Top Ten List for the Evolving Role of In-House Legal and Compliance Officers

The upcoming year promises to bring new operational challenges to our evolving legal and compliance profession.  Based on reader interest from The Datakos Blawg, which had over 20,000 visitors in 2007, and the collective feedback of chief legal officers who participated in Lexakos surveys this year, here is a top ten list of areas of greatest interest or concern:

1.  Legal and compliance risk assessments
2.  Measuring Effectiveness of compliance and ethics program
3.  Proposed new Federal Rule of Evidence 502 (effective December 2008)
4.  Alternate and more cost effective methods for document review
5.  Litigation and matter management systems, and convergence programs
6.  Records and information management program development
7.  Developing data maps and efficient strategies for FRCP compliance
8.  Auditing and monitoring compliance programs (with records management topping the list)
9.  Education and training programs for employees, line managers, executives and boards
10.  E-discovery task force initiatives, including vendor management

 

Proposed Legislation Adopting Federal Rule of Evidence 502

The Judicial Conference’s Committee on Rules of Practice and Procedure submitted its proposed Federal Rule of Evidence 502 dealing with “Attorney-Client Privilege and Work Product; Limitations on Waiver” to the House and Senate Judiciary Committees.  See S. 2450.

After receiving the proposed rule from the Judicial Conference’s Rules Committee, the Senate Judiciary Committee asked the ABA for its view on the proposed rule. After conferring with the leaders of the ABA Litigation Section (principal sponsor of the ABA main policy on FRE 502(b)) and a subcommittee of the ABA Task Force on Attorney-Client Privilege, the ABA submitted a letter to the Senate Judiciary Committee on December 7 endorsing proposed FRE 502. See ABA Letter to SJC re 502. The ABA Litigation Section sent supplemental letters in support of legislation to implement proposed FRE 502 to the Senate and House Judiciary Committees on December 10. Several other coalition groups, including ACC and the U.S. Chamber of Commerce, also submitted separate letters to Congress endorsing the legislation.

After receiving this substantial input, Senators Leahy and Specter introduced legislation on December 11, 2007, S. 2450, which would adopt proposed FRE 502 as submitted by the Judicial Conference’s Rules Committee. A copy of S. 2450 is attached. It is expected that the legislation will advance following the current recess of Congress, though it is unknown whether the Senate will hold hearings or vote on the bill without hearings.

Companies Still Struggling To Find Way on E-Discovery

By Beth Bar
December 20, 2007

One year after revisions to the Federal Rules of Civil Procedure (FRCP) were put in place to address confusion and increased costs associated with electronic discovery, corporations are still struggling to comply with the new guidelines.

“Companies are taking a pro-active approach to electronic discovery,” said Allison L. Brecher, who is litigation counsel and e-discovery coordinator at Marsh & McLennan Companies. “The burdens of compliance, though, remain very difficult.”

Although it may be too early to gauge the ultimate impact of the rules, which went into effect on Dec. 1, 2006, attorneys agree that businesses are spending more money and time on electronic discovery.

The stakes are high. Companies that neglect the new obligations may face sanctions if they cannot produce evidence sought in litigation.

The short-term burdens of complying are reflected in several recent surveys.  Some of the findings:

• Almost 55 percent of the 140 in-house counsel surveyed by the e-discovery consultant Lexakos said their companies needed to spend more time developing e-discovery and litigation readiness plans.
• Fifty two percent agreed that they had to improve their litigation hold procedures, which require companies to preserve all data that may relate to a legal action involving the company. And almost half expressed the need to develop a process to segregate privileged communications and thus avoid high document review costs.
• Of the 76 people surveyed by Lexis Nexis at the Association of Corporate Counsel’s annual meeting, 44 percent said that their companies had not been prepared for the new rules. Although 61 percent said they were now very or somewhat confident that they were fully compliant, 30 percent still said that they were not very confident and 5 percent not at all confident.
• Twenty seven percent of respondents to a litigation trends survey released earlier this year by Fulbright & Jaworski said that the rules have made handling of e-discovery issues in federal litigation more difficult. Eighteen percent said they have made the process at least somewhat easier. The remainder detected no change.

The amendments includes revisions and additions to Rules 16, 26, 33, 34, 37 and 45, as well as Form 35. Among the matters addressed were the definition of discoverable material, the procedure for asserting privilege or work product after production and the early attention to electronic discovery issues.

The new protocols have made e-discovery compliance a prime litigation issue. H. Christopher Boehning of Paul, Weiss, Rifkind, Wharton & Garrison said that cases are increasingly being dismissed or companies heavily sanctioned based on the loss of electronic evidence.

“Cases are being derailed as a result of discovery issues,” Mr. Boehning said. “You want cases to be decided based on the merits, not on an e-discovery sideshow.”

So far, Mr. Boehning said, the rules have not improved the situation.

“Everybody is still trying to find their way,” he said.

Under the revised rules, parties have no initial duty to produce electronic data that is reasonably identified as inaccessible. A judge, however, can still order the evidence to be produced if she or he deems that there is good cause.

The rules also allow for a subpoena to be served to “permit inspection, copying, testing, or sampling” of electronically stored information.

This occurred in the recent Southern District case, Bridgeport Music v. UMG Recordings, 05 Civ. 6430. In this copyright infringement dispute, defendants UMG Recordings, Napster, Apple Computer and Yahoo! deposed attorney Stewart L. Levy, a nonparty, during discovery and subsequently issued a subpoena seeking production of certain licencing agreements for “new media.”

Bridgeport Music and Southfield Music argued that production of these documents would be unduly burdensome. But Magistrate Judge James C. Francis IV disagreed. In a decision that will be published in the Law Journal on Dec. 27, he ruled that the burden of production was “not so great as to justify quashing the subpoena, even if it is imposed upon a nonparty such as Mr. Levy.”

Costs for complying with the new discovery rules can run into hundreds of thousands of dollars.

High Cost of Preservation

Courtney Ingraffia Barton, an attorney who is vice president of industry relations for LexisNexis Applied Discovery, and Deborah House, Association of Corporate Counsel’s vice president and deputy general counsel, said that one of the biggest challenges companies are facing is securing the resources to implement a system that addresses electronic discovery issues.

David J. Lender, a partner at Weil, Gotshal & Manges, acknowledged that creating an electronic document preservation system is costly, but said that companies save money in the long run because they save on litigation expenses by having a system already in place.

And Adam I. Cohen, co-chair of the New York State Bar Association’s e-discovery committee, said that a documented process for handling information is beneficial in litigation.

“If mistakes are made you can defend your good faith by showing that you have devoted resources and developed methods” for dealing with this type of data, Mr. Cohen said.

Ms. Brecher of Marsh & McLennan, said her company was using a “team-based” approach.

“We are partnering with the IT department, and educating each other,” Ms. Brecher said.

She said that sometimes this education takes the form of training sessions and may involve bringing an information technology colleague to an e-discovery seminar.

Patrick Oot, director of electronic discovery and senior counsel in Verizon’s legal department, said that his company has developed a litigation manual that identifies the company’s policies with regards to electronic document preservation. It also identifies the specific actions that information technology and in-house legal counsel must take.

He said that having some type of efficient and uniform process for dealing with data requests is “invaluable.”

However, Robert D. Owen, a partner at Fulbright who is co-head of the firm’s e-discovery and information management practice group, said that rather than instituting e-discovery policies, many companies have decided to play “the e-discovery lottery.”

“They have decided to take the chance that they won’t be hit,” Mr. Owen said. “It’s a gamble.”

Prediction for 2008: Avoiding Inadvertent Disclosure of Privileged Information becomes Top E-discovery Risk and Costs More than Complying with the FRCP

We have a year under our belt with the amended Federal Rules of Civil Procedure and the new procedures might not have caused as much immediate collateral damage as expected.  After all, the rules are procedural and did not affect substantive rights.  While the common law interpretation of the new procedures continues to evolve in practice, quickly emerging on the horizon is a substantive law that will, by comparison, rock the legal world — new Rule 502 of the Federal Rules of Evidence. 

There is much uncertainty, even among many lawyers, as to when the attorney-client privilege should be invoked or asserted.  Let’s face it, business people, and lawyers too, insist on using email for everything.  Hence, operationally, there are numerous challenges we all face in protecting confidential information from leaking through email forwarded to third parties.

In the context of records and information management, this is an increasingly important area.  New Federal Rule of Evidence 502 is scheduled to take effect in December 2008. The rule codifies circumstances in which a party might inadvertently disclose privileged information without waiving privileges. If “reasonable steps” are taken to avoid disclosure (e.g., measures taken before producing information to an adverse party) but some information accidentally gets in the hands of a third party, there would not be a waiver.  Good RIM policy and procedures would constitute reasonable steps. If you review the notes to the new rule, which are provided in earlier posts on this blog, you will find reference to this notion.  I testified on this specific subject before the Advisory Committee on Evidence Rules in January 2007.

The doctrine of inadvertent waiver is an area of great concern to all generals counsel in the United States, as a recent Lexakos survey of chief legal officers demonstrates. The subject of privilege waiver is an area lawyers, compliance officers, IT and RIM professionals need to study and better understand.  2008 should be an interesting year!

Best wishes to all for a happy holiday season!

SEC Wants Another Delay on Section 404 — One-Year Extension for Small Companies

SEC Chairman Christopher Cox testified briefly today before the House Committee on Small Business and revealed plans to give non-accelerated filers yet another extension to comply with SOX 404.  The SEC intends to conduct a study of Section 404 costs and benefits in 2008.  The SEC is going to give small businesses another extension pending completion of that analysis. If approved, this latest action will be the third extension for small companies.  This one comes on the eve of the December 15 deadline for filings.  One has to wonder how much money small businesses have spent in anticipation of having to comply next week?  

For more see the Text of Commissioner Cox’s Testimony.

 

Study Shows In-House Costs Are Rising Faster Than Those for Outside Counsel

Katheryn Hayes Tucker
Fulton County Daily Report

Internal costs at the largest corporate law departments last year outpaced spending growth for outside counsel, according to the latest Altman Weil Law Department Metrics Benchmarking Survey.

The report, published with LexisNexis Martindale-Hubbell, found that the internal cost of operating an in-house law department grew an average of 7 percent last year for companies with $5 billion or more in revenue. That translates to $346,497 per lawyer, up from $323,697 per lawyer last year.

At the same time, the average spent on outside counsel rose only 1.4 percent, although the amount is still much higher: $616,519 per lawyer.

The industry with the highest outside counsel expenses was chemical manufacturing, with $1,063,294 per lawyer, more than four times higher than the insurance industry, which had the lowest cost at $251,405 per lawyer.

The highest percentage of outside counsel fees was for litigation, 30.3 percent, followed by products liability/class actions, 18.1 percent, and risk management, 17.4 percent. Two-thirds of all legal fees, 66.1 percent, on average, were paid to a department’s top four law firms.

For more see dailyreportonline.com.

Large Firms’ Billing Rates Continue to Climb — Elite law firms charged an average of 7.7 percent more in 2007, and clients aren’t happy about it

Leigh Jones
The National Law Journal
December 11, 2007

Attorney billing rates shot up in 2007, with approximately three-quarters of the law firms that participated in The National Law Journal’s annual survey boosting the amounts they charged for partner and associate services.

At the same time, the average firmwide billing rates, which included partner and associate rates, climbed by 7.7 percent, while the firmwide median rates rose by 7.1 percent, compared to the firms that reported billing data in 2006.

Despite grousing by clients about ever-higher lawyers’ fees, 75.2 percent of the firms providing billing information this year and last charged more this year than they did in 2006. The figure represents law firms that increased the high end of the billing range charged by their partners and associates.

For more see law.com.

CIA tape destruction offers cautionary tale for CIOs — Companies face big fines for not producing electronic evidence

December 10, 2007 (IDG News Service) — The recent revelation that the U.S. Central Intelligence Agency destroyed videotapes of interrogations of two terrorist suspects may offer a timely reminder for CIOs at private companies in the U.S. tasked with electronic evidence preservation rules since last December.The e-discovery rules — amendments to U.S. courts’ Federal Rules of Civil Procedure — don’t apply to the CIA. But the agency’s decision to destroy videotapes showing harsh interrogation techniques may teach private companies how not to handle evidence, some e-discovery experts said.

The e-discovery rules require U.S. companies to keep electronic records when they’re faced with a civil lawsuit or the likelihood of a lawsuit. In effect, what this means is that companies should archive e-mail and other electronic records, said Ralph Harvey, CEO of Forensic & Compliance Systems Ltd., an e-mail archiving vendor based in Dublin.

For more see ComputerWorld.com.

Records Management: A Governance Crisis?

By Elizabeth Judd – Compliance Week — December 4, 2007

A new survey says that only 7 percent of senior executives and board directors consider records management a top issue for their company-compared to a whopping 40 percent of law departments on the front lines of litigation and growing demands for speed access to relevant electronic data.

The study, the Chief Legal Officer 2008 Strategic Planning Survey by consulting firm Lexakos, validates a growing suspicion among records management experts that too many executives still don’t understand the rapidly proliferating collection of data their companies are amassing and the attendant legal risks.

“A Post-It note may seem like a nothing, but it may be the core of a legal case,” notes Carol Choksy, president of ARMA International, the trade association for records and information management professionals, and CEO of IRAD Strategic Consulting.

Even the term “records management” is subject to debate. Some refer to “Records” with a capital “R,” classifying only personnel, tax, and environmental documents in that category. Official records like these are fairly easy to manage; regulations often stipulate how long they must be kept, and companies generally treat these documents with care.

More worrisome are the e-mails, random jottings, voicemails, instant messages, and other informal communiqués that employees generate every day. New “e-discovery” rules for how to handle such information in civil litigation, now in place for a year, do shine a spotlight on this area. Unfortunately, they seem to be illuminating the fact that most employees just don’t know how to handle these impromptu records.

“For most communications, there’s a fast-food mentality. You fire off an e-mail, and that’s how people communicate,” says Rick Wolf, founder of Lexakos and former chief compliance officer of the now-defunct Cendant Corp. He notes that an estimated 97 billion business e-mails are generated each day worldwide, nearly five times the volume just five years ago.

This over-accumulation of information-Wolf calls it “corporate plaque” -creates legal risk. Wolf says companies have “poor processes and controls around how people communicate.”

That shouldn’t be so, he argues. With e-mail messages turning out to be a smoking gun in everything from Microsoft’s antitrust trial to the collapse of Arthur Andersen five years ago, “Records management is becoming difficult to trump as a priority,” he says. “And to a company, no one’s comfortable that they’re nailing this thing.”

Office of Special Counsel chief under fire for erasing computer files

By Dan Friedman

November 28, 2007 — Conflict of interest charges flew Wednesday after a report that Special Counsel Scott Bloch, whose office is investigating improper White House political activity, erased computer files that may affect a separate probe into his own conduct.

Bloch’s Office of Special Counsel, which investigates violations of government personnel rules, gained attention last spring when he announced a probe into whether briefings on electoral politics — given to appointees at most agencies by former White House political aide Karl Rove or his aides — led to violations of the Hatch Act, which bars use of government resources for partisan politics.

But when he announced the probe, Bloch faced an investigation into whether he politicized his office and retaliated against whistleblowers who opposed his policies, among them how OSC processes whistleblower complaints. The Wall Street Journal reported Wednesday that the Office of Personnel Management’s inspector general, who leads the two-and-one-half-year-old investigation into Bloch, has learned the special counsel used agency funds to pay a computer-help company for a so-called seven-level wipe of his computer and those of two former aides. The wipe can prevent experts from recovering data.

Ironically, one of the areas targeted by OSC’s wide-ranging investigation is White House officials’ heavy use of campaign e-mail accounts. The White House has said many of the e-mails, which congressional critics have charged may have been used to mask improper political activity, were accidently erased. OSC has said it needs a budget increase for the Hatch Act probe to cover expenses including computer forensics equipment for such tasks as searching computer hard drives for deleted files. An OSC spokesman said Wednesday that the agency’s investigation is not now focused on e-mails.

For more see CongressDaily.