12 | June | 2011 | e-Discovery Team

Going “Gaga” Over Big Deals and Malpractice in e-Discovery

June 12, 2011

After my last blog, The Information Explosion and a Great Article by Grossman and Cormack on Legal Search, which was somewhat on the deep and heavy side, I felt like writing something a tad lower on the intellectual scale. So my blog this week is more news oriented but still has some opinion and analysis. I will discuss some vendor news and the world’s first electronic discovery legal malpractice case. With careful mining you may find a few nuggets of valuable ratiocination, but nothing deep. As you know, I try to include a cultural theme in most of my blogs. For this one on deals and malpractice I could think of no better cultural icon than Lady Gaga. In her immortal words.

If somebody said to me, ‘What you do isn’t art,’ I would say, They’re right. Yes it is, no it isn’t, absolutely, perhaps, it’s irrelevant, it’s important…that’s what this is all about, really. For me, more than anything, I want to do something important. It’s gotta be important. If it’s coming out of my mouth, if it’s going on my body, if it’s going on TV, it better be important.

In case you usually respond to Ga Ga with Ga Gag, you should know that she is an advocate of sorts of First Amendment rights. She is a particularly strong proponent of freedom of expression and opinion, including freedom of individual sexual preferences. Her latest album is widely seen as a gay rights political statement. See Eg., Sisario B., Lady Gaga Ends Deal With Target (NY Times, March 9, 2011). She also frequently sings at charitable gay rights events and is concerned with freedom of expression in writing and art. Here is her Twitter feed. Also See Eg. this lyric from the song Paper Gangsta on her The Fame album:

Midnight rush with a pen in my hand
Inkin’ Lincoln, sand-script with a fan
Remembering me before we began
Sometimes I felt so def in the jam

So apparently she writes about Abraham Lincoln late at night, in addition to her many original songs. That is certainly a late night activity for a young girl that I approve of. Lady Gaga, an Italian-American whose real name is Stefani Joanne Angelina Germanotta, also knows a lot about def jam and Universal’s hip hop music, among other things.

The e-Disco M&A Beat Goes On

Let’s start with two new big deals from vendor-land. In my May 19th blog, 2nd Addendum to e-Disco is Hot: Clearwell Sells for $410 Million!, which supplemented my earlier blog, The Word is Out: e-Disco is the Hot New Dance, I reported on Clearwell’s purchase by Symantec. It was consistent with my theme of high growth in electronic discovery. I concluded my May 19th blog on Clearwell’s sale with the question: Who will be next? Little did I know that two teams of M&A specialists were in the final stages of deals. Cataphora sold its legal division, i.w. most of the company, to accounting giant Ernst & Young for an undisclosed sum a week ago, and, at the same time Iron Mountain sold all of its e-discovery, online backup, and other digital assets to Autonomy for $380 Million. Both deals are puzzling in their own way. As the wondrous and eloquent Lady Gaga put it in her song Starstruck:

Groove, slam, work it back
Space Cowboy just play that track
Gaga in the room, so starstruck
Cherry cherry cherry cherry, boom boom

Goodbye Cataphora and Hello Ernst & Young

Here are excerpts from the parties joint press release painting a rosy picture of the deal:

Ernst & Young LLP’s Fraud Investigation & Dispute Services (FIDS) practice has combined with Cataphora Legal, a division of Cataphora, Inc., a leader in the management of digital communications. The combination enables Ernst & Young to further enhance its ability to serve and extend additional value to its clients, while allowing the seller, Cataphora, Inc., to focus on selling large-scale data analysis software to the Fortune 1000. The deal closed May 27, 2011, and terms were not disclosed.

“We believe we have built the most established, scalable and defensible e-discovery technology and process in the industry,” said Elizabeth Charnock, Chief Executive Officer, Cataphora, Inc. “The time is right to sell our e-discovery business to the Ernst & Young organization so they can continue to grow it, enabling us to focus on our core business of selling software to meet the big data analysis needs of Fortune 1000 enterprises and government. Best of all, we know our e-discovery customers are in excellent hands with Ernst & Young and we believe the combined cultures and operations to be extremely complementary.”

The exact terms are secret, and nobody will tell me a price or other details. Nineteen of Cataphoria’s key technical people went with the sale to Ernst & Young, but some lost their job. It wont take these people long to land on their feet, and some already have. Cataphora had many good employees, and a cool service that could be very helpful to most attorneys, but I’m not sure how well it was doing financially.

The press release description of Cataphoria legal’s services sounds almost the exactly the same as what I, and others, do every day as a practicing e-discovery lawyer:

… increases the effectiveness of document review while reducing its costs – up to 70-80 percent compared to traditional legal document review. The objective is to model customized attorney decisions that result in both the broadest recall – inclusion of relevant documents – and precision – exclusion of false positives. The methodology enables attorneys to create rules that consistently categorize documents.

The results are then tested and improved through statistical sampling techniques, a key innovation in the Cataphora Legal methodology. They are also measurable, transparent, and defensible – critical elements that align with Ernst & Young’s approach to providing information services to clients.

What is puzzling to me about the Cataphora deal is that the company claims it will still be a viable business enterprise after the sale of all of its legal search assets. I would have thought that was their whole business. I had never heard before that it was just one division in the company. When I asked Cataphora about this, Rick Janowski, Director of Marketing, told me:

Just a touch of background before I get to your specific questions. Cataphora is based on technology that has a wide applicability beyond the legal market. We have a broad base of technology, in fact, both patented and what I like to call ‘the best of the rest,’ incorporating with our own advanced solutions well-known and proven technologies, such as clustering, that have been around for many years. When we founded the company, it was with the intent of addressing problems in a wide variety of markets, especially enterprise and government. Legal was one area that was on our radar, but by no means the only one.

Rather than taking outside investment, we chose to build the company from the outset using revenues from customers. The e-discovery market proved to be ideal in this respect – our technology was a great match for the needs of that market, as I think you are well aware. Over several years, this has provided a significant portion of our income. However, it has always been our intent to build our business across markets and, from the start, we realized that divesting a successful legal operation was a possible way of funding further development of these other markets. This is the opportunity that we have been able to take advantage of with this deal.

This deal apparently carves-out search services outside of litigation, ones that will not compete with Ernst & Young’s already strong presence in the e-discovery scene. The cash infusion from the sale will allow Ms. Charnock a chance to innovate and create new search-related products outside of the legal scene. So goodbye Cataphora (I never could pronounce your wacky name anyway), and hello Ernst & Young’s FIDS (who thinks of these names?) with their new linguistic search-expert pals. As Lady Gaga puts it in her classic So Happy I Could Die:

Be your best friend, yeah, I’ll love you forever
Up in the clouds, we’ll be higher than ever
Eh-eh, eh-eh, so happy I could die

Goodbye Iron Mountain

Iron Mountain is your Grand Dad’s paper warehouse company, but it has spent tons of money since Bob Brennan joined the company in 2004 to try to buy its way into the 21st Century with good acquisitions. (Brennan, by the way, became chief executive of Iron Mountain in June of 2008.) Brennan began by acquiring Accutrac Software, Inc., in March 2007. Accutrac provides records management software. Iron mountain then continued by purchasing well known e-discovery vendor, Stratify, on Halloween 2007 for $158,000,000. As the press releases in 2007 explained:

With this acquisition, Iron Mountain augments its suite of eDiscovery services, providing businesses with a complete, end-to-end Discovery Services solution that efficiently manages paper and digital information for discovery and data investigations, compliance and associated records management, and litigation matters.

Ramana Venkata, CEO and founder of Stratify, who became an Iron Mountain employee with the deal, and who was no doubt glowing at the time from the $158 Million cash purchase, had this to say in 2007:

With Stratify, Iron Mountain is now the only company that can collect, protect and store an organization’s information, consolidate matter-specific information from external parties, and deliver high-productivity results through people, process and unique underlying technology to handle investigations and discovery requirements quickly and cost-effectively.

Sounded right at the time. So what happened?

Bob Brennan, now Iron Mountain CEO, continued his digital vision for Iron Mountain when he bought Mimosa for $112 Million in February 2010. I’ve worked with Mimosa email archiving software and like it. I thought that was another good acquisition. According to their press release at the time:

The deal provides Iron Mountain with an integrated archive for email, SharePoint data and files, and gives the company an on-premises archiving option to complement its existing cloud-based archives.

The ability to archive and manage data both onsite, inside the customer’s firewall, and remotely in the cloud makes Iron Mountain a one-stop shop for data capture, archiving and management. It also provides the company’s customers with greater flexibility and choice for managing their information.

Forbes reported at the time that Ramana Venkata, who became the President of Iron Mountain Digital in 2009, the Company’s technology business unit that has just been sold to Autonomy, said that Iron Mountain acquired Mimosa:

… because we believe it offers the best archiving technology on the market, and the company shares our philosophy to help customers reduce the cost and risk of storing and managing information.” The deal will allow Iron Mountain to “store, recover and discover digital content wherever it resides.”

All true. And their were more acquisitions of other smaller digital based companies to beef up their technology business unit. This was a major initiative and a large investment in Iron Mountain’s future.

So again, what happened? How could Iron Mountain give up on digital just a few years later? Did they not hear the motivational words of the GaGa:

Fight and push harder for what you believe in, you’d be surprised, you are much stronger than you think.

It seems like the paper warehousing giant has given up on the 21st Century and is leaving digital storage entirely. I have to question that strategy. I think Bob Brennan had it right the first time. Has the current Iron Mountain leadership team not read EMC data storage projections? How about my video with Jason R. Baron, e-Discovery: Did You Know?, which, by the way, was recently featured in Gartner’s Magic Quadrant for e-Discovery Software. This is the Information Age and paper is a tiny part of it, one which is growing tinier every day.

So what happened? Why did Iron Mountain leave the vision and instead just take the money and run. Two records management type bloggers, Lee Dallas and Marko Sillanpaa, think they know the answer and recently opined:

The big picture here is that Iron Mountain was never a software company nor really a records management company. They are a storage company, and I don’t mean the computer kind. They are a logistics company that’s used to managing locations (buildings, warehouses, and empty mines) and shifting boxes inside them. They don’t know how to do software. They can maybe sell software, but not build and manage software.

I think it just goes to show that it is one thing to have the right vision, which Iron Mountain under Brennan clearly had, and quite another to be able to implement that vision. Like many people, I have many great ideas, well, at least I think their great. But great ideas are a dime a dozen. The hard part is making them happen, the hard part is implementation. So it looks like the sale to Autonomy represents a throw in the towel moment for Brennan and Iron Mountain. They appear to have given up on their dream to not only be your grand-dads information storage company, but also your grandchild’s. Pity. As Lady Gaga says:

Some women choose to follow men and some women choose to follow their dreams. If you’re wondering which way to go, remember that your career will never wake up and tell you that it doesn’t love you anymore.

Personally, I think they should have persevered, they should have followed their dreams. Never give up on a good vision, a good idea. Go with the future momentum. By this decision to give up on digital, they have decided on a future where their paper warehouses will someday be about as filled with paper files as the clerks office in most federal court houses. Think Dunder Mifflin. Of course, Iron Mountain and its shareholders now have a $380 Million consolation. But, on the long term, the real winners here are Autonomy and its shareholders. They’ve seen the video, I know. They seem to get it and, so far, their implementation is pretty good.

Hello Autonomy

Autonomy has made a good acquisition by buying the Mountain’s digital assets. According to ZGNet:

Autonomy will support Iron Mountain’s existing customers; Iron Mountain’s Connected backup service will be offered to existing Autonomy customers; and, the deal will boost Autonomy revenue by $130 million to $140 million a year, with cost savings of $40 million annual a year after the purchase closes.

Autonomy, a British corporation, made quite an impression on the stock market over there with the announcement of this deal. According to Reuters, the day the deal was announced, May 16th, Autonomy shares (AUTN.L) were up 4.6 percent to be the top gainer among London’s top 100 stocks on the FTSE. Way to go Autonomy! Apparently the stock markets think that e-disco is hot too. Here is what Mike Lynch, CEO of Autonomy, had to say about his purchase:

This acquisition makes Autonomy the cloud platform of choice, processing and understanding 25 petabytes of customer information.

By the way, a petabyte is a million billion bytes. Reuters explained that with this deal came six petabytes of Iron Mountain’s customer data from 6,000 customers. This increases Autonomy’s total customer base to over 25,000 users. Goldman Sachs said the deal would enable Autonomy to further consolidate its lead in the archiving and e-discovery data market while also making it the most scalable and functional cloud platform for data. Of course, implementation is key (just ask Stratify) and that depends on Mike Lynch and his executive team. Goldman Sachs seems to have every confidence in them based on what they called Autonomy’s “strong track record with acquisitions.” Note that on June 9, 2011, after doing further research into Autonomy, Goldman raised its price target on the company from 2350 Pounds to 2600 Pounds.

This $380 Million acquisition of Iron Mountain’s digital assets was an all cash deal from Autonomy’s existing cash reserves. Autonomy still has a gross cash balance of at least $700 million after this purchase. I wonder who they will buy next? You know what Lady Gaga says:

Money is completely boring to me. It means nothing, except it feeds my art. Every penny I make goes back into the Haus of GaGa. My Haus of GaGa is something like Andy Warhol’s Factory.

I assume the great John Cleese comic videos on e-discovery were included with the Iron Mountain assets. I hope that Autonomy will now use some of their cash to bring them all back. Iron Mountain added these very funny videos on e-discovery to their web shortly after they purchased Stratify. They took them off their website about two years ago (that’s when I knew the company was in trouble), but a few can sometimes still be found on YouTube, and are worth a look, especially if you are a Monty Python fan like me. For instance, take a look at the Cleese classic on Rule 26. It’s mandatory viewing for my law students.

First Law Suit for e-Discovery Malpractice

The world’s first e-discovery lawsuit has been filed in State Court in California against McDermott Will & Emery. This is not at all funny, but still, I can’t help but think of Lady Gaga’s line from her song Bad Romance:

I want your ugly, I want your disease
I want your everything, as long as it’s free

McDermott is one of the largest and best respected law firms in the world. It has over 1,000 lawyers and offices all over the world. McDermott’s LA office was supposedly using contract lawyers for review work in a Qui Tam case against their client, J.M. manufacturing. They were responding to a request from the government investigating allegations of fraud. Apparently the document production made to the government by J.M. under McDermott guidance included some privileged ESI. Nothing new here. In large volume reviews that is common and is why Rule 502 was enacted and why the federal rules have built-in clawback provisions. But this mistake seemed to really upset the client, J.M. Manufacturing. One wonders about the content of these emails? J.M. reacted by firing their counsel, McDermott, and hiring new attorneys. The requesting parties would not honor the clawback and would not return the privileged documents. They instead claimed that the production was not inadvertent (as if it would ever be done on purpose). So in the face of this mess, J.M. decided to file suit against its law firm, McDermott Will & Emery, and claim they were negligent. Specifically, they allege negligence in the improper supervision of contract lawyers.

It looks to me like a res ipsa loquitur type of b.s. argument. As I have said many time before, the law does not require perfection, that is an impossible standard. It only requires reasonable efforts, and in large ESI projects there will always be mistakes, not matter how reasonable, and even superlative, your efforts.

This malpractice suit is an important and widely talked about event because it represents the first time, to my knowledge, that a law firm has been sued for e-discovery malpractice. We have all been waiting for this to happen. It was inevitable. But it is still shocking to see it happen to a firm like McDermott, and to see the weak basis for the claims. This is not an obvious mistake case where for instance a hold was never issued because a lawyer said it was unnecessary, or something like that. It is a claim of error by reviewers not seeing privileged documents before they were produced. They were reviewing a very large collection, representing email and loose files from 160 custodians. I can’t tell the exact numbers involved from the one-sided allegations in a complaint, which is all we really know about the dispute so far, but you know there had to be several million files. Allegedly 3,900 privileged documents were produced. This omission and production is alleged to be legal malpractice.

Specifically the Complaint in paragraph twelve alleged:

12. Defendants owed PLAINTIFF a duty to render legal services competently. Defendants breached that duty by, inter alia, producing privileged documents to parties adverse to JME in litigation without obtaining its informed consent, failing to supervise attorneys and vendors MWE contracted with to perform the review and production of documents, and charging JME fees and costs for performance of such work that was not properly performed, or not performed at all.

I’ve studied this complaint and in my probably somewhat biased opinion it is a whole-cloth production. Get this, it not only sues McDermott, which it calls an unknown entity, but also sues 100 John Does, supposedly representing unknown lawyers in the law firm that represented them in the case. Come on! Don’t they know who any of their individual lawyers were? Maybe they didn’t know all of the contract lawyers, but they must have known some of the McDermott lawyers. Seems a bit over the top to me to sue 100 John Does. I am reminded of the words of Lady Gaga in her song The Fame from the album by the same name:

All we care about is
Runway models, Cadillacs and liquor bottles
Give me something, I wanna be
Retro glamour, Hollywood, yes we live for the fame

The first count of the complaint alleges professional malpractice, but that’s not all. It has a second count for breach of fiduciary duty and a third count for an accounting. The second count has some outrageous language in it about intentional fraudulent conduct that is malicious and despicable, and oppressive, meaning despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person’s rights. See paragraph 18 of the Complaint. Please. Could missing privileged documents really be an act of cruelty? As Lady Gaga said in her song, Speechless:

Could we fix you if you broke?
And is your punch line just a joke?
I’ll never talk again, oh boy, you’ve left me speechless.

The third count seeking an Accounting is more interesting from an ethics perspective. It appears to be based on an allegation that the law firm marked up the charges of the contract review lawyers without telling the client. Here is the “information and belief” language used in the complaint:

20. PLAINTIFF is informed and believes and thereon alleges that Defendants “marked up” fees and costs paid to contract attorneys and vendors and failed to disclose that such fees and costs were being “marked up.” Because Defendants did not have a written contract with JME, or other authority, to “mark up” such fees and costs, such “mark up” was unlawful.

21. The amount of the “mark up” is unknown to PLAINTIFF and cannot be ascertained without an accounting of the amounts paid for such contract attorneys and vendors.

I predict this case will end soon and will never go to trial. Still, the ice has been broken. I am reminded of the slogan that men used to say about women, can’t line with them, cant live without them. Of course, I’m aware that is the way that most people feel about lawyers too. But still, cruel malpractice from miss-coding documents in a 160 custodian review? Please. As Stefani Germanotta said in Just Dance: