Failed Deals: BSkyB, EDS and Enforceability of Contractual Limitations on Liability for Fraudulent Misrepresentation
February 2, 2010 by Bierce & Kenerson, P.C.
© 2010 Simmons & Simmons. Reprinted from www.elexica.com with permission.
Judgment in the long running case of BSkyB v EDS was handed down on 27 January 2010, by Ramsey J in the Technology and Construction Court. Although the case has not turned the law on misrepresentation upside down, it hammers home the severe consequences a court will impose on a business if it finds a person acting on behalf of that business has made a fraudulent misrepresentation. Although BSkyB alleged fraudulent misrepresentation in respect of several aspects of EDS’s tender process, it only succeeded in proving that EDS’s assurance that they had carried out a proper analysis of the amount of elapsed time they would need to complete the delivery of the project and “go live” was fraudulent. Barring any successful appeal, this fraudulent misrepresentation looks set to cost them around £200m.
The court battle between BSkyB and EDS is a tale of a contract process that appears to have gone wrong from the start; various allegations of lies told by employees and, bizarrely, a dog with a Masters Degree in Business Administration.
The background
The handing down of the judgment in this case marks the end of a process of deliberation that began in July 2008 when the last court hearing on the case took place. The case itself took a number of years of preliminary argument and amendment of each side’s pleadings to come to court. It concerns allegations of fraudulent misrepresentations and breaches of contract that go back a decade.
In 2000, BSkyB invited Invitations to Tender for a multimillion pound project to build a Customer Relationship Management (CRM) System, which it hoped would cut costs, improve the service offered to subscribers and even reduce the “churn rate”, ie those subscribers who would leave in frustration having failed to get their systems to work. EDS emerged as the successful bidder beating, among others, PwC with their tender.
In an all too familiar way, things started to go wrong with the contract fairly quickly and deadlines slipped. The parties decided to deal with these delays by essentially putting the project on hold and replanning how the rest of the project would proceed; a pragmatic approach. As a result, the original contract was largely superseded by a “Letter of Agreement”, which purported to exclude liability for “all known claims and unknown claims” for breaches of the original contract that EDS may have committed.
This second attempt at implementing the project was as unsuccessful as the first and the companies parted ways in early 2002. Again, in circumstances that are all too familiar, how the parties parted ways was a matter of dispute between them. BSkyB argued that they had accepted a repudiatory breach of contract by EDS and EDS fired back that it was they who had terminated the agreement for non payment of invoices by BSkyB, which they counterclaimed for at trial.
Fraudulent misrepresentation: BSkyB subject EDS to russian roulette
BSkyB alleged that a number of fraudulent misrepresentations were made by EDS both during the tender process and later into the signing of the Letter of Agreement and attempted resurrection of the project. Ultimately, Ramsey J ruled against most of the fraudulent misrepresentations alleged, including representations about EDS’s own resources and readiness to start work.
The importance in alleging fraud arose because the contract contained a limitation of liability provision which potentially restricted BSkyB’s recoverable damages for EDS’s actions. BSkyB claimed that its damages were in the region of £700m. If it could demonstrate that the breaches were fraudulent, then as a matter of law the limitation of liability provision restricting recoverable damages would not apply. In England, it is unusual for fraud to be alleged in civil proceedings. Before a lawyer commits to such a pleading in litigation, he must be satisfied to a higher standard than is ordinarily the case that evidence of fraud exists. This was a fairly high risk strategy for BSkyB and no doubt the substantial legal costs were increased by the need to investigate the background evidence even more thoroughly than usual.
BSkyB however, only had to succeed once on the fraudulent misrepresentation allegation and did so with regard to EDS’s misrepresentation that it had carried out a proper analysis of the amount of elapsed time needed to complete initial delivery and “go live” of the project. EDS had not done such an assessment, yet during both the tender process and prior to the signing of the original contract, Ramsey J held that Joe Galloway MBA, an EDS employee, had made knowingly deceitful representations that EDS had made the assessment (more on his credibility below). The judge said that but for this misrepresentation, the contract would have been awarded to another of the tenderers.
Other claims
BSkyB was also successful in a claim of negligent misrepresentation against EDS with regard to the replanning process that had gone on prior to the Letter of Agreement being signed. The judge found that EDS had not carried out a proper analysis and replanning exercise to produce an achievable programme for the implementation of the system. Contrary to the previous misrepresentations, Ramsey J held that this misrepresentation had only been made negligently.
EDS were also found liable for a number of breaches of contractual terms, including a breach of the invariably implied term that EDS would carry out its work with reasonable care and skill.
Witness credibility and Lulu the dog, MBA
One of EDS’s chief witnesses, Joe Galloway, claimed in his various witness statements that he had achieved an MBA from Concordia College, St John. He said in evidence that he attended classes at the college, while working on a project for Coca Cola on St John in the US Virgin Islands for a year in the mid 1990’s, flying to and from the island by commuter plane. He even supplied materials which he said “may have” been associated with the classes he took.
BSkyB’s lawyers exposed this account as false. Not only had Mr Galloway not attended MBA classes on St John, but the island had no airport for his commuter aeroplane to land at and no Coca Cola facilities for him to have worked at. While the MBA did superficially exist, it was an internet degree, available to anyone for whom an application was filled out and the fee paid. Mark Howard QC, Counsel for BSkyB, starkly illustrated this by obtaining an MBA from the institution for his dog, Lulu. Most gallingly for Mr Galloway, the dog was awarded better marks than he was.
EDS’s lawyers appear to have made a brave effort to salvage their witness’ haemorrhaging credibility by citing various authorities which state that just because a witness has been shown to be lying in some respect does not mean that they have been lying all the time. However Ramsey J noted the “same confident manner” being present in his false testimony concerning his time at Concordia as was in his testimony concerning the facts of the case and held his credibility to be “completely destroyed”, saying that:
“My general approach to his evidence has therefore to be that I cannot rely on the truth of his evidence unless it is supported by other evidence or there is some other reason to accept it, such as it being inherently liable to be true.” Mr Galloway was dismissed from employment during the trial by EDSC, a company related to EDS, for lying about his MBA. The employment status of the similarly qualified dog is currently unknown.
Lessons for drafters: exclusions of liability
As in every complicated commercial relationship, there were as noted above, various limitations on liability (overcome by the successful claims of fraud), entire agreement clauses and other common clauses which EDS tried to use to deflect BSkyB’s claims. These were drafted by experts in their fields and so how they stood up will be of interest to every draftsman in this field and their clients. The judge ruled on the protective measures as follows:
Entire agreement clause
EDS argued that an entire agreement clause in the original contract overrode any representations that they would have made previously, given that the agreement stated that it did “supersede any previous discussions, correspondence, representations or agreement between the parties” (emphasis added). The judge disagreed, holding that while it is an established principle that representations can be withdrawn or corrected, this was not done here. The representations may have been superseded by this clause, but the terms of the clause were not such as to amount to a “contractual renunciation” of the representations and as such they remained in place. Draftsmen take note: a representation must be killed, it cannot be relied upon to die on its own.
Waiver of contract claims in the Letter of Agreement
As part of the letter of agreement which formed the new understanding between the two parties, BSkyB had agreed to waive all “known claims and unknown claims” in contract against EDS. EDS argued that this included misrepresentation. Not so, said the judge. The clause was clearly restricting itself to contractual claims. Representation, including fraudulent misrepresentation is technically a tort however. While the losses that flowed from the misrepresentations were linked to the contract, they were not contractual claims but tortious ones and the judge would not allow the waiver to extend to such tortious claims.
Memorandum of understanding
At the end of the relationship, before litigation appears to have been decided upon, BSkyB and EDS entered into a Memorandum of Understanding which representatives from both signed. This was to smooth the handover between EDS and BSkyB’s own in house team SSSL. The agreement was expressed to be “subject to contract” and both parties envisaged concluding and signing a detailed contract in the future. A binding contract never materialised but the terms of the memorandum were far more congenial to EDS than any lawsuit from BSkyB would be, so their representatives tried to make the terms stick. This did not work, the judge holding that not only was the Memorandum of Understanding merely an agreement to agree, it after all said “subject to contract”. It was thus not a binding and enforceable agreement. Further, in order to hold it to be binding the court would have to have split the binding terms out from the rest of the memorandum.
Limitation of liability
Some good news for EDS can be found from the judge’s ruling on the effect of the limitation of liability provisions. Here, the judge held that BSkyB would be prevented from circumventing or escaping a contractual exclusion or limitation of liability by bringing a contractual claim by way of an equivalent claim in tort. Unfortunately for EDS, the judge upheld the general legal rule that such limitation clauses are not effective in claims based on the tort of fraudulent misrepresentation.
A claim for PWC?
The judge’s ruling on causation, that BSkyB would have engaged PwC to implement its own system but for the misrepresentations made by EDS prior to their selection, may open up a potential claim for PwC. In holding this, Ramsey J is suggesting that PwC suffered actual loss in the form of the lost profits they could have made from any contract with BSkyB. Further, as one of only three tenderers who responded to BSkyB’s invitation, their loss was foreseeable. There already exist a number of remedies in public law available to a disgruntled tenderer to an awarding public body. However, the statement by the judge may well provide PwC with a potential cause of action against EDS, a non public body.
Implications
EDS, in their amended defence, argued that:
“The points to which the Claimants refer are “risks,” which are commonly understood within the IT industry as anticipated potential challenges, to be avoided or managed. The Claimants have treated risks as if they were “issues”, ie currently manifest problems.”
To the relief of suppliers and perhaps the frustration of customers, the judgment does not appear to have given any greater rights to seek damages for the problems commonly associated with the implementation of IT and similar projects. EDS was not held liable for misrepresenting risks which they had discovered. Rather, it was held liable for both fraudulently and negligently making misrepresentations about whether they had properly assessed those risks. The law has not changed (although how it may apply to the implementation of such projects in practice has, perhaps, been clarified). Rather, we have been shown that the consequences of a fraudulent misrepresentation by one employee may be the company being held liable for a staggering sum of money.
Further, it is clear that the judgment has not opened the proverbial floodgates to dissatisfied customers, enabling them to routinely allege “fraud” as a way of circumventing provisions limiting recoverable damages. As is clear from the evidence regarding Joe Galloway, the facts of this case were (probably) exceptional.
Sales people should however take note of the consequences of making representations in the tendering process that are careless or not easily proven. Although BSkyB failed to make most of its allegations of fraudulent misrepresentation stick, it was able to overcome the threshold required to take such claims to court and argue them without a hint of criticism of this approach from the Judge in his verdict. Civil cases such as this cost time, money and are disruptive to the operation of a business, even if successfully defended and especially when they include allegations of deception.
The inevitable appeal (and change in the law?)
While the full figure of damages to be awarded to BSkyB is to be determined at a hearing in February 2010, BSkyB believe that they are likely to be awarded at least £200m. This is more than the limitation clauses would have restricted them to although somewhat less than the total £700m claimed by BSkyB.
HP (which now own EDS), continue to deny any accusations of deceit and are reported to have said that they intend to appeal the ruling. They are likely to hope that the appeal process does not take up as much time and money as the original trial did. Despite the length of the judgment, the long term impact of the decision may well be in doubt pending the outcome of any appeal which may result in a redefinition of the law on misrepresentation. The recent case of CBS v Dunlop Hayward, shows quite how far the courts are willing to go in terms of awarding losses suffered against those they have found to be dishonest.
E-Discovery and Legal Process Outsourcing: ESIM Process Design and Choices between Outsourcing vs. Insourcing
December 21, 2009 by Bierce & Kenerson, P.C.
State and federal rules of civil procedure and emerging common law of the discovery process impose significant costs on businesses that are engaged in litigation. Pre-trial “discovery” serves to narrow the issues in dispute by forcing the disclosure of records, including electronically stored information (“ESI”) for judicial economy, to narrow the scope of disputed issues for adjudication (such as through motions for partial summary judgment, admissions and prior inconsistent statements), and to speed the actual trial process. E-discovery has become a daily challenge for the General Counsel, the CIO, the COO and the Risk Management Department. They face a choice of policies, procedures and technologies for insourcing (such as by using forensic software and employed staff) or outsourcing for electronic records discovery management. This article explores some of the differences between insourcing and outsourcing in terms of ESI records management, legal requirements for protection and production of electronic records, project management in forensic record examination, litigation readiness, knowledge management, risk management, ethics and legal compliance.
I. E-DISCOVERY AS A SUB-PROCESS OF RECORDS MANAGEMENT.
Record and Information Management (“RIM”) Policies and ESI Management (“ESIM”). The demands of e-discovery highlight the challenges of developing and managing effective governance policies and procedures for information of all kinds, including ESI, and the challenge of adopting and updating an ESI management (“ESIM”) plan for “business as usual.” The International Standards Organization has developed a records management standard (ISO 15489-1, at www.iso.org). ARMA International (www.arma.org) has identified eight standards for records and information management (“RIM”), namely, accountability, integrity, protection, policy compliance, retrievability/ availability, retention, disposition and transparency.
Memory-storage devices have proliferated, challenging the company’s records custodian. In addition to computers, there are cell phones, cameras (stand-alone or in cell phones), scanners, facsimile machines, USB “key” drives, backup hard drives and other storage devices. All pose a challenge for a fully compliant response to an e-discovery request.
Legal Requirements for Protection and Production of E-Records. Federal and state rules of civil procedure have evolved to include electronic records. See F.R.Civ. P. 26(b), 34 and 45 (subpoenas) and F. R. Evid. 901(a) (authenticity). State procedural rules have been adopted to implement the Uniform Rules Relating to Discovery of Electronically Stored Information issued by the National Conference of Commissioners on Uniform State Laws. [Copy available at http://www.law.upenn.edu/bll/archives/ulc/udoera/2007_final.htm]. Basic common law, statutory and civil procedure rules in e-discovery start with similar requirements:
- Protection: preservation of ESI through a “litigation hold” to prevent inadvertent loss when a third party demand has been made, or it has become reasonably foreseeable that such a demand will be made, and ensuring that the in-house attorney’s instruction is actually implemented (for example, avoiding the inadvertent over-writing of storage and backup tapes).
- Accountability: identifying the scope and “proportionality” of the e-discovery requirements in relation to the overall scope of the dispute.
- Cost allocation: allocating costs that are reasonable to the producing party and costs that are unreasonable to the requesting party.
- Cost management: using search terms and other cost-effective automated search technologies to get the reasonable or “agreed” coverage for the initial triage, fulfilling the approach that information technology can solve the problem of searching massive records databases using search technologies. See, e.g., Zubulake v. UBS Warburg, LLC, 2004 WL 1620866 (SDNY July 20, 2004, Judge Scheindlin) and other rulings in the same case, at 217 F.R.D. 309 (SDNY 2003), 216 FRD 280 (SDNY 2003) and 2003 WS 22410619 (SDNY Oct. 22, 2003).
- Integrity (authenticity and identification of the e-record): identifying appropriate methods and procedures for ESI production, including the appropriate level and nature of legal supervision of forensic inspections, to ensure authentication under F.R.Evid. 901(b) by using circumstantial information such as the file access permissions, file ownership, dates when the file was created and when it was modified, other metadata and hash values for the record when copied to a forensic computer for analysis.
- Accessibility: under the rules of evidence: identifying and managing risks of loss of evidentiary privileges by the mere use of electronic e-discovery tools and procedures.
- Accountability for Non-Compliance: identifying the sanctions for culpable conduct, mainly, “spoliation” (intentional or negligent destruction of evidence) or negligent collection done by the record custodian rather than by an automated process, such as:
judicial issuance of an instruction to the jury that the jury may validly draw a “negative inference” (or “adverse inference”) from the fact that the offending party could not produce the normally available documents in support of its legal arguments, resulting in a conclusion that, if the “lost” or “destroyed” records had been introduced into evidence, they would have supported a negative conclusion as to disputed factual matters; and judicial sanctions including an order to pay the reasonable expenses, including attorney’s fees, caused by the violation of discovery rules, where, for example, the adverse party incurred expenses to overcome the inability to access the “lost” or “destroyed” (spoliated) records.
Project Management in Forensic Record Examination. Within a holistic approach to ESIM, e-discovery tools and techniques can be identified along the continuum of “cradle-to-grave” (or more appropriately, “cradle to judge and jury”) progress. As a sub-process of electronic records management, an e-discovery process model can be used to identify the particular role or function of third-party software, in-house resources and an outsourcer’s resources. By looking holistically at the end-to-end chain of processes leading to satisfactory e-discovery compliance, under such a paradigm, the end-result, production and presentation of ESI, can be managed by effectively adopting either a total control at the “information management” level (when records are initially created and stored). The following is our own view of electronic discovery records management (“EDRM”) as a subset of an enterprise-wide holistic ESIM resource management paradigm for governance, risk management and compliance in e-discovery:
Litigation-Readiness: Converting “Business as Usual” IT into Information Management Operations for E-discovery. Information technology plays a strategic role in the enterprise’s ability to comply with e-discovery mandates. The enterprise’s legal department should team up with the IT department, the records management department and the line-of-business management to participate in the design – or re-design – of the enterprise’s information management operations and records management. E-discovery compliance features are now available through software that can troll the enterprise’s entire ESI, search for information according to a myriad of legal and business terms, technical parameters. In conjunction with the CIO and the records management department, the legal department can:
- Gap Analysis: Conduct a “gap analysis” to identify which features are missing from those that are recommended or required under the applicable rules of civil procedure and common law, particularly those policies and procedures that involve data collection, classification, accessibility, storage, retention and destruction.
- Strategic Access Plan: Develop a strategic access plan for the full life-cycle of “business as usual” and custody and control, including audit, of the company’s information and litigation-relevant information.
- Process Design using an ESIM Paradigm: Apply the e-discovery records management sub-process of the enterprise’s holistic ESIM model to identify and segregate functions that will be performed by in-house or captive resources and those for outside legal counsel and outsourcing service providers.
- Cross-Border Considerations: Integrate multinational and cross-border legal mandates into the design of the information technology and information management systems, at an early stage in the e-discovery process, to avoid breaches of foreign data protection and privacy laws when complying with U.S. judicial rules of procedure.
- Integration of Internal and External Resources: Develop policies and procedures for use of outside litigation support services providers and an array of personnel and technology resources both domestically and internationally to fulfill e-discovery compliance mandates, without adversely impacting the ongoing business operations.
Litigation-readiness must be added to the selection criteria for new IT initiatives such as “cloud computing” (here, the “software as a service” model, not the “variable IT computing-power as a service” model), internal and external social networks, Twitter and internal and external collaboration platforms such as wikis, e-rooms and Google Wave.
Knowledge-Management Readiness: Managing and Protecting Corporate Knowledge. “Knowledge management” refers to policies, procedures and technology that enable an enterprise to capture, organize, identify, re-use and protect the confidentiality of its trade secrets. Knowledge management (“KM”) procedures must also enable the enterprise to distinguish among sources of confidential information that may be trade secrets, copyrights or patents of third parties (including “freeware” and “open source” software) as well. Accordingly, CIO’s must adopt KM planning strategies that, in conjunction with legal and compliance departments, also serve regulatory and legal requirements. The IT infrastructure needs to identify all such trade secrets during the e-discovery process so that, if disclosable, they are subject to non-disclosure and non-use under appropriate protective orders.
II. RISK MANAGEMENT
Risk of Spoliation by Employees and Contractors. According to one e-discovery service provider, a large majority of all corporate litigation is employment-related. If employees have access to change ESI, disgruntled or negligent employees pose a major risk of spoliation. Employees can unknowingly or intentionally destroy ESI evidence. Such actions can range from concealment (through downloading pirated software that deletes files on the employee’s web surfing history) to sabotage (actually deleting documents).
As a result, the legal department and the CIO need to develop IT-enabled solutions to prevent such acts. This article does not address this particular issue, but it highlights the need for appropriate design of the overall information management architecture as a preventive measure.
Risk Management. From the risk-management perspective, a proper defensive strategy will require an alliance between the company’s Legal Department, its Risk Management department and its IT department.
- IT Role. The IT department needs to work with the Legal Department to ensure a proper chain of custody and proofs of authenticity.
- Insurance. The Risk Management Department needs to help design and review the e-discovery process. Sanctions for spoliation have implications for coverages for directors and officers, employment practices, errors and omissions and general liability. The records manager needs to understand how the company’s Records Management (destruction) Policy meets e-discovery requirements.
- Legal Department. The in-house Legal Department must not only manage the e-discovery process. It must design and manage effective records management policies, educate all employees about the e-discovery process and its role in management of risks, knowledge and records.
III. BUSINESS MODELS: INSOURCING, CAPTIVES AND OUTSOURCING
Business Models for Insourcing. Before comparing outsourcing and insourcing, it is helpful to consider the different business models in which an internal e-discovery operation can be financed. These models can be summarized:
- Infrastructure Investment in a Complete e-discovery Toolkit. At the “high end,” the enterprise can make a capital investment in the essential tools of a fully “in-sourced” e-discovery operation. Such an investment will have significant payback for enterprises having a high volume of litigation with predictable volumes of e-discovery demands. Such enterprises will need to invest in all the people, process and technology necessary for the operation. If the operation is highly automated, it can be effectively managed onshore. If it requires substantial human review, part of the operation may be handled in offshore locations with remote access, security controls and other measures to prevent loss of confidentiality, competitive advantage and effectiveness. This leads to consider a captive e-discovery service delivery center. In this case, outsourcing can be a viable solution for that portion of the e-discovery process that requires supervised human review and analysis.
- Pay-Per-Use Pricing. Where litigation is more volatile in terms of volume and timing, a “pay-per-use” pricing for insourced use of third-party technologies can prove cost-effective. This pricing model provides some benefits to enterprises that have very few litigations, but a large volume of ESI for assembly, analysis, protection and disclosure.
- Consumption-Based Pricing. Consumption-based pricing reflects the volume of ESI being sorted and analyzed. This pricing model provides benefits for enterprises that want to allocate litigation costs to individual lines of business or affiliated companies, as a charge-back accounting principle that effectively rewards litigation-free business managers for staying away from the judicial system.
Relative Advantages of Insourcing.
- Industries Affected by Persistent Litigation. Several software tools exist that allow in-house counsel and the CIO to conduct the full forensic discovery using staff employees. Internalization of the discovery process makes economic sense where the company is constantly involved in litigation. Such companies typically include insurance companies, banks, consumer products manufacturers, and can include food service chains and franchisees. Other companies that are subject to class action claims for torts or securities law violations can fall into this category as well, impacting virtually any publicly traded company that has a volatile stock price.
- Control of Records Management; Cost Management. Software and IT services companies argue that insourcing can significantly reduce the costs of e-discovery. They argue that, by taking control of the forensic search, collection, analysis and processing of a company’s electronic records, companies have more flexibility and control over the manner in which these critical discovery processes are conducted. This control can translate into cost savings by enabling a closer supervision on-site by the internal lawyers.Cost savings must be compared to comparable external services.Cost savings that might arise from an easier ability to make small changes in the search criteria, for example, may result in a loss of the hard-wired “e-discovery plan” that serves as the basis of justifying to the court that the discovery disclosures comply with civil procedure to locate and disclose all relevant records.
- Protection of Trade Secrets and Intellectual Property. Insourcing, or using captives, can provide a significant level of additional protection for knowledge management, trade secrets and intellectual capital. Such protection comes at the cost of maintaining internally controlled resources. Outsourcers will claim that their security levels are higher than those in many global enterprises. Outsourcers offer personal non-disclosure covenants by individual employees. But there is always a risk, whether through insourcing or outsourcing, that the personnel having access to trade secrets, for example, might abuse their positions of trust through tipping a securities investor, selling the ideas to a competitor of the enterprise or other tortious conduct. Even a non-disclosure agreement does not constitute a valid non-competition covenant, and even non-competition covenants are unenforceable as a matter of public policy unless strictly limited in time, territory and scope, and (in California and some other jurisdictions) they may require additional payments of consideration. In short, neither insourcing nor outsourcing appears to have a clear advantage in this field, except that e-discovery managers who are employed by the enterprise might offer an advantage by having ongoing knowledge of what is (and is not) a trade secret for faster, better, “cheaper” claims to a protective order.
- Effectiveness of Coordination and Collection of ESI. The use of skilled internal people who know the company’s operations may be able to provide better collection and coordination of ESI. However, “professional” e-discovery service providers may have the advantage in skills at the beginning as the company’s internal personnel become familiar with the processes and technology of e-discovery. Hence, insourcing might follow outsourcing until the processes can be internalized.
- Reduction of Risks of Noncompliance with e-discovery Rules. Well-trained, well-supported internal personnel might be able to reduce risks of non-compliance in the typical e-discovery process.
Relative Advantages of Outsourcing e-discovery. Outsourcing of e-discovery processes may be costly, but it may be the best solution for several reasons. This requires an analysis of the relative merits. This “gating analysis” should include appropriate considerations of staffing, quality, ethical risks and speed.
- Staffing. One of the key benefits of outsourcing, and one of the key parameters in selecting the right outsourcing service provider, is the service provider’s staff. The best outsourcers have developed a methodology for human capital management in the specialized field of e-discovery and related disciplines. The outsourcer designs a service delivery platform, recruits, trains and tests its staff in generic functions (including project management, information technology and security) and then offers this staff for custom-training on the litigating company’s particular process and e-discovery requirements.Using a business company to provide litigation support can run afoul of ethics and disciplinary rules applicable to the litigating company’s (or its law firm’s) lawyers. Law society rule in England will be changed if and when a pending draft law is modified to permit competent non-lawyers to perform tasks that might be considered the practice of law. Under applicable ethics opinions of the American Bar Association and various city and state bar associations, the in-house lawyer or outside law firm cannot escape certain core ethical duties:
- to supervise the work of the outside service provider;
- to avoid assisting in the unauthorized practice of law (“UPL”)
- to ensure the protection of client confidences;
- to avoid waiving any rule permitting a claim of legal privilege (and to rectify innocent or mistaken disclosures, see e.g., Fed. R. Evid. 502);
- to avoid conflicts of interest;
- to protect against data loss, theft or other act or omission that might constitute sanctionable spoliation;
- to comply with the rules of court relating to e-discovery and management of ESI at all stages.
- Vendor selection involves finding the right fit for the particular litigating company’s legal, regulatory, compliance, privacy, legal ethics and security requirements.
- Service Level Metrics and Quality Considerations. Few internal employees want to live by performance metrics. Outsourcers live by “guaranteeing” service metrics and other quality parameters.
Offshoring Issues. In considering an offshore captive or an offshore LPO outsourcing, the company’s lawyers must evaluate special cross-border legal issues.
- Export Controls. By transferring any U.S. data abroad, the company may require a license from one or more branches of the U.S. government. While commercial information may be subject to a general export license that does not require any notification, filing or administration, some information (such as software or design information that may have dual civilian and military uses) may require a specific license. Similar issues arise where the company’s ESI includes trade secrets, pending patent applications and other information that is subject to a required export license.
- Data Protection. Data protection rules under HIPAA and other legislation may apply to the data being processed. Foreign LPO service providers must ensure compliance.
- Privacy. Privacy rights arise from many legal sources and different jurisdictions. Depending on the source of any personally identifiable information (“PII”), any transfer of company records to a foreign LPO service provider may violate applicable rules. This issue suggests a proactive approach in the design and implementation of the company’s overall information management systems.
- Third-Party Consent. The information in a company’s database may include information that is licensed under restrictive disclosure conditions or where a third-party’s consent is required by an applicable law. Third-party consent may be required.
- Client Consent. The information in a company’s data base may also require the client’s consent
- Political Risk. Foreign service providers come with a suite of political risks that could impair service quality, timeliness of service, confidentiality and other custody and control issues for the ESI and the foreign nationals accessing such ESI.
IV. PROJECT MANAGEMENT
Most effective e-discovery procedures will require effective integration of internal and external resources. The design, planning, implementation, performance, intermediate re-balancing and supervision of all resources remain, of course, in the hands of the company, and, in particular, in-house attorneys. The Legal Department (which is ultimately responsible) may wish to consult with “outsourcing lawyers” not merely with litigation counsel on achieving a flexible, cost-effective, efficient design, vendor selection and supervision, review of compliance with ethics rules and project management.
Evaluation Process. Companies evaluating an LPO solution for e-discovery (or any other LPO) should therefore carefully explore all relevant implications, design the program for compliance and quality of service, address special issues involving any cross-border data flows and other commercial, judicial rules, legal and ethical requirements.
Project Management Roles. Each LPO project requires thoughtful and careful attention to ensuring that all responsibilities of the different parties are aligned with their roles. Within the outsourcing model, there is room for designing and allocating roles and responsibilities to give in-house attorneys control of the process so that they can manage the ethical responsibilities. The introduction of the LPO service provider raises new questions whether the cost-controlling measures will impair (or improve) the quality of the outcome. External lawyers could also manage the service providers.
V. BUSINESS MODELS
- Business Models. Currently, most LPO e-discovery services are conducted under business models of insourcing (including contract attorneys), captives and outsourcing.
- New Models. Over time, companies and their legal counsel will become more familiar with the tools, alternatives and strategies for effective LPO, including identifying and assessing risks and evaluating a risk-benefit matrix. With greater maturity in capabilities, new business models for identifying and managing e-discovery processes, tools and personnel may evolve. The impact of cloud computing, platform-as-a-service, software-as-a-service, virtualization of both servers and client computing and mobile computing will challenge enterprises and their technology and legal service providers to integrate a holistic and global ESIM process to incorporate the EDRM subset as “business as usual.”