The legal and economic implications of electronic discovery: As computer technologies continue to develop, concerns have arisen that, because of the sheer volume of electronically stored information, requests for electronic discovery e-discovery can increase litigation costs, impose new risks on lawyers and their clients, and alter expectations about likely court outcomes. For example, concerns about e-discovery may cause businesses to alter the ways in which they track and store information, or they may make certain types of plaintiffs and defendants more likely to sue, settle out of court, or go to trial.
This paper presents the results of an exploratory study to identify the most important legal and economic implications of e-discovery. The authors interviewed plaintiffs and defense attorneys as well as corporate information technology staff and in-house counsel, and they reviewed the current state of e-discovery law and procedure. They then developed a preliminary model to explore the range of plausible effects that e-discovery might have on case outcomes. After summarizing this research, the authors propose five studies that will evaluate how e-discovery affects and is affected by technology, costs, business practices, legal outcomes, and public policy.
Performance evaluation and Army recruiting by James N Dertouzos 13 editions published in in English and held by 1, WorldCat member libraries worldwide Traditional performance metrics, such as number of contracts signed per month per Army recruiter, do not adequately measure recruiter effort, skill, and productivity.
The authors develop a "preferred performance metric" that takes into account the difficulty of recruiting different types of youth in various markets and propose short-term changes to the system that would more accurately assess recruiter effort and skill. Human resource management and Army recruiting: Army Recruiting Command USAREC is faced with the challenge of ensuring that the flow of qualified volunteers is adequate to meet future active-duty accession requirements. This report documents research methods, findings, and policy conclusions from a project analyzing human resource management options for improving recruiting production.
It details research designed to develop new insights to help guide future recruiter management policies. The research involves econometric analyses of three large and rich datasets. The first analysis compares the career paths of enlisted personnel, including recruiters. The second analyzes individual recruiter characteristics and links those characteristics with their productivity, controlling for a variety of independent factors. Finally, the research focuses on station-level recruiting outcomes, paying close attention to the management options that can affect recruiter production and effort.
These empirical analyses demonstrate that various types of human resource management policies can be very helpful in meeting the Army's ambitious recruiting requirements. For example, the findings have implications for human resource policies in the areas of selecting soldiers for recruiting duty, assigning recruiters to stations, missioning to promote equity across recruiters, missioning to increase recruiter productivity, using promotions to motivate and reward recruiters, and screening out recruiters who are under-producing.
Although the gains from any individual policy appear to be modest, the cumulative benefits of implementing multiple policies can save the Army hundreds of millions of dollars annually. This work will interest those involved in the day-to-day management of recruiting resources as well as researchers and analysts engaged in analyses of military. Fair value accounting, historical cost accounting, and systemic risk: In the wake of the financial crisis, conflicting arguments have been made about the contributions of valuation approaches in triggering the crisis.
This report investigates and clarifies the relationship between these two accounting approaches and risks to the financial system. The authors examine the risk implications of FVA and HCA in the various situations in which each is used; assess the role that these accounting approaches have played historically in financial crises, including the financial crisis, the savings and loan crisis of the s, and the less developed country debt crisis of the s; and explore insights about systemic risk that can be gleaned from better understanding the accounting approaches.
The authors find that FVA was probably not a primary driver of the crisis. Instead, both accounting approaches can provide useful information for different contexts when applied rigorously, but when they are implemented poorly or when regulatory oversight is weak, both FVA and HCA can produce misleading information that can increase systemic risk across the financial sector.
The authors conclude with a series of recommendations for how FVA and HCA, and the financial information that both methods generate, can be improved to better protect against systemic risk to the banking sector in the future. The legal and economic consequences of wrongful termination by James N Dertouzos Book 4 editions published in in English and held by WorldCat member libraries worldwide Although there has been an uproar over wrongful termination litigation, the aggregate legal costs are not large, even compared with the number of involuntarily terminated employees who are not otherwise protected by collective bargaining agreements, civil service regulations, or explicit employment contracts.
The direct costs may understate the effects of wrongful termination suits. The fear of such suits could prevent managers from being flexible in adjusting to business cycles, new investment opportunities, or evolving technologies. In response to wrongful termination suits, administrative costs may rise substantially. Costly procedural changes could be balanced by benefits stemming from more efficient utilization of human resources, making everyone better off.
Labor market responses to employer liability by James N Dertouzos Book 5 editions published between and in English and held by WorldCat member libraries worldwide The labor market in the United States has always been more flexible than labor markets of other Western societies. American employers have been relatively unencumbered in dismissing poor performers or adjusting the labor force in response to exogenous changes in product demand, technological change, or the competitive environment. Recently, however, state judiciaries have adopted a number of wrongful-termination doctrines that challenge the "employment-at-will" rule.
This report provides the first empirical estimates of the aggregate effects of wrongful termination. It outlines the major exceptions to employment at will that have been adopted by state court jurisdictions. It also examines the timing and pattern of state adoption of the new doctrines. In an econometric analysis, it identifies those political, legal, and economic factors that are correlated with, and possibly causes of, the changes in court views of employee job protection.
What technologies or applications have been avoided because of e-discovery concerns? Then, after a year or two of implementation, one could directly analyze intermediate outcome measures in federal court cases, such as the scope of discovery requests and frequency of sanctions. As a result, settlements demands will tend to increase more often than not.
Thus, depending on the distribution, settlement probabilities can either increase or decrease. An increase in costs will increase the probability of settlement since both parties will wish to avoid such costs. Davis What occurs while public prosecutors, the main strong officers within the legal justice process, search convictions rather than justice?
Options for Future Research by James N. See infra notes — Of special significance, perhaps not entirely recognized by the original rules, is that the extraordinary authority to force the other party to produce all of its relevant documents makes depositions much more effective. It is by confronting a witness with her own documents on the record, under oath, and with the help of cross-examination that an examiner can extract important admissions.
Moreover, the use of interrogatories and the opportunity to depose record-keepers early during discovery provide all-important information about the existence and location of documents. See infra notes —39 and accompanying text. Options for Future Research 1 describing the vast amount of discoverable data available in an electronic world.
The rules do not place any specific limits on the kind or quantity of information that may be obtained via document requests. As is well known to U. While this statistic is vaguely appreciated outside the United States, the full extent and logistical requirements of litigation discovery in a U. The FRCP allow parties to engage in the exchange of information with very little supervision by the judge.
In a departure from prior practice, and contrary to civil law jurisdictions, In civil law jurisdictions, parties must petition the court for an order to obtain evidence. Before seeking an order to compel or a protective order from a judge, the parties must first attempt to resolve their dispute. Discovery practice is principally a sustained negotiation between the parties. When one party loses an unreasonable discovery motion, that party must pay the costs of the opposing party, which further discourages involving judges.
Objections based on lack of relevance are disfavored. Orders of protection in document discovery are granted sparingly. The results of discovery—interrogatory responses, documents, deposition transcripts, and other information—are not filed with the court, unless provided as evidence on a substantive motion; nor does the court review a majority of the testimony or documents produced during discovery.
This shows how decentralized the process of fact investigation is. The structure of the U. This means that the parties need not rely on the initiative or the presence of a judge; they control and perform this time-intensive phase of adjudication on their own. This reduces the burden on judges and prosecutors, whose resource constraints are most acutely felt in discovery; expedites the process; and enables more in-depth investigation by parties with the interests, expertise, and resources suited to pursue them.
As we discuss in the next section, federal rules of discovery influenced practice in state courts, like the Delaware Court of Chancery, which are important venues for corporate litigation. Tompkins held that federal courts apply state and federal substantive law, but federal procedural rules. State courts, where most shareholder derivative actions are litigated, apply state procedural rules. Do state procedural rules afford the same kind of probing discovery as the federal rules? The short answer is yes. While there are differences between federal and state court rules, which can easily trip up attorneys not familiar with local practices, as of , most U.
In their study, comparing state and federal rules, Oakley and Coon found that twenty-two states, plus the District of Columbia, could be classified as having procedural systems that were true replicas of the FRCP. Further, ten states, including Arkansas, Delaware, Georgia, Idaho, Kansas, Mississippi, Nevada, North Carolina, Oklahoma, and South Carolina largely replicated the federal rules, except for slight variations or codifications that had nothing to do with the nature or conduct of discovery. The FRCP were adopted in toto with some minor differences in at least thirty-five states, including Delaware.
But most jurisdictions, including the ones that follow their own rules, like California, New Jersey, and New York, do not significantly differ from the federal rules with regard to the scope of discovery or the available tools and procedures. These rule changes, however, did not expand discovery; if anything, they attempted to expedite discovery and limit discovery excesses by, inter alia , requiring parties to agree on a discovery plan early in the case, Fed.
But the basic version of the FRCP prevails in all states. This is true of Delaware. But they are, in certain respects, more permissive than the ones presently in effect in federal court. Thus, for example, Delaware Chancery Court Rule 26 is almost identical to the version of Federal Rule 26 from the s, when the philosophy of liberal discovery was at its apex. The same is true for other jurisdictions. It is not ground for objection that the information sought will be inadmissible at the trial if the information sought appears reasonably calculated to lead to the discovery of admissible evidence.
Similarly, the chancery rules have no presumptive limits on the number of depositions or the number of interrogatories, as the Federal Rules now do. But the Delaware Chancery amended its electronic discovery rules in to bring them in line with similar amendments to the FRCP. In short, the nature and scope of discovery in civil litigation is very similar in federal and state courts.
The tools of discovery deployed in federal courts including interrogatories, depositions, the authority of attorneys to issue subpoenas, and the right to obtain all nonprivileged information, including ESI are also available in state courts. Discovery is broad in scope, conducted by the parties themselves in accordance with the rules, and performed with minimal involvement by a judge.
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As Delaware shows, this does not mean that state rules are exact replicas of the federal rules, but that they operate in substantially the same way and produce substantially the same results. And, if anything, discovery in federal courts can sometimes be less permissive than in state courts. This Part describes in detail how litigation discovery has shaped U. Section A shows how the practices of offensive and defensive discovery generate and disseminate company internal information relevant to the determination of management misconduct at every stage of shareholder litigation, even prior to the beginning of formal discovery.
It argues that the process of discovery generates positive information externalities and disciplines management ex post and ex ante. Section B briefly discusses how the rules and practices of discovery have shaped mechanisms of internal corporate governance that protect against mismanagement and wrongdoing. Section C describes changes in substantive law that have been influenced by discovery.
Second, we describe the gradual transformation of shareholder information rights into vehicles for prelitigation discovery. Third, we consider the impact of information obtained through litigation discovery on changes in securities regulation. Section D concludes that litigation discovery complements federal securities disclosure and serves as a form of ex post disclosure. Thompson, Securities Litigation and Its Lawyers: Commenting on the burdens imposed on securities class action plaintiffs by the Private Securities Litigation Reform Act of , Lynn A.
False positives lead to overdeterrence, whereas false negatives lead to underdeterrence. A Critical Analysis , U. See Stout, supra note 42, at But neither Stout nor others See, e. Broad discovery reduces both false positives and false negatives by increasing accuracy, because it affords access to critical information. The better the information, the greater the accuracy, and the less likely a judge is to conclude from a single rotten apple that every apple in the barrel has worms.
In re Caremark International Inc. Derivative Litigation , A. Chancellor Allen could make these findings in the civil case only because of extensive civil discovery into what the board knew and what systems of monitoring and reporting the company had in place. Litigation discovery is integral to private enforcement and defines shareholder litigation in concrete and specific ways. Shareholder derivative actions are subject to different rules that intricately calibrate under what circumstances shareholders will be given the opportunity to obtain discovery against directors or officers of a corporate defendant.
Specialized judicial doctrines and procedural rules have emerged in this context. The business judgment rule, See, e. Van Gorkom, A. Absent fraud, illegality, or self-dealing, the business judgment rule ordinarily bars courts from reviewing the decisions of corporate management for breach of fiduciary duty. Van Gorkom , A. Thompson, Corporations and Other Business Associations: Cases and Materials 5th ed.
Bennett N. Delaware followed a substantially similar rule in Zapata Corp. Maldonado , A. The hurdles to obtaining discovery that plaintiffs face have developed over time, mostly in response to a new wave of shareholder derivative actions during the s. Perhaps not incidentally, the s amendments to the FRCP represented the highpoint of liberal discovery, generating backlash by the business community. Subsequent developments in securities litigation resulted in the passage of the Private Securities Litigation Reform Act of The PSLRA raised the pleading requirements for securities fraud actions and instituted other measures, such as a mandatory stay of discovery during the pendency of any motions to dismiss, in response to a wave of securities class actions during the late s and early s.
When plaintiff-side attorneys responded by filing actions in state court, Congress passed the Securities Litigation Uniform Standards Act of SLUSA , which preempted most state securities litigation. State cases filed in the aftermath of the PSLRA often had nearly identical claims to those brought by the same law firm in federal court. Hearing Before the Subcomm. The passage of SLUSA prevented plaintiffs from avoiding the discovery stay in federal court because state courts would apply their own procedural rules.
While the corporate defense lobby successfully argued that the high discovery costs effectively allowed plaintiff-side firms to blackmail defendants into settling cases without merit, this is only one side of the story. In sum, the special hurdles to obtaining discovery have evolved in response to the special threat of discovery for corporate defendants in probes of corporate internal wrongdoing.
The threat of discovery emanates from multiple factors. Discovery is a costly procedural mechanism per se. Therefore, they gather as much information as possible. See supra note 42 on the costs of discovery. Moreover, unlike civil law jurisdictions where the loser pays, U. Thus, even if a defendant corporation succeeds on the merits in a shareholder action, it is saddled with its own litigation costs—which largely flow from discovery. It is the defendant corporation that must search for, review, and produce almost all of the documents and witnesses.
But the threat of discovery is not limited to the high litigation costs incurred by corporate defendants. Quite apart from the costs, discovery increases chances that management will face liability for wrongdoing—whether related or unrelated to the claims set forth in any given complaint. Even if the threat of personal liability is remote, See Black et al. Todd Henderson, Impact of the Rakoff Ruling: Such mistakes may result in direct and indirect financial penalties.
Executives may be forced to forgo expected compensation. See In re Bank of Am. Finally, management also faces opportunity costs as a result of discovery. The rules governing shareholder litigation are thus structured by determinations about when to allow, and when to deny, access to discovery. Special features that characterize contemporary shareholder litigation in the United States—and that are generally taken for granted by U. These characteristics do not exist in other countries, because discovery does not exist. Some have objected to our thesis on the central importance of discovery by arguing that discovery materials, like corporate internal documents, e-mails, and witness testimony, generally do not become available to nonlitigants.
Where discovery materials are subject to confidentiality agreements, only the litigating parties have access to these materials. And the public only gains access to information obtained through discovery where such information is disclosed during hearings in open court—principally at trial. But cases are almost always settled before trial. Therefore, discovery cannot generate the kind of information externalities or disciplinary results that we suggest.
In response, we first note that some shareholder derivative actions, like Disney Disney II , A. We address such cases in subsection 1. Discovery, however, is presumptively public before and after trial. Plaintiffs are not required to enter confidentiality agreements that cover documents and testimony produced during discovery.
Moreover, confidentiality agreements have their limitations. Finally, even if discovery materials are not filed with the court, explored during settlement hearings, or otherwise made available to the general public, discovery nonetheless generates detailed information about potential corporate internal wrongdoing during defensive discovery and during prediscovery internal investigations.
In both cases, such information is shared with gatekeepers, and typically with regulators and parties to any settlement. We discuss these scenarios in subsections 4 and 5. Critics of shareholder litigation have focused on discovery costs, See sources supra note A radical solution would be elimination of derivative litigation. Recent empirical studies show that managers of public companies are rarely subject to personal liability, and liability for outside directors is almost nonexistent. But our discussion of the Disney litigation shows that, independent of any remedy, shareholder actions reveal and publicize substantial information about corporate internal practices, controls, judgments, and failures, including information about culpable wrongdoing and wrongdoing that falls just short of liability.
The knowledge and information produced by discovery about what really happened and how executives run their companies is an informational public good that private enforcement generates for markets, institutional investors, regulators, courts, gatekeepers, self-regulatory organizations, and the general public. The public good of information generated by shareholder litigation is illustrated by the Disney example.
The Disney court articulated new standards of fiduciary duty in board decision-making, relying on the facts revealed by discovery, which became part of a much broader corporate governance discussion about executive pay practices. Discovery in this case, and many other cases, such as Enron , Worldcom , and Tyco , informed the broader executive pay discussion, which ultimately led the SEC to require that public companies include a compensation, disclosure, and analysis CDA section in their periodic disclosures.
As Thompson and Thomas have stated,. Public company suits continue to be filed and to make new law. The impact of decisions in derivative cases like Caremark , Disney , and Oracle goes well beyond the outcome of the cases themselves. These decisions changed the rules for future legal practice by allowing well-motivated legal counselors to get their clients to accept better conduct and procedures.
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For an example of such advice on best practices after Disney , see Kevin M. Just as securities regulation is influenced by litigation discovery, shareholder litigation is also frequently driven by the actions of the securities regulator. Administrative agencies play a crucial role in investigating and requiring information about alleged corporate wrongdoing. This role results in an important interaction between shareholder private litigation and SEC investigations.
In this respect, discovery is not the only mechanism available for ex post information gathering and may be induced by other regulatory actions. But investigations and enforcement actions by the SEC have serious shortcomings with regard to information production. SEC investigations are generally confidential, and those confronted with an SEC enforcement action will provide the SEC with information, including documents and testimony, subject to a confidential treatment request.
Also, unlike a civil complaint, an SEC notice of formal investigation is confidential. Sachs, Securities Litigation and Enforcement: Cases and Materials 3d ed. Interviews are generally preferable whenever parallel proceedings or litigation exists or is likely, as such discussions with the staff will not generate witness transcripts as would be the case with formal testimony that may be discoverable.
Discovery, by contrast, promotes an important informational flow to the judiciary, to the administrative regulatory authorities, and to the public. Moreover, the SEC cannot pursue all cases that it should. There are many reasons why this is so. The SEC does not have nearly enough staff or budgetary resources to investigate every allegation of wrongdoing.
One response is to dramatically increase the resources of the SEC. See Rose, supra note , at — And there are political limits to further increases. Furthermore, according to the theory of regulatory capture put forward by George Stigler, the SEC may not have the right incentives to do so. The SEC staff may suffer from selection or cognitive biases, or make mistakes in evaluating cases, which may interfere with efficient oversight. Research, Working Paper No. The SEC may focus on certain types of claims, in which wrongdoing is easier to observe. Finally, the SEC may simply not have the authority to take action in cases in which there are regulatory gaps, when the supposed wrongdoing falls under the overlapping authority of state law or a foreign jurisdiction.
All of these administrative issues, biases, and hindsight may prevent the regulator from making the best or most efficient decisions from a market perspective. In situations where the regulator has failed to pursue enforcement actions, the system must rely on the work of private attorneys general to oversee market participants and investigate misconduct.
As the Disney litigation and many other cases show, often a complaint by shareholders is first brought by private plaintiffs. As described in our discussion of the Disney litigation, the very process of discovery disciplines management, aside from the generation of informational public goods. Becoming the object of the kind of intense adversarial scrutiny that the Disney management endured is burdensome and disciplinary per se. Discovery forces managers to answer questions they do not want to answer; it challenges their power and authority in a public setting; it requires them to reveal their business secrets; and they face contempt and possible criminal charges if they engage in misrepresentations.
The process can result in employment and reputational consequences. Discovery may trigger a duty to file a Form 8-K with the SEC or restate earnings as was typical in the stock options backdating cases , because once obtained, whether routinely or through litigation discovery, material information must be disclosed. Such probes also raise the specter of criminal liability and other sanctions by regulators.
An International Guide , supra note 53, at 53, paras. Finally, there are opportunity costs associated with the process for all executives affected by discovery. Thus, they must exercise extreme care in the discharge of their disclosure and oversight responsibilities to make sure they are not personally damaged in this event.
Cases informed by extensive fact investigation through discovery that go to trial result in a decision on the merits. This will shape case law development and legal change, as we discuss in section C below. But what about cases that do not go to trial? These include most shareholder litigation.
Critics contend these cases do not have the benefit of exposing information to the public because discovery is not revealed at trial. In response, we describe how cases on summary judgment also publicize information, as do cases settled prior to summary judgment. Even cases settled prior to the motion to dismiss, as we will show, often generate substantial information on corporate internal practices and wrongdoing. An important point that has been overlooked is that defensive discovery produces at least as much information as adversarial discovery produces, and that information is shared with gatekeepers and regulators even prior to the motion to dismiss.
The same is true for corporate internal investigations. Below we examine what information is revealed at each stage in the litigation process. Cases that go through discovery and are resolved upon the filing of a motion for summary judgment will typically produce a substantial portion of the information that the parties would have presented at trial.
Motions for summary judgment are decided based on evidence submitted to the court by the parties. Motion papers include statements of fact that identify and explain why, based on all the evidence presented to the court on the motion, there is no need to go to trial.
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Admissible evidence is attached to the motion in the form of exhibits. In shareholder actions, plaintiffs may present the court with thousands of pages of compromising documents, excerpts from deposition transcripts, responses to interrogatories and requests for admission, and other admissible evidence. For more than a decade now, the federal trial courts have required electronic filing on PACER, making this information readily available online, and increasingly entire dockets are becoming available on Bloomberg and other legal information services.
PACER is provided by the federal Judiciary in keeping with its commitment to providing public access to court information via a centralized service. Attorneys who practice in federal court, legal academics, law students, librarians, and journalists working for a major news organization have full access to documents filed with the federal courts in every case across the country.
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This case consolidated securities fraud, derivative, and ERISA claims against Bank of America for misstatements and omissions during the acquisition of Merrill Lynch following the financial meltdown. The full docket, including all pleadings, motions, court decisions, and exhibits filed with the court, are readily available, for a per-page fee, on PACER. Shortly before the parties reached a settlement on June 20, , plaintiffs and defendants each moved for summary judgment. In the month of June alone, the parties attached at least exhibits—including thousands of pages of deposition transcripts, documents, e-mails, confidential memos, and other information, to support their motions.
Again, all of these exhibits, and thousands of others, are readily available online to anyone with a PACER account. The exhibits paint a picture of top executives at BofA pointing fingers at one another and their attorneys as to who was responsible for negotiating, overseeing, and monitoring key terms of the merger and for disclosing relevant material information in their SEC filings. The filing in the shareholder suit included sworn testimony from Mr. Lewis in which he concedes that before Bank of America stockholders voted to approve the deal he had received loss estimates relating to the Merrill deal that were far greater than reflected in the figures that had appeared in the proxy documents filed with regulators.
Times, June 4, , at A1. The settlement was negotiated even as the compromising discovery materials were being filed with the court. The Bank of America case illustrates how settlement prior to trial does not necessarily affect the publication of information revealed by discovery. Top management did not escape scrutiny in extensive depositions. United States, U. Settlement rates are likely to increase where parties have full access to the facts and information before trial, as intended by the rule-makers.
In a model with one-sided discovery, Sobel shows that mandatory discovery rules reduce the probability of trials. In civil law jurisdictions, which do not allow broad discovery, settlement rates are lower. Huang reports an interesting development after the introduction of civil discovery in Taiwan in a legal reform. An Empirical Answer , 6 J. He shows that settlement rates for civil cases consistently increased over time in all district courts following the adoption of the discovery regime.
Settlements before trial thus introduce a selection bias into the empirical debate about outcomes in shareholder litigation because the very cases that could lead to liability are likely to be settled; in other words, the same cases in which discovery has turned up evidence that would encourage the defendants to settle. All class action and derivative settlements must be approved by the court. As the Bank of America case showed, judges will sometimes insist on additional discovery before approving a settlement.
The more damning the information revealed by discovery or internal investigations, discussed below , the more likely a case is to settle before trial. The lack of liability, including personal liability, thus does not necessarily show that shareholder litigation fails to discipline corporate wrongdoing—as most of the literature concludes.
Information about alleged wrongdoing is revealed and will be assessed by market participants, with the potential for generating serious reputation damages. And settlement values will also reflect the seriousness of the alleged wrongdoing. We show in the next subsection how cases resolved during discovery also reveal substantial information about mismanagement or management misconduct. In cases settled prior to summary judgment, discovery materials are not usually filed with the court unless required to support a motion.
But discovery materials are nonetheless available under various circumstances. In federal securities class actions, the parties may file discovery materials with the court in connection with the motion for class certification. In shareholder derivative actions, plaintiffs may support their complaint with evidence obtained by means of a shareholder information request. The findings must be set out in sufficient detail to explain to class members and the appellate court the factors that bear on applying the standard.
In so doing, courts may request the full settlement agreement from the parties and review what discovery revealed. The court may also require additional discovery before approving a settlement. Nonetheless, the court engaged in a lengthy examination of the factual record. In reviewing the standard for approving settlements in shareholder derivative actions, Chancellor Allen held that. It does not tend to show knowing or intentional violation of law. The Caremark settlement included several corporate governance improvements, including a changes in compensation structure, commissions, and fees paid variously to employees, agents, physicians and health care providers; b mandatory review of material changes in government health care regulations and their implications for Caremark on a semi-annual basis by the full Board; c written disclosure of the financial relationship between Caremark and health care providers to patients; d the establishment of a four-member board committee on compliance and ethics with at least two independent directors to meet at least four times a year to carry out these policies, monitor compliance, and report back to the full board; and e direct reporting by corporate officers to the committee, which was charged with reviewing and approving contracts and new contract forms with the assistance of outside counsel.
In sum, although the case settled before summary judgment, Caremark did publicize facts obtained through discovery. More generally, the Caremark decision represented an important development in corporate case law. One standard criticism of settlements in shareholder derivative and class actions is that they do not accurately reflect the merits of the case. The sole benefit to the shareholders on whose behalf the plaintiffs.
I am sure there are skilled advocates who have persuaded themselves, at least, that this process represents something more than a highly stylized form of larceny. This benefit need not be pecuniary, but may consist in corporate governance improvements. On this view, lawyers maximize their returns and the whole settlement effort constitutes nothing more than a rent-seeking device. Settlement negotiations are not affected by discovery, and the judge merely rubber-stamps the settlement. According to this rationale, parties and the litigation itself do not benefit from discovery, because litigation results have been somehow fixed ex ante.
There are many examples one could cite to make this point. And an empirical study shows significant reputational penalties for compensation committee members of firms involved in backdating. Evidence from Option Backdating , J. It neglects that important information concerning the diagnosis of the misconduct may have been revealed by the discovery process. Assessing the quality of structural settlements is an empirical issue we do not pursue here, but we note that these agreements may include important changes in executive compensation, changes in board composition, and restrictions on self-dealing transactions.
Moreover, the nature and content of the changes themselves respond to information obtained during discovery. Settlement of representative litigation is conditioned on confirmatory discovery. In Caremark , for example, the board agreed to some very concrete changes that addressed the failure of the board to become aware of the compliance problems within the company.
See Order, In re Inspire Pharm. All this leads us to conclude that judicial approval of settlements is not as meaningless as is often suggested. Recent studies refute the view that, in settling class actions, the merits do not matter. But even assuming that the information revealed by discovery is deficient in certain cases, or lawyers fail to propose useful corporate governance improvements, the general thesis that discovery promotes corporate governance can still be sustained in a Kaldor—Hicks framework.
Discovery may generate significant positive externalities in a few cases, or small positive externalities in a large number of cases, which may compensate for these flaws. In other words, instead of looking only at the aggregate costs of discovery, even imperfect outcomes may produce positive effects that result in compound aggregate benefits to corporate governance, whether at the firm level or systemwide.
To be sure, we do not deny that parties are driven by economic incentives and self-interest in prosecuting a civil law suit. Rent-seeking will certainly drive outcomes in some cases. We do not attempt to provide a comprehensive solution to this problem here. Judges should monitor settlements to maximize the value of the information revealed by discovery.
Sale, Judges Who Settle , 89 Wash. Some cases do not go through the entire process of discovery. But even if discovery is not completed, its disciplining function is much more extensive than often recognized. The disciplining function of discovery is typically associated with the ability of a plaintiff to obtain information from a defendant corporation, that is, with offensive discovery. But the disciplining function of defensive discovery is rarely, if ever, considered. Party-on-party discovery involves both offensive and defensive discovery.
Every party to a lawsuit may serve and must respond to discovery requests during the discovery period approved by the court. In a typical shareholder derivative action, the plaintiffs are the ones who will conduct most of the offensive discovery, because their interest is to investigate the company. Defensive discovery is a task that all parties to the litigation must complete. It typically begins with the collection of information from the client even before discovery begins.
There is a disciplining effect to having litigation counsel perform the internal investigation necessary to prepare the case and conduct defensive discovery. Consider concretely what occurs when a large public corporation defends itself and its executives against a shareholder action. A good faith discovery effort and standard practice requires that litigation counsel to a corporate defendant must collect, restore, sort, and review a much larger quantity of electronic information and documents than are eventually disclosed.
Havener, Defensive Strategies in Discovery: A Refresher , A. After you have reviewed those documents, select those that are responsive, note documents that are not clearly responsive but that may have some significance to your claims or defenses, and remove and log any privileged documents. Then follow up with your client to confirm that nothing has been missed. This includes highly confidential documents subject to attorney—client privilege, many marginally relevant documents, as well as documents that will eventually not be produced.
Public companies typically hire outside litigation counsel for shareholder litigation—especially in cases alleging management misconduct or securities fraud. The technology and complexity of ESI discovery make it very hard, if not impossible, for the executive suite to manage or limit what information is turned over to outside counsel once an investigation gets underway.