Morgan Stanley Winning the War But Not Winning the eDiscovery Battle

Yesterday, the FL state appellate court threw out the $1.5 billion award against Morgan Stanley.  This case, which was first filed in 1998, has been heavily analyzed, especially because of the sheer size of the award, and because of the eDiscovery implications of the case.  The case concerned the allegations of financier Ron Perelman, who obtained Sunbeam stock in a transaction, but that stock lost most of its value after it was determined that Sunbeam's former executives had engaged in financial fraud.  Morgan Stanley was the investment bank on the transaction and Perelman alleged that Morgan helped falsify the value of the Sunbeam stock.  Morgan vigorously denied those claims.

The trial court, however, the underlying claims in the case were almost overwhelmed by eDiscovery issues having to do with Morgan Stanley's failure to produce certain electronically stored information.  The trial judge eventually sanctioned Morgan after a series of eDiscovery problems, essentially telling the jury that Morgan's failure to produce email and other electronic content to the other side in the case itself amounted to fraud.  That ruling resulted in Morgan never really getting a chance to defend itself on the actual facts of the case (the underlying fraud claims relating to the value of the Sunbeam stock); they never got the chance to overcome taint of the initial eDiscovery problems. 

The appellate court completely avoided a review of whether the trial judge's eDiscovery sanction was justified.  Instead, the appellate court found that the Plaintiff (Ron Perelman) failed to make a proper proof of economic damages; basically, that his expert did not correctly calculate the loss in the value of the Sunbeam stock. Because such a proof is an essential element of the claim, that failure - the appellate court held - was fatal.  The case will continue to be appealed to the next level in the FL appellate court system; it is not over for either party.

Despite the failure of the appellate court to expressly review the eDiscovery issues in the case, there are two key eDiscovery lessons to be taken from the case at this point.  First, trial judges have tremendous discretion to sanction parties for eDiscovery abuses, but those sanctions still have to bear a proportional relationship to the underlying conduct.  Here, the notion that a company could essentially lose a massive verdict without ever getting the chance to defend itself was, in my view, excessive. 

Second, and most importantly, the eDiscovery lessons of the Morgan case remain unchanged (despite the reversal of the verdict).  It would have been hard enough (and expensive enough) for Morgan just to defend itself on the underlying allegations in the case.  However, due to their eDiscovery problems, Morgan has been on its heels for several years, the appeals will continue, the legal bills will continue, and Morgan will spend perhaps tens of millions more than they would have spent had they had good records management, proactive and repeatable eDiscovery processes and a proactive information management infrastructure in the first place.