanted public scrutiny with undesirable consequences regardless of culpability.


Elizabeth Ann Fitzwater is Counsel to the Gibbons Business & Commercial Litigation Department and a member of the Gibbons E-Discovery Task Force.
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Posted on August 7, 2012 by Elizabeth Ann Fitzwater

"Did I Just Get a Tweet From Goldman Sachs?!?": Increased Expansion and Scrutiny of Social Media in the Financial Services Industry

With the increased use of social media by financial services industry participants, more activity and scrutiny can be expected from financial regulators. This is not to mention the litigation from investors that could arise out of, for example, the misinterpreted or well-meaning post from an advisor that simply did not translate to “less than 140 characters.” It appears that there is a trend (amongst at least the larger financial institutions) that a united and pre-approved voice is best for now.

Social Media has become a critical business tool for financial advisors. A recent study of the use of social media in the financial services industry concluded that 7 in 10 financial advisors are already using social networks for business purposes as illustrated by the following excerpt:

With a business that is fueled primarily by networking, advisors are increasingly integrating social media as a core element of their marketing efforts. This comes as no surprise, given the adoption rates of their prospective clients: According to Forrester Research, two-thirds of U.S. Online adults with an investment account now have social network profiles.

Indeed, after concluding a year long trial involving 600 employees, financial giant Morgan Stanley recently announced that it plans to give its roughly 17,000 financial advisors at Morgan Stanley Smith Barney partial access to Twitter and LinkedIn over the next several months. Morgan Stanley’s big roll out has been widely criticized for its somewhat conservative approach which calls for its financial advisors to draw from a prewritten library of Twitter messages, e.g., “Morgan Stanley Advisors Take To Twitter To Do Nothing Very Interesting.” The company apparently decided to shelve an experiment that allowed a handful of investment advisors to compose their own Twitter messages. Its investment advisors also must submit all LinkedIn postings for approval.

This criticism may be easy to dish out for those whose Twitter feeds are not regulated by several state, federal and even international regulators. Financial services industry participants -- particularly large institutions such as Goldman Sachs (which sent its first “Tweet” at the end of May of this year) -- have to balance the spontaneity of social media with the competing concerns of the protection of its investing public and the potential costs associated with disregarding those concerns in a regulatory climate that has latched on to social media as a paramount concern to the investing public. It was recently reported by Reuters that FINRA, the Financial Industry Regulatory Authority, asked questions about social media in more than 1,000 brokerage examinations since mid-2010.  Not having a social media policy in place -- even one prohibiting the use of social media - was the most common violation of industry regulations. See prior blog post here concerning prior industry guidance on these policies. According to Amy Sochard, FINRA’s director of advertising regulation, the second most common industry violation was failing to enforce those existing social media policies, whether through record keeping or the storage of electronic communications. In this regard, Reuters recently reported that at least one registered investment advisor (disclosing on the condition of anonymity) was issued an exam deficiency letter by a state securities regulator which cited deficiencies relating to the failure to create and outline proper procedures for social media use, its failure to train its employees in those procedures, and the failure to check up on the activities of its employees on LinkedIn and Facebook, even though the company had hired an outside company to save messages employees sent through the sites.

Pre-approved social media content also alleviates the need for dedication of additional compliance resources -- a cost-center that is typically stretched too thin. Similarly, outsourcing review and approval of the content of social media (as opposed to outsourcing a recordkeeping function), is likely not an option for a prudent entity or advisor, particularly with FINRA’s increased expression of interest concerning outsourcing and vendor selection in the industry as reported in Notice 11-14, which sought comment on proposed FINRA Rule 3190 concerning vendor selection and outsourcing. In any event, the ultimate responsibility for compliance with securities laws and rules rests with the firm.

For services that are supposedly free of charge, the increasing prevalence of social media in the financial services industry is coming at quite a cost to those ultimately responsible for its content. Many things -- such as the use of email, advertising and financial information, to name a few -- are simply different for those involved in the financial services industry because they face the added burden of a complex web of securities laws, external regulators and their rules, as well as internal compliance codes and legal regulations. Social media, the Johnny-come-lately, is proving to be no less complex of an issue -- far from it.


Elizabeth Ann Fitzwater is Counsel to the Gibbons Business & Commercial Litigation Department and a member of the Gibbons E-Discovery Task Force.
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Posted on May 21, 2012 by Elizabeth Ann Fitzwater

Social Media in the Securities Industry: Complying with Reg FD

Delivering non-public material information through Internet-based social media, especially social networking sites such as Facebook, LindedIn, and Twitter, means that this information will first reach only a fraction of the investing public -- those who “follow” the company using those platforms. As illustrated by the hypothetical below, this may create a potential “Reg FD” issue for a public company. As we addressed in a previous blog, the SEC has recently issued guidance to investment advisers concerning their use of social media. Click here for prior blog. We have also addressed in a previous blog that FINRA, too, has issued Regulatory Notices which make it clear that member firms are expected to have policies and procedures in place that cover the use of social media by the firm and its associated persons. Click here for prior blog. While direct guidance to public companies on the use of social media to report a company’s material financial matters has yet to issue, this post offers suggestions for avoiding pitfalls in this regard.

The Scene: The CEO of Awesome Widgit Inc. just received his company’s yet to be released first quarter earnings report showing unprecedented profits from this winter’s hot new gadget, the Widgitslicer. In his excitement, he grabs his mobile device and tweets to all Widget Inc.’s followers: “First quarter profits are out! Earnings up 5%!!!”

The Issue: Every officer, director, senior employee and investor of a public company should know that the disclosure and timing of a public company’s material financial details are highly regulated by, among other entities, the SEC, state securities agencies, and self-regulatory organizations (like FINRA and national exchanges). In less than ideal circumstances, inadequate disclosures can trigger investigations and enforcement actions not only by the foregoing regulators, but also lead to prosecution by the U.S. Department of Justice and/or state attorneys general, as well as private investor lawsuits. A large portion of a corporate securities lawyer’s time is devoted to ensuring that a company’s disclosures not only come with the appropriate disclaimers, but also that such disclosures do not run afoul of the SEC’s Regulation Fair Disclosure (commonly referred to as “Reg FD”). Essentially, Reg FD mandates that when an issuer, or a person acting on behalf of the issuer, discloses material nonpublic information to certain enumerated persons (generally, securities market professionals and security holders who may trade on the basis of the information), it must make public disclosure of that information simultaneously (for intentional disclosures), or promptly (for non-intentional disclosures). The SEC’s stated purpose of Reg FD is to “address the selective disclosure of information by publicly traded companies” and “aims to promote the full and fair disclosure.”

A Potential Solution: A public company can take advantage of social media platforms simply by ensuring that their message is being simultaneously delivered to a wider audience instead of to a fraction of subscribers to a particular social media platform. Companies can have their lawyers (in-house or outside counsel) and investor relations staff coordinate to file a Form 8-K with the SEC and, for example, “tweet” a headline concerning the information in the 8-K to its Twitter followers. Services such as “StockTwit” or a similar platform will also allow businesses to attach lengthy postscripts to their tweets and other online messages with the language necessary to comply with the various disclosure rules mandated by the SEC.

In light of the foregoing, initially, it is a good idea for public companies to have documented policies and procedures concerning the use of social media, which include compliance and legal review and a designated corporate “voice” to deliver the messages (such as its investor relations department). Indeed, as the SEC clearly signaled to investment advisers and FINRA to its members, the adoption of policies and procedures governing the use of social media sites is a prudent exercise -- this advice translates equally to public companies.


Elizabeth Ann Fitzwater is Counsel to the Gibbons Business & Commercial Litigation Department and is a member of the Gibbons E-Discovery Task Force.
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Posted on January 23, 2012 by Elizabeth Ann Fitzwater

Recent Regulatory Guidance from the SEC on the Use of Social Media

Broker-dealers and investment advisors face a variety of legal and compliance ramifications resulting from the expanding use of social media for business purposes. It is now commonplace that an entity or individual in the securities industry will employ a combination of social media platforms including Facebook, Twitter, YouTube and LinkedIn to market and network with their investors and potential investors. For example, an investment advisory firm may establish its own Facebook page where industry-related information may be posted, an investment advisor may “tweet” investment and wealth management strategies, or a registered representative may present his experience, licensures or his own opinions on trending stocks on his LinkedIn page.

Both the SEC and FINRA have now clearly articulated that the use of social media and its contents by regulated financial entities or individuals is not exempt from pre-existing compliance and regulatory requirements, the latter of which we previously blogged on. Click here for prior blog post. This is so despite the challenges faced when these new “in the moment” marketing channels meet recordkeeping and retention requirements and compliance regulations designed to protect investors. These challenges include ensuring compliant content of communications on platforms that are designed for spontaneous interchange, a firm’s determination and monitoring of “personal” versus “business” use by its registered representatives and employees, and regulating third-party content and contributions to a regulated-entities’ social media platform.

Beginning in late 2010 through early 2011, the SEC conducted a sweep of registered investment advisors and investment adviser firms to gather information about their use of, and policies and procedures regarding, social media including their existing or prospective communications on social media and those related to ongoing monitoring or review of such communications. On January 4, 2012, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued a national examination “Risk Alert” providing the Staff’s observations based on a review of investment advisors of varying sizes and strategies that use social media. The OCIE, while more informal than the previously-issued FINRA Notices, made clear that a firm’s use of social media must comply with the already-existing provisions of the federal securities laws including anti-fraud, compliance and recordkeeping provisions. The Risk Alert’s “key takeaway[ ]” was as follows:

Investment advisers that use or permit the use of social media by their representatives, solicitors and/or third parties should consider periodically evaluating the effectiveness of their compliance program as it relates to social media. Factors that might be considered include usage guidelines, content standards, sufficient monitoring, approval of content, training, etc. Particular attention should be paid to third party content (if permitted) and recordkeeping responsibilities.

The Alert came on the heels of the SEC’s January 4, 2012 charge of an Illinois-based investment advisor related to his alleged offer to sell more than $500 billion in fictitious securities through various social-media websites such as LinkedIn. The SEC simultaneously issued an “Investor Alert” aimed to help investors be better aware of fraudulent schemes that use social media, and an “Investor Bulletin” containing best practices for investors to protect their information and avoid fraud.

One well-publicized attempt to comply with applicable regulations has been offered by financial services firm Raymond James Financial Inc. On November 2, 2011, Raymond James and Actiance (the company providing the software for Raymond James’ program), announced the implementation of a self-proclaimed “social media solution for financial advisors.” The “Socialite” platform is described as “enabl[ing] the company’s financial advisors to utilize social media sites including LinkedIn, Facebook and Twitter. The firm is also offering advisors optional marketing support with access to a library of pre-approved content and analytics to measure engagement and their social graph.” The Socialite system apparently allows financial services firms to moderate, manage and archive social media traffic routed through the solution. This approach, while perhaps removing the spontaneity of social media and certainly providing some delay in communications, provides at least a partial solution to this growing industry issue.


 

Elizabeth Ann Fitzwater is Counsel to the Gibbons Business & Commercial Litigation Department and a member of the Gibbons E-Discovery Task Force.
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Posted on January 17, 2012 by Paul E. Asfendis

Non-Party E-Discovery Obligations in New York - A Question of Proportionality

In a rare New York State appellate decision concerning e-discovery, the First Department took the opportunity to address claims by a subpoenaed nonparty of inaccessibility of electronically stored information (ESI).

The case, Tener v. Cremer, 2011 N.Y. Slip op. 6543 (1st Dep’t 2011), involved an alleged defamatory post originating from one of New York University’s computers. Plaintiff served NYU with a subpoena seeking identification of persons who accessed the Internet on a certain date via a certain IP address. In connection with motion practice on the subpoena, NYU explained that computers that accessed the web through NYU’s portal are identified in a text file listing that is automatically overwritten every 30 days. NYU claimed not to possess the technical capability or software, if such exists, to retrieve a text file that had been created more than a year earlier and written over at least 12 times during that period. Plaintiff argued that NYU had not even attempted to retrieve the data, and that the term “written over” simply meant that the old data had been allocated to free space within the system and was likely retrievable using commercially available software.

In evaluating NYU’s claim of inaccessibility, the Court adopted a hybrid standard based on the Federal Rules of Civil Procedure and e-discovery guidelines published by the Commercial Division of the Nassau County Supreme Court (the “Nassau Guidelines”). The Court cited Fed. R. Civ. P. 45(d)(1)(D)’s requirement that on a showing by a subpoenaed party that ESI was “not reasonably accessible because of undue burden or cost,” the party seeking disclosure could still obtain the discovery if it demonstrated good cause. Finding good cause to be shown since the sought after data was the only way to determine who defamed the plaintiff, the Court adopted the Nassau Guidelines approach to determining whether the data is “so ‘inaccessible’ that NYU does not have to comply with the subpoena.” This approach applies a cost/benefit analysis that weighs the burden and expense of recovering and producing the ESI against the relative need for the data.

The Court remanded the case for a hearing to determine the exact nature of the ESI at issue and the costs and burdens associated with retrieving it. The Court also cited to New York’s Civil Practice Law and Rules, which require a requesting party to defray the reasonable production expenses of a nonparty and directed that if the lower court finds that NYU has the ability to produce the data, costs should be allocated to Plaintiff.


Paul E. Asfendis is a Director on the Gibbons E-Discovery Task Force.
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Posted on December 12, 2011 by Phillip J. Duffy

The Fifth Annual Gibbons E-Discovery Conference Closes With Helpful Guidance on Drafting Records Management Policies

An effective and up-to-date set of records management policies may help companies reduce the likelihood of sanctions and other adverse consequences by ensuring records are retained and preserved in accordance with legal requirements, according to Gibbons Director Phillip Duffy; TechLaw Solutions’ Northeast Regional Director Michael Landau; and Inventus LLC Senior Consultant Bryan Melchionda.

The challenges, Duffy notes, include identifying and managing data, determining how long to retain it, and how to implement policies and execute them.

“As a general rule, records should be retained long enough to satisfy the purpose of their creation, and the applicable legal requirements, including those imposed by applicable statutes or regulations” he says. “Of course, there is also a common-law duty to preserve records that are relevant to lawsuits, investigations, audits and other circumstances, which is why every records management policy must contain provisions for institution of a legal hold when necessary.”

“So while it’s not unreasonable to destroy records after a specified period in compliance with a company’s general policy, before destruction begins, one must be certain that a duty to preserve that may require suspension of that routine destruction has not arisen and is not likely to arise,” Duffy adds.

But the regulations may be more constrained for non-profits, thanks to the Sarbanes-Oxley Act of 2002, notes TechLaw's Landau.

“Certain SOX requirements impose criminal liability on exempt organizations that destroy records with the intent to obstruct a federal investigation,” he says. “Additionally, IRS’ revised Form 990—the annual information return filed by most publicly supported exempt organizations—indicates the agency’s intent to continue to scrutinize corporate governance policies of exempt organizations.”

The challenges aren’t limited to paper-based documents, notes Inventus' Melchionda.

“Despite the widespread use of electronic filings, the volume of paper records is increasing in about 56 percent of organizations, and it’s decreasing in only 22 percent,” he relates. “Concurrently, electronic records volume is increasing rapidly for 70 percent of companies and it’s not decreasing in any of them.”

Findings like those hint at the potential cost savings, and regulatory compliance that may be utilized by businesses, Melchionda points out.

“We worked with a Fortune 10 financial services company that requested a comprehensive physical records reconciliation project to comply with records retention rules and business process procedures,” Melchionda says. “The client was incurring a high annual carrying cost for records with inventory that was more than 10 years old.”

Completing the metadata record-keeping requirements associated with the non-compliant records meant the client was able to make “confident and defensible retention and destruction decisions” on the records “as well as provide cost savings opportunities,” he adds. “We developed a robust methodology and strategy that provided better planning and estimation of disposition, and created scalable, repeatable record classification methodology while aligning record classification with corporate taxonomy. We’ve had cases where improved record retention and destruction strategies have yielded annual savings of nearly $800,000, while easing the integration of legacy and present records through a manageable, scalable and process driven framework.”

Generally Accepted Recordkeeping Principles, or GARP, have been developed by ARMA International, a non-profit professional association that addresses issues concerning the efficient maintenance, retrieval and preservation of vital records and information, says Duffy.

“The eight GARP principles address accountability, transparency, integrity, protection, compliance, availability, retention and disposition,” he explains. “Being GARP-compliant involves identifying all laws and regulations, developing systematic processes to capture and manage records through their life-cycle, and establishing continuous audit and improvement processes.”

Adherence to GARP Principles can result in ethical decisions by organizations and individuals, he adds, noting that the success of such efforts means they must be embraced by board and C-level officers.

“In our experience, GARP compliance requires the establishment of a statement of purpose to ensure compliance, facilitate retrieval and reduce storage costs,” he says. “You also have to establish the scope of your efforts, including the identification of employees, business units and storage locations.”

Consider the reasonableness of your records management policies and practices, Duffy advises.

“Among other issues, examine their scope, purpose, application and compliance,” he explains. “Do they address preservation and production issues, and do they address the information life cycle, while providing for obligations and measures directed at protecting privacy of information that should be kept confidential, such as medical records or propriety company information?”

As Landau further explained, “over-restrictive IG policies and record retention plans will lead to underground archiving.” Policies need to focus on business continuity needs as well as regulatory compliance. They also need to allow employees to do their jobs effectively and efficiently. “Clearly defensibility and risk mitigation is critical and so is the ability and willingness to comply. It is a delicate balance that has to be managed,” says Landau.

"Overall, retention schedules should be prepared with care," Duffy adds.

“Bear in mind that consistent application of your records policy can demonstrate good faith legal compliance,” he cautioned. “So, when you group records into categories, use terms that all employees understand—and speak with your IT, regulatory/compliance and legal departments so they ‘make sense’ to the employees. If you do so, you're much more likely to facilitate understanding and implementation.”

The PowerPoint presentation that was used for this panel discussion can be found here.


Phillip J. Duffy is a Director on the Gibbons E-Discovery Task Force.
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Posted on November 16, 2011 by Robert D. Brown, Jr.

The Fifth Annual Gibbons E-Discovery Conference Kicks Off with an Interactive and Thought-Provoking Overview of the Past Year's Pivotal E-Discovery Case Decisions

The Fifth Annual Gibbons E-Discovery Conference kicked off with an interactive overview of the important judicial decisions from 2011 that shaped and redefined the e-discovery landscape. Before an audience of general and in-house counsel, representing companies throughout the tri-state area, the esteemed panel of speakers, including Michael R. Arkfeld, Paul E. Asfendis, and Mara E. Zazzali-Hogan, moderated by Scott J. Etish, tackled the issues faced by the courts over the past year. Through a series of hypotheticals, the panelists and attendees analyzed and discussed how to handle the tough e-discovery issues that arose and how the courts’ decisions again reshaped the e-discovery landscape as we know it. Litigation hold protocols and spoliation concerns, the use of social media in discovery with its attendant ethical concerns, and the use of social media and the Internet in the courtroom were the hot topics of the day. This interactive overview of the past year’s hot button, e-discovery issues was an instant success and clearly set the tone for the remainder of the conference.

Right out of the gate, the panelists and audience examined and debated Judge Scheindlin’s aggressive litigation hold protocol set forth in Pension Committee and the ramifications and aftermath it has since had on litigants. The attendees were treated to an in-depth, interactive discussion of two critical opinions from 2010-11 decided in the Southern and Western Districts of New York. These decisions made it clear that there are other approaches to the problems raised in Pension Committee other than the “gotcha game” that has since ensued. The panelists and attendees discussed the significance of the split in authority clearly seen in Pension Committee (S.D.N.Y), Orbit One (S.D.N.Y.) and Steuben Foods, Inc. (W.D.N.Y.). The implications of whether the more liberal and practical approach found in the Orbit One and Steuben Foods decisions were also discussed at length, during which time the attendees were asked to offer their insights on whether and how they would approach their existing litigation hold protocols as a result of these recent opinions. This examination served as a perfect segue into the analysis of other key issues raised by litigation hold protocols and the production of electronic evidence, including spoliation of evidence, sanctions, and waiver of privileges by inadvertent production of data.

In addition to the considerable discussion afforded to the recent changes in the litigation hold area, the panelists next offered a thought-provoking analysis of the important developments shaping the continued evolution of e-discovery disputes stemming from discovery requests for information maintained by a litigant or witness on social media host sites. As social media has become a modern replacement for face-to-face communications, its role in the litigation of cases has increased exponentially. The panel debated the primary question of whether counsel should be afforded access to the private sections of a litigant’s Facebook, MySpace or other social media account and how the courts and local bar associations answered this question over the past year. The discussion also focused on what measures counsel can and should employ to obtain access to this private information once litigation is threatened. As the panel emphatically stressed, the past year’s decisions and bar association opinions clearly demonstrate that “friending” a litigant or using deceptive practices to gain private access is extremely risky and could result in discipline. The issue of spoliation of evidence in this context, an issue recently addressed by the District of New Jersey in Katiroll Company, Inc. was also addressed by the panel.

Before wrapping up this important roadmap to the ever increasing e-discovery issues faced by litigants and their counsel, the panel discussed and examined the challenges faced by the court with the advancements in technology and the Internet. As we are all aware, gone are the days when it took considerable time to learn about an important event or to research an issue. With the advent of smart phone devices and websites like Wikipedia, information about virtually everything is at one’s fingertips. Although extremely useful and beneficial in every day life, such instant access to information has been detrimental, at times, to the efficient administration of the law. The final hypothetical of the segment brought this very point to light when the distinguished attendees were asked to analyze what a juror did wrong when he decided to perform some research on Wikipedia regarding a critical fact of the case and then printed it out for review by his fellow jurors.

It is clear that the creation and storage of electronic data and the utilization of social media is here to stay with new advancements everyday. With these advancements, however, come new disputes and more intervention by lawyers and the courts to develop and manage methods to best keep up. It is clear that the landscape of e-discovery protocol is still unsettled with changes in methodology and philosophy popping up at a rapid pace. As the overview panel discussion made it equally clear, Gibbons is at the forefront in this area of the law and continues to strive to stay ahead for the benefit of its clients and those who may need assistance in the future.

The PowerPoint presentation that was used for this panel discussion can be found here.


Robert D. Brown, Jr. is an Associate on the Gibbons E-Discovery Task Force.
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Posted on November 15, 2011 by Jeffrey L. Nagel

U.S. Privacy Law Protects Non-U.S. Citizens

On October 3, 2011, the United States Court of Appeals for the Ninth Circuit determined that the Electronic Communications Privacy Act of 1986 (“ECPA”), 18 U.S.C. §§ 2510 2522, applies to foreign citizens, giving them the same privacy protections Congress afforded U.S. citizens in connection with the disclosure of electronic data by third-parties service providers.

The facts of Suzlon Energy Ltd v. Microsoft Corporation demonstrate how U.S. law can be used both as a sword and a shield with respect to gathering information abroad.The case arose because of a civil fraud proceeding in the Federal Court of Australia by Suzlon Energy against a citizen of India named Rajagopalan Sridhar. Mr. Sridhar maintained a Microsoft Hotmail email account, and his emails were stored on a domestic server by Microsoft. Suzlon sought Sridhar’s emails from Microsoft by having issued a subpoena in accordance with 28 U.S.C. § 1782, which allows the gathering of evidence for use in a foreign proceeding.The Court was tasked with resolving whether Microsoft would be required to produce Mr. Sridhar’s emails notwithstanding language in the ECPA providing that “a person or entity providing an electronic communication service to the public shall not knowingly divulge to any person or entity the contents of communication while in electronic storage by that service.” 18 U.S.C. § 2702(a)(1). Microsoft is an “electronic communication service” because it “provides to users . . . the ability to send or receive wire or electronic communications.” “Users,” in turn, constitute “any person” who uses the service.

The Ninth Circuit, affirming the lower district court, concluded that the language of the ECPA -- which defines a “user” as “any person” -- clearly included foreign citizens, and thus protected Mr. Sridhar’s emails from disclosure by Microsoft. The Court reached no conclusions regarding whether the ECPA also applied to data residing abroad, but held that data residing in the U.S. was subject to the law and “any person” enjoyed the benefit of the law’s protection.

The Suzlon case provides clear guidance to electronic communications service providers and relieves them of having to ascertain the citizenship of their users before determining whether the ECPA prevents disclosure to third parties. The case also demonstrates the interesting interplay that can occur between U.S. rules that allow for evidence to be gathered for use in a foreign proceeding and the protections that U.S. law may afford to foreign citizens subject to those proceedings. It is also somewhat ironic that U.S. courts often give little weight to foreign privacy laws when it comes to discovery proceedings against foreign nationals in U.S. courts, but appear quite willing to afford those same foreign nationals, in a foreign proceeding, the privacy protections embedded in U.S. laws.


Jeffrey L. Nagel is a Director on the Gibbons E-Discovery Task Force.
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Posted on September 21, 2011 by Paul A. Saso

FINRA Issues Regulatory Notice 11-39: Social Media Websites and the Use of Personal Devices for Business Communications

In August 2011, FINRA, the self-regulatory agency of the securities industry, issued Regulatory Notice 11-39, offering additional guidance concerning the use of social media and supplementing its first notice on the subject—Regulatory Notice 10-06, issued in January 2010. Notice 11-39 focuses on issues relating to FINRA members’ use of social media, including record-keeping, supervision and responding to third-party posts and links. The Notice includes 14 “Q&As,” which provide instruction on the practical application of a firm’s and “associated person’s” (i.e., FINRA members) obligations under applicable laws and regulations when it comes to social media. With respect to record-keeping requirements, social media websites raise new complications because member firms do not themselves typically sponsor or host the content on those websites. The Notice, however, clarifies that record retention requirements continue to apply to content on social media sites and that the controlling question is whether the communications on those sites relate to the firm’s “business as such.” Any business communication made via Facebook, for example, must be “retained, retrievable and supervised.”

Firms are also required to supervise the content of associated persons’ social media websites, including conducting “appropriate training and education concerning [the firm’s] policies,” and must follow up on “‘red flags’ that may indicate that an associated person is not complying with firm policies.” The Notice states that many firms have chosen to require associated persons to certify on an annual (or more frequent) basis that they are complying with firm policies and perform spot checks on associated persons’ social media sites to monitor compliance. (An earlier post on Gibbons E-Discovery Law Alert addressing social media policies generally can be found here.)

Third-party posts and links on social media sites raise additional concerns for FINRA members. The Notice provides that associated persons may respond to a third-party’s business-related inquiry on a personal social media site, such as a question about a particular security, as long as the response does not violate the firm’s policies concerning such communications and the firm takes appropriate steps to retain that communication. According to the Notice, many firms require associated persons to provide only a non-substantive response on the social media site, directing the person with an inquiry to firm-approved communication channels, such as the firm’s email system.

In sum, Notice 11-39 does not alter the existing rules concerning communications between member firms and associated persons on the one hand, and their clients and the general public on the other, but serves to acknowledge the difficulties in applying the traditional rules in the social media context. The Notice recognizes that the general rules regarding firms’ supervision and retention of business-related communications are complicated where certain communications no longer take place in hard copy or even on firm-provided devices or websites, but seeks to instruct members that these rules apply nonetheless and provides guidance on how members can continue to comply.


Paul A. Saso is an Associate on the Gibbons E-Discovery Task Force.
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Posted on October 6, 2010 by Jeffrey L. Nagel

New York Courts Adopt Preliminary Conference Counsel Readiness Rule for Electronic Discovery

Recently, the NY Supreme and County courts addressed the topic of electronic discovery at the preliminary conference. The Court issued a Notice amending Section 202.12(b) of the Uniform Rules as well as Rule 1(b) of section 202.70(g) and requiring that in any case “reasonably likely to include electronic discovery” counsel must come to court “sufficiently versed in matters relating to their clients’ technological systems to discuss competently all issues relating to electronic discovery” and may bring a client representative or outside expert to assist in such discussion. A list of some of issues that may be addressed at the preliminary conference stage can be found in 22 NYCRR Section 202.12(c)(3) and includes electronic data retention, a discovery preservation plan, redaction of privileged electronic data, the scope and form of electronic production, anticipated costs, and the identification of individuals responsible for data preservation.

The NY Commercial Division rules at 22 NYCRR Section 202.70(g) and Rule 8(b) contain a similar list and even includes topics such as the identification of experts. There is no question that counsel appearing for a preliminary conference in NY Supreme or County court must have meaningful discussions with their clients concerning electronic discovery and the clients’ technological systems prior to such conference with the court. Having these critical discussions at the outset of a case will benefit both the counsel and the client and will help lead to the early identification of any significant problems that might arise later on during the electronic document and data production phase of a litigation.


Jeffrey L. Nagel is a Director on the Gibbons E-Discovery Task Force.

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