Averting potentially costly electronic discovery lapses: while lawyers have been concerned about the implications of electronic discovery for some time, recent court judgments--including a $1.45 billion verdict--have made this a significant financial issue.

• Author: Schwarz, Eric

As has been widely covered in the press, a Florida jury earlier this year awarded $1.45 billion in compensatory and punitive damages to Ronald Perelman in his lawsuit against Morgan Stanley. The decision can be traced to a series of strongly worded instructions from the judge, along with a partial default judgment shortly before the start of the trial.

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In press reports, this high-profile and controversial judgment was said to be largely the result of repeated discovery issues over the course of a year. Those culminated in the company's stating on the eve of trial that it had found records that it had previously said it did not have.

This case is but one example--albeit a large and highly publicized one--of the results of glitches in responding to a discovery request, particularly when it comes to electronic document retention, location of relevant files and the searching of electronic records. Planning ahead for discovery can save a company considerable sums of money, both in employee time and in risk management and risk reduction.

As many people know, discovery, from a legal perspective, takes place in the course of litigation when one side asks that the opposing side disclose all documents related to a specific topic. This is generally the lawyers' responsibility, involving financial executives only when the subject of the discovery request includes documents in their possession and/or control. In the wake of Arthur Andersen and Morgan Stanley--two high-profile examples--the retention and disclosure of electronic records is no longer solely a legal concern. The stakes have been raised for the company as a whole.

Potential civil verdicts are not the only consequences of lapses in electronic discovery. Effective document production is critical to conducting a successful internal investigation, should one become necessary. The more reliable the internal process, the better the chances of mitigating or preventing external inquiries.

Further, several provisions within the Sarbanes-Oxley Act of 2002 include implications for document retention that could later become of issue in discovery. The act significantly increases criminal penalties for improper destruction of documents that would impede, obstruct or influence official procedures.

It does no good, however, to have the correct documents stored if the company cannot find them, review them and disclose them when necessary. Under common judicial practices, the court...