27VOLKSWAGENjp3-articleLargeSince 2008, Volkswagen programmed vehicles sold in the U.S. to falsify government emissions tests, enabling diesel VWs to spew forty times more pollutants than the law allowed.  I don’t even have to include the lawyerly qualifier, “allegedly,” because, after years of denials, misdirection and efforts to undermine investigations, Volkswagen has fallen on its sword and admitted its intentional misconduct.  It’s a breathtaking revelation in every sense of the word, and it’s going to drive a lot of American litigation…and e-discovery.

I thought we might get a jump on the discovery issues in terms of both the usual and unique challenges that Volkswagen and its suppliers, dealers and counsel face, as well as the discovery duties of the estimated 482,000 owners of affected vehicles in the U.S., many of whom are sure to file individual actions or join class-actions seeking damages or rescission.  Let’s not forget the regulatory and Congressional investigations that will ensue, and actions by shareholders and dealers.  Before it’s over, billions of dollars will change hands, some of it in court; and because this concerns software subroutines, electronic evidence is key. 

High Expectations and Culture Clash
Volkswagen is no stranger to U.S. litigation, and it even has a track record going back to the 1970s of defending itself from charges that it deployed emissions “defeat device” technology to deceive regulators.  VW has legions of big firm U.S. lawyers.  It well knows what U.S. jurisprudence demands in the way of preservation and discovery.  By the same token, Volkswagen is a quintessentially German company.  You can read into that what you wish, but I mean that Volkswagen is based in a country wholly lacking U.S.-style discovery and a culture that values personal data privacy over corporate disclosure.  It’s a business culture that exalts process and reveres recordkeeping.  None of this is bad; but, it’s surely different, and it’s a powder keg in terms of the potential for culture clash when U.S. lawyers seek to dig deeply into what happened in Wolfsburg.

Being a German engineering company and the world’s largest automaker, courts and opponents will properly demand a high degree of e-discovery competency from VW and its counsel.  Because the case stems from an admitted fraud, little slack will be cut, and production delays attributable to compliance with German privacy laws will be greeted with skepticism and likely cast as intentional obstruction and evasion.  The saving grace for VW is that this is a matter of “bet the company” dimensions with intense scrutiny from the highest levels of corporate governance.  Works Councils and others who might be slow to grant approvals will quickly fall in line when counsel demands data for the ‘Defeat Device Cases.’  At first, that is; but over time, the urgency fades and it gets harder and harder to gain cooperation and meet deadlines.  VW’s counsel would be wise to get “all” the potentially responsive data out quickly and made part of a discrete and accessible repository while everyone still cares enough to respond to orders to jump with, “How high, mein herr?”  Easier said than done; but, it will spare counsel grief down the line.

Parties
Volkswagen is remarkable in that, despite being the biggest car maker, it’s operated more like a closely-held concern.  Slightly over half of its stock is in the hands of a single fractious family (the Porsche and Piëch clans).  The state of Lower Saxony in northwestern Germany owns 20.3 percent, and the Qatar Investment Authority owns 17 percent of common stock.  This leaves just 12% of ownership in the hands of other investors.  Volkswagen’s stock price has been crushed by the recent revelations.

Per Reuters, securities litigation against the company will probably be centered in Europe, because Volkswagen common shares are not traded on U.S. exchanges and Germany permits group actions by shareholders.  That’s not to say that there won’t be any investor suits in the States.  VW American Depository Receipts are traded here (OTC VLKAY) and have also fallen off a price cliff.  There will surely be many sniffing around to see if insiders (or those tipped off by insiders) sold shares while privy to the questions raised about the vehicles.

In terms of class actions by U.S. vehicle owners, potential plaintiffs can be readily identified through public car registration records; so, unlike the BP oil spill or most pharma liability litigation, advertising for claimants is probably not going to play a big role.  Instead, it may be a race to see who gets to the owners first: VW or those jockeying to be class counsel and to hold coveted plaintiffs’ steering committee roles.  Considering the importance of electronic evidence, candidates for steering committee roles should be prepared to demonstrate fluency in e-discovery and rustle up some database doyens.  Fluency in German wouldn’t hurt either as most of the witnesses will speak English, but may exercise the right to be questioned in their native tongue.

If only as an effort to defeat diversity and keep out of federal court, early-filing plaintiffs will likely name local dealers and perhaps even local repair shops and private inspection facilities as parties.  My hunch is that those machinations won’t mean much in the long run as this monster will end up as federal multi-district litigation (MDL).

I’ve yet to hear component suppliers mentioned as culprits; but, I’d expect that VW wasn’t building its own control modules or electronic components.  Accordingly, some claimants may file shotgun petitions naming component suppliers.  If liability exposure and fines threaten to push VW to insolvency, claimants will doubtlessly seek compensation from other potentially culpable parties.  I expect most lawyers would agree that companies having anything to do with repairing, inspecting, testing, designing, building, assembling, supplying or selling any part of the emissions systems for Volkswagen or Audi diesels in the last decade would be well-advised to anticipate litigation and (if subject to U.S. jurisdiction) initiate a proper legal hold.

Many issues,  many potential parties; so, many types of electronic data that will need to be preserved and produced from many sources and custodians.

Preservation
Perhaps a handful of developers and technicians is behind this sustained global fraud and the culprits will readily step into the spotlight of shame while diligently preserving evidence of their perfidy. But, no competent counsel is going to approach preservation with that expectation.  This is not a case where principal reliance on custodial holds will suffice.   Counsel must reflect on the fact that VW has had a long time to investigate and respond to charges that it was gaming emissions.  The company chose to deny and deflect.  No competent counsel lets the fox guard the henhouse–and need I remind that VW is headquartered in Wolfsburg?

This is not an attack on the character of VW’s 600,000 employees.  Many honest, hardworking people will be unfairly tarred by what occurred.  They are victims, too, and no doubt heartsick about what has come to light.  But, anticipation of at least isolated spoliation is a necessary and proper acknowledgement of human nature.  Those tasked with preservation must remember that this was a sophisticated and deliberate deception and that cheaters cheat.  It’s practical to anticipate that those who have mounted a multibillion dollar global fraud over many years and through many lies may not be morally constrained to refrain from hitting the delete key or resetting their mobile devices to factory freshness.  For Volkswagen to fail to aggressively guard against data destruction because it trusts its employees would be to add recklessness and naiveté to its list of failings.

Anticipation of Litigation: In the U.S., the obligation to preserve information that may be relevant to issues in litigation is a creature of common law (e.g., published decisions in other cases) and attaches when claims or litigation are “reasonably anticipated.”  If relevant information is lost, at what point in time will Volkswagen be charged with the duty to have acted reasonably to preserve it in anticipation of litigation?  This is something of a novel question when it comes to intentional efforts to defraud.  Does the anticipation of litigation attach when one is aware they are acting illegally or fraudulently, or does it require awareness of the noose tightening around the neck as exposure draws nigh?  Must a suit be expressly threatened?

There’s no laudable public policy served by excusing the behavior of those acting intentionally and duplicitously.  Conversely, how pervasive must the awareness of misconduct be to trigger the duty to preserve in those without subjective awareness of the fraud?  When is the corporation charged with the knowledge of its key players?  How many “rogue” key players must participate for the company to be deemed complicit or vicariously responsible to the point of corporate bad faith?

These assessment will likely turn on when those in managerial roles first became aware that the emissions test results were deemed irregular by a credible group of researchers or under scrutiny by regulators.  Then, the question becomes, how reasonable is it for management to accept and promulgate multiple inconsistent excuses for the irregularities before management wakes up and initiates a hold (assuming that the claims that senior management had no idea hold water)?  One conclusion seems beyond doubt: senior management has known of the issue through months of secret negotiations with regulators; so, a legal hold needed to be initiated no later than a modest interval after those negotiations began.  The jig was up.  The fan had been hit. The deer was not in the headlights; it was through the windshield and kicking the crap out of the driver.

Legal Hold: A legal hold describes the panoply of processes and actions that must be taken by a potential party and its counsel to preserve potentially relevant information in anticipation of a claim, investigation or litigation.  An effective legal hold has both objective and subjective preservation components.  The subjective component is to notify and rely upon individual custodians to act to identify and preserve relevant information.  This is termed a “custodial hold,” and for reasons that should be obvious, it is always needed but never, by itself, sufficient in cases of intentional misconduct, fraud and criminal activity.

The objective preservation component tends to involve information technology (IT) resources and personnel.  It typically entails disabling custodians’ abilities to alter or destroy potentially relevant information. This is achieved by, inter alia, disabling purge settings, revising backup procedures, modifying user privileges, mirroring data and by sequestration and imaging of media and devices.

Preserving “everything” is rarely feasible and never justified; accordingly, counsel scoping and implementing an objective legal hold has to possess a deep and insightful appreciation of the corporate data map and be skilled at making defensible choices.  In an enterprise setting, only incompetent counsel endeavor to put a hold on everything or believe it can be done.

But just because a hold cannot be perfect does not mean it cannot be good.  In e-discovery, the inability to achieve perfection is often perversely posited as an enemy of the good and as justification for the abysmal.

Once more, because the VW matter involves fraudulent action, wise counsel will initiate an objective hold “safety net” before circulating a hold instruction to key custodians, since among those key custodians will be those with a vested interest in data alteration or destruction.  To do otherwise is to alert the most culpable to the fact that their data will be scrutinized and potentially trigger a flurry of evidence destruction efforts.

Presumably a company of Volkswagen’s size, reach and experience will have an automated legal hold system in place globally to track hold notices, acknowledgements and refreshes (i.e., reminders and changes in scope).  Likewise, they will need a well-trained and technically-adept team of German-speaking interviewers to do deskside interviews to insure that the key custodians understand their preservation obligations and are acting with due diligence.  The team should grasp both the American discovery obligations that must be met and the German privacy rules that cannot be ignored.  This is a task for the best and brightest; yet, it tends to be assigned to the most inexperienced personnel or relegated to a tedious questionnaire.  These deskside interviews are important; unfortunately, many counsel fail to rouse to that import until a witness testifies that no one came around and the witness  had no idea what to do, so did nothing (or kept on deleting, business as usual).

The legal hold directives needed here should not be some vague, blathering, all-encompassing missive that reads like one of those annual bank privacy notices everyone tosses in the trash.  It should be bespoke and personal when directed at any custodian who actually had a role in the events of interest.  It should tell them exactly what they should and should not do with respect to the data, documents, tools and devices they actually use day-to-day.  It should make it clear that preservation is their job.  And that no one else is going to do that job for them.  And that management is watching.  And that failure carries consequences.  Finally, all of that should be true, such that the time and resources needed to accomplish the task are made available.  Everyone has a full time job already; so, they can’t just conjure up the extra time needed to execute on a legal hold.  The time must be carved out for them, and the task supervised and managed like any other important, expensive project.  Too many companies and counsel just think they can wing it on the hold, or skate by with a boilerplate email.

When you get the legal hold wrong, everything that follows is at risk.  In VW’s case, failure won’t be given the benefit of the doubt.

VW also has an obligation to exercise all such actual or practical control as it actually possesses to put relevant information held by third-parties (e.g. counsel, agents, dealers, contractors, suppliers, former employees, etc.) on hold.  Dealers have service records and may reflect complaint data respecting cars that failed to pass emissions tests (hey, sometimes even evil software glitches). Independent labs and testing companies may have played a role.  External consultancies may have supplied specialists or handled special projects.  Even all those advertisements touting the green character of “clean diesel” are likely to be evidence.

As importantly, let’s not forget that preservation and legal hold is a two-way street.  The claimants and other parties have preservation duties, too.  Claimants will need to preserve purchase, service and repair records.  Investors must preserve basis records and trade data.  Was dem einen recht ist, ist dem andern billig!

Forensics
The need for a forensic-level preservation of media isn’t often needed in e-discovery; but, a circumstance when its use must always be considered is where the computer has been used as an instrumentality of a crime or tort.  The Volkswagen investigation seems like just such a situation, at least with regard to the programmers, technicians, managers, supervisors and externals closely tied to the development, testing, deployment and support of the software and systems at issue.  These technically-astute players are among those who will be most-tempted and –capable of altering data and wiping and swapping drives.

For different reasons, forensic-level preservation might be considered for the C-level and Board-level personnel for whom proof on a complete lack of knowledge of the fraud will be crucial.  Their denials will be suspect if their evidence is haphazardly handled.

Scope
Setting the scope of this e-discovery preservation and collection effort will be enormously challenging.  The only predictions I can make with confidence are that it will be ludicrously overbroad and excessively expensive (from ignorance and misplaced caution) and that it will turn up big gaps in key data that unquestionably should have been preserved (likely because someone made an assumption they shouldn’t have made).  I don’t even need to wear my golden Carnac the Magnificent turban to see that future.

Electronic evidence is key here.  Computers were the instrumentalities of the fraud, and programmers (among others) were the perpetrators.  Programmers are going to communicate in a unique argot using tools and methods unlike those used by non-programmers.  Rounding up the usual e-suspects (e-mail, network share content) won’t suffice.  The performance sought from the vehicles when seeking to detect test modes had to be teased out of the software; so, test data will be highly probative. Code bases, versioning data, comments in code will be telling.  The means by which programmers communicated will change over time.  Email may have been important in 2008; but texting will matter more of late.  No one should assume that any communications channel was not used as a matter of company policy.  If this was a black op, they would have acted to hide it.  If they weren’t hiding, it wasn’t a secret.

Some may wonder why there’s even a need to do a lot of preservation and discovery.  After all, they’ve admitted to the fraud and promised to compensate everyone, right?

Discovery will be required to answer the age-old questions, who knew what and when?  Punitive damages and corporate intent will entail discovery because Volkswagen can’t simply stipulate to every charge leveled against it and its management without shutting down.  Both the new and former CEO’s deny any knowledge of the fraud, so there will be an effort to determine how high the lie reached.  Insurers (for dealers, if not for VW) will seek to reserve rights and deny indemnification.  Investors will need to prove when facts adverse to stock prices were known and by whom.  Criminal inquiries and prosecutions are certain to ensue (injecting the potential for obstruction of justice exposure, if evidence is destroyed).  So, discovery is inevitable.  All the money in the world isn’t going to make this mess go away overnight.  Nor will bankruptcy.

Proportionality
Whether per the language of the existing Federal Rules of Civil Procedure or per the coming amendments to Rule 26, proportionality considerations govern the scope of discovery.  Such considerations include the amount in controversy, the importance of the issues at stake in the action, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.

The cases that will spring from this scandal can’t help but prompt a discovery feeding frenzy.  When the hundreds of thousands of claims are ultimately consolidated into an MDL, the Court will likely apply a proportionality analysis in its consideration of the inevitable motions to compel and motions for protection.

Volkswagen is the world’s largest automaker, having just pushed Toyota out of the top spot. Worldwide, VW sold about 11 million of its Lance Armstrong-style Jetta, Passat, Beetle, Golf and Audi A3 diesel models.  Even if every U.S.-based owner were willing to accept, say, US $5,000 and a repaired vehicle, that’s $2.4 billion dollars plus the cost of repair in contention.  Most owners will want more because this wasn’t negligence.  The intentional effort to defraud owners and regulators is especially galling to those taken in by the claims that these were “green” vehicles and so paid more for diesel engines and diesel fuel.  These owners, are saddled with vehicles likely to take a big hit on resale value.  So, the potential for punitive damages is high and recovery of attorneys’ fees by claimants seems assured.  Then, there’s the EPA, which has the right to recover civil penalties of $37,500 for each vehicle not in compliance.  That’s $18 billion.  It’s hard to conceive of a level of discovery that would be disproportionate based on the amount in contention or the defendant’s financial resources.

It seems to me that the willingness of U.S. courts to rein in discovery will turn on the extent to which Volkswagen demonstrates competence in its handling of ESI from the start.  Delays and errors in production, gaps in the data or a pervasive reek of spoliation will undermine the company’s ability to show that excessive discovery is peripheral or cumulative.

That’s my take on first blush.  What do you think?

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