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Are Energy Companies Prepared for the Next Round of Investigation?

Investigations, windfall profits, rebates...the legislative and enforcement activity around energy companies is at its highest peak since the California energy crisis. In addition, new changes to the Federal Rules of Civil Litigation are coming in December. So that brings up a big question – are today’s energy companies really ready for this next round of legal fireworks?

Traditionally, document discovery has been a paper-based process treated as a fire drill on each large matter. Plaintiff's counsel or regulatory agencies requests documents, and defense counsel searches and sifts through desk drawers and file cabinets to locate, review and produce copies of responsive information. Despite the fact that most large organizations are sued regularly, litigation response is primarily managed as an aggregation of discrete actions.

With more than 93 percent of all corporate data now being created electronically, the proliferation of computers and low cost of storage has resulted in an information explosion. The amount of potentially relevant data now involved in most every type of lawsuit has grown exponentially. Courts and agencies are mandating its production, so there is no more pretending it is not there.

One of the most important issues in litigation and investigation is how to find and access the data when it is requested, ensure its admissibility in court and make sure that sensitive information is protected. For example, in a large energy company with more than 20,000 employees in 20 worldwide offices, where is the information stored for the 200 employees that might have data relevant to a pending lawsuit or governmental inquiry? Is the information stored in a central enterprise content management or in an e-mail archiving repository? Is it on their laptops or PDAs? Or, is it stored on one of the hundreds of back-up tapes in some warehouse?

Energy companies need to get their electronic discovery house in order now!

The latest salvo is a voice vote approving new bipartisan sponsored antitrust legislation designed to reduce fuel costs. It's not yet known if this antitrust will sport treble damages and attorney fees; however, the government investigation angle has been more than covered. From the prolific beSpacific legal blog site sourced from a press release from Senator Specter (R):

"Today the Senate Judiciary Committee overwhelmingly approved bipartisan legislation [Oil and Gas Industry Antitrust Act of 2006, S. 2557] that seeks to promote competition in the oil and gas industries in order to reduce fuel costs. The legislation was approved by voice vote. This legislation would keep fuel prices low by preventing companies from withholding oil and gas in an effort to raise prices. A joint federal and state task force is also created by the legislation to investigate information sharing between oil companies to determine if that practice has encouraged anti-competitive pricing."
From Specter's website:
Additionally, the legislation aims to foster competition by requiring the antitrust enforcement agencies (Department of Justice, the Federal Trade Commission) to consider whether future consolidations need closer scrutiny.

The ramifications…

This new legislation creates a new task force to investigate “information sharing” between oil companies. They are not talking about hallway conversations. They will be looking at email, voice recordings, instant messaging and other methods of sharing pricing information. The legislation is also targeting the ubiquitous mergers and acquisitions for more scrutiny.

Add the new amendments to the Federal Rules of Civil Procedure (applicable to all industries) that accelerate and broaden electronic discovery, especially in the first 120 days of a federal suit, and you have a perfect storm.

It is imperative that General Counsel (GCs) in the Energy market take the necessary steps to understand where relevant data resides and work with the IT, records management and compliance departments to ensure retention policies for electronic data are up to snuff. It is critical to have the ability to preserve relevant electronic documents and avoid claims of spoliation. The most common examples are deletion or destruction of relevant emails, files and/or disks. In some situations, judges may impose sanctions against the individuals who destroyed the evidence and possibly the spoliator’s attorneys.

The counterbalance is that the business needs to continue to function, serve its customers and generate revenue and profits. Saving everything means that there are increased storage and labor costs to carry out, maintain and organize the backups. Backup tapes or archival systems are the tip of the iceberg: transactional database systems need to be addressed as well.

Try changing a database structure under the demands of the legal process. Transactional databases routinely “roll-up” the detailed transactions into a summary record at predetermined times. Many applications purge these detailed records. If the backup retention is not suspended for a legal hold and the detailed transactions are not kept for legal hold, potentially responsive evidence will be lost. Some proactive organizations are building in fields for legal hold purposes so not every single transaction needs be held. Other approaches include an automated dump of transactions to a holding server prior to purging. Companies who have simply turned purging off to meet a legal requirement have not fared well in terms of system degradation and uptime. Try accumulating all those transactions or emails without system degradation or crash.

For time-sensitive transaction systems, a little planning will go a long way to ensuring business continuity while under legal threat.

The challenge of the digital landscape…

Most companies have fairly comprehensive document retention/destruction policies for both paper and electronic information. Often times these policies have been crafted to meet a wide range of state, local, federal and regulatory laws (e.g., FERC, SEC, etc.) that impact document retention schedules. For companies that face regular, complex litigation or investigation, the greatest challenge is seen when the organization has to suspend these policies in response to “likely discovery.” A company’s obligation to preserve data does not necessarily begin at the exact moment a complaint or investigation is filed. Rather, recent case law, local statutes, and American Bar Association (ABA) guidelines show that a company’s obligation to preserve data begins at the time action becomes likely.

To ensure the appropriate steps are taken to fulfill preservation obligations, GCs must be able answer some basic questions, such as:

1. What will be the court’s (or governmental agency’s) expectation of what I need to preserve?

2. Is their expectation fair?

3. Is their expectation is defensible?

4. Is the assessment of their expectation defensible?

5. Will the actions taken to identify and preserve potentially responsive evidence demonstrate good faith?

6. Will the processes used to preserve evidence maintain the evidence in an un-altered state?

7. Will we know exactly where the evidence has been and who has moved or interacted with it?

8. Have proven, proactive steps been taken to cease the (normal course of business) destruction of documents in order for them to be preserved?

9. Will the discovery request be overly burdensome for the organization to respond to?

10. Can search tools be used to locate potentially responsive data, audit the results of the searches to make sure attachments are searched, ensure case sensitivity is not an issue, and that all appropriate areas of the organization are searched?

11. Is there a documentation process in place that a non-technical person can understand that captures the steps the legal team is taking?

While these questions seem simple, they present a huge challenge to GCs who are under increasing pressure to reduce the costs, risks and time associated with litigation. And preservation is just the first step in the discovery process. The collection, review and production of electronic evidence can be just as overwhelming and fraught with risk and costs if not managed properly.

The challenge for the CIO’s team is to be able to understand what the legal team is asking them to do and to not only do it to their own “change control,” or full lifecycle development standards, but also to maintain a legal chain of custody while moving at breakneck speed.

Getting balanced…

So, how does an organization obtain a balance and actually prepare for litigation? Taking a proactive approach to litigation starts by analyzing an organization’s internal processes and mapping out a litigation response plan. This may include:

  • Assessing the current litigation response system – An organization, with the help of outside specialists, should completely review and assess what systems (people, processes and technologies) are in place. More importantly, this assessment should identify what processes are lacking for effectively and accurately responding to a discovery requests. The mechanics of this process are important because, if done right, the total cost of discovery response can be significantly reduced.
  • Mapping out a litigation response plan: Once the gaps, peoples, processes and supporting technologies have been analyzed, an organization can then begin mapping out a litigation response plan that includes recommendations for personnel roles and responsibilities, technology improvements, and a roadmap for responding to each case.

There are internal questions that will be answered in order to begin the assessment process. Examples of these questions include:

  • Does the General Counsel and CIO regularly sit down with each other to outline the types of lawsuits that legal could have to handle and proactively discuss what support might be needed from IT?
  • When Legal calls on IT, is it consistently a fire-drill (e.g. "This is a bet-the-company lawsuit. Drop everything and help me!") or is there a response process established?
  • Has the legal department articulated their business requirements for IT, so IT can plan their activities and budget for them accordingly?
  • Is IT comfortable that all the nuances associated with electronic evidence handling and have all of the requirements been properly conveyed by legal?
  • What systems are in place to help the company be compliant with corporate governance regulations like Sarbanes-Oxley?
  • Are the IT compliance/document preservation systems supportive of the legal departments needs when a lawsuit is filed?
  • Is there at least one IT staffer dedicated to supporting the legal department?
  • Who is the point person in the legal department assigned to interact with IT?

Millions of dollars have been won and lost due to a simple email that wasn't collected and produced. The sheer enormity and complexity of the transformation in discovery response practice can be overwhelming. By having a plan in place from inception, that aligns with IT processes with the legal departments' needs, today’s energy companies can alleviate a lot of the headaches when they are required to collect the hundreds of gigabytes (or terabytes) of data associated with a discovery request.

Discussions

Mary has done an outstanding job here in advising and informing us of the need for organization and sufficient capability in records management. One thing I believe should be emphasized is currency and completeness of critical documents, such as documented system and service restoration procedures for damaging events, along with past records of the utility's performance during recovery. Companies that have not sufficiently taken heed following the recent string of disasters may want to take an objective look at their emergency plans, procedures, and restoration logs and records, and how those documents might be viewed (along with other documents) relative to the handling of post-disaster recovery efforts. Documentation that is not current, reflecting today's methods and today's resources, will certainly be called into question as a result of increased regulation in this area. Today, many of these documents are still kept in paper form, but are increasing moving to digital storage.

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Excellent & concise summary of an important subject.

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