E-Discovery: Implications for the Construction Industry

By some estimates, 97% of all new information being created today is in electronic form. With the proliferation of digital information, it is no longer possible to litigate a construction case without locating, reviewing, and managing voluminous electronic documents. For example, a typical construction project might involve all of the following electronic information: job site e-mails, computer document control systems, critical path updates, schedule data, bid materials, change order processing, job cost reports and estimates, contract control databases, financial statements, payrolls, and project correspondence and diaries. Given this new digital reality, it is important for all those involved in construction litigation to learn how to properly handle electronic information.

Electronic discovery is the exchange of any discoverable information maintained in an electronic format. The Federal Rules of Civil Procedure will soon specifically address electronic discovery. Amendments to Rules 16, 26, 33, 34, 37, and 45 are set to take effect on December 1, 2006, unless rejected or modified by Congress. Proposed changes include mandatory disclosure of categories and locations of electronic information, cost and burden considerations regarding production of electronic information, and rules regarding inadvertent production and form of production. In addition, some forward-thinking state courts and federal district courts have already adopted rules relating to e-discovery. For example, California has adopted Code of Civil Procedure § 2017.710 et seq., which permits a court to order the use of technology in conducting discovery under certain circumstances. The District of New Jersey has promulgated L.R. 26.1(d) which imposes a duty to investigate and disclose responsive electronic information, a duty to notify the opposing party that electronic information is being sought, and a duty to meet and confer to discuss methods of production and who will bear the costs of electronic production.

Although the Rules are only now being amended to address electronic discovery, cost and preservation issues have dominated the electronic discovery field for several years. One important consideration with respect to electronic discovery is who will pay for the costs of production. Although the general rule is that the responding party bears the cost of production, a balancing test may be employed to determine if the burden or expense of the proposed discovery outweighs its likely benefit. See Toshiba Am. Elec. Components, Inc., v. Sup. Ct., 124 Cal. App. 4th 762, 769 (2004); see also F.R.C.P. 26(b)(2). Some courts have found that with respect to electronic discovery, a more nuanced approach is required. The court in Zubulake v. UBS Warburg, 217 F.R.D. 309, 322 (2003), introduced a seven-factor cost-shifting test to use in situations where electronic data is relatively inaccessible: 1) the extent to which the request is specifically tailored to discover relevant information; 2) the availability of such information from other sources; 3) the total cost of production, compared to the amount in controversy; 4) the total cost of production, compared to the resources available to each party; 5) the relative ability of each party to control costs and its incentive to do so; 6) the importance of the issues at stake in the litigation; and 7) the relative benefits to the parties of obtaining the information. However, the court cautioned that the factors should not be weighed equally. Rather, the first two factors are the most important. Id. at 322-23.

On the other hand, California has looked to statutory authority in concluding that the demanding party must pay the cost of production. The court found that “when it is necessary to translate electronic data compilations in order to obtain usable information responsive to a discovery request,” pursuant to Code of Civil Procedure 2031(g)(1), the demanding party must pay. Toshiba, 124 Cal. App. 4th at 767.

With respect to preservation of electronic documents, it is important to remember that the duty to preserve electronic information arises at several stages of litigation, including: prior to filing a complaint, upon filing a complaint, upon service of a discovery demand requesting specific evidence, and upon entry of a preservation order. In addition, the duty to preserve information may affect a vast network of persons. According to Federal Rule of Civil Procedure 34(a), a party served with a request must produce documents in the party's possession, custody or control. Thus, documents held by employees, subsidiaries and affiliates, and third parties with legal or practical control of documents may all be discoverable.

Second, because failure to preserve documents is sanctionable, companies must do their utmost to ensure electronic documents are not destroyed. One solution is to implement (and ensure compliance with) document retention and preservation policies. Document preservation instructions should also be issued in response to litigation or anticipated litigation.

Preserving electronic information requires extensive planning, especially given the challenges of collecting electronic information. As mentioned above, the scope of e-discovery is exceptionally broad due to the ease of copying, forwarding, and searching for electronic information. Consequently, in order to effectively create a document retention policy, it is important to understand the IT network and systems, back-up and archiving practices, and how custodians create, access and store documents.

In light of the likely changes to the Federal Rules of Civil Procedure and the increasing sophistication of courts and practitioners in dealing with digital information, it is incumbent upon those involved in construction litigation to learn how to deal with electronic information in an effective manner. Understanding the scope of information sought by e-discovery requests, creating comprehensive document retention policies, and recognizing cost and preservation issues are important first steps in managing information in the digital age.

Legal And Industry Update:

FALSE CLAIMS: Disappointed bidder filed qui tam suit alleging violations of state and federal False Claims statutes, seeking to recover monies obtained by successful bidder pursuant to a contract awarded by CalTrans. The qui tam plaintiff alleged that the successful bidder failed to subcontract 5% of the work to DBE companies even though a certified DBE had submitted a subcontract bid to the contractor prior to the deadline for final bids. CalTrans was aware that the successful bidder failed to subcontract any work to a DBE before it awarded the contract. Plaintiff sought treble the $1.1 million dollar contract price and an additional $10,000 for each of 18 payment requests pursuant to the contract. Held : Government's motion to dismiss the qui tam suit granted. CalTrans' knowledge of the alleged noncompliance effectively negated the falsity required to prove a violation of the state or federal False Claims Acts. United States v. Shasta Services, Inc., 440 F. Supp. 2d 1108 (E.D. Cal. 2006).

CONSTRUCTION MANAGERS: Owner sued Construction Manager's (“CM”) professional liability insurer for CM's negligence. Trial court granted summary judgment dismissing negligence claim based on the Economic Loss Rule (“ELR”). The Wisconsin Court of Appeals reversed, finding that the CM agreement was a contract for services and therefore the ELR did not apply. In Wisconsin, the ELR applies to contracts for the delivery of products, but not to service agreements. The Court of Appeals reasoned that the actual work was performed by subcontractors and thus the CM agreement was primarily for construction management services. The defendants appealed. Held : Reversed. The CM-as-constructor agreement is predominantly a contract for delivery of a product, here the completed building, to which the ELR applies and bars the negligence claim. 1325 North Van Buren, LLC v. T-3 Group, LTD., 716 N.W.2d 822 (2006).

CAL-OSHA REG: Cal-OSHA cited contractor for violation of Cal. Code Regs. tit. 8, § 1592(e), which provides: “Hauling or earth moving operations shall be controlled in such a manner as to ensure that equipment or vehicle operations know of the presence of … workers on foot in the areas of their operations.” Contractor appealed the citation to an Administrative Law Judge (“ALJ”), arguing for an interpretation which only required that equipment operators have general knowledge that there are workers on foot in the area. Cal-OSHA argued that the regulation required operators to know the positions of workers on foot at all times. The ALJ rejected both positions as too extreme, holding instead that the rule required operators to know when there are workers in the “immediate vicinity” of their equipment, and upheld the citation. The Cal-OSHA Appeals Board affirmed, agreeing with the ALJ's interpretation, and the contractor appealed to the California Court of Appeal. Held : Citation affirmed. The Board's interpretation of the rule was reasonable, and “simply informing equipment operators that workers will be on foot in the general area of such operations does not satisfy the requirement.” Teichert Constr. v. California Occupational Safety and Health Appeals Bd., 140 Cal. App. 4th 883, 44 Cal. Rptr. 3d 833 (2006).

INSURANCE: Subcontractor financed the purchase of commercial lines insurance through a lender and then defaulted, prompting the lender to exercise subcontractor's right to cancel policy. Contractor was an additional named insured on the policy, but was not notified of the cancellation. Contractor was later sued by owner for construction defects, and sought defense as an additional insured, however the alleged damage occurred after the policy was cancelled. Insurer filed complaint for declaratory relief, arguing that contractor had no right to notice of cancellation and accordingly cancellation was valid as to the contractor. Trial court granted summary judgment for insurer, and contractor appealed. Held : Affirmed. Neither the insurance policy nor applicable statutes required the contractor, as an additional insured, to be notified of the lender's cancellation of the subcontractor's insurance policy. The Gorham Co., Inc. v. First Fin. Ins. Co., 139 Cal. App. 4th 1532, 44 Cal. Rptr. 3d 197 (2006).

PROPOSITION 51: Injured workers sued seller of scissor lift for injuries sustained when the scissor lift collapsed at the job site. The jury found that defendant sellers made intentional misrepresentations regarding the suitability and condition of the scissor lift, and awarded economic and noneconomic damages to plaintiffs. The trial court found that that the noneconomic damages were not subject to apportionment under Proposition 51, which provides that “[e]ach defendant shall be liable only for the amount of noneconomic damages allocated to that defendant.” Plaintiffs appealed. Held : Affirmed. Ruling on the issue as a case of first impression, the Court of Appeal held that an intentional tortfeasor (as opposed to a negligent tortfeasor) is not entitled to apportionment under Proposition 51 where the negligence of one or more third party tortfeasors contributed to the injuries. Thomas v. Duggins Constr. Co., Inc., 139 Cal. App. 4th 1105, 44 Cal. Rptr. 3d 66 (2006).

C&M News:

• On November 14th, Randall L. Erickson and Andrew H. Marks will be presenting on the cutting edge topic of “E-Discovery in Today's Construction Project” at the Construction Users Roundtable (“CURT”) National Conference. This year, CURT will be held at the Hilton El Conquistador Resort in Tucson, Arizona. Mr. Erickson and Mr. Marks will present on the same topic at the Construction Superconference on December 7th at the Palace Hotel in San Francisco, California.
  
  
• Mr. Erickson concluded several successful mediations in the past few months, including a dispute related to the widening of a freeway overpass and another dispute related to the construction of a hotel in San Diego. Mr. Erickson also recently served on several arbitration panels, involving matters which range from a commission dispute regarding workers' compensation policies to the refurbishment of a hotel in which asbestos was discovered.
  
  
• Stuart J. Einbinder settled a dispute involving a large California utility related to the development and sale of a power generation facility.
  
  
• A team of Crowell & Moring's construction and employment law attorneys have been providing advice and assistance to clients regarding prevailing wage law requirements and project labor agreements.
  
  
• On October 26, 2006, Crowell & Moring LLP presented the fourth conference in its Globalization series, co-sponsored by AeA and the California Council for International Trade: "Globalization's New Road Map: Best Practice and Policy Tools for Growing and Protecting Your International Business" in Irvine, California. The event was comprised of four panels, with topics including an update on developments and trends in international trade, such as the expanding universe of free trade agreements and their potential impact on businesses; a discussion with representatives from Canada, Mexico, and California on the opportunities and benefits that NAFTA provides for companies doing business in California; best practices and new trends for protecting your investments and assets in overseas markets; and a primer on expanding and protecting your business in the global marketplace.