By BRIAN BERGSTEIN
January 31, 2006
EDEN PRAIRIE, Minn. - Even just a few years ago, lawyers in corporate
lawsuits sometimes agreed not to poke around in their opponents'
e-mails. Instead they'd confine themselves to paper memos and other
documents on file as they pursued evidence.
Now, however, with so much work done via e-mail, instant messaging and
other online platforms, "nothing's in the file cabinets anymore," said
Michele Lange, staff attorney for legal technologies at Kroll Ontrack
Instead, the memos, presentations and other scraps of corporate
intelligence are increasingly finding their way into vast "electronic
discovery" centers like the one Kroll Ontrack operates here near
Day and night, rows of whirring, blinking computers sock away enormous
batches of digital records sent by companies involved in lawsuits.
Other files are discovered deep in hard drives _ wedged between
everything from personal e-mails to pornography _ by Kroll Ontrack
forensic teams whose code names keep their missions secret. All this
once was an arcane backwater of the legal-services field. Electronic
discovery was commonly performed by local computer experts who played
golf with law firm procurement officers.
But several factors _ including the inexpensive abundance of data
storage, high-profile lawsuits and strict new laws such as
Sarbanes-Oxley that demand thorough corporate archiving _ are making
electronic discovery a lucrative and competitive slice of information
The overall market is worth close to $2 billion and growing at about
35 percent a year, says Michael Clark, who analyzes the field at EDDix
LLC. The number of companies offering computer-related evidence
gathering appears to have doubled in the past two or three years, with
several hundred now hanging a shingle.
This surge has led Kroll Ontrack to quadruple the size of its
data-crunching center in less than 18 months, from a half-petabyte of
storage to two petabytes. That's 2 million gigabytes. Consider that
the Internet Archive, which aims to store almost every public Web page
ever to appear, currently totals one petabyte.
Rival e-discovery vendor Fios Inc. had 48 employees three years ago.
This year, the Portland, Ore.-based company expects to employ more
than 120, with revenue of $30 million _ nearly double its 2004 figure.
Increasingly, e-discovery customers are not just law firms enmeshed in
big corporate cases. More and more, companies are working proactively
with e-discovery vendors, getting a handle on their data troves so
they can meet regulatory requirements _ or just in case they are sued.
After all, 90 percent of U.S. corporations are engaged in some type of
litigation, according to research by the law firm Fulbright & Jaworski
LLP. The average company bigger than $1 billion is wrestling with 147
"The big risk for companies is too much data that there's really no
business need for, being kept in ways that if they had to go looking
for it, would be uneconomic," said e-discovery pioneer John Jessen,
who founded Electronic Evidence Discovery Inc. in 1987. (It began
after Jessen, who had a small computer business in his basement, was
able to find a seemingly absent mailing list on a defendant's PC.)
Partial credit for the recent e-discovery boom goes to two 2005 cases
involving investment banks.
In one, former UBS AG equities trader Laura Zubulake won a $29 million
award in a federal gender discrimination suit in which she had
requested that the bank turn over all internal communications about
her. The bank produced 350 pages of documents, but Zubulake knew there
were more _ she had retained some herself.
The case set several precedents about how e-discovery ought to proceed
and who should pay for it. In one key ruling, the judge slapped UBS
for failing to recognize that the missing e-mails likely would end up
being relevant to future litigation.
Later, financier Ron Perelman won $1.6 billion from Morgan Stanley &
Co. after a judge said the firm had failed to turn over e-mails and
other digital evidence in a lawsuit stemming from its role in the 1998
sale of Perelman's Coleman camping gear company to Sunbeam Corp.
The case is being appealed, but still proving instructive. "In
litigation today, if e-discovery is done wrong, it can have huge
implications," said Jonathan Redgrave, a partner at Redgrave Daley
Ragan & Wagner LLP who specializes in electronic document issues.
In addition to these cases and laws such as Sarbanes-Oxley that
tighten record-retention requirements, new changes in rules of civil
procedure set strict standards for what companies should do with their
files the moment they are sued.
"Some of those standards are fairly onerous even to sophisticated,
highly litigious businesses," said Gerald Massey, head of Fios.
Complicating matters, other rules _ including European data-privacy
laws and the new Fair and Accurate Credit Transactions Act _ require
companies to go in the opposite direction and dispose of certain kinds
Much of what e-discovery companies do is similar _ but offered under
different names or pricing schemes.
Generally, a vendor gets raw material from corporate computers and
backup tapes, then dives in _ with specialized software rather than
humans _ to remove duplicate files or records that have no bearing on
a case, while zeroing in on those that might. Later the vendors can be
asked to testify how the searches were conducted.
Sometimes the findings are virtual smoking guns, like the infamous
e-mail in which investment banker Frank Quattrone endorsed a
recommendation that colleagues destroy files.
Other times evidence comes not from what's in a file, but from its
"metadata" _ the automatically applied labels that explain such things
as when a file was made, reviewed, changed or transferred.
>From there, even the end product comes in digital form. The evidence
found by electronic discovery firms can be put on secure Web sites for
legal teams to pore over, mark up and redact if necessary.
This kind of service often runs well into six figures, but there will
be pressure to bring that down as cost-conscious companies replace law
firms as the direct clients. And that figures to change the sprawling
Some think software providers and tech-services giants will step in
and begin baking electronic discovery capabilities into other
data-retention products. For example, storage systems can include
"litigation hold" functions that let a company instantly preserve
certain records if necessary.
"The ultimate buyers of a company like ours have only just begin to
emerge in our space," said Massey at Fios. "The names we'll associate
with the services we provide in three, four, five years from now will
be like IBM and EMC and Oracle."
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