Special thanks to Yoav Griver and Siddartha Rao for their contributions to this series.
ESI and technology issues relating to data storage and retrieval are often critical to litigation; there are many examples of high-stakes litigation that has turned on issues involving data management and e-discovery. See, e.g., United States v. Microsoft, 253 F.3d 34, 71–74 (D.C. Cir. 2001). New legal frameworks have been created to deal with the reality of electronic data in litigation, and parties considering M&A deals should be aware of the potential litigation issues involving a merging counterparty or target company’s ESI and data management systems.
Data Storage and Potential Litigation Issues
Counsel must perform data due diligence that includes identification of existing legacy systems and the data stored within them. Failure to do so may create integration issues, as well as data loss and data recovery issues that will create substantial costs and dangers in the event of future litigation.
For example, the ability to present data in multiple forms can raise the cost of discovery because courts can order litigants to convert discovery data into new formats. This makes it all the more important that parties to M&A transactions conduct data due diligence to discover the location and formats of ESI in legacy data systems of M&A counterparties. In the 1980 case of National Union Electric Corp. v. Matsushita Electric Industrial Co., 494 F. Supp. 1257 (E.D. Pa. 1980), the defendants requested National Union to provide a “computer readable tape” copy of documents already produced in paper form. See National Union, 494 F. Supp. at 1258. National Union resisted the motion on the grounds that under discovery rules National Union had an obligation to produce already existing documents, but had no such obligation to manufacture data in a new format. Id. at 1259. The court acknowledged the distinction, but ultimately rejected the argument as inconsistent with the realities of data use and storage:
We now live in an era when much of the data our society desires to retain is stored in computer discs. This process will escalate in years to come. We suspect that by the year 2000, virtually all data will be stored in some form of computer memory. To interpret the Federal Rules which, after all, are to be construed to “secure the just, speedy, and inexpensive determination of every action,” in a manner which would preclude the production of material such as is requested here, would eventually defeat their purpose. Id. at 1261–63
At the time of this opinion, the court could confidently state that it found “no case in which the court has ordered the programming of a computer to manufacture a computer tape not theretofore in physical existence.” Id. at 1261. In contrast, today, “[t]he law is clear that data in computerized form is discoverable even if paper ‘hard copies’ of the information have been produced, and . . . the producing party can be required to design a computer program to extract the data from its computerized business records, subject to the Court’s discretion as to the allocation of the costs of designing such a computer program.” See Anti-Monopoly, Inc. v. Hasbro, Inc., 1995 U.S. Dist. LEXIS 16355, 1 (S.D.N.Y. Nov. 3, 1995).
When ordering the preservation or production of ESI, courts are sensitive to the relevance of the ESI to the litigation, the value of the ESI to the requesting party, and the cost to the producing party—courts will not foist irrational discovery requirements and costs upon litigants. See, Wright v. AmSouth Bancorp, 320 F.3d 1198 (11th Cir. 2003).
Nonetheless, where it is the producing party’s own document retention scheme which escalates the costs of production, courts may order the producing party to bear these costs. For example, in In re Brand Name Prescription Drugs Antitrust Litigation, Brand, 1995 U.S. Dist. LEXIS 8281, defendant CIBA-Geigy Corporation argued that the class plaintiffs’ motion to compel the production of inter-corporate emails was overly broad, burdensome, and expensive and that the class plaintiff should bear the estimated $50,000–$70,000 costs of culling through over 30 million stored email documents. Id. At 2-4. The court rejected this argument, noting that at least four other defendant manufacturers had produced emails without requesting payment of costs and succinctly stating that ”Class plaintiffs should not be forced to bear a burden caused by CIBA’s choice of electronic storage.” Id. at 6–7
Not surprisingly, the course of events has vindicated the predictions of the National Union court, and requests to produce data in specific formats are no longer unusual. See L.H. v. Schwarzenegger, 2008 U.S. Dist. LEXIS 86829 (E.D.Cal. May 14, 2008).
However, without proper data due diligence that accounts for document retention or legacy data management systems, such routine requests can create large litigation costs. To the extent such costs are avoidable with proper data due diligence, the failure to conduct data due diligence on a counterparty’s legacy systems or ESI is tantamount to ignoring a potentially large liability when valuing a merging counterparty or target company.