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Ethical Issues in E-Discovery Matthew D. Lerner (202) 429-8024 May 2013 Copyright 2013, All Rights Reserved

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Presentation on theme: "Ethical Issues in E-Discovery Matthew D. Lerner (202) 429-8024 May 2013 Copyright 2013, All Rights Reserved"— Presentation transcript:

1 Ethical Issues in E-Discovery Matthew D. Lerner (202) May 2013 Copyright 2013, All Rights Reserved

2 ABA Model Rules of Professional Conduct  The Model Rules consist of standards of conduct and comments. They are advisory and serve as the model for the ethics rules adopted by most states.  Tax Court Rule 201(a): “General: Practitioners before the Court shall carry on their practice in accordance with the letter and spirit of The Model Rules of Professional Conduct of the American Bar Association.” 2

3 Circular 230  Circular 230, 31 C.F.R. 10, governs practice before the Internal Revenue Service. –The ethical rules imposed on practicing attorneys in Circular 230 are in addition to those imposed by state bars and courts.  “Practitioners” include attorneys, certified public accountants, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and registered tax return preparers. § 10.3  “Practice before” the IRS is defined as “all matters connected with a presentation to the [Service] or any of its officers or employees relating to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the [Service]. Such presentations include, but are not limited to, preparing documents; filing documents; corresponding and communicating with the [Service]; rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion; and representing a client at conferences, hearings, and meetings.” §10.2(a)(4) 3

4 General Obligations of Counsel  Competency –ABA Model Rule 1.1 A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation. Maintaining competence includes knowledge of the benefits and risks of relevant technology. See Comment 8. –Circular 230 Prop. Reg. §10.35 A practitioner must possess the necessary competence to engage in practice before the Internal Revenue. Competent practice requires the knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged.  E-Discovery issues require distinct skills and knowledge, so lawyers should know the limits of their abilities and have assistance when needed. 4

5 General Obligations of Counsel  Circular 230 §10.20 –Tax practitioners must promptly submit records or information requested by IRS officers or employees. –If the documents or information requested are not in the possession of, or subject to the control of, the practitioner or the practitioner’s client, the practitioner must promptly notify the requesting IRS officer or employee. –The practitioner must make reasonable inquiry of his or her client regarding the identity of any person who may have possession or control of the requested records. But the practitioner is not required to make inquiry of any other person or independently verify any information provided by the client regarding the identity of such person. 5

6 General Obligations of Counsel  Circular 230 §10.34(b)(2) –A practitioner may not advise a client to submit a document, affidavit or other paper to the IRS - The purpose of which is to delay or impede the administration of the Federal tax laws; Is frivolous; or Contains or omits information that demonstrates an intentional disregard of a rule or regulation unless the practitioner also advises the client to submit a document that evidences a good faith challenge to the rule or regulation.  Circular 230 §10.34(d) –A practitioner can rely in good faith without verification upon information furnished by the client. –A practitioner must make reasonable inquiries if the information provided appears to be incorrect, inconsistent, or incomplete. 6

7 General Obligations of Counsel  A lawyer cannot improperly withhold documents from an opposing party. –Model Rule 3.4: Fairness to Opposing Party and Counsel A lawyer shall not unlawfully obstruct another party’s access to evidence or unlawfully alter, destroy or conceal a document or other material having potential evidentiary value. Documents and other items of evidence are often essential to establish a claim or defense. Subject to evidentiary privileges, the right of an opposing party, including the government, to obtain evidence through discovery or subpoena is an important procedural right. Rule 3.4, Comment 2.  A lawyer cannot create an undue delay when producing documents. 7

8 General Obligations of Counsel  Duty to third parties –Model Rule 4.4(b): A lawyer who receives a document or electronically stored information relating to the representation of the lawyer’s client and knows or reasonably should know that the document or electronically stored information was inadvertently sent shall promptly notify the sender. See also D.C. Ethics Opinion 256.  Candor Toward the Tribunal –Model Rule 3.3: A lawyer may not knowingly: 1) make a false statement of fact or law to a tribunal or fail to correct a false statement of material fact or law previously made to the tribunal by the lawyer; … or 3) offer evidence that the lawyer knows to be false. –The IRS is not a “tribunal.” ABA Formal Opinion 314 (1965). 8

9 General Obligations of Counsel  Certain cases address spoliation and provide significant guidance regarding counsel’s duties for electronic document retention, preservation, and production.  Zubulake v. UBS Warburg LLC, 229 F.R.D. 422 (S.D.N.Y, 2004) (Zubulake V).  The Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, 685 F.Supp.2d 456 (S.D.N.Y. 2010).  Phoenix Four, Inc., v. Strategic Resources Corporation, 2006 WL (S.D.N.Y.).  Metropolitan Opera Association, Inc., v. Local 100, Hotel Employees and Restaurant Employees International Union, 212 F.R.D. 178 (S.D.N.Y. 2003).  Qualcomm Inc. v. Broadcom, 2008 WL (S.D.Cal.) vacated in part, 2008 WL (S.D.Cal.).  Victor Stanley, Inc. v. Creative Pipe, Inc., 269 F.R.D. 497 (D. Md. 2010). 9

10 Duty to Preserve  Spoliation –“[T]he destruction or significant alteration of evidence or failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation.” United Med. Supply Co. v. United States, 77 Fed. Cl. 257, 263 (2007) –Can lead to sanctions for the client. –Can lead to sanctions for counsel. –Counsel may be responsible for sanctions incurred by the client.  Counsel must be aware of when the duty may attach and ensure that the client implements necessary protections. 10

11 Duty to Preserve  An audit or appeals proceeding does not automatically trigger the duty to preserve. “[C]orporate taxpayers should not have to immediately conclude that all audits by the IRS, or even extensive, IRS administrative proceedings to challenge results of those audits negative to the taxpayer, necessarily will lead to litigation.” “Although there is a point in time during interaction with the IRS that it is reasonable to conclude that litigation is likely or should be anticipated.” Consolidated Edison Co. of NY v. U.S., 90 Fed. Cl. 228 (2009) 11

12 Duty to Preserve  Although cases provide some comfort that there is not an automatic duty to preserve for an audit, it is recommended that counsel ensure that clients preserve documents and take necessary measures to retain any relevant documents once an audit starts. –Destruction of documents could result in a lack of contemporaneous documents to support the position taken on the return. I.R.C. § 6001 –Willful destruction could create significant criminal and ethical violations. –It is not always clear when litigation is anticipated. 12

13 Duty to Preserve  Electronic documents can create unique challenges for document preservation. –Documents can disappear. –Computers and servers can disappear. –Files, documents, and computers can be corrupted. –Documents can be changed. –Privileged documents may be shared more widely. –Large amounts of data can be lost inadvertently. –Multiple copies of documents may exist. –Metadata must be preserved. 13

14 Monitoring and Directing Retention Efforts  Counsel has a duty to monitor and direct retention efforts. –Once litigation is anticipated counsel must advise the client to suspend routine document retention/destruction policies for all accessible information. –Counsel must communicate the preservation duty to persons with relevant information; must speak directly to the key players in the litigation. Litigation holds must be written and direct employees to preserve both paper and electronic records. –Counsel must oversee compliance with the litigation hold and monitor the client’s efforts to retain and produce relevant documents. See Zubulake V, 229 F.R.D. 422 (S.D.N.Y, 2004); The Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, 685 F.Supp.2d 456 (S.D.N.Y. 2010) 14

15 Monitoring and Directing Retention Efforts  Counsel must properly communicate with the client to ensure that all sources of relevant information are discovered.  Counsel may not simply ask the client for documents, but has a duty to search for the sources of information.  Counsel may not simply accept a client’s representation that there is nothing to search.  If the client cannot answer technical questions, counsel must coordinate the retention of technical expertise to help determine if relevant documents exist. See Phoenix Four, Inc. v. Strategic Resources Corporation, 2006 WL (S.D.N.Y) 15

16 Monitoring and Directing Retention Efforts  Counsel has an affirmative duty to make a reasonable inquiry into the basis of discovery responses.  Counsel must make an adequate inquiry to ensure that the client has provided all the relevant information and documents available.  Counsel should keep records of the retention and production process to support discovery responses and to show compliance.  Counsel must assist in implementing a systematic procedure for document production or for the retention of documents, including electronic documents.  Counsel must provide adequate supervision to junior attorneys, laypersons, and vendors involved in the production and retention process. See Metropolitan Opera Association, Inc., v. Local 100, Hotel Employees and Restaurant Employees International Union, 212 F.R.D. 178 (S.D.N.Y. 2003); See also DC Bar Opinion

17 Measures Recommended for E-Discovery  Understand the Information Technology (IT) architecture and practices of the client, so that the location of potentially relevant documents can be identified. –Where can custodians save documents? –In practice, where do custodians save documents? (on computer hard- drives, on thumb-drives, on company servers, as attachments, etc.) –How are s stored and archived? –What are the potential risks to document retention for server migrations, software updates, or conversions? –What happens to the hard drives of the computers of personnel who leave the company? –Can documents or files be “locked” so only specific individuals have access? –How are mobile devices integrated into the system? –What are possible search terms or other unique identifiers? 17

18 Measures Recommended for E-Discovery  Collect electronic documents before or during the audit and repeat measures once litigation is anticipated and a formal litigation hold is in place. –Ensure that employees know that documents will need to be retained. –Collect documents, including metadata, from each custodian in every possible location. Documents saved to the server. Documents saved on local hard drives. Documents on mobile devices. Documents on thumb-drives or other removable data storage device. s relating to the transaction. Restoration of back-up tapes may be required if that is the only source for certain documents or information. 18

19 Measures Recommended for E-Discovery  Ensure that all collected documents are kept outside of the automatic document retention and destruction procedures.  Do not assume each employee uses the same preservation approach. –Interview employees so you know how to locate their files.  Any searches of documents may need to be updated once a discovery request is issued.  Decisions regarding any search parameters (search terms, date limitations, custodians, etc.) should be well documented and disclosed. Cooperation with the opposing party is also important for this process. 19

20 Measures Recommended for E-Discovery  Keep records about the document collection process.  What custodians were involved.  Where the documents came from.  What was collected.  Who created the documents.  When they were created.  Any other relevant information.  Preserve metadata. 20

21 Specific Considerations for E-Discovery  Metadata –Provides information about electronic documents, such as how, when and by whom an electronic document was collected, created, accessed, and modified. Types of metadata include: Application metadata: information required to create the file, such as fonts, styles, and spacing; Document metadata: information about the properties of the file, such as document author, creation, and revision dates and times; File System metadata: stored externally from the document and generated by the system to track information, such as the name, size, and location of an electronic document; metadata: information within the program, such as blind carbon copy, received date, and sent date; Embedded metadata: information that is generally hidden but a part of the file, such as spreadsheet formulas, hidden columns, track changes, comments, and notes. 21

22 Specific Considerations for E-Discovery  Metadata –Ethical issues around metadata generally focus on confidentiality and preservation of evidence, but can also involve competency and adequate supervision. –Ethical issues vary based on whether the production of documents is in a discovery or non-discovery context. –The ethical rules relating to metadata vary significantly by state. –Not all metadata will be relevant or helpful. 22

23 Specific Considerations for E-Discovery  Metadata Outside of Discovery –Counsel has a duty to ensure the confidentiality of client information and to prevent disclosure. –Duty of confidentiality may require counsel to remove metadata through “scrubbing” or converting documents to pdf. –Some states prohibit metadata “mining” or attempts by counsel to examine a received file for metadata. Other states have no restrictions or limited restrictions on reviewing the metadata of received files. –A lawyer that receives confidential metadata that he knows or reasonably should know was inadvertently sent must treat it as if he received a confidential document and promptly notify the sender. See ABA Model Rule 4.4(b) and comments. 23

24 Specific Considerations for E-Discovery  Metadata in Discovery –Metadata must be produced if it is requested, relevant, and not privileged, but production of metadata is generally not required if it is not specifically requested. –The form of production can affect how metadata is involved. Electronic documents must be produced in a “usable format”. Fed.R.Civ.P. Rule 34 (b)(2)(E)(ii). This generally requires a searchable electronic format, such as TIFF or PDF with some metadata to make the files useable. Documents may also be produced in “native” format. Production in native format is not obligatory. See e.g., Covad Communications Co. v. Revonet, Inc., 267 F.R.D. 14 (D.D.C. 2010). –Counsel must review metadata for privileged information. Privileged metadata may exist in a non-privileged file. Privileged metadata must be redacted and included on a privilege log. –Duty to preserve includes preservation of metadata. 24

25 Specific Considerations for E-Discovery  Privilege –Electronic documents can create challenges for preserving and documenting privilege. Documents can be easily shared. Documents can be easily accessed by people outside of a privilege circle. Multiple copies of documents may result in the discovery that a document previously marked as privileged was not privileged. Redaction of electronic documents may require additional attention to detail and technical expertise. –For example, various branches or parts of an chain may be privileged. –Electronic documents can create a greater risk of inadvertent waiver of privilege, and the need to “clawback” documents. See F.R.E

26 Specific Considerations for E-Discovery  What is the continuing obligation? –A party must supplement or correct its disclosure or response in a timely manner if the party learns that in some material respect the disclosure or response is incomplete or incorrect and if the additional or corrective information has not otherwise been made known to the other parties. Fed.R.Civ.P. Rule 26(e).  Is there an obligation to alert opposing counsel to a waiver of privilege? –If a document that was previously asserted to be privileged loses that status, it likely must then be disclosed. –One should not be required to disclose a document if he believes in good faith that the document remains privileged or that any waiver does not apply to the discovery request. 26

27 Specific Considerations for E-Discovery  When the Federal Rules of Civil Procedure Don’t Apply: –Rule 3.4 prohibits concealing a document from opposing counsel. –Under ABA Formal Opinion 314, a lawyer has a duty not to mislead the Service either by misstatements or by silence. –Circular 230 §10.51(a)(4) provides that a practitioner can be sanctioned for giving, or participating in giving, false or misleading information. 27

28 Specific Considerations for E-Discovery  Proportionality –E-Discovery can involve significant costs for collection and review. –In signing a discovery request an attorney certifies that: The request is “neither unreasonable nor unduly burdensome or expensive, considering the needs of the case, prior discovery in the case, the amount in controversy, and the importance of the issues at stake in the action.” Fed.R.Civ.P. Rule 26(g)(1)(B)(iii). 28

29 Sanctions  Over the past several years sanctions related to e-discovery have increased.  The IRS Office of Professional Responsibility has the authority to propose censure, suspension, or disbarment of a practitioner; or propose a monetary sanction (not exceeding the gross income derived or to be derived from the conduct giving rise to the misconduct) on a practitioner or a firm. OPR has discretion to reprimand in lieu of a proceeding for sanctions. §10.60(a).  Although relatively rare, lawyers have been sanctioned by courts for clear violations of the standards for preservation and disclosure of documents. 29

30 Sanctions  Qualcomm Inc. v. Broadcom, 2008 WL (S.D.Cal.) vacated in part, 2008 WL (S.D.Cal.): Individual attorneys were sanctioned and referred to the State Bar of California for failure to disclose s that were discovered during trial; “the Sanctioned Attorneys violated their discovery obligations and also may have violated their ethical duties.”  Phoenix Four, Inc., v. Strategic Resources Corporation, 2006 WL (S.D.N.Y.): District court awarded monetary sanctions against defendant and its counsel for destruction and late production of evidence. Counsel failed in its obligation to locate and timely produce evidence stored on its client’s servers. Accepting the client’s representation that there were no computers or electronic collections to search was not adequate.  Metro. Opera Ass’n v. Local 100, Hotel Emps. & Rest. Emp. Int’l Union, 212 F.R.D. 178 (S.D.N.Y. 2003): Court imposed monetary sanctions on defendant and counsel due to the failure to conduct adequate discovery and the unreasonable obstruction and delay of discovery. 30


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