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By Rob Garretson  |  Posted 12-06-2006 Print

Legal judgments and sanctions can be costly for companies that can't find the information required for court hearings.
Morgan Stanley is expected to post more than $7 billion in profits for 2006. But even this Wall Street behemoth felt a sting last year when a Florida jury slapped it with a $1.45 billion judgment, now approaching $1.6 billion with interest and other adjustments.

The jury found in favor of billionaire Ronald Perelman, who accused the global investment bank of helping Sunbeam Corp. inflate its earnings back in 1998. Perelman had sold Sunbeam his controlling interest in camping equipment maker Coleman Co. for $680 million in stock that became worthless after Sunbeam restated earnings and filed for bankruptcy. The case famously turned on Morgan Stanley's mishandling of e-mail evidence, which led presiding Judge Elizabeth T. Maass to instruct jurors they could assume Morgan Stanley was complicit in the deception because of its failure to turn over all relevant e-mail.

The case was no legal anomaly, just the most costly warning shot fired to date across the bow of corporate America in advance of new federal rules of evidence that went into effect on Dec. 1. Escalating regulatory requirements, along with spiraling costs of managing burgeoning data stores, have already spurred some companies to implement information lifecycle management—the concept of matching data retention policy and storage systems to the business value of the underlying information. Now, new legal requirements are adding fuel to the fire and creating strange new bedfellows among CIOs, corporate counsel and compliance officers, who are being forced to collaborate on a solution and reverse decades of unfettered data expansion.

These new revisions to the Federal Rules of Civil Procedure—only the sixth modification to the rules governing civil suits in the last 70 years—are intended to bring the courts up to speed with modern communications technology. Up to 80 percent to 90 percent of all business communication is now conducted via e-mail and electronic documents—to say nothing of instant messaging, cellphone text messaging, voice mail and the like. This evolution of business practices has turned the once-routine pretrial fact-finding called "discovery" into a costly quagmire that has the courts struggling to decipher electronic databases, e-mail archives, backup tapes and other data repositories.

Enter the brave new world of e-discovery. The new rules recognize "electronically stored information" as a distinct form of discovery, and require the parties in a federal lawsuit to provide, at the outset, a detailed description of how they manage, retrieve and purge electronic data—including unstructured repositories such as e-mail systems and instant-messaging logs. Though the Dec. 1 rule changes apply to federal courts only, state courts and other jurisdictions typically adopt the federal rules, or similar variations. Among states that have already adopted them are California, Delaware, Illinois, Maryland, Mississippi, New Jersey and Texas. What this means for CIOs is that they have been formally annexed into the legal team at most large corporations, which typically are party to dozens, if not hundreds, of lawsuits at any given time.

Ask the Legal Department:

Do you and outside counsel have a basic understanding of how and where the company's data is stored?


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