Lawsuits Fuel E-Data Storage Industry

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 Inc.

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 Minneapolis.

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 technology.

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 lawsuits.

"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 of records.

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 field.

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."
By Brian Bergstein