Author: JOLT Page 32 of 50

Gottehrer Publication Version PDF 

 

Cite as: Gail Gottehrer, “Connected” Discovery: What the Ubiquity of Digital Evidence Means for Lawyers and Litigation, 22 Rich. J.L. & Tech. 8 (2016), http://jolt.richmond.edu/v22i3/article8.pdf.

Gail Gottehrer

I. Introduction

[1]       More than ten years ago, the Zubulake case[1] raised awareness of the importance of digital evidence in litigation. At that time, for many lawyers, the discovery process consisted of collecting paper documents, manually reviewing those paper documents, and responding to document requests by producing paper documents. Digital evidence existed, but was more limited in scope and volume than it is today. Back then it was often overlooked or not recognized as a potential source of valuable evidence to be obtained in discovery.

[2]       In the post-Zubulake era, the ways in which companies and individuals create and maintain information have changed dramatically. Many types of documents that were traditionally created on paper and stored in hard-copy now never exist on paper. Instead, they are created on computers or other digital devices and stored in e-mail archives, on backup tapes, or in the cloud. Business and personal communications that once took place via letters and faxes are now transmitted through e-mails and text messages. Microsoft Excel files replaced handwritten accounting ledgers. Medical records are routinely created and stored electronically, making the paper medical file a thing of the past. Carbon copy secretarial message books with tear-away message slips are replaced by programs that transcribe voicemail messages and deliver them to the recipient by e-mail. Designs are created and maintained in CAD files rather than drawn on paper. Many businesses advertise primarily, if not exclusively, on social media and the Internet and little, if at all, through paper mailings. Employees traded in paper calendars and address books for electronic schedulers, using programs and applications that reside on their computers and mobile phones.

[3]       The prevalence of digital information, and the corresponding decline in the use of paper for the creation and storage of information, profoundly affected litigation, including discovery and trials. The “documents” and information that are requested and produced in discovery are overwhelmingly electronic documents and data. Electronically created and stored information is being used in depositions, to support motions, and at hearings and trials. Given the ways in which technology transforms how people communicate and do business, the “smoking gun” in a case—to the extent one exists—is more likely to be an e-mail, text message or social media post than a tangible document. Knowing how potential sources of digital evidence are created and stored, how to obtain that data in discovery, and how to maximize the value of that information during depositions and at trial are now critical components of the practice of law.

[4]       Digital evidence is so significant in discovery and litigation that it should be acknowledged as being much more than a subset of discovery, often referred to as “e-Discovery.” Existing and emerging technologies provide digital evidence that can shape the outcome of a case or investigation. Digital evidence from a wide range of technologies finds its way into civil and criminal litigation in the United States and other countries, with dramatic results. Digital evidence is poised to take on an even greater role in litigation as the Internet of Things continues to grow,[2] autonomous vehicles become commonplace,[3] industrial business operations incorporate drones,[4] and blockchain revolutionizes banking.[5]

[5]       This article discusses some of the reported cases in which digital evidence was the subject of motion practice, was introduced at trial, and was a determining factor in a case. It is not an exhaustive look at all the cases that have been affected by digital evidence, or all the kinds of technology that generate data relevant to legal proceedings. A review of the cases in this article, however, is sufficient to dispel any doubt about the importance of digital evidence and to confirm the magnitude of its impact on the practice of law. 

II. Connected Devices

A. Telematics Devices

 [6]       Telematics devices are wireless devices, typically installed in personal vehicles or fleet vehicles. They collect data on how the vehicle is being operated, if the vehicle crashes or an airbag is deployed, and when maintenance is needed.[6] These devices transmit that data from the vehicle to an entity, such as an insurance company or a fleet owner, in real time.[7]

[7]       Telematics data led to the criminal conviction of a driver in the United Kingdom who was involved in a hit and run accident that resulted in the death of a pedestrian in 2014.[8] Police experts analyzed data from the telematics device Omar Tariq was driving at the time of the accident, which showed that he was speeding—driving more than 20 miles over the posted speed limit.[9] Confronted with that evidence, Tariq pled guilty to causing a death by dangerous driving and was sentenced to more than three years in prison.[10]

[8]       In the United States, data from a Progressive Insurance telematics device helped a Cleveland, Ohio father persuade a jury that he was not guilty of murder.[11] Michael Beard was accused of suffocating his infant daughter on May 8, 2011 at 4:45 a.m., after he finished his shift working as a nursing aide.[12] Counsel introduced data from the Snapshot telematics device in his car at trial, and showed that Beard had turned the car off in front of the child’s house “at 4:44 a.m. and turned it back on three minutes later.”[13] After deliberating for an hour, the jury found that Beard was not guilty of the crime.[14]

[9]       Important leads in another criminal matter came from data from the UConnect telematics system in a stolen Jeep Renegade.[15] That evidence, in combination with footage from a Nest home security camera in the Jeep owner’s house, led to an arrest and assisted police in identifying the other thieves.[16] When a group of teenagers broke into the house of a Baltimore man, their faces were caught on the Nest camera in the house, which led to the arrest of one of the thieves.[17] He refused to identify his accomplices, who also stole the homeowner’s Jeep.[18] When the homeowner got his Jeep back, he noticed three new device names on the Jeep’s UConnect system paired device list.[19] The homeowner matched one of the device names to an Instagram account of a teenager who appeared to match one of the individuals seen on the Nest footage.[20] The homeowner also noticed that one of the names on the Instagram account’s contacts matched one of the phones on the list on the UConnect System.[21] This digital evidence gave Baltimore police several leads in the case.[22]

[10]     On the civil side, data from a telematics device enabled a driver in the United Kingdom to successfully challenge a speeding charge by contradicting the evidence that allegedly supported it.[23] Police charged Neil Herron with driving 10 miles over the posted speed limit.[24] Herron insisted that he had not been speeding.[25] At the time of the alleged speeding incident, Herron had been conducting a trial of a telematics device in his car.[26] The data from that device enabled Herron to prove that the car had been traveling far below the speed limit, as he had claimed.[27]

B. GPS Navigation Systems

[11]     Data from a GPS device[28] introduced in a criminal non-jury trial led to the conviction of a New Jersey man for second degree murder for intentionally running over a twelve year old girl.[29] Prosecutors alleged that George Ford killed the girl to prevent her from reporting what had happened to her when he was alone with her in the hours before her death.[30] Ford contended that he had hit the girl by accident after showing her horses he had in a pasture near Binghamton.[31] The critical evidence came from a GPS device that Ford’s estranged wife placed in his vehicle when she suspected he was having an affair.[32] When she provided the GPS device to the police, the data from the device showed that Ford had not been at the pasture and had spent the hours before the girl’s death behind an abandoned farmhouse half a mile from where she was killed.[33]

[12]     Similarly, in State v. Jackson, data from a GPS device installed by police proved to be key evidence leading to the conviction of defendant William Jackson for the murder of his daughter.[34] Jackson told police that his daughter had been kidnapped on her way to school.[35] After a search of Jackson’s house and truck failed to yield any evidence, police obtained a warrant and put a GPS tracking device in his truck.[36] Data from the GPS device led police to a storage unit, an empty grave near a logging road and a new grave where the girl was buried.[37] Based largely on the GPS data connecting Jackson to the body and its burial and reburial sites, the court convicted Jackson of murder and sentenced him to fifty-five years in prison.[38] The conviction was affirmed by the Washington Supreme Court.[39]

[13]     Ironically, in the case of a Wisconsin man, the evidence used to convict him of stalking his former girlfriend was the data from the GPS device he himself had used to commit the crime.[40] Paul Seidler previously installed a GPS tracking device on his ex-girlfriend’s car that tracked the car’s location and reported it to him by cellphone or computer through the Internet.[41] Seidler used the data to follow his ex-girlfriend.[42] Prosecutors used the data to support their case against him, describing the GPS device as “the best witness.”[43]

[14]     GPS data is also used as evidence in civil cases, such as the wrongful termination action brought by a cable company employee against his former employer, Pacific Bell Telephone Company.[44] Pacific Bell terminated Blake Smith’s employment after an investigation into the theft of his work truck led the company to conclude that Smith had failed to safeguard company property and that he had lied during the investigation into the theft.[45] Smith claimed he parked the truck, took the keys out of the ignition, and locked the truck.[46] A significant factor in Pacific Bell’s determination that Smith was lying was the data obtained from the GPS technology in the truck, which revealed that the truck was idling when it was stolen.[47] In an affidavit filed in support of its motion for summary judgment, Pacific Bell explained that the GPS technology in its trucks generates a report in a Microsoft Excel spreadsheet that records various data, including the time and location of every vehicle, each time the ignition is turned on or off, the time and location of the vehicle every seven seconds, and the time and location of the vehicle every one mile it is driven.[48] The Court ultimately granted Pacific Bell’s motion for summary judgment.[49]

C. Wearables[50]

 [15]     Digital evidence from wearable fitness trackers will play a role in a pending criminal case in Pennsylvania and a pending civil case in Canada. In West Chester, Pennsylvania, police arrested defendant Jeannine Risley when data from her Fitbit showed she lied to police when she reported she was assaulted.[51] Risley told the police officers responding to her 911 call that she was sleeping until around midnight, when she awoke to find a man on top of her.[52] She alleged that the man assaulted and raped her.[53] An examination of data from the Fitbit she wore that night, however, contradicted her claims.[54] The Fitbit data showed that Risley was awake and walking around at the time she claimed she was sleeping and ultimately assaulted.[55] Risley now faces trial on three misdemeanor counts including knowingly filing a false police report.[56]

[16]     On the civil side, a Canadian law firm is planning to use Fitbit data as evidence in a personal injury case to prove the effect that a car accident had on their client.[57] The accident victim, injured years before Fitbits were available, was a personal trainer and led an active lifestyle before the accident.[58] To support the plaintiff’s claim that her activity level is impaired by the accident, her lawyers intend to run data from the Fitbit she currently wears through an analytics platform which uses publicly available research to compare a person’s activity data with that of the general population.[59] Her lawyers expect the data to show that their client’s activity levels are now below average for a woman of her age and profession, as a result of the injuries she sustained in the accident.[60]

D. Dashboard Cameras and Red Light Traffic Cameras 

[17]     Data from dashboard video cameras and government operated traffic cameras is effective in both civil and criminal cases. Evidence from an onboard video camera, in addition to cell phone records, led to an Alabama jury awarding nearly $1.3 million to a driver who was severely injured in a crash caused by a truck driver who was distracted by a work-related phone call at the time of the accident.[61] At trial, the jury saw video footage from a camera that was in the school bus with which Michael Duey collided.[62] Additional digital evidence from cell phone records from the truck driver Gregory Moore, whose negligence caused the collision, showed Moore was on a business call at the time of the accident.[63] Based on this data, the jury found Moore and his employer liable for the damages incurred by Duey.[64]

[18]     In a criminal case in California, the court convicted Carmen Goldsmith of failing to stop at a red light in an intersection, based on photos and video generated by a red light traffic camera system.[65] At trial, a police investigator testified that this computer based digital camera system records events that occur in an intersection after the traffic light turns red, and stores the information on the hard disc of a computer at the scene.[66] Technicians retrieve the data during the day via an Internet connection.[67] The system records and produces three photos and a twelve-second video.[68] The photos show the vehicle approaching the intersection before the violation, then the vehicle within the intersection turning right or going through the intersection, and finally the vehicle’s license plate.[69] The system puts a data bar on all three photos showing the date, time, location and amount of time the traffic light was red at the time of the photo.[70] In this case, the video shows the vehicle approaching the intersection and moving through it.[71] The Appellate Division of the Superior Court, the Court of Appeals, and the California Supreme Court all affirmed Goldsmith’s conviction. In response to Goldsmith’s claim that the camera evidence was not adequately authenticated, the Supreme Court explained that it frequently approved the “substantive use of photographs as essentially a ‘silent witness’ to the content of the photographs,” because to “hold otherwise would illogically limit the use of a device whose memory is without question more accurate and reliable than that of a human witness.”[72]

E. Event Data Recorders

[19]     Data from event data recorders, also known as black boxes, proves to be important evidence in criminal cases. In Commonwealth v. Zimmerman, the Massachusetts Appellate Court held that the trial judge properly admitted evidence taken from the event data recorder (EDR[73]) in the defendant’s car, which contributed to her conviction for motor vehicle homicide.[74] Michelle Zimmerman lost control of her SUV and it spun, sliding off the road, hitting a tree, and resulting in the death of the passenger in the front seat of her vehicle.[75] At the time of the accident, road conditions were poor, with both rain and snow.[76] The police accident investigator found there was probable cause to believe that “evidence of this crime would be found in the EDR.”[77] While Zimmerman claimed she was driving between 20 and 30 miles per hour, the data from the EDR in her vehicle showed that five seconds before the accident, she was driving at 58 miles per hour.[78] Zimmerman was charged with and convicted of operating her vehicle at a rate of speed that was not reasonable or prudent and criminally negligent operation of a vehicle.[79]

[20]     In Matos v. State, the Florida District Court of Appeal affirmed the conviction of Edwin Matos on two counts of vehicular manslaughter where the key issue in the case–the speed at which Matos had been driving–was established by the prosecution through data from an EDR.[80] Matos collided with another vehicle, killing two teenage girls.[81] Data from the EDR in Matos’s car showed he was driving at a 114 miles per hour (in a 30 mile per hour zone) four seconds before the crash, and 103 miles per hour within one second after the crash.[82] The defense’s expert estimated the car’s speed at only 56.91 miles per hour.[83] Data from the EDR helped the court to convict Matos.[84]

[21]     Similarly, in People v. Hopkins, data from the air bag module in the defendant’s car helped prosecutors establish “a prima facie case of depraved indifference murder” and defeat the defendant’s motion to dismiss the indictment.[85] The air bag module data showed that at the time of impact, the defendant’s vehicle was going between 65 and 70 miles per hour; that five seconds before impact, the defendant’s car was travelling at 104 miles per hour; and that three to four seconds before impact, the vehicle was going 106 miles per hour.[86] The posted speed limit in the area was 30 miles per hour.[87] The data further showed that the defendant did not apply the brakes until two and a half to three second before he crashed into the line of cars stopped at a red light.[88]

F. E-Z Pass Transponders

[22]     The E-Z Pass system, implemented in toll plazas in sixteen states, collects data used by both prosecutors and defendants in states like New Jersey. In S.S.S. v. M.A.G., a New Jersey appellate court reversed the lower court’s entry of a final restraining order in a domestic violence case and remanded the case for a new trial due to the improper exclusion of E-Z Pass evidence.[89] In this case, a woman alleged her former boyfriend picked her up at her school at Rutgers-Newark at 9 A.M., assaulted her at a Jersey City motel at 9:30 A.M., and returned her to her school at 10 A.M.[90] The defendant denied this and claimed that nothing had happened.[91] In addition to a letter from his employer stating he had been at work from 8:35 A.M. until 5 P.M., he also offered data from E-Z Pass transponder records, showing that he crossed the Bayonne Bridge in to Brooklyn at 8:16 A.M. that day.[92] The defendant argued that he could not have crossed the bridge into Brooklyn at 8:16 A.M., gotten to work at 8:35 A.M., and been in Newark at 9 A.M.[93] The appellate court found that in this he-said-she-said dispute, where no witnesses could be called or exhibits introduced, the E-Z Pass transponder evidence was critical to the defense and its exclusion on hearsay grounds was improper.[94]

[23]     In State v. McGuire, the prosecutor introduced E-Z Pass transponder data against Melanie McGuire, a New Jersey woman accused of killing her husband, cutting up his body, and disposing of it in suitcases in Virginia.[95] The prosecution introduced the evidence to support the allegation that she traveled from her home to Atlantic City in order to create false evidence showing that her husband was still alive and in the Atlantic City area.[96] McGuire had called E-Z Pass customer service trying to get them to remove two forty-five cent charges showing her traveling near Atlantic City, which she claimed were incorrect.[97] The prosecution also introduced E-Z Pass evidence from the vehicles of McGuire and her parents.[98] This data, in combination with the state’s case, suggested that on May 3, McGuire picked up her kids from day care, dropped them off with her parents, and then returned to her house to get the suitcases containing her husband’s body and travel to Delaware and Virginia to dump them.[99]

III. Social Networking Sites

[24]     Not only does the widespread use of social networking sites create new ways for individuals and businesses to communicate, but it also creates a treasure trove of relevant data for civil and criminal litigation. For example, in Reid v. Ingerman Smith LLP, Reid sued her employer and Mary Anne Sadowski for damages resulting from alleged sexual harassment by Sadowski.[100] Defendants sought production of postings and photographs from private portions of Reid’s Facebook account, arguing that since postings and photographs on the public portions of her account contradicted her claims in the lawsuit, the private portions may also contain relevant information.[101] After reviewing the public postings, the Court found them to be probative evidence of Reid’s mental and emotional state, and concluded that her private postings may also contain relevant information that reflected her emotional state.[102] The Court also found that postings by third parties about Reid’s social activities were discoverable, as they could be relevant to her claims of emotional distress and loss of enjoyment of life, and could reveal the names of potential witnesses in the case.[103] Reid was ordered to produce social media postings and photographs that “reveal[ed], refer[ed], or relate[d] to any emotion, feeling or mental state… [and] relate[d] to events that could be reasonably expected to produce a significant emotion, feeling or mental state,” including posts made by third parties that contain their observations of Reid and Reid’s responses to those posts.[104]

[25]     Similarly, in Romano v. Steelcase, Inc., the court required the plaintiff to provide the defendant with access to her Facebook and MySpace pages and accounts, as they were deemed to contain information relevant to her damages claims and to the extent of her alleged injury, including her claim for loss of enjoyment of life.[105] The plaintiff alleged that she was permanently injured as a result of the accident and could not participate in certain activities due to her injuries.[106] The defendant argued that information on the public pages of plaintiff’s Facebook and MySpace pages showed her to have an active lifestyle, and that one account contained a photo of the plaintiff smiling outside her home–even though she claimed that she was bedridden and confined to her house as a result of her injuries.[107] The contradictions between the information on the public portions of these social media sites and plaintiff’s claims in her lawsuit led the Court to find it was reasonably likely that the private portions of those sites may contain additional information relating to her activities and enjoyment of life, which were relevant and material to the defense of the case.[108]

[26]     In Held v. Ferrellgas, Inc., a recent employment discrimination and retaliation case, the Court found that data from the online job search engines that the plaintiff had used were relevant and had to be produced.[109] Defendants argued that any job searches conducted during the course of plaintiff’s employment related to his commitment to his job, his perspective on the working environment at the company, and any emotional distress he allegedly suffered.[110] Searches conducted after his employment ended, defendants contended, related to plaintiff’s alleged emotional distress, actual damages and attempts to mitigate his alleged damages.[111] The court ultimately agreed with the defendants.[112]

[27]     Being equally probative in criminal matters, postings and communications on Facebook played a role in the conviction of several men on terrorism conspiracy charges in U.S. v. Hassan.[113] The prosecution used the defendants’ Facebook postings and communications to demonstrate their violent tendencies and commitment to terrorism.[114] At trial, the prosecution’s evidence included messages posted by one defendant on Facebook promoting his radical Jihadist beliefs; another defendant’s postings on Facebook and other social media sites that demonstrated his belief in violent jihad and his willingness to further violent causes; and information showing that the second defendant had asked someone to delete the postings that related to his violent ideology.[115] The defendants were convicted of conspiracy to provide material support to terrorists and other charges.[116] Their convictions were affirmed by the Fourth Circuit Court of Appeals.[117]

IV. Text Messages and Tweets 

[28]     Digital evidence played a central role in the criminal trial of Dharun Ravi, a Rutgers college student charged with witness tampering, invasion of privacy, and bias intimidation arising from his activation of a webcam to watch his roommate’s date with a man in their dorm room.[118] The evidence of Ravi’s witness tampering included a series of text messages he sent to fellow Rutgers student Molly Wei while police interviewed her.[119] Those texts showed that Ravi tried to influence what Wei told the police about their spying on his roommate.[120] In one text message, Ravi wrote: “Did you tell them we did it on purpose? What did you tell them when they asked why we turned it on? I said we were just messing around with the camera.”[121] After the trial, where Ravi was convicted of witness tampering, one juror stated that Ravi’s texts convinced her that he had tampered with a witness.[122]

[29]     Texts and tweets were also important evidence introduced at trial in connection with the invasion of privacy and bias intimidation charges.[123] In a Tweet from Ravi to another student, he wrote: “Roommate asked for the room. I went to Molly’s room and turned on my webcam I saw him making out with a dude. Yay.”[124] In another Tweet, Ravi invited others to view video of his roommate during another date with the same man, saying “[a]nyone with iChat I dare you to video chat me between hours of 9:30 and 12. Yes it’s happening again.”[125] In an attempt to persuade the jury that he was not biased against gay people, Ravi’s attorney introduced a text Ravi sent to his roommate where Ravi wrote “I’ve known you were gay and I have no problem with it. In fact one of my closest friends is gay and I have a very open relationship.”[126] The jury found Ravi guilty on those charges as well.[127]

V. Blogs and Chat Rooms 

[30]     Litigants also rely on blog entries and chat room transcripts to support their claims in civil cases. Portions of a blog were among the evidence a father used to support his motion for a new trial in a divorce case, after a Louisiana trial court awarded domiciliary custody of his minor son to his ex-wife.[128] The father unsuccessfully relied on pages of his ex-wife’s blog to argue that she may have had a relationship with another man during the couple’s separation, despite having denied that she was in a relationship during the trial.[129] He further argued that his ex-wife’s blog entries showed she spent an excessive amount of time on the Internet rather than taking care of her child, and that she hated his parents because she accused them of cyberstalking her by reading her blogs.[130] The trial judge stated that while the Internet statements were evidence that could have been used to impeach the ex-wife’s credibility during the divorce proceeding, the statements occurred after the trial and were not made under oath, and therefore, did not provide the basis for a new trial.[131] The Court also noted that, more generally, it was not clear that the statements would be evidence that was important to the case.[132] The appellate court affirmed the trial court’s order.[133]

[31]     Conversely, other courts have found chat room transcripts to be relevant evidence. In Glazer v. Fireman’s Fund Insurance Company, the plaintiff was ordered to produce copies of all her chats from LivePerson, a website offering online advice and professional consulting services, including sessions with online psychics.[134] Glazer chatted with the online psychics on numerous occasions, and e-mailed portions of some of those online chats to her work e-mail account.[135] When she sued Fireman’s Fund for allegedly retaliating against her after “she complained about discrimination against non-African Americans and [ultimately terminating] her because of her religion,” Fireman’s Fund reviewed the excerpts of the chats and sought to obtain the transcripts of all chats in discovery.[136] Based on a review of the excerpts, the Court agreed with Fireman’s Fund that all the chats appeared to be relevant to one or more issues in the case—such as Glazer’s work performance, her relationships with her co-workers, her opinions about how she was treated during her employment at the company, her emotional state before, during, and after her employment, the steps she took to mitigate her damages, and her personal beliefs about African Americans—and allowed them to be discoverable.[137]

VI. E-mails

[32]     While there is a myriad of other digital evidence sought in building cases, perhaps the most frequently sought and used form of digital evidence is e-mail. In Arroyo v. Volvo Group North America, LLC, a military service discrimination and disability discrimination case, e-mail evidence led to the reversal of an order granting summary judgment to Volvo.[138] The Court found that e-mails sent between Volvo employees could lead a reasonable jury to conclude that Volvo had anti-military animus against Arroyo, and discriminated against her because she had post-traumatic stress disorder.[139] The Seventh Circuit Court of Appeals found that the District Court underestimated the “strength of the emails as support for Arroyo’s case.”[140]

[33]     In those e-mails, Volvo supervisors expressed frustration with Arroyo’s taking time off from work for military service, writing “are we required to give her the day before and day after for travel?” and “I find myself with a dilemma if I were to discipline a person for taking too much time off for military reserve duty․ I certainly give her credit for serving our country but of course I am also responsible for our business needs.”[141] During Arroyo’s deployment to Iraq, her supervisor sent an e-mail to Volvo’s head of labor relations complaining that Arroyo had contacted him only once since she deployed, stating that for scheduling purposes, “it would be beneficial for us to know her status.”[142] Responding to that concern, the head of labor relations wrote in another e-mail that “[u]nfortunately, there isn’t a lot we can do. Per the law we have to wait for her. Sorry it isn’t what you wanted to hear.”[143]

[34]     Internal e-mails from Volvo personnel also provided support for Arroyo’s disability discrimination claim.[144] One such e-mail showed that Volvo considered disciplining Arroyo for being absent while she was hospitalized for her post-traumatic stress disorder, even though she previously advised Volvo of her disabling condition.[145] In another e-mail, one of Arroyo’s supervisors joked about her absence, writing that there were “several rumors for [Arroyo’s] not being here,” including that “[s]he’s on vacation in Hawaii.”[146] In yet another e-mail, a Volvo employee opined that Arroyo was “really becoming a pain with all this.”[147] 

VII. Conclusion 

[35]     Digital evidence has disrupted discovery, civil and criminal litigation, and the practice of law. Advances in technology radically changed the way in which information is created, transmitted, preserved, and accessed–as well as the way in which potential litigants communicate. Technological innovation altered the types of claims that are litigated, the way in which they are litigated, and the kinds of evidence that must be used to support and undercut those claims.

[36]     There is no turning back. The days of document production consisting primarily of paper and of hard-copy trial exhibits sitting on easels in front of juries are behind us. When asked to find information about an opposing party, the initial inclination of lawyers who have recently graduated from law school and entered the practice of law will be to check social media to obtain information about that party. To investigate the allegations in a complaint, these lawyers’ first instinct will be to search the e-mails on the client’s office computer and their messages on cell phones and tablets. All lawyers must acknowledge that digital evidence plays an important role in litigation. Those who fail to understand the relevance of technology and digital evidence to the practice of law do so at their—and their clients’—peril.

[37]     The cases discussed in this Article illustrate why lawyers need to stay abreast of changes in technology and be knowledgeable about sources of data they create.[148] To competently and effectively represent their clients, lawyers need to know which digital evidence may be relevant in a particular case, what they should request from the opposing party in discovery, the proper way in which to craft those requests, how to confirm that what they received is what they requested, how to use digital evidence in depositions, as well as how to authenticate digital evidence at trial and overcome potential objections to its admissibility.

[38]     As the widespread adoption of new technology continues, and more companies, industries, and governmental entities recognize the transformative power of big data and analytics, the volume of data that will be relevant in litigation will increase exponentially. The frequency with which digital evidence will be used in litigation, in government investigations and administrative proceedings, and at civil and criminal trials will soar. It will become clear to lawyers and clients that gaining competence, if not expertise, in the use of digital evidence is not a necessary evil, but a way to enhance the litigation strategy for a case and to increase the likelihood of a successful resolution. The ubiquity of digital evidence means that litigation and data are inextricably intertwined and that mastering “connected” discovery and maximizing the value of digital evidence are critical skills for today’s lawyers.

 

 

[1] See Zubulake v. UBS Warburg, 220 F.R.D. 212, 214 (S.D.N.Y. 2003) (stating “Electronic evidence only complicates matters. As documents are increasingly maintained electronically, it has become easier to delete or tamper with evidence (both intentionally and inadvertently) and more difficult for litigants to craft policies that ensure all relevant documents are preserved. This opinion addresses both the scope of a litigant’s duty to preserve electronic documents and the consequences of a failure to preserve documents that fall within the scope of that duty.”).

[2] See Internet of Things: Privacy and Security in a Connected World Fed. Trade Comm’n i (2015), https://www.ftc.gov/system/files/documents/reports/federal-trade-commission-staff-report-november-2013-workshop-entitled-internet-things-privacy/150127iotrpt.pdf, archived at https://perma.cc/44WA-JH2N.

[3] See The Driverless Cars Are Coming Sooner than You Think, Classifiedleaks, (Oct. 27, 2015, 8:04 AM), http://classifiedleaks.com/driverless-cars-are-coming-sooner-you-think, archived at https://perma.cc/2G36-95AX; see also Catherine Clifford, There Will Be 20 Million Self-Driving Cars on the Road by 2025, Entrepreneur (Dec. 2, 2015), http://www.entrepreneur.com/article/253468, archived at https://perma.cc/7L4C-6Z8P.

[4] See Tim Devaney, Eight Industries that Want to Fly Drones, The Hill (Oct. 25, 2014, 2:43 PM), http://thehill.com/regulation/221788-eight-industries-that-want-to-fly-drones, archived at https://perma.cc/PYG5-YWMD; see also Megan Crouse, Which Industry Uses Drones Most? Manufacturing (July 31, 2014, 9:57 AM), http://www.manufacturing.net/news/2015/07/which-industry-uses-drones-most, archived at https://perma.cc/3M2R-PA9F; Sally French, Drone Delivery Is Already Here — And It Works, MarketWatch (Dec. 15, 2015, 7:32 AM), http://www.marketwatch.com/story/drone-delivery-is-already-here-and-it-works-2015-11-30, archived at https://perma.cc/TH98-ZPH8.

[5] See Jack Bowling & Steve Quinlivan, Bitcoin Blockchain Technology to Revolutionize Financial Services, StarTribune (Jan. 10, 2016, 2:00 PM), http://www.startribune.com/bitcoin-blockchain-technology-to-revolutionize-financial-services/364706851/, archived at http://perma.cc/R8GG-TBWM; see also Dion Hinchcliffe, How Blockchain Is Likely to Transform IT and Business, ZDNet (July 31, 2015), http://www.zdnet.com/article/how-blockchain-is-likely-to-change-it-and-business-forever/, archived at https://perma.cc/9DKA-C799.

[6] See What is Telematics, Fleetmatics, https://www.fleetmatics.com/what-is-telematics, archived at (last visited Mar. 18, 2016); see also Brian Hughes, Why Telematics (Think: Driverless Cars) Is the Future, Entrepreneur (Dec. 18, 2015), http://www.entrepreneur.com/article/252578, archived at https://perma.cc/5WZ5-2C2J.

[7] See Telematics, Gartner, http://www.gartner.com/it-glossary/telematics, archived at https://perma.cc/3A3Z-XRUZ (last visited Mar. 18, 2016).

[8] See Telematics Data Helps Jail Courtesy Car Driver for Hit and Run Collision, FleetNews (Jan. 26, 2016), http://www.fleetnews.co.uk/news/fleet-industry-news/2016/01/26/telematics-data-helps-jail-courtesy-car-driver-for-hit-and-run-collision, archived at https://perma.cc/THN5-SVKM.

[9] See id.

[10] See id.

[11]See Donna J. Miller, With Help from Snapshot Insurance Device, Parma Heights Man Is Cleared of Murdering His 7-Month-Old Daughter, Cleveland.com (July 2, 2013, 3:30 PM), http://www.cleveland.com/metro/index.ssf/2013/07/with_help_from_snapshot_insura.html, archived at http://perma.cc/8FSE-Y34E.

[12] See id.

[13] See id.

[14] See id.

[15] UConnect is a multimedia infotainment system in Chrysler vehicles that integrates with smartphones, has navigation functionality and gives drivers access to physical controls that adjust features from climate control to music preferences. See Lindsay Martell, What Is Chrysler UConnect?, Autotrader (Oct. 2013), http://www.autotrader.com/car-tech/what-is-chrysler-uconnect-215353, archived at https://perma.cc/J287-CYWM.

[16] See Sean Gallagher, Opsec Fail: Baltimore Teen Car Thieves Paired Phones with Jeep UConnect, arstechnica (Feb. 11, 2016, 11:44 AM), http://arstechnica.com/security/2016/02/opsec-fail-baltimore-teen-car-thieves-paired-phones-with-jeep-uconnect/?mc_cid=db1e887d36&mc_eid=664f313ded, archived at https://perma.cc/TU63-3LUG.

[17] See id.

[18] See id.

[19] See id.

[20] See id.

[21] See Gallagher, supra note 16.

[22] See id.

[23] See Telematics Successfully Used to Overturn Speeding Prosecution, FleetNews (Feb. 10, 2015), http://www.fleetnews.co.uk/news/manufacturer-news/2015/10/01/telematics-successfully-used-to-overturn-speeding-prosecution, archived at https://perma.cc/38XF-5NKS.

[24] See id.

[25] See id.

[26] See id.

[27] See Driver Wins Speeding Case Through Telematics, The Driving Instructor Leicester (Oct. 5, 2015), http://www.the-driving-instructor-leicester.co.uk/Blog/uncategorized/driver-wins-speeding-case-through-telematics/, archived at https://perma.cc/YFW8-YKM9; see also supra note 23.

[28] See What Is GPS?, Garmin, http://www8.garmin.com/aboutGPS/index.html, archived at https://perma.cc/PE47-QS93 (stating Global Positioning System (GPS) devices use a “satellite-based navigation system made up of a network of [twenty-four] satellites placed into orbit by the U.S. Department of Defense,” and made available for private use. The satellites transmit signal information to GPS receivers that use the data to determine a vehicle’s location and display it on an electronic map on the device) (last visited Feb. 23, 2016).

[29] See People v. Ford, 935 N.Y.S. 2d 368, 368–69 (NY App. Div. 2011); see also Carly Rothman, N.Y. Judge Convicts Piscataway Man of Killing Baby Sitter, NJ.com (Feb. 19, 2009, 7:08 PM), http://www.nj.com/news/index.ssf/2009/02/ny_judge_convicts_piscataway_m.html, archived at https://perma.cc/T29R-GVDF.

[30] See id.

[31] See id.

[32] See id.

[33] See id.

[34] See State v. Jackson, 46 P.3d 257, 260 (Wash. Ct. App. 2002); see also David A. Schumann, Tracking Evidence with GPS Technology, Wisconsin Lawyer (May 2004), http://www.wisbar.org/newspublications/wisconsinlawyer/pages/article.aspx?Volume=77&Issue=5&ArticleID=810, archived at https://perma.cc/D5PZ-4G8N.

[35] See id.

[36] See id.

[37] See id.

[38] See id.

[39] See Schumann, supra note 34.

[40] See id.

[41] See id.

[42] See id.

[43] Id.

[44] See Smith v. Pac. Bell Tel. Co., 649 F.Supp.2d 1073, 1076 (E.D. Ca. 2009).

[45] See id. at 1079–80.

[46] See id. at 1078.

[47] See id. at 1079–80.

[48] See id. at 1078.

[49] See Smith v. Pac. Bell Tel. Co., 649 F.Supp.2d 1073, 1101–02 (E.D. Ca. 2009).

[50] Wearable devices contain smart sensors and wirelessly connect to smartphones through a web connection. These devices collect and track data about the person who wears them, such as activity level, heart rate, calories burned and sleep patterns. They can also be used to make payments at stores and to alert the wearer about incoming calls and e-mails. Popular types of wearables include fitness trackers, smartwatches, smart glasses, smart clothing and smart jewelry. See Dan Sung, What Is Wearable Tech? Everything You Need to Know Explained, Wareable (Aug. 3, 2015), http://www.wareable.com/wearable-tech/what-is-wearable-tech-753, archived at https://perma.cc/FW2P-NKJY; see also The Wear, Why and How, The Economist (Mar. 14, 2015), http://www.economist.com/news/business/21646225-smartwatches-and-other-wearable-devices-become-mainstream-products-will-take-more, archived at https://perma.cc/8W62-JWAS. Experts have predicted that by 2019, 173.4 million wearable devices will have been shipped worldwide. See Fueled by Growing Demand for Smart Wearables, IDC Forecasts Worldwide Wearable Shipments to Reach 173.4 Million by 2019, IDC (Sep. 14, 2015), http://www.idc.com/getdoc.jsp?containerId=prUS25903815, archived at https://perma.cc/W4NQ-UTMU; see also Dinah Wisenberg Brin, As Wearables Become More Popular, What Is HR’s Responsibility?, Society for Human Resource Management (Feb. 16, 2016), http://www.shrm.org/hrdisciplines/technology/articles/pages/as-wearables-become-more-popular-what-is-hrs-responsibility.aspx?utm_source=SHRM%20HR%20Technology%20_%20PublishThis%20(17)&utm_medium=email&utm_content=February%2016,%202016&MID=01516098&LN=Gottehrer&spMailingID=24737172&spUserID=ODM1OTI3NDQzOTgS1&spJobID=742677018&spReportId=NzQyNjc3MDE4S0#sthash.kFaSjKe3.dpuf, archived at https://perma.cc/K69G-GT27.

[51] A Fitbit is a fitness tracker that allows the wearer to monitor things such as the number of steps taken, distance covered and calories burned. Some versions include an altimeter, which keeps track of the amount of stairs climbed and some include sleep tracking. The Fitbit syncs to the wearer’s Fitbit account through a computer or mobile device and enables the wearer to view the activity data collected by the wearable device. See Robert J. Nelson, Everything You Need to Know About Fitbit, iMore (Jun. 12, 2014, 8:24 AM), http://www.imore.com/everything-you-need-know-about-fitbit, archived at https://perma.cc/UD9A-GUD8; see also Brett Hambright, Woman Staged ‘Rape’ Scene with Knife, Vodka, Called 9-1-1, Police Say, Lancasteronline.com (Jun. 19, 2015), http://lancasteronline.com/news/local/woman-staged-rape-scene-with-knife-vodka-called–/article_9295bdbe-167c-11e5-b6eb-07d1288cc937.html, archived at https://perma.cc/4WQD-9EHZ.

[52] See Hambright, supra note 51.

[53] See id. 

[54] See id.

[55] See id.

[56] See id.

[57] See Parmy Olson, Fitbit Data Now Being Used in the Courtroom, Forbes (Nov. 16, 2014, 4:10PM), http://www.forbes.com/sites/parmyolson/2014/11/16/fitbit-data-court-room-personal-injury-claim/#67483e2a209f, archived at https://perma.cc/JAX9-G8UW.

[58] See id. 

[59] See id.

[60] See id. 

[61] See Video: Distracted Driving Lawsuit Draws $1.3M Award, Automotive Fleet (Feb. 8, 2016), http://www.automotive-fleet.com/channel/safety-accident-management/news/story/2016/02/video-distracted-driving-lawsuit-draws-1-3m-award.aspx?utm_campaign=topnews-20160212&utm_source=Email&utm_medium=Enewsletter, archived at https://perma.cc/J3QG-KXLQ.

[62] See id.

[63] See id.

[64] See id.

[65] See People v. Goldsmith, 203 Cal. App. 4th 1515, 1518 (Cal. App. 2d Dist. 2012).

[66] See People v. Goldsmith, 59 Cal. 4th 258, 264 (Cal. 2014).

[67] See id.

[68] See id.

[69] See id. at 264-65.

[70] See id. at 265.

[71] See People v. Goldsmith, 59 Cal. 4th 258, 265 (2014).

[72] Id. at 267.

[73] An Event Data Recorder (EDR), also known as a “black box,” is a device that is built into a vehicle’s airbag control module and records certain information from a vehicle immediately before and/or during most crashes. The data from the event data recorder’s memory can be downloaded to provide information about what happened to the vehicle, the deployment of airbags and seat belt tensioners, as well as data about the engine speed and vehicle speed prior to the crash. See Event Data Recorders, Insurance Institute for Highway Safety (Apr. 2015), http://www.iihs.org/iihs/topics/t/event-data-recorders/qanda, archived at https://perma.cc/ULM9-58YJ (last visited Feb. 18 2016).

[74] See Commonwealth v. Zimmerman, 873 N.E.2d 1215, 1218 (2007).

[75] See id. at 1217.

[76] See id.

[77] See id.

[78] See id. at 1216, 1219.

[79] See Commonwealth v. Zimmerman, 873 N.E.2d 1215, 1217 (2007).

[80] See Matos v. State, 899 So. 2d 403, 405 (Fla. Dist. Ct. App. 2005).

[81] See id. at 405.

[82] See id.

[83] See id.

 [84] See id.

 [85] People v. Hopkins, No. 2004-0338, 2004 N.Y. Misc. LEXIS 2902, at *17.

[86] See id. at *9.

[87] See id.

[88] See id.

[89] See S.S.S. v. M.A.G., No. A-1623-09T2, 2010 N.J. Super. Unpub. LEXIS 2479, at *1 (N.J. Super. Ct. App. Div. 2010). 

[90] See id. at *3. 

[91] See id. at *4.

[92] See id.

[93] See id. at *4–5.

[94] See S.S.S., 2010 N.J. Super. Unpub. LEXIS 2479, at *8–10.

[95] See State v. McGuire, 16 A.3d 411, 419, 426 (N.J. Super. Ct. App. Div. 2011).

[96] See id. at 426.

[97] See id.

[98] See id. at 427.

[99] See id.

[100] See Reid v. Ingerman Smith LLP, No. CV-2012-0307(ILG)(MDG), 2012 U.S. Dist. LEXIS 182439, at *1 (E.D.N.Y. Dec. 27, 2012).

[101] See id. at *3.

[102] See id. at *3–4.

[103] See id. at *7.

[104] See id. at *7, 9. Using the same relevance analysis, another court similarly required the plaintiff in a race discrimination action to produce her online social media communications, including “profiles, postings, messages, status updates, wall comments, causes joined, groups joined, activity streams, applications, blog entries, photographs, or media clips, as well as third-party communications that put the plaintiff’s communications in context.” See Robinson v. Jones Lang LaSalle Americas, Inc., No. 3:12-cv-00127-PK, 2012 U.S. Dist. LEXIS 123883, at *5–6 (D. Or. Aug. 29, 2012); see also Bass v. Miss Porter’s School, No. 3:08cv1807(JBA), 2009 U.S. Dist. LEXIS 99916, at *1, *3–4 (D. Conn. Oct. 27, 2009) (finding that the defendant was entitled to receive information from the Facebook account of the plaintiff, relating to her allegation that she was teased and taunted on Facebook and through text messages, because “Facebook usage depicts a snapshot of the user’s relationships and state of mind at the time of the content’s posting” and was therefore relevant to issues of liability and damages in the case)

[105] See Romano v. Steelcase, Inc., 907 N.Y.S.2d 650, 651 (2010).

[106] See id. at 653.

[107] See id. at 654.

[108] See id.

[109] See Held v. Ferrellgas, Inc., No. 10-2393-EFM, 2011 U.S. Dist. LEXIS 120980, at *1 (D. Kan. Aug. 31, 2011).

[110] See id., at *2.

[111]See id.

[112] See id., at *3. 

[113] See United States v. Hassan, 742 F.3d 104, 117 (4th Cir. 2014).

[114] See id.

[115] See id. at 147.

[116] See id. at 141.

[117] See id. at 151. 

[118] See Collen Curry, Rutgers Trial: Dharun Ravi Sent Texts to Witness During Police Investigation, abc NEWS (Feb. 27, 2012), http://abcnews.go.com/US/rutgers-trial-dharun-ravi-texts-witness-police-investigation/story?id=15800869, archived at https://perma.cc/GE6J-XBKT.

[119] See id. 

[120] See id.

[121] Id.

[122] See David M. Halbfinger & Beth Kormanik, Rutgers Case Jurors Call Digital Evidence Crucial, N.Y. Times (Mar. 16, 2010), http://www.nytimes.com/2012/03/17/nyregion/jurors-say-digital-evidence-convinced-them-of-dharun-ravis-guilt.html?_r=0, archived at https://perma.cc/5G4U-E74U.

[123] See id.

[124] Jamil Smith, ‘I Saw Him Making Out with a Dude. Yay.,’ MSNBC (Sept. 30, 2010, 12:10 PM), http://www.msnbc.com/rachel-maddow-show/i-saw-him-making-out-dude-yay, archived at https://perma.cc/Q4E4-Y58B.

[125] Tyler Clementi: Rutgers Suicide, CBSNEWS, http://www.cbsnews.com/pictures/tyler-clementi-rutgers-suicide/19/, archived at https://perma.cc/HR36-RJRR (last visited Feb. 25, 2016).

[126] Amy Davidson, The Tyler Clementi Verdict, The New Yorker (Mar. 16, 2012), http://www.newyorker.com/news/amy-davidson/the-tyler-clementi-verdict, archived at https://perma.cc/3YSQ-954S.

[127] See id. 

[128] See Steinebach v. Steinebach, 957 So.2d 291, 299 (Ct. of App. La. 2007).

[129] See id.

[130] See id.

[131] See id.

[132] See id. at 300.

[133] See Steinebach, 957 So.2d at 300.

[134] See Glazer v. Fireman’s Fund Ins. Co., No. 11 Civ. 4374 (PGG) (FM), 2012 U.S. Dist. LEXIS 51658, at *1–4 (S.D.N.Y Apr. 4, 2012).

[135] See id. at *2.

[136] See id. at *1–2.

[137] See id. at *2–3. Instant messages (“IMs”) have been introduced at trial and have been found to be sufficient evidence to support a verdict. See, e.g., State v. Voorheis, 844 A.2d 794, 796–97 (2004) (text of instant messages between defendant and mother of minor girl that contained graphic and sexually explicit language offered substantial evidence that defendant had attempted to promote a lewd performance by a child and to incite another to commit a felony and supported his conviction on both charges).

[138] See Arroyo v. Volvo Group North America, LLC, 805 F.3d 278, 280–81, 287, 288 (7th Cir. 2015).

[139] See id. at 285, 287.

[140] Id. at 285.

[141] Id. at 281–82.

[142] Id. at 282.

[143] Arroyo v. Volvo Group North America, LLC, 805 F.3d at 282.

[144] See id. at 287.

[145] See id.

[146] Id. at 283.

[147] Id.

[148] See Model Rules of Prof’l Conduct R. 1.1, Cmt. 8 (2015) (“A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.”) (“To maintain the requisite knowledge and skill, a lawyer should keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology….”); see also Robert Ambrogi, 20 States Have Adopted Ethical Duty of Technology Competence, LawSites (Mar. 16, 2015), http://www.lawsitesblog.com/2015/03/11-states-have-adopted-ethical-duty-of-technology-competence.html, archived at https://perma.cc/H3XG-RPT3 (stating that as of October 2015, twenty states have recognized that lawyers have a duty to be technologically competent).

Preservation: Competently Navigating Between All and Nothing  

Cite as: Lauren Wheeling Waller, Preservation: Competently Navigating Between All and Nothing, 22 Rich. J.L. & Tech. 7 (2016), http://jolt.richmond.edu/v22i3/article7.pdf.

Lauren Wheeling Waller^*

I. Introduction

 [1]       Merriam-Webster defines “competent” as “having requisite or adequate ability or qualities.”[1] All professions require competence to be successful—from chefs, to tailors, to NFL quarterbacks. Without the adequate ability to poach an egg, alter suits, or read defenses, they lose patrons, customers, or—in the case of a quarterback—games and fans. Lawyers are no different. Without competence, they may not be successful. However, lawyers are different than the NFL quarterback in that they have an explicit duty of competence to their clients. The Model Rules of Professional Conduct provide “[a] lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness, and preparation reasonably necessary for the representation.”[2] The comments to the Model Rules make it clear that competency also requires that lawyers “keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology . . . .”[3] With this sentence, attorneys can no longer simply put up their hands and say, “it’s e-mail and text messages, I don’t know how nor do I want to handle that.”

[2]       Additionally, some State Bars implementing their own Rules of Professional Conduct have decided that attorney competence applies to handling electronically stored information (“ESI”), and at a minimum, that attorneys be able to carry out the following:

• [I]nitially assess e-[D]iscovery needs and issues, if any;
• [I]mplement/cause to implement appropriate ESI preservation procedures;
• [A]nalyze and understand a client’s ESI systems and storage;
• [A]dvise the client on available options for collection and preservation of ESI;
• [I]dentify custodians of potentially relevant ESI;
• [E]ngage in competent and meaningful meet and confer with opposing counsel concerning an e-[D]iscovery plan;
• [P]erform data searches;
• [C]ollect responsive ESI in a manner that preserves the integrity of that ESI; and
• [P]roduce responsive non-privileged ESI in a recognized and appropriate manner.^[4]

[3]       Attorneys now need to have an understanding of the components of the Electronic Discovery Reference Model[5] and the tools available to assist in each part of that process. If they do not have the requisite understanding, they need to associate with someone who does.[6]

[4]       Preservation of ESI is implicated in at least five of the competencies specifically listed in a California Rules of Professional Conduct’s Formal Opinion,[7] but preservation for some lawyers can be a scary concept. Why? For one, data never sleeps.[8] Every minute of the day, people generate data in the form of e-mails, Instagrams, Tweets, and Snapchats.[9] If you compare the data generated in 2012 to that created in 2015, not only has the amount of data increased, but also the type of data created has increased with the proliferation of new applications that create data.[10] Identifying the type of data that needs to be preserved and how it needs to be preserved can be complicated because of this ever-changing data landscape.

[5]       Additionally, preservation provokes fear in the heart of many attorneys, because failing to preserve potentially relevant evidence can have significant adverse consequences for not only the client in the lawsuit but also for the attorneys involved.[11] Attorneys, however, now have more guidance regarding the imposition of sanctions in Federal Court, as the Federal Rules of Civil Procedure were amended to clarify when a court can impose sanctions for the failure to appropriately preserve evidence, including when evidence is intentionally destroyed.[12]

[6]       Even with the amendments to the Rules, the following questions still exist for every piece of litigation:

• When does the duty to preserve arise?
• What must be preserved for the potential or current litigation?
• What steps can I take to competently preserve potentially relevant information?

[7]       Is the answer to the above questions that every piece of data in your client’s possession must be preserved? No. Is the answer to preserve only e-mails a specific custodian sends to counsel on his or her own accord, without any further discussion with counsel? No. While there is no “one size fits all” answer to preservation, this article intends to guide practitioners through the preservation rubric outlined in the cases of “e-Discovery Canon,”[13] as well as recent case law and the 2015 amendments to the Federal Rules of Civil Procedure. This article also outlines questions practitioners should ask their clients and themselves in order to competently identify and preserve ESI.

II. The Duty to Preserve

[8]       The first question that a lawyer must answer is whether the duty to preserve has been triggered. Common law creates the duty to preserve evidence, and litigants owe this duty to the court, not just the opposing party.[14] Some commentators argue that the duty to preserve may be the most important duty a litigant has, in that failing to meet this duty can deprive the court of the ability to properly assess the claims of the parties before it.[15] This duty “arises not only during litigation but also extends to that period before the litigation when a party reasonably should know that the evidence may be relevant to the anticipated litigation.”[16] In the context of litigation for plaintiffs, the duty arises before the lawsuit is filed, and for defendants when the lawsuit is served, at the very latest.[17]

[9]       To be clear, though, whether a party is filing or has filed a lawsuit is not the test—it is the reasonable anticipation of litigation, in whatever form that takes. Recently, in Clear-View Technologies, Inc. v. Rasnic Magistrate Judge Paul S. Grewal (no stranger to preservation and e-Discovery issues[18]) found that a text message sent to a defendant over two years before suit was filed and eight months before any preservation notice was sent to the defendant triggered the duty to preserve.[19] Magistrate Judge Grewal stated that Plaintiff’s then-CEO “made clear in text messages to [defendants] that he was prepared to sue them for trying to interfere with” a potential business investment.[20] In his opinion, Judge Grewal noted that while the then-CEO later sent text messages apologizing for his previous texts, at no time did he take back his threat of litigation.[21] In the context of non-lawsuit triggers, courts have also found that a presentation regarding potential patent infringement claims,[22] ultimatums made to a CEO to “comply with [an] injunction” or face a lawsuit,[23] and of course, requests in writing that an individual or entity preserve evidence that may be relevant to a dispute trigger the duty to preserve.[24]

[10]     Accordingly, practitioners should not depend on the arrival of a complaint to trigger a client’s duty to preserve. While service of pleadings certainly can and does trigger the duty to preserve, once apprised of a potential dispute, practitioners should ask their clients not only about the facts of the potential dispute, but also how they communicated with the individuals involved with the potentially adverse party—in-person, telephone, e-mail, text messages, and/or any other medium of communication. As a practical matter, these queries will be easier the more you know about your client’s business and data landscape.[25] While a slip-and-fall, a failure to make a specified delivery under the terms of a contract, or a malfunction of a piece of equipment causing injury will remain clear triggers for the duty to preserve, practitioners should not overlook the wide variety of ways individuals now communicate with one another when analyzing whether and when the duty to preserve was triggered.

III. The Scope of Preservation

[11]     The duty to preserve evidence includes “an obligation to identify, locate, and maintain[] information that is relevant to specific, predictable, and identifiable litigation.[26] The duty pertains, however, only to relevant documents.[27] Relevant documents include:

[A]ny documents or tangible things . . . made by individuals “likely to have discoverable information that the disclosing party may use to support its claims or defenses.” The duty also includes documents prepared for those individuals to the extent those documents can be readily identified (e.g., from the “to” field in e-mails). The duty also extends to information that is relevant to the claims or defenses of any party, or which is “relevant to the subject matter involved in the action.” Thus, the duty to preserve extends to those employees likely to have relevant information—the “key players” in the case.[28]

The cases are clear on one point: once the duty to preserve is triggered, not every piece of data belonging to an organization must be preserved, just as every piece of paper belonging to an organization is not required to be preserved.[29] The cases outlined below demonstrate as much.

[13]     In Blue Sky Travel & Tours, LLC v. Al Tayyar, the Fourth Circuit vacated and remanded the district court’s decision to impose severe sanctions on the defendant for failing to preserve certain invoices requested by the plaintiff.[30] In this breach of contract action, the plaintiff’s damages included a claim for lost profits, and in an effort to prove those lost profit claims, the plaintiff requested that the defendant produce certain invoices.[31] When the defendant did not provide the invoices, the plaintiff moved to compel their production.[32] The court granted the motion, but the defendant still did not produce the invoices because the documents were not retained.[33] The plaintiff then moved for sanctions, and the magistrate recommended the court grant the motion and provide an adverse inference instruction.[34] The problem with this recommendation and ruling, though, was that the magistrate judge ruled that the defendant had a duty to hold “all” documents, stating:

[W]hen this litigation started, the defendants were required by law to preserve. Any document retention policy you had had to be stopped. . . . [o]nce you are put on notice that there is litigation pending, or once litigation starts, you are required . . . to stop [your] normal document retention policies and to preserve [ALL] documents because you don’t know what may or may not be relevant.[35]

[14]     The Fourth Circuit vacated and remanded the magistrate’s decision because the lower court used the incorrect standard for the duty to preserve.[36] The Fourth Circuit noted that a party may be sanctioned for spoliation if the party “(1) had a duty to preserve material evidence, . . . (2) willfully engaged in conduct resulting in the loss or destruction of that evidence, [and] (3) at a time when the party knew, or should have known, that the evidence was or could be relevant to the litigation.”[37] The Fourth Circuit reiterated that a party is not required to preserve all of its documents, only documents that the party knew or should have known were or could be relevant to the parties’ dispute.[38]

[15]     In Wandering Dago, Inc. v. N.Y. State Office of Gen. Servs., the court had to decide whether officials in one governmental agency and their attorney could be sanctioned for the destruction of e-mails, according to the terms of an e-mail retention policy, belonging to another governmental agency.[39] More to the point, the court had to determine whether a preservation obligation for one governmental agency involved in a specific litigation automatically applies to every other governmental agency not involved in the litigation.[40] The court said no, as the defendant agencies in the litigation had no control over the other governmental agencies’ e-mails.[41] Therefore, the defendant agencies had no obligation to preserve the other non-party agencies’ e-mails.[42] The court noted that to require a governmental agency in litigation to preserve and produce documents belonging to another governmental agency not a party to the litigation would “subject all [ ] agencies, the legislature, the judiciary, quasi-state agencies, and possibly public authorities to disclosure scrutiny, notwithstanding their relative remoteness to the case.”[43] The court found that “state agencies for most purposes are separate and distinct organs and should not be viewed in the aggregate.”[44] Moreover, the court noted that requiring each governmental agency “and thousands of officials to institute a litigation hold every time a party contemplates or even commences litigation against another agency would paralyze the State.”[45]

[16]     In AMC Technology, LLC v. Cisco Systems, Inc., Magistrate Judge Grewal distinguished between documents parties are obligated to preserve and those that they are not obligated to preserve and that can be destroyed as part of a routine retention policy.[46] Pursuant to Cisco’s document retention policy, Cisco reformatted departed employees’ laptops and deleted e-mail archives thirty days after an employee’s departure.[47] After one employee’s departure, and the deletion of his data, AMC requested his custodial data.[48] When Cisco did not provide the data because it had been destroyed according to its retention policy, AMC moved for spoliation sanctions.[49]

[17]     Judge Grewal held that sanctions were not warranted because Cisco was under no obligation to preserve his data at the time it was destroyed.[50] Judge Grewal underscored that the “scope of this duty is confined to what is reasonably foreseeable to be relevant to this action. Requiring a litigant to preserve all documents, regardless of their relevance, would cripple parties who are often involved in litigation . . . .”[51] In its analysis, the court also noted that the disposal of the employee’s documents “appears to have been routine—Cisco followed established company procedure, which deletes company emails and information within thirty days.”[52]

[18]     These cases provide a framework for identifying the scope of preservation. While each case turns on its own unique facts, these cases demonstrate that preserving everything is not the requirement of the duty to preserve, as such a requirement would create inefficiencies for business and government entities attempting to carry out their daily functions. Moreover, they show that only those documents that are reasonably foreseeable to be relevant to the action at the time the duty is triggered must be preserved. Obviously, what is relevant can change during the course of an investigation. As a result, practitioners should continue to monitor what has been preserved and the pertinent issues in the litigation to continue to observe their preservation obligations.

A. Identifying What Must Be Preserved

[19]     So the next question is: how do you identify and preserve documents that are potentially relevant to the parties’ dispute? Understanding who created and possesses potentially relevant ESI—and how that ESI is stored—is the first step to competently complying with the duty to preserve. Not taking these steps can lead to the destruction of potentially relevant information, and adverse consequences for that destruction. Brown v. Tellermate Holdings Ltd. outlines the failings of practitioners in executing their duty to identify and preserve potentially relevant ESI, and thus provides a good description of what practitioners need to do to competently comply with their preservation obligations.

[20]     In Brown v. Tellermate Holdings Ltd., the court found that Tellermate’s counsel “failed to uncover even the most basic information about an electronically-stored database of information” and that “as a direct result of that failure, took no steps to preserve the integrity of the information in that database.”[53] In this age discrimination case, the plaintiffs requested reports from both of their accounts in salesforce.com, a web-based application that allows businesses to track sales activities, as well as a number of other employees’ reports.[54] While at Tellermate, the plaintiff employees knew that Tellermate acquired licenses for their sales team to use salesforce.com and encouraged its employees to use it.[55] During discovery, Tellermate contended that it could not produce the reports because, among other things, Tellermate could not “print out accurate historical records from salesforce.com. . . .”[56] Counsel for Tellermate represented to the court that “Tellermate [did] not possess or control data maintained in the salesforce.com database and [was] not at liberty to produce it in discovery,” as well as that no one from Tellermate “has access to [the] ESI of salesforce.com . . . .”[57] However, in direct contradiction from its attorneys’ representations to the court, Tellermate’s representative testified that “any Tellermate employee with a login name and a password could access . . . historical information . . . at any time.”[58]

[21]     Additionally, after the plaintiffs’ departure, Tellermate changed the user names to the their accounts and took no action to preserve the information in the plaintiffs’ accounts, as the data in their accounts could be changed or deleted by salesforce.com administrators at the company.[59] For the above actions, the court admonished Tellermate’s counsel, stating “all of this information was clearly known to at least some Tellermate employees since Tellermate began using salesforce.com; had the right questions been asked of the right people, counsel would have known it as well.”[60]

[22]     The court also found that “counsel apparently never identified the persons having responsibility for salesforce.com information, which would have included those Tellermate employees (named by the [plaintiffs] in their document request) whose salesforce.com accounts were being requested, or the persons designated by Tellermate as its salesforce.com administrators.”[61] In short, the court found that “counsel had an affirmative obligation to speak to the key players at Tellermate so that counsel and client could identify, preserve, and search the sources of discoverable information.”[62]

[23]     To competently preserve ESI, practitioners must determine the individuals who may have knowledge or information about the different issues involved in the dispute, then determine what potentially relevant documents and data those individuals have in their possession, custody, or control.[63] Simultaneously, practitioners should speak with their client’s information technology personnel, who can explain the company’s system-wide back up procedures, any “auto-delete” functions, and gain a general overview of where and how data resides throughout the company (e.g., e-mail servers, file share servers, VM systems, databases, etc.).[64] These steps allow a practitioner to ask the right questions of the right people in order to determine where potentially relevant information resides.

[24]     Additionally, asking the right questions of the right people can also inform your decision as counsel as to what is reasonably accessible and therefore reasonably can be preserved. For example, if you learn from information technology personnel that the company’s disaster recovery systems are truly disaster recovery systems rather than a form of long-term storage, it may be worth mentioning at a Fed. R. Civ. P. 26(f) conference or meeting that, because these systems are for disaster recovery only, they are not reasonably accessible and will not be preserved.[65]

[25]     Moreover, discussing the data landscape with key custodians and information technology personnel provides valuable information about the various data sources and the amount it may cost to preserve those data sources, which can provide insight into whether producing from that data source is proportional to the needs of the case.[66] For example, in You v. Japan the court allowed defendant Sankei, a newspaper publisher, to modify a piece of a preservation order because of the undue burden it was placing on its business.[67] The preservation order required each party to take affirmative steps to preserve evidence related to the action by ceasing “any document destruction programs and any ongoing erasures of e-mails, voicemails, and other electronically recorded materials.”[68] Sankei took steps to comply with the order, including retaining versions of articles that it placed in a proprietary application used for laying out each edition of the newspaper.[69] The application typically retained these versions for 90 days.[70] Sankei stated that requiring that application to retain the article versions for greater than 90 days “could slow down the system or cause it to crash.”[71] Sankei also stated that installing a new storage system could take up to eight months and would cost $18 million.[72] Accordingly, Sankei filed a motion for relief from the preservation order and proposed an alternative method to preserve the documents in the proprietary application.[73] The Court, noting plaintiffs’ objections, granted Sankei’s proposal and included a modification proposed by the plaintiffs.[74] Without asking the right questions of the right people, Sankei may not have been able to seek an alternative that would allow it to continue functioning as a business and maintain its preservation obligations.

B. The Litigation Hold

[26]     While the litigation hold or legal hold notice should now be part of every practitioner’s litigation checklist, it is still an integral part of competently complying with the duty to preserve. As the court in Zubulake V stated, “[o]nce a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a ‘litigation hold’ to ensure the preservation of relevant documents.”[75]

[27]     A litigation hold informs custodians and information technology personnel about the lawsuit and their preservation obligations to preserve potentially relevant information relating to the lawsuit.[76] However, implementing the litigation hold does not end a party’s preservation obligations—“[c]ounsel [also] must oversee compliance with the litigation hold.”[77]

[28]     Apple Inc. v. Samsung Electronics Co., Ltd. demonstrates the potential consequences of failing to monitor compliance with a litigation hold. There, Magistrate Judge Grewal analyzed “whether Samsung took adequate steps to avoid spoliation after it should have reasonably anticipated” litigation.[78] In this case, a Samsung entity/defendant failed to disable the “auto-delete” function of its e-mail system after the duty to preserve was triggered.[79] Judge Grewal noted that it is “generally recognized that when a company or organization has a document retention policy, it is ‘obligated to suspend’ that policy and ‘implement a “litigation hold” to ensure the preservation of relevant documents’ after the preservation duty has been triggered.”[80] Samsung issued a litigation hold notice requesting employees to “preserve any and all [] documents that may be relevant to the issues in the potential litigation . . . until [the potential litigation] is fully resolved.”[81] However, while the litigation hold notice provided categories of documents that should be retained, Samsung took no steps to evaluate what its employees were doing to comply with the litigation hold notice, especially in light of the continued use of the auto-delete function.[82] While under the legal hold, Samsung never checked to see whether a single custodian was in compliance with the given directives.[83]

[29]     Practitioners and clients should consistently monitor employee and information technology compliance with their legal hold directives. The longer a legal hold is in place and the more time that goes by opens companies up to something that can be described as “Litigation Hold Fatigue,” resulting in less enthusiastic preservation practices.[84] Additionally, as noted above, issues in a litigation change, which can change what needs to be preserved. Follow-up reminders and revisions to litigation holds not only assist in complying with preservation obligations, but they can also assist in defining the scope of preservation.

IV. What Can We Learn From Failing to Preserve

[30]     Cases outlining complete failures to preserve are instructive to practitioners as a template for “Preservation Do Nots.” In Altercare, Inc. v. Clark, the Ohio Court of Appeals was required to determine whether the trial court abused its discretion in dismissing Altercare’s case against its former employee, Clark, for failing to preserve the former employee’s computer after the obligation to preserve arose.[85] After being told not to return to Altercare for work, Clark’s attorney sent Altercare a letter stating that it had breached Clark’s employment contract, and requesting that Altercare preserve evidence relevant to the dispute.[86] The preservation notice portion of the letter provided a non-exhaustive list of data covered by Altercare’s obligation, as well as ways that Altercare could comply with its obligation.[87] Once suit was filed, Clark requested in discovery all ESI relating to Clark and/or Clark’s employment with Altercare.[88]

[31]     The trial court attempted to determine what Altercare did to preserve Clark’s ESI on numerous occasions.[89] The court found that, at one point, Altercare returned a different hard drive to Clark than belonged to the work computer she sent the company for preservation.[90] The trial court held that Altercare did not preserve Clark’s work computer, failing to either “[pull] it out of service or [make] a copy or clone of its hard drive at the time Ms. Clark put [Altercare] on notice” of its obligation to preserve.[91] Because the trial court found that Altercare’s conduct in failing to preserve Clark’s work computer showed “such extreme carelessness and indifference,” the trial court dismissed Altercare’s complaint.[92] The Court of Appeals affirmed the trial court’s ruling, finding that Altercare “took no action whatsoever” to preserve Clark’s computer, either when she was terminated—even though it was reasonably foreseeable that litigation with Clark was probable—or after receiving the preservation notice from Clark’s attorney.[93] Notably, the Court of Appeals also recognized that the trial court “found that there was no evidence that Clark’s computer was lost as a result of a routine, good faith operation,” [94] such as a retention schedule.

[32]     Similarly, in Alter v. Rocky Point Sch. Dist., in ruling on the Plaintiff’s motion to compel and for sanctions in a workplace discrimination claim, the court found that defendants had failed to satisfy their duty to preserve relevant evidence.[95] The court based its ruling on the following facts:

• Defendants failed to issue a timely litigation hold, instead waiting more than two years after Plaintiff filed a Notice of Claim;[96]
• Defendants “failed to discuss the litigation hold with key players” in the lawsuit;[97]
• Defendants failed to inform key custodians regarding their obligation to preserve relevant evidence “on whatever devices contained the information, [including] [personal] laptops, cellphones or any personal digital devices capable of ESI storage.”[98]

[33]     In Clear-View Techs., discussed above, the defendants took “no reasonable steps to preserve relevant evidence” and, in fact, “affirmatively destroyed it,” after the text message that triggered the preservation obligation was sent and, in some cases, after the preservation letter was received and after suit was filed.[99]

[34]     In each of these cases, the party responding to destruction allegations failed to take reasonable steps to preserve potentially relevant evidence—no litigation holds issued, no custodian interviews performed or even simple questions asked, and in a workplace discrimination suit, the terminated employee’s workstation was not preserved—and was then punished in some manner by the court. As these cases demonstrate, it is this failure to competently preserve potentially relevant evidence that places clients and their attorneys on rocky ground with the court.

[35]     Prior to the 2015 amendment of Rule 37(e), the sanctions imposed by courts because of the destruction of evidence, whether through negligence or bad faith, created inconsistencies in the sanctions imposed throughout the federal circuits.[100] In one circuit, a party could receive an adverse inference instruction from the grossly negligent deletion of an employee’s ESI,[101] while in another, an adverse inference instruction was appropriate only where there was a finding of bad faith in the destruction of the evidence.[102] Amended Rule 37(e) no longer allows courts to punish parties through an adverse inference instruction in the wake of destroyed evidence if they can show they took reasonable steps to preserve evidence.[103]

[36]     So what does this mean for practitioners? In the words of algebra teaches everywhere, litigants must “show their work.” Litigants should document the processes by which and steps they took to preserve potentially relevant evidence. The following steps, while not all-inclusive, and when they were taken should be well-documented by practitioners:

• Issue a litigation hold that outlines the potential forms of ESI (e-mail, text messages, word documents, databases, etc.) and the potential sources of ESI (e-mail mailbox, smart phone, workstation, network servers, social media accounts, etc.) available to custodians;[104]

• Identify and interview key players and custodians regarding their ESI forms and sources;

• Interview information technology personnel regarding forms and sources of ESI available to employees and other personnel at the company, as well as the back-up and disaster recovery systems in place;

• Document which devices were identified as having potentially relevant evidence and how each device was preserved for each custodian;

• Document how specific information on servers and other company sources was identified and preserved;

• Monitor legal hold compliance and refresh litigation hold notice as issues in the litigation evolve and new custodians are identified and new employees hired;

• Disable and document the disabling of “auto-delete” functions for systems containing such functions;

• Evaluate software offerings available to assist with the implementation of a legal hold;[105]

• Analyze records management or retention policies for those categories of documents under a litigation hold to ensure routine destruction as to those documents has stopped.

[37]     Practitioners should document what was done and when it was done to demonstrate to the court how they took reasonable steps to preserve ESI. Taking the time to identify whose data and what sources and forms of data need to be preserved, and then “showing your work” by documenting those preservation steps and the considerations necessary to make those choices, demonstrates competence and may save you from headaches and discord later.

^* Lauren Wheeling Waller is a partner at Williams Mullen and chairs the firm’s e-Discovery and Information Governance Practice Group. She is an experienced litigator and provides guidance in crafting defensible and uniform approaches to records management and retention, litigation hold implementation, as well as managing complex e-Discovery projects in commercial litigation and investigations. She has written and spoken frequently on electronic discovery topics and is a member Working Group I on Electronic Document Retention and Production of The Sedona Conference.

 

 

[1] Competent, Merriam-Webster, http://www.merriam-webster.com/dictionary/competent, archived at https://perma.cc/VZ57-Z6TR (last visited Feb. 25, 2016).

[2] Model Rules of Prof’l Conduct R. 1.1 (2014).

[3] Model Rules of Prof’l Conduct R. 1.1 cmt. 8 (2014) (emphasis added).

[4] State Bar of Cal. Standing Comm. on Prof’l Responsibility & Conduct, Formal Op. 2015-193, 3–4 (2015) [hereinafter Cal. Ethics Op.] (emphasis added) (internal citations omitted).

[5] See EDRM Stages, EDRM, http://www.edrm.net/resources/edrm-stages-explained, archived at https://perma.cc/D63L-HC9E (last visited Feb. 25, 2016).

[6] See Cal. Ethics Op., supra note 4, at 3; see also HM Electronics, Inc. v. RF Techs., Inc., No. 12cv2884-BAS-MDD, 2015 WL 4714908, at *24 (S.D. Cal. Aug. 7, 2015) (holding that an “attorney’s duty to supervise the work of consultants, vendors, and subordinate attorneys is non-delegable. ‘An attorney must maintain overall responsibility for the work . . .,’ and, must do so by remaining regularly engaged in the . . . work.”) (internal citations omitted) (emphasis in original).

[7] See Cal. Ethics Op., supra note 4, at 3–4. (“[I]nitially assess e-[D]iscovery needs and issues, if any; [I]mplement/cause to implement appropriate ESI preservation procedures; [A]nalyze and understand a client’s ESI systems and storage; [A]dvise the client on available options for collection and preservation of ESI; [I]dentify custodians of potentially relevant ESI; [C]ollect responsive ESI in a manner that preserves the integrity of ESI”).

[8] See generally Data Never Sleeps 3.0, DOMO, https://web-assets.domo.com/blog/wp-content/uploads/2015/08/15_domo_data-never-sleeps-3_final1.png, archived at https://perma.cc/HN24-72YD (last visited Feb. 11, 2016). 

[9] See id.

[10] Compare id., with Data Never Sleeps 2.0, DOMO, www.domo.com/learn/data-never-sleeps-2, archived at https://perma.cc/83QJ-HM8Q (last visited Feb. 11, 2016), and Data Never Sleeps, DOMO, www.domo.com/blog/2012/06/how-much-data-is-created-every-minute, archived at https://perma.cc/Q5LW-ZK4B (last visited Feb. 11, 2016) (noting that applications such as Snapchat and Tinder were not identified in 2012 but generated vast amounts of data in 2015).

[11] See Victor Stanley, Inc. v. Creative Pipe, Inc., 269 F.R.D. 497, 538–41 (D. Md. 2010) (recommending sanctions including permanent injunction and attorneys’ fees); Malibu Media, LLC v. Tashiro, No. 1:13-cv-00205-WTL-MJD, 2015 U.S. Dist. LEXIS 64281, at *104 (S.D. Ind. May 18, 2015) (granting motion for sanctions for default judgment); HM Elecs., Inc. v. RF Techs., Inc., No. 12cv2884-BAS-MDD, 2015 WL 4714908, at *31–35 (S.D. Cal. Aug. 7, 2015) (recommending adverse inference instruction, as well as other sanctions). As these cases indicate, EDRM preservation tends to be the area where attorneys and clients make the most mistakes.

[12] See Fed. R. Civ. P. 37(e) (allowing for sanctions only when information is lost and cannot be replaced, and the court finds that another party is prejudiced from the loss or that the party acted with the intent to deprive the other party of information).

[13] See Pension Comm. of Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC, 685 F. Supp. 2d 456, 461 (S.D.N.Y. 2010) [hereinafter Pension Comm.], abrogated by Chin v. Port Auth. of N.Y. & N.J., 685 F.3d 135, 143 (2d Cir. 2012); Rimkus Consulting Grp. v. Cammarata, 688 F. Supp. 2d 598, 607 (S.D. Tex. 2010); Victor Stanley, Inc., 269 F.R.D. at 499–500; Zubulake v. UBS Warburg LLC (Zubulake V), 229 F.R.D. 422, 424 (S.D.N.Y. 2004), Zubulake v. UBS Warburg LLC (Zubulake IV), 220 F.R.D. 212, 214 (S.D.N.Y. 2003).

[14] See Victor Stanley, Inc., 269 F.R.D. at 525 (noting “the duty to preserve evidence relevant to litigation of a claim is a duty owed to the court.”) (emphasis in original).

[15] See Monica McCarroll, Discovery and the Duty of Competence, 26 Regent U. L. Rev. 81, 91 (2013).

[16] Silvestri v. Gen. Motors Corp., 271 F.3d 583, 591 (4th Cir. 2001).

[17] See Pension Comm., 685 F. Supp. 2d at 466.

[18] See generally Apple Inc. v. Samsung Elecs. Co., Ltd., 881 F. Supp. 2d 1132, 1132 (N.D. Cal. 2012).

[19] See Clear-View Techs., Inc. v. Rasnick, No. 5:13-cv-02744-BLF, 2015 U.S. Dist. LEXIS 63579, at *3. The text message stated, in part, “[D]on’t call my shareholders with your b.s. That is [tortious] economic interference. I will not accept this. . . . [K]eep it up and you’ll find [yourself] in court[.] Call Clyde again and I sue. Mark my words.” Id at *3–4 (alteration in original).

[20] Id. at *3.

[21] See id. at *21.

[22] See Apple Inc., 881 F. Supp. 2d at 1145 (noting that the presentation from Apple provided Samsung with “more than just a vague hint” that litigation “was at least foreseeable, if not ‘on the horizon.’”).

[23] In re Napster, Inc. Copyright Litig., 462 F. Supp. 2d 1060, 1069 (N.D. Cal. 2006).

[24] See, e.g., Altercare, Inc. v. Clark, 9th Dist. No. 12CA010211, 2013-Ohio-2785, at ¶ 2.

[25] While discussed only in the context of preservation below, information about a client’s data landscape prior to litigation should be part of an overall information governance effort. See Information Governance Reference Model (IGRM), EDRM, www.edrm.net/projects/igrm, archived at https://perma.cc/6F5N-D633 (last visited Mar. 18, 2016) [hereinafter IGRM].

[26] Apple Inc., 881 F. Supp. 2d at 1137; The Sedona Conference, The Sedona Conference Commentary on Legal Holds: the Trigger & the Process 1 (Conor R. Crowley et al. eds., 2007), https://thesedonaconference.org/download-pub/77, archived at https://perma.cc/EP4B-2AAY (download required).

[27] See Pension Comm., 685 F. Supp. 2d 456, 466 (S.D.N.Y. 2010), abrogated by Chin v. Port Auth. of N.Y. & N.J., 685 F.3d 135, 143 (2d Cir. 2012).

[28] Zubulake IV, 220 F.R.D. at 217–18. While this case was decided under the pre-2015 amendment scope of discovery, it remains a seminal case in defining the scope of the duty to preserve.

[29] See id. at 217 (noting that the duty to preserve does not require litigants to preserve “every shred of paper, every e-mail or electronic document, and every backup tape[.]”).

[30] See Blue Sky Travel & Tours, LLC v. Al Tayyar, 606 Fed. Appx. 689, 690 (4th Cir. 2015).

[31] See id. at 691.

[32] See id.

[33] See id. at 692.

[34] See id. at 692–93.

[35] Blue Sky Travel & Tours, LLC, 606 Fed. Appx. at 692.

[36] See id. at 690.

[37] Id. at 697–98.

[38] See id.

[39] See Wandering Dago Inc. v. N.Y. State Office of Gen. Servs., No. 1:13-CV-1053 (MAD/RFT), 2015 U.S. Dist. LEXIS 69375, at *1 (N.D.N.Y. May 29, 2015).

[40] See id. at *1–2.

[41] See id. at *22 (“Defendants correctly assert that they have no control over [Defendants’] emails. . . .”).

[42] See id.

[43] Id. at *23 (quoting N.Y. v. Amtrak, 233 F.R.D. 259, 266 (N.D.N.Y. 2006).

[44] Wandering Dago Inc., 2015 U.S. Dist. LEXIS 69375, at *24.

[45] Id. at *24–25.

[46] See AMC Tech., LLC v. Cisco Sys. Inc., No. 11-cv-3403 P, 2013 U.S. Dist. LEXIS 101372, at *4 (N.D. Cal. July 15, 2013).

[47] See id. at *4.

[48] See id. at *5–7.

[49] See id.

[50] See id. at *10.

[51] AMC Tech., LLC, 2013 U.S. Dist. LEXIS 101372, at *9.

[52] Id. at *11.

[53] Brown v. Tellermate Holdings, Ltd., No. 2:11-cv-1122, 2014 U.S. Dist. LEXIS 90123, at *6 (S.D. Ohio July 1, 2014).

[54] See id. at *7, *10.

[55] See id. at *8.

[56] Id. at *11.

[57] Id. at *13.

[58] Brown, 2014 U.S. Dist. LEXIS 90123, at *14.

[59] See id.

[60] Id. at *19 (emphasis added).

[61] Id. at *52–53.

[62] Id. at *56.

[63] See Zubulake V, 229 F.R.D. 422, 432 (S.D.N.Y. 2004); see also McCarroll, supra note 15, at 94–95.

[64] See Zubulake V, 229 F.R.D. at 432.

[65] See Zubulake IV, 220 F.R.D. 218. Amended Rule 26(f) now puts issues of preservation at the forefront of a 26(f) conference. See Fed. R. Civ. P. 26(f)(3)(C) (“A discovery plan must state the parties’ views and proposals on: . . . any issues about disclosure, discovery, or preservation of electronically stored information, including the form or forms in which it should be produced . . . .”) (emphasis added); see also Fed. R. Civ. P. 37(e), advisory committee’s note on 2015 amendments (“A party may act reasonably by choosing a less costly form of information preservation, if it is substantially as effective as more costly forms.”).

[66] Fed. R. Civ. P. 26(b)(1) (“Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense” and proportional to the needs of the case).

[67] See Hee Nam You v. Japan, No. C 15-03257 WHA, 2015 U.S. Dist. LEXIS 123877, at *2–5 (N.D. Cal. Sept. 16, 2015).

[68] Id. at *2.

[69] See id. at *2–3.

[70] See id. at *3.

[71] Id.

[72] See Hee Nam You, 2015 U.S. Dist. LEXIS 123877, at *3.

 [73] See id.

[74] See id. at *4–5.

[75] Zubulake V, 229 F.R.D. at 431 (quoting Zubulake IV, 220 F.R.D. at 218).

[76] See id. at 439.

[77] Id. at 432.

[78] Apple Inc. v. Samsung Elecs. Co., Ltd., 881 F. Supp. 2d 1132, 1134 (N.D. Cal. 2012).

[79] See id. In his opinion, Judge Grewal again reiterated that the duty to preserve includes identifying, locating, and maintaining information that is relevant to the litigation. See id. at 1137.

[80] Id. at 1137 (internal citations omitted).

[81] Id. at 1142–43.

[82] See id. at 1145.

[83] See Apple Inc., 881 F. Supp. 2d at 1147.

[84] See generally Legal Hold Software, Exterro, http://www.exterro.com/e-discovery-software/legal-hold/, archived at https://perma.cc/HS9M-VFVQ (last visited Feb. 20, 2016) (“Help custodians understand the importance of pending obligations, fight ‘notice fatigue’ by those on multiple legal holds, and promote consistent compliance.”).

[85] See Altercare, Inc. v. Clark, 9th Dist. No. 12CA010211, 2013-Ohio-2785, at ¶ 12.

[86] See id. at ¶ 2.

[87] See id. (“Altercare can most easily comply with its obligation by making mirror-image bit stream back-up copy of computers and storage media (such as hard disk drive[s], floppy disks, CDs, DVDs, back-up tapes, or any other electronic data), which will inexpensively preserve relevant electronic and digital evidence on searchable CD-ROMs or DVD.”).

[88] See id. at ¶ 3.

[89] See id. at ¶¶ 3–10.

[90] See Altercare, 2013-Ohio-2785, at ¶ 6.

[91] Id. at ¶ 10.

[92] Id.

[93] Id. at ¶¶ 2, 16.

[94] Id. at ¶ 16.

[95] See Alter v. Rocky Point Sch. Dist., No. 13-1100 (JS) (AKT), 2014 U.S. Dist. LEXIS 141020, at *3 (E.D.N.Y. Sept. 30, 2014).

[96] See id. at *28.

[97] Id. at *23.

[98] Id. *22­–24, *26, *28.

[99] Clear-View Techs., Inc. v. Rasnick, No. 5:13-cv-02744-BLF, 2015 U.S. Dist. LEXIS 63579, at *21–23 (noting that defendants “failed to implement a hold policy,” “deleted thousands of relevant emails, [and] discarded several phones, laptops, [and] iPads…”).

[100] Compare Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 108 (2nd Cir. 2002) (“The sanction of an adverse inference may be appropriate in some cases involving the negligent destruction of evidence because each party should bear the risk of its own negligence.”), with United States v. Artero, 121 F.3d 1256, 1259 (9th Cir. 1997) (noting that a “district judge did not abuse his discretion by refusing to give an adverse inference instruction, because the appellant showed neither bad faith imputable to the federal government nor prejudice from the loss and destruction of the evidence.”) (citing United States v. Jennell, 749 F.2d 1302, 1308–09 (9th Cir. 1984)).

[101] See Sekisui Am. Corp. v. Hart, 945 F. Supp. 2d 494, 504 (S.D.N.Y. 2013).

[102] See Rimkus Consulting Grp. v. Cammarata, 688 F. Supp. 2d 598, 614 (S.D. Tex. 2010).

[103] See Fed. R. Civ. P. 37(e) advisory committee’s note on 2015 amendments (“The rule only applies if the information was lost because the party failed to take reasonable steps to preserve the information.”).

[104] See generally D.O.H. v. Lake Cent. Sch. Corp., No. 2:11-cv-430, 2015 U.S. Dist. LEXIS 20259, at *23–25 (N.D. Ind. Feb. 20, 2015) (discussing where custodians identify social media as a potential source of potentially relevant information, practitioners should take steps to ensure that they understand how to preserve data from a social media site or engage a third-party vendor that does understand both how the site works and how to preserve the data contained in the site.).

[105] See generally Jie Zhang & Garth Landers, Magic Quadrant for E-Discovery Software, Gartner (May 18, 2015), https://www.gartner.com/doc/reprints?id=1-2G57ESF&ct=150519&st=sb, archived at https://perma.cc/SC7T-8DJP (evaluating over twenty e-Discovery software vendors).

[et_pb_section admin_label=”section”]
[et_pb_row admin_label=”row”]
[et_pb_column type=”4_4″][et_pb_text admin_label=”Text”]

Favro Publication Version

Cite as: Philip Favro, Addressing Employee Use of Personal Clouds, 22 Rich. J.L. & Tech. 6 (2016), http://jolt.richmond.edu/v22i3/article6.pdf.

Philip Favro*

 

I. INTRODUCTION

[1]       Cloud computing is one of the most useful innovations in the digital age.[1] While much of the attention on recent advances has focused on smartphones, tablet computers, and wearable technology, the cloud is perhaps unrivaled in its utility for organizations.[2] From simplified data storage to innovative software platforms, enterprise-grade cloud solutions provide cost-effective alternatives to acquiring expensive computer hardware and software.[3] Enterprise clouds also offer a collaborative work environment for a mobile and widespread work force, enabling businesses to maximize worker productivity.[4]

[2]       Organizations are not alone in reaping the benefits of cloud computing. Individuals have likewise discovered the value that cloud providers offer in their personal lives.[5] With increased storage for digital photos, music, and other files, personal cloud providers help users avoid losing personal data when a computer hard drive inevitably fails.[6] Furthermore, the transfer functionality afforded by personal clouds enables users to seamlessly move data between computers, smartphones, and other mobile devices.[7]

[3]       With such utility at their fingertips, it should come as no surprise that individuals use personal clouds to facilitate work responsibilities.[8] Personal cloud providers like Dropbox, Box, and Google Drive can obviate clunky network storage options and simplify data sharing and teamwork among colleagues.[9] While employees of many organizations could benefit from such functionality, it is particularly advantageous to workers whose employers lag behind the technology curve.[10]

[4]       These and other features seem to make personal clouds an ideal tool for advancing business objectives within the corporate environment.^[11] Appearances, however, can be deceiving. That is exactly the case with employee use of personal cloud applications in the workplace.^[12] From information retention and information security to litigation readiness and cybersecurity, personal cloud use among employees implicates a range of troubles for organizations.^[13] Indeed, the very aspects that make personal clouds so attractive–cheap and unlimited storage, simplified transfers, and increased collaboration–pose serious threats to the enterprise.[14]

[5]       Nevertheless, companies in many instances have taken few, if any, actionable steps to address the proliferation of personal cloud use among their employees.[15] Worse, some organizations have implemented “bring your own cloud” (BYOC) policies that officially sanction employee use of consumer-grade cloud applications in the workplace without sufficient corporate oversight.[16] A BYOC policy that lacks proper measures to ensure compliance may very well result in a disastrous outcome for the enterprise.[17]

[6]       In this article, I address these issues by surveying recent court cases that exemplify the information governance and litigation challenges arising from personal cloud use in the business enterprise. In particular, I discuss the problems with BYOC practices that expressly or implicitly enable employee use of personal clouds. I also spotlight some of the troubles that stealth use of personal clouds creates for organizations. I conclude by suggesting some practices that can help organizations ameliorate these problems.

 II. LAISSEZ-FAIRE TREATMENT OF PERSONAL CLOUD
USE IN THE CORPORATE ENVIRONMENT

[7]       Employers are often directly responsible for the difficulties that have resulted from employee use of cloud applications.[18] That employers are at fault does not stem from this being a new trend. Indeed, personal cloud providers have been around since the 2000s,[19] with courts examining the troubles associated with cloud computing beginning in 2011.[20]Organizations previously overlooked the risks of this trend by authorizing their executives or employees to use personal cloud applications in the corporate ecosystem.[21] In addition, they ignored the hazards associated with the stealth use of personal clouds.[22] This Part examines cases that address these aspects of employee use of consumer clouds.

 A. Corporate Approved BYOC Accounts

[8]       In many instances, organizations have openly welcomed the use of personal clouds by their employees.[23] Whether by policy or by practice, corporate IT departments have approved personal cloud use by expressly enabling its functionality.[24] Nevertheless, that is often the extent of corporate oversight.[25] Beyond requiring an employee to sign a perfunctory non-disclosure agreement, little follow up effort is taken to prevent employees from transferring confidential information from company servers to a personal cloud.[26]

[9]       Such corporate inaction can be challenging for cybersecurity initiatives, retention schedules, and preservation requirements in litigation. However, it can be especially problematic when an employee leaves the company with proprietary materials and begins working for an industry competitor.[27] The Selectica v. Novatus[28] and PrimePay v. Barnes[29] decisions are particularly instructive on the need for organizations to abandon their laissez-faire attitude toward employee use of approved BYOC accounts.

1. Selectica v. Novatus

[10]     In Selectica, plaintiff (Selectica) filed suit against defendant (Novatus), claiming Novatus misappropriated various trade secrets.[30] In particular, Selectica alleged that four of its former sales personnel violated their respective non-disclosure agreements by sharing confidential pricing information with Novatus, their new employer.[31] Those agreements provided that the employees would maintain the confidentiality of Selectica’s proprietary information and return all such materials to the company upon termination of their employment.[32]

[11]     Despite those agreements, one of the employees (Holt) offered to share Selectica’s pricing information to a member of Novatus’ senior management team after joining Novatus.[33] Holt still had access to that information along with other data belonging to Selectica because he maintained it with Box, a cloud storage provider.[34] The Box account was not a stealth cloud drive concealed from Selectica.[35]

[12]     Instead, Selectica expressly recommended and authorized Holt to store that data under a BYOC arrangement with Box: “While employed by Selectica, [Holt] had a company laptop computer which, on Selectica’s recommendation, was configured so that it automatically synced to his personal cloud storage account at Box.com. This meant that when Holt saved a file to the laptop, the system pushed a copy to his Box account.”[36] Despite having enabled the BYOC arrangement with Holt, Selectica apparently neglected to disable the Box account or remove any proprietary materials upon Holt’s departure.[37] As a result, Holt had full access to the pricing information when he joined Novatus.[38]

[13]     Selectica demonstrates the folly of a lax approach to personal cloud use within the enterprise. While Selectica enabled the Box account for backup purposes, it took no action to protect Selectica’s interest in the corporate information stored in that account. For example, Selectica did not obtain Holt’s login credentials to the Box account.[39] Nor does it appear that Selectica monitored Holt’s use of the account while employed with the company.[40] Selectica did not disable the Box account when Holt left the company.[41] Furthermore, Selectica took no action to confirm that Holt had either returned or destroyed all proprietary company information before going to work for Novatus.[42]

[14]     Any one of these steps—and certainly a combination of them—would likely have prevented the disclosure of Selectica’s product pricing information to an industry competitor.[43] Selectica exemplifies the need for corporate oversight of approved BYOC accounts if organizations are to prevent their trade secrets from falling into the hands of competitors.

2. PrimePay v. Barnes

[15]     Another exemplary decision on these issues is PrimePay v. Barnes.[44] Like Selectica, PrimePay involves claims of trade secret misappropriation.[45] In PrimePay, the plaintiff (PrimePay) sued one of its former executives (Barnes) that established a competing business entity.[46] PrimePay moved for a preliminary injunction against the operation of Barnes’ business, arguing that Barnes took several categories of confidential PrimePay information and stored it with cloud service provider Dropbox, along with other locations.[47] According to PrimePay, Barnes accessed the Dropbox-stored data to allegedly help start his competing company. He then allegedly destroyed those materials after the plaintiff warned him “to preserve any PrimePay electronically stored information that he possessed.”[48]

[16]     In response to these arguments, Barnes asserted that he never absconded with PrimePay’s proprietary data.[49] Instead, Barnes explained that any PrimePay data in his Dropbox account was from work that he previously performed while at PrimePay.[50] According to Barnes, that data was mostly deleted at the time he left the company.[51] As for the origin of the Dropbox account, it was created far in advance of Barnes’ departure from the company.[52] Its purpose was not to steal proprietary data, Barnes argued, but to allow him to complete work for PrimePay when he was away from the office.[53] Nor was this a stealth account; it was a company-approved BYOC:

Barnes created the Dropbox [account] . . . so that he could transfer and access files when he worked remotely on PrimePay matters if he was away from the office, on vacation or elsewhere and needed access to the PrimePay files, all with the knowledge and approval of [PrimePay owner] Chris Tobin.[54]

[17]     Given that Barnes’ Dropbox account was a company-approved BYOC account, and in light of other evidence suggesting Barnes did not access the Dropbox files or other proprietary PrimePay information after leaving his position with the company, the court did not find evidence of trade secret misappropriation.[55] While the court ordered the destruction of PrimePay’s remaining confidential information stored on the Dropbox, it refused to issue a preliminary injunction against the operation of Barnes’ competing enterprise.[56]

[18]     PrimePay reinforces the lesson from Selectica that a laissez-faire approach to personal clouds may lead to corporate disasters. Because PrimePay did not monitor or disable the Dropbox account, Barnes apparently left the company with a massive trove of proprietary company data. Even though the court accepted Barnes’ explanation that he accessed little, if any, of that data after he left the company, PrimePay’s evidence suggested otherwise.[57] While PrimePay may never know how much of its information was used to start Barnes’ competing enterprise, it is reasonably certain that a more robust compliance program would have quarantined the proprietary data before Barnes left the company.[58] This may have obviated the legal expenses and opportunity costs of the litigation. Like Selectica, PrimePay ultimately teaches that organizations should police approved BYOC environments to better safeguard proprietary corporate information.

 B.  Stealth Use of Personal Clouds

[19]     Beyond the problem of a poorly monitored BYOC ecosystem stands the equally troubling scenario of stealth use of personal clouds.[59] Such a scenario involves employees using their personal cloud accounts in connection with their work duties without express company approval.[60] While some employees do so in good faith to facilitate their work, others clandestinely use their cloud accounts to sabotage the organization or to gain a competitive advantage over their former employers after leaving the company.[61] A number of decisions demonstrate the problems with stealth—or “shadow”—use of personal clouds across the spectrum of corporate employees.[62]

1. Operations-Level Employee

[20]     Operations-level employees are often at the heart of stealth use of personal clouds. For example, in Toyota Industrial Equipment Manufacturing v. Land, a managerial level employee (Land) used Google Drive and other personal cloud applications to steal hundreds of critical documents from his employer (Toyota) before going to work for an industry competitor.[63] Those documents included technical specifications reflecting the proprietary design of certain industrial equipment, along with related pricing and financial information.[64] While authorized to use that data during his employment, Land stored and kept shadow copies of these materials on his Google Drive account so they could be accessible after he left Toyota.[65]

[21]     To facilitate the removal of Toyota’s proprietary information, Land downloaded “GoogleDriveSync.exe” on his work computer.^[66] Similar to the corporate-enabled Box account in Selectica, the GoogleDriveSync.exe program enabled Land to simultaneously save documents on his personal Google Drive account that he saved to his company-issued computer.[67] On the eve of his departure from Toyota, Land placed approximately 800 “files and folders” on Google Drive.[68] These actions—Land removing and then retaining Toyota’s proprietary information after his departure from the company in violation of his non-disclosure agreement—resulted in an injunction preventing Land from working for Toyota’s competitor.[69]

[22]     Another case involving stealth cloud use by an operations-level employee is RLI Insurance Company v. Banks.[70] In RLI, the employee (Banks) used a Norwegian cloud provider (Jottacloud)[71] to upload “757 customer claim files and other files containing proprietary information” belonging to her employer (RLI).[72] Banks initially tried to upload the files to her Dropbox account, but RLI’s corporate network denied access to Dropbox.[73] RLI had employed a web filtering software blocking employees from accessing more commonly used cloud providers, such as Dropbox.[74] Undeterred, Banks researched “Dropbox alternatives” that could evade RLI’s filtering protocol, opened a Jottacloud account, and used that service to remove proprietary RLI data in violation of her employment agreement.[75] RLI eventually discovered Banks’ malfeasance, but only after offering her a severance package subsequent to her dismissal from the company.[76]

2. Company Executives

[23]     Operations-level employees are not alone in their furtive use of personal clouds. Company executives can also be guilty of such conduct. Given the nature of access that executives often have to critical information, such conduct can be particularly problematic. The Frisco Medical Center v. Bledsoe[77] and De Simone v. VSL Pharmaceuticals[78] cases are instructive in this particular scenario.

[24]     In Frisco Medical, the chief operating officer (Bledsoe) for a Texas hospital (Frisco) used Dropbox to obtain several classes of proprietary and patient information before leaving Frisco for a new position elsewhere.[79] More specifically, Bledsoe installed Dropbox on her work computer after she accepted her new position but before she resigned from Frisco.[80] With Dropbox enabled, Bledsoe then transferred “Frisco’s confidential and proprietary information, trade secrets, peer review materials, and statutorily protected patient health information to her personal” cloud account in violation of her employment agreements.[81]

[25]     Frisco did not suspect that Bledsoe surreptitiously removed proprietary information from its computer network until she revealed in an exit interview that “she knew where too many bodies were buried.”[82] It was only then that Frisco began investigating Bledsoe’s computer usage, discovered her use of Dropbox, and determined the extent of the information she had taken from the hospital.[83]

[26]     In contrast to Frisco Medical, De Simone v. VSL Pharmaceuticals involved a chief executive officer (De Simone) who used Dropbox to deprive his company (VSL) of corporate records.[84] De Simone, who served as VSL’s chief executive for more than a decade, became embroiled in a dispute with investors over who rightfully owned VSL’s intellectual property related to the probiotic drug sold by the company.[85] In connection with that dispute, De Simone transferred VSL’s corporate records to his personal Dropbox account.[86] He then wiped the corporate network in order to eliminate any trace of the records and rejected shareholder requests to access the information.[87] After resigning his position as VSL’s CEO a few months later, De Simone began working for a competitive enterprise that manufactured and sold a generic version of VSL’s probiotic drug, taking the corporate records with him.[88]

3. Analysis of Cloud Jurisprudence

[27]     The cases discussed so far generally involve harm to employers that likely could have been obviated had the organizations taken safeguards to prevent or detect stealth use of personal clouds.[89] Instead, like Selectica, the employers in Toyota Industrial, RLI, and Frisco Medical relied on non-disclosure and other employment agreements to protect their sensitive and proprietary information.[90]

[28]     On the one hand, those agreements successfully enabled the aggrieved parties to obtain injunctions, summary judgment orders, and damages against the cloud-wielding tortfeasors.[91] But at what cost? The employers incurred legal fees and costs for the investigations and court actions they undertook to address the theft of corporate information by their former employees. In addition to those expenses, the organizations sustained substantial opportunity costs. Personnel were likely redirected from business operations to ameliorate the harm caused by the loss of proprietary data. Moreover, industry competitors may have become acquainted with strategic plans, pricing information, design specifications, financial performance, and other proprietary data. All of this may have provided their competitors with an advantage in subsequent business dealings.[92]

[29]     Simply put, the non-disclosure and employment agreements did nothing to stop the perpetrating employees from misappropriating company trade secrets.[93] Beyond the agreements, the only employer that apparently took anything close to a preventative step was RLI, which used a blocking program to prevent personal cloud use.[94] However, even that step proved inadequate as the employee easily circumvented the software filter by using a previously unknown cloud application.[95]

[30]     Just as in Prime Pay, none of the employers appears to have established a process to detect the possible use of personal cloud applications. This is evident from De Simone, as the company did not know that its chief executive used Dropbox to steal its corporate records.[96] That no such process was in place in RLI is confirmed by the company’s initial offering of severance pay to Banks.[97] The Frisco employer only began its search of Bledsoe’s computer activity after she carelessly suggested she knew where the “bodies were buried.”[98] In Toyota Industrial, no efforts were made either to examine Land’s computer activity or to verify his next work destination after he tendered his resignation.[99] Indeed, Toyota allowed Land to work for another two weeks at the company before his termination date.[100]

[31]     With employees now regularly using consumer clouds in connection with their work responsibilities, organizations must be prepared to counteract their potential negative effects. As set forth in Part III, companies should develop proactive measures to address employee use of cloud applications and to mitigate any resulting harm.

III. PROACTIVE STEPS TO ADDRESS PERSONAL CLOUD USE

[32]     Despite the complexities that personal clouds now present for many organizations, they are not insurmountable. Enterprises can generally manage potential problems through a proactive, common sense approach to information governance. In this Part, I discuss some of the key aspects of an information governance program that can help address the challenges associated with employee use of personal cloud applications.

[33]     A prefatory step that organizations can take in this regard is to create a data map identifying the locations—both on and off the corporate network—where their information resides.[101] While a data map is useful for both information retention and litigation purposes, it is essential for controlling ingress and egress to proprietary information—precisely the data endangered by personal cloud applications.[102] If a company cannot identify the precise areas where it has stored its trade secrets and other sensitive materials, it becomes difficult to establish that it used “reasonable steps” to safeguard that information.[103] In contrast, a current and accurate data map better enables organizations to reasonably account for proprietary records, along with other indispensable business information.[104] Once the data map is in place, organizations can then proceed to develop policies that reasonably ensure the protection of corporate data.[105]

[34]     Those policies should include actionable protocols that address employee use of personal cloud applications.[106] Those protocols should clearly delineate whether personal clouds are permitted and if so, what constitutes an authorized BYOC account.[107] Whether an enterprise chooses to ban the use of personal clouds or to adopt a BYOC-friendly environment, the policy should include audit and enforcement mechanisms to gauge policy observance.[108] At a minimum, those mechanisms ought to include the right to monitor, access, and disable employee use of personal clouds.[109] Related mechanisms will also be required for those organizations that proscribe BYOC use since employees will likely circumvent such a policy.[110] For example, blocking programs like the one used in RLI, while not foolproof, are a practicable first step to preventing some personal cloud use.[111]

[35]     In a BYOC ecosystem, applicable protocols should additionally describe what company data can or cannot be transferred to the cloud.[112] Organizations should also require the disclosure of user login credentials for approved cloud applications to ensure appropriate policy compliance.[113] Upon an employee’s termination, approved BYOC accounts should either be disabled or the company should verify that company data previously maintained in the account has been either returned or destroyed.[114]

[36]     In like manner, non-BYOC organizations should consider examining terminated employees’ computer activity and corporate devices to detect whether there was illicit use of personal clouds.[115] However, such a step may not be practicable for many organizations that lack the resources for a thorough review of every employee device. If a comprehensive sweep is cost prohibitive, organizations should consider conducting a review of those employees whose possible disclosure of corporate information carries the greatest risk to the enterprise.[116] The extent to which a company carries out this step likely depends on the role of the terminated employees, their position in the company, and the nature of the information to which they were privy.[117] Despite the expense of this procedure, such a step would likely have obviated much of the litigation that ensued in Selectica, Novatus, Toyota Industrial, RLI, and Frisco Medical.

IV. CONCLUSION

[37]     The challenges with personal cloud applications need not be an intractable problem. Following industry best practices like those suggested in Part III should help organizations address many of the troubles associated with approved BYOC accounts. They should also mitigate the harm created by stealth cloud use that may go undetected. While certainly not an elixir, adopting these practices should help companies avoid many of the worst problems associated with personal cloud use in the enterprise.

 

 

 

*Consultant, Discovery and Information Governance, Driven, Inc.; J.D., Santa Clara University School of Law, 1999; B.A., Political Science, Brigham Young University, 1994.

 

[1] See Joe McKendrick, 5 Benefits of Cloud Computing You Aren’t Likely to See in a Sales Brochure, Forbes (July 21, 2013, 9:04 PM), http://www.forbes.com/sites/joemckendrick/2013/07/21/5-benefits-of-cloud-computing-you-arent-likely-to-see-in-a-sales-brochure/#34a34b6e7d85, archived at http://perma.cc/ET8N-JKG5.

 [2] See Edwin Schouten, 5 Cloud Business Benefits, Wired (Oct. 5, 2012), http://www.wired.com/insights/2012/10/5-cloud-business-benefits/, archived at https://perma.cc/7LJK-RP4M.

 [3] See Jim Lynch, What Are the Benefits and Drawbacks of Cloud Computing?, TechSoup (Feb. 6, 2015), http://www.techsoup.org/support/articles-and-how-tos/what-are-the-benefits-and-drawbacks-of-cloud-computing, archived at https://perma.cc/9JYQ-AD93.

[4] See id.

[5] See Nicholas Lee, Is Your Corporate Data Appearing on Personal Clouds?, CloudTweaks (Sept. 9, 2015), http://cloudtweaks.com/2015/09/is-your-corporate-data-appearing-on-personal-clouds/, archived at https://perma.cc/HD3C-VDDX.

[6] See Zack Christenson, Benefits of Cloud Computing, American Consumer Institute (Sept. 30, 2013), http://www.theamericanconsumer.org/2013/09/benefits-of-cloud-computing/, archived at https://perma.cc/9ATN-QEP2.

[7] See Bill Kleyman, What Personal Cloud Means for Consumers and Enterprises, Data Center Knowledge (Sept. 10, 2013), http://www.datacenterknowledge.com/archives/2013/09/10/what-personal-cloud-means-for-consumers-and-enterprises/, archived at https://perma.cc/RK2Z-VE6L.

[8] See Louis Columbus, How Enterprises Are Capitalizing on the Consumerization of IT, Forbes (Mar. 24, 2014, 06:43 AM), http://www.forbes.com/sites/louiscolumbus/2014/03/24/how-enterprises-are-capitalizing-on-the-consumerization-of-it/#1af595ef6160, archived at https://perma.cc/38F9-KTQ6 (“79% [of surveyed enterprises] report that file sharing and collaboration tools including Box, Egnyte, Google Apps, Microsoft Office 365, GroupLogic, ShareFile and others are pervasively used today. 49% are with IT approval and 30% are not.”).

[9] See Andrew Froehlich, The Buck Stops at BYOC, InformationWeek (Jan. 29, 2014, 12:00 PM), http://www.networkcomputing.com/infrastructure/buck-stops-byoc/870595087, archived at https://perma.cc/K7BV-HPPL (“Employees are comfortable using services such as DropBox, Google Apps, and Carbonite at home. Because of that comfort level, they naturally want to use those same tools in their business life.”); Intermarine, L.L.C. v. Spliethoff Bevrachtingskantoor, B.V., No. 15-mc-80211-MEJ, 2015 U.S. Dist. LEXIS 112689, at *2 (N.D. Cal. Aug. 20, 2015) (“Dropbox provides a document storage and sharing service through which users can collectively save, share, and edit documents stored ‘in the cloud.’”).

[10] See Froehlich, supra note 9.

[11] See id. (“Lack of IT management and control will quickly put an end to BYOC, even though it has the potential to provide real benefits.”).

[12] See Frisco Med. Ctr., L.L.P. v. Bledsoe, No. 4:12-CV-37; 4:15cv105, 2015 U.S. Dist. LEXIS 159915, at *22–24, *29 (E.D. Tex. Nov. 30, 2015) (discussing defendants’ extensive use of Dropbox to remove vast amounts of proprietary information belonging to plaintiff).

[13] See Susan Miller, New Risk on the Block: Bring Your Own Cloud, GCN (May 23, 2013) https://gcn.com/articles/2013/05/23/new-risk-bring-your-own-cloud.aspx, archived at https://perma.cc/T7DM-3CD6.

[14] See Robert L. Mitchell, IT’s New Concern: The Personal Cloud, ComputerWorld (May 20, 2013, 7:00 AM), http://www.computerworld.com/article/2497860/consumerization/it-s-new-concern–the-personal-cloud.html, archived at https://perma.cc/XZN9-RSK8.

[15] See discussion infra Part II.

[16] See Froehlich, supra note 9.

[17] See id. (“BYOC presents a nightmare scenario because data can be copied, duplicated, and ultimately lost or stolen via the various cloud services.”).

[18] See Columbus, supra note 8.

[19] See Victoria Barret, Dropbox: The Inside Story of Tech’s Hottest Startup, Forbes (Oct. 18, 2011, 8:30 AM), http://www.forbes.com/sites/victoriabarret/2011/10/18/dropbox-the-inside-story-of-techs-hottest-startup/4/#1cace6c73a44, archived at http://perma.cc/C9Q3-465F; Jonathan Strickland, How Cloud Storage Works, HowStuffWorks.com (Apr. 30, 2008), http://computer.howstuffworks.com/cloud-computing/cloud-storage2.htm, archived at https://perma.cc/5JTG-UZS3 (Web-based e-mail providers like Yahoo! and Hotmail have been providing their users with a quasi-cloud computing environment through e-mail since the 1990s).

[20] See, e.g., Animators at Law, Inc. v. Capital Legal Solutions, L.L.C., 786 F. Supp. 2d 1114, 1117–18 (E.D. Va. 2011) (explaining that plaintiff’s former employees accessed company files stored in a company Dropbox account through login credentials that plaintiff failed to disable after the employees left the company).

[21] See Columbus, supra note 8.

[22] See Boston Scientific Corp. v. Lee, No. 13-13156-DJC, 2014 U.S. Dist. LEXIS 66220, at *2, *4–7 (D. Mass. May 14, 2014) (enjoining defendant from using proprietary information that he had taken from his prior employer and which he stored both during and after his employment on Google Drive).

[23] See Selectica, Inc. v. Novatus, Inc., No. 6:13-cv-1708-Orl-40TBS, 2015 U.S. Dist. LEXIS 30460, at *2 (M.D. Fla. Mar. 12, 2015).

[24] See Columbus, supra note 8.

[25] See Froehlich, supra note 9.

[26] See Frisco Med. Ctr., L.L.P. v. Bledsoe, No. 4:12-CV-37; 4:15cv105, 2015 U.S. Dist. LEXIS 159915, at *7–9 (observing that defendants’ former employer began investigating the possibility that defendants took proprietary company data in violation of their non-disclosure agreements only after one of the defendants mentioned that “she knew where too many bodies were buried.”).

[27] See Toyota Indus. Equip. Mfg. v. Land, No. 1:14-cv-1049-JMS-TAB, 2014 U.S. Dist. LEXIS 99070, at *5–6, *9 (S.D. Ind. July 21, 2014) (explaining that defendant uploaded confidential information from his former employer to his Google Drive account before going to work for an industry competitor).

[28] See Selectica, Inc. v. Novatus, Inc., No. 6:13-cv-1708-Orl-40TBS, 2015 U.S. Dist. LEXIS 30460 (M.D. Fla. Mar. 12, 2015).

[29] See PrimePay, L.L.C. v. Barnes, No. 14-11838, 2015 U.S. Dist. LEXIS 65710 (E.D. Mich. May 20, 2015).

[30] See Selectica, Inc., 2015 U.S. Dist. LEXIS 30460, at *4.

[31] See id. at *2.

[32] See id. at *1.

[33] See id. at *3.

[34] See id.

[35] See Selectica, Inc., 2015 U.S. Dist. LEXIS 30460, at *2–3.

[36] Id. at *2 (emphasis added).

[37] See id. at *2.

[38] See id. at *2–3.

[39] See id. at *17.

[40] See Selectica, Inc., 2015 U.S. Dist LEXIS 30460, at *2–3.

[41] See id.

[42] See id.

[43] See Tom Nolle, Bring Your Own Cloud: The Movement Companies Can’t and Shouldn’t Stop, TechTarget (Apr. 8, 2014), http://searchcloudapplications.techtarget.com/feature/Bring-your-own-cloud-The-movement-companies-cant-and-shouldnt-stop, archived at https://perma.cc/C478-7NCG.

[44] See PrimePay, L.L.C. v. Barnes, No. 14-11838, 2015 U.S. Dist. LEXIS 65710 (E.D. Mich. May 20, 2015).

[45] See id. at *2.

[46] See id. at *4–5.

[47] See id. at *2, *9–11.

[48] Id. at *8–9.

[49] See PrimePay, L.L.C., 2015 U.S. Dist. LEXIS 65710, at *3.

[50] See id. at *11–13.

[51] See id. at *12.

[52] See id. at *11.

[53] See id.

[54] PrimePay, L.L.C., 2015 U.S. Dist. LEXIS 65710, at *11.

[55] See id. at *64, 66.

[56] See id. at *106–08.

[57] See id. at *34–36, *100–01.

[58] See Lee, supra note 5.

[59] See Danny Palmer, CIOs Worried Cloud Computing and Shadow IT Creating Security Risks, Computing (July 27, 2015), http://www.computing.co.uk/ctg/news/2419409/cios-worried-cloud-computing-and-shadow-it-creating-security-risks, archived at https://perma.cc/39AR-LJ4F.

[60] See Thoran Rodrigues, Cloud Computing and the Dangers of Shadow IT, TechRepublic (Aug. 16, 2013, 12:48 PM), http://www.techrepublic.com/blog/the-enterprise-cloud/cloud-computing-and-the-dangers-of-shadow-it/, archived at https://perma.cc/Y5BG-PEQZ.

[61] See, e.g., Frisco Med. Ctr., L.L.P. v. Bledsoe, No. 4:12-CV-37; 4:15cv105, 2015 U.S. Dist. LEXIS 159915, at *3–4, *8–9 (E.D. Tex. Nov. 30, 2015); Toyota Indus. Equip. Mfg. v. Land, No. 1:14-cv-1049-JMS-TAB, 2014 U.S. Dist. LEXIS 99070, at *10, *13–14 (S.D. Ind. July 21, 2014).

[62] See Rodrigues, supra note 60.

[63] See Toyota Indus. Equip. Mfg., Inc., 2014 U.S. Dist. LEXIS 99070, at *3–7.

[64] See id. at *5.

[65] See id. at *5–7.

[66] See id. at *6–8.

[67] See id. at *6–7.

[68] See Toyota Indus. Equip. Mfg., Inc., 2014 U.S. Dist. LEXIS 99070, at *8.

[69] See id. at *15–16, *22.

[70] See RLI Ins. Co. v. Banks, No. 1:14-CV-1108-TWT, 2015 U.S. Dist. LEXIS 9396, (N.D. Ga. Jan. 27, 2015).

[71] See id at *2; see generally Jottacloud, https://www.jottacloud.com, archived at https://perma.cc/7HQJ-AYFR (last visited Mar. 17, 2016) (“Jottacloud is a cloud storage service for individuals and companies that lets you backup, synchronize, store and share files from all your devices. The uploaded data is protected by one of the worlds [sic] strongest privacy laws, with all your data stored in Norway.”).

[72] RLI Ins. Co., 2015 U.S. Dist. LEXIS 9396, at *2.

[73] See id.

[74] See id. at *1–2.

[75] Id. at *2.

[76] See Verified Complaint for Damages and Emergency Injunctive Relief at 15–16, RLI Ins. Co. v. Banks, 2015 U.S. Dist. LEXIS 9396 (N.D. Ga. Jan. 27, 2015) (No. 1:14-CV-1108-TWT) (“Not aware of Defendant’s misappropriation of RLI’s Customer Claim Files and Proprietary Information, RLI offered Defendant a severance package upon her termination. Defendant had not yet accepted the offer of a severance package when RLI discovered the misappropriation. Based on Defendant’s misconduct, RLI revoked its offer of severance to Defendant by letter to Defendant.”).

[77] See Frisco Med. Ctr., L.L.P. v. Bledsoe, No. 4:12-CV-37; 4:15cv105, 2015 U.S. Dist. LEXIS 159915 (E.D. Tex. Nov. 30, 2015).

[78] See De Simone v. VSL Pharm., Inc., No. TDC-15-1356, 2015 U.S. Dist. LEXIS 128209, at *2 (D. Md. Sept. 23, 2015).

[79] See Frisco Med. Ctr., L.L.P., 2015 U.S. Dist. LEXIS 159915, at *8.

[80] See id. at *12.

[81] Id. at *11.

[82] Id. at *7.

[83] See id. at *7–9.

[84] See De Simone v. VSL Pharm., Inc., No. TDC-15-1356, 2015 U.S. Dist. LEXIS 128209, at *48 (D. Md. Sept. 23, 2015).

[85] See id. at *1–2.

[86] See id. at *48–49.

[87] See id. at *18.

[88] See id. at *2.

[89] See discussion infra Part III.

[90] See Frisco Med. Ctr., L.L.P. v. Bledsoe, No. 4:12-CV-37; 4:15cv105, 2015 U.S. Dist. LEXIS 159915, at *3 (E.D. Tex. Nov. 30, 2015); RLI Ins. Co. v. Banks, No. 1:14-CV-1108-TWT, 2015 U.S. Dist. LEXIS 9396, at *2, *6 (N.D. Ga. Jan. 27, 2015); Toyota Indus. Equip. Mfg. v. Land, No. 1:14-cv-1049-JMS-TAB, 2014 U.S. Dist. LEXIS 99070, at *4–6 (S.D. Ind. July 21, 2014).

[91] See Frisco Med. Ctr., L.L.P., 2015 U.S. Dist. LEXIS 159915, at *40–41 (granting Frisco summary judgment against Bledsoe on its trade secret claims); Toyota Indus. Equip. Mfg., Inc., 2014 U.S. Dist. LEXIS 99070, at *21–22 (enjoining Land from working for his new employer).

[92] See Frisco Med. Ctr., L.L.P., 2015 U.S. Dist. LEXIS 159915, at *2 (stating that beyond the problems with industry competitors, such unauthorized disclosures could violate regulatory schemes such as the Health Insurance Portability and Accountability Act, or HIPAA).

[93] See David S. Levine, School Boy’s Tricks: Reasonable Cybersecurity and the Panic of Law Creation, 72 Wash. & Lee L. Rev. 323, 334–35 (2015) (observing that many companies prefer to litigate rather than protect their trade secrets).

[94] See RLI Ins. Co., 2015 U.S. Dist. LEXIS 9396, at *1–2.

[95] See id. at *2.

[96] See De Simone v. VSL Pharm., Inc., No. TDC-15-1356, 2015 U.S. Dist. LEXIS 128209, at *48 (D. Md. Sept. 23, 2015).

[97] See Verified Complaint for Damages and Emergency Injunctive Relief at 15–16, RLI Ins. Co. v. Banks, 2015 U.S. Dist. LEXIS 9396 (N.D. Ga. Jan. 27, 2015) (No. 1:14-CV-1108-TWT).

[98] Frisco Med. Ctr., L.L.P. v. Bledsoe, No. 4:12-CV-37; 4:15cv105, 2015 U.S. Dist. LEXIS 159915, at *7 (E.D. Tex. Nov. 30, 2015).

[99] See Toyota Indus. Equip. Mfg. v. Land, No. 1:14-cv-1049-JMS-TAB, 2014 U.S. Dist. LEXIS 99070, at *6 (S.D. Ind. July 21, 2014).

[100] See id.

[101] See David Wetmore & Scott Clary, To Map or Not to Map: Strategies for Classifying Sources of ESI, Information Management (2009), http://content.arma.org/IMM/SeptOct2009/to_map_or_not_to_map.aspx, archived at https://perma.cc/CG8S-VACB.

[102] See R. Mark Halligan, Protecting U.S. Trade Secret Assets in the 21st Century, 6 Landslide, No. 1, Sept.–Oct. 2013, at 4, http://www.americanbar.org/publications/landslide/2013-14/september-october-2013/protecting_us_trade_secret_assets_the_21st_century.html, archived at https://perma.cc/FU3T-L4FW (urging companies to adopt “mapping” approaches to better safeguard trade secrets); see also Sterling Miller, Ten Things: Trade Secrets and Protecting Your Company, Corporate Law Advisory (Apr. 27, 2015), http://www.lexisnexis.com/communities/corporatecounselnewsletter/b/newsletter/archive/2015/04/27/ten-things-trade-secrets-and-protecting-your-company.aspx, archived at https://perma.cc/XH3L-WXRQ [hereinafter Miller] (“You need an inventory of all of the company’s trade secrets . . . [a]n inventory helps you identify what steps are needed to keep those specific items confidential and protected and be clear with the business what items are not considered trade secrets . . .”).

[103] See Boston Scientific Corp. v. Lee, No. 13-13156-DJC, 2014 U.S. Dist. LEXIS 66220, at *10, *12–13 (D. Mass. May 14, 2014) (finding the employer used “reasonable means to protect its trade secrets” despite contradictory evidence suggesting an employee openly used a personal Google Drive account to access and store confidential company information).

[104] See Halligan, supra note 102, at 4.

[105] See, e.g., Philip J. Favro, Getting Serious: Why Companies Must Adopt Information Governance Measures to Prepare for the Upcoming Changes to the Federal Rules of Civil Procedure, 20 Rich. J.L. & Tech. 5, 25–35 (2014), http://jolt.richmond.edu/v20i2/article5.pdf, archived at https://perma.cc/SZ3M-3MNP (explaining that a comprehensive information governance plan would take various factors into consideration. They would likely include the length of pertinent retention periods, the ability to preserve data for legal matters, applicable data protection laws, cybersecurity initiatives, and use policies for smartphones and other mobile devices).

[106] See Philip Favro, Do You Know Your BYOCs?, Legal Tech. News (July 13, 2015), http://www.legaltechnews.com/id=1202731897715?keywords=favro&publication=Legal+Technology, archived at https://perma.cc/QF6S-8KVW.

[107] See Miller, supra note 102.

[108] See Sophie Vanhegan, Legal Guidance: Protecting Company Information in the Cloud-Era, HRZone (Apr. 23, 2013), http://www.hrzone.com/perform/business/legal-guidance-protecting-company-information-in-the-cloud-era, archived at https://perma.cc/8MGT-3QZG.

[109] See id. (observing that corporate policies must “allow company monitoring of employees’ IT activity and work email accounts . . .”).

[110] See id. (“Employers may also wish to consider . . . implementing IT measures to prohibit uploading of documents onto web-based applications.”); see also RLI Ins. Co. v. Banks, No. 1:14-CV-1108-TWT, 2015 U.S. Dist. LEXIS 9396, at *2 (N.D. Ga. Jan. 27, 2015).

[111] See, e.g., RLI Ins. Co., 2015 U.S. Dist. LEXIS 9396, at *1–2.

[112] See Vanhegan, supra note 108 (explaining that policies addressing personal cloud usage should “expressly prohibit the removal of company documents and information outside the company’s systems.”).

[113] See Esther Schindler, Protecting Corporate Data…When an Employee Leaves, Druva Blog (Oct. 13, 2014), http://www.druva.com/blog/protecting-corporate-data-employee-leaves/, archived at https://perma.cc/4GS5-QJ9H.

[114] See Rachel Holdgrafer, Fix Insider Threat with Data Loss Prevention, Cloud Security Alliance (Dec. 10, 2015), https://blog.cloudsecurityalliance.org/2015/12/10/fix-insider-threat-with-data-loss-prevention/, archived at https://perma.cc/EU5U-2FZN.

[115] See Miller, supra note 102 (“Departing employees constitute one of your biggest risks for trade-secret theft.”).

[116] See id.

 [117] See id.; see also Frisco Med. Ctr., L.L.P. v. Bledsoe, No. 4:12-CV-37; 4:15cv105, 2015 U.S. Dist. LEXIS 159915, at *5 (E.D. Tex. Nov. 30, 2015).[/et_pb_text][/et_pb_column]
[/et_pb_row]
[/et_pb_section]

Skorup Publication Version PDF

Cite as: Brent Skorup, Sweeten the Deal: Transfer of Federal Spectrum Through Overlay Licenses, 22 Rich. J.L. & Tech. 5 (2016), http://jolt.richmond.edu/v22i2/article5.pdf.

Brent Skorup*

I. Introduction

[1]       The explosion in consumer demand for wireless services that began in the 1990s caught policymakers off guard. Demand for wireless services has only accelerated, as new cellular wireless technologies—such as broadband Internet via 3G and 4G LTE—permit services such as web browsing, video streaming, the Internet of Things, and gaming, necessitating a steady influx of spectrum as an input. However, the traditional Federal Communications Commission (FCC) and National Telecommunications and Information Administration (NTIA) spectrum assignment processes, to nonfederal and federal users respectively, strained to accommodate new demands and cutting-edge services. In traditional assignment, still widely used today, the rights to free use of certain frequencies are awarded by the FCC and NTIA to deserving users.[1] Figuring out who is deserving of frequencies in the absence of the price system, however, is a time-consuming and politicized process. Rent-seeking and economic waste at the FCC became too obvious to ignore in the 1990s, so regulators today increasingly rely on market allocation of nonfederal spectrum through spectrum auctions.[2]

[2]       The new challenge is transferring spectrum from inefficient legacy operators to bandwidth-hungry entrants. Almost no “greenfield” spectrum is left—commercial and government users occupy nearly all valuable spectrum—so policymakers are scouring existing wireless systems for surplus spectrum that can be auctioned. In the past 25 years, various incumbent users, including television broadcasters,[3] public safety agencies,[4] aeronautical systems,[5] and utility companies,[6] have seen their spectrum transferred to new licensees and repurposed for consumer uses such as mobile broadband. Not only are inefficient commercial technologies locked in because of decades of top-down spectrum assignment, but also the growing consensus among experts is that spectrum assigned to federal agencies is lightly used and would be better redeployed for consumer use.[7]

[3]       Slow repurposing of federal spectrum is a hidden public policy crisis with tremendous economic costs. Delayed reassignment of spectrum to efficient use is costly to society,[8] so streamlining the process of quickly transferring swaths of spectrum between users is a policy goal that would yield significant economic benefits. Economists estimate that spectrum in the hands of inefficient incumbents represents hundreds of billions of dollars of lost consumer surplus annually.[9] Delayed deployment of new wireless services results chiefly because few incumbents offer to relinquish their valuable spectrum. Incumbents generally have two undesirable options: either (a) relocate to another band and purchase new, more efficient equipment or (b) mothball operations completely.

[4]       The spectrum shortage is not a market failure; rather, it is a regulatory failure that prevents spectrum from being quickly transferred to its highest-valued uses. First, although some commercial users pay market rates for spectrum through auctions and secondary markets, federal agencies do not pay market rates.[10] The negligible annual fee agencies pay for their frequencies means spectrum is undervalued and agencies have little incentive to economize. Second, because federal agencies cannot sell or transfer their spectrum to commercial users, the resources are locked into inefficient federal systems.[11]

[5]       To paraphrase FCC Commissioner Jessica Rosenworcel, federal agencies need “carrots and sticks” for efficient use.[12] In the next five to ten years, particularly with the hardest-to-reclaim spectrum (such as that of the Department of Defense), a “carrot” may be required. One “carrot” proposal would encourage efficient trades by giving agencies greater rights to the spectrum they possess—a system of transferable spectrum licenses[13]—so that agencies can trade and sell spectrum to commercial users and retain some of the proceeds.

 [6]       Commissioner Rosenworcel proposed that to affect these transactions and to channel spectrum to its highest-valued uses, the FCC and NTIA could auction off “overlay” licenses to commercial users.[14] Overlay licenses here mean flexible-use licenses to use a particular band occupied by another licensee. Overlay licenses grant auction winners (1) primary rights to any unused spectrum in the band, (2) secondary rights to spectrum in the band that is being used by an incumbent, and (3) exclusive rights to bargain with existing users occupying portions of the band.[15] These licenses can be accompanied by a deadline for incumbent users to move out of the band.[16] Before that deadline, overlay licensees must protect existing users in the band, but they also reap rewards (such as faster deployment of 4G LTE services) if they can convince the incumbents to move or repack to another band.

[7]       Purchasing an overlay license is akin to purchasing a city block of real property that has a few tenants with unexpired leases. The existing tenants have a superior possessory right to occupy the property, but they may willingly abandon the property for a high-enough cash payment or trade. The benefit of overlay licenses is that they create residual claimants and encourage voluntary settlements between the incumbent user or users—in this case, a federal agency—and the overlay auction winner. The FCC previously executed successful overlay auctions on the nonfederal side, and Rosenworcel called such auctions an “elegant solution” for a band encumbered by federal users.[17]

[8]       There are several policy alternatives for repurposing federal spectrum. A White House–commissioned study focuses on the deficiencies of these proposals, but largely avoids comparative institutional analysis.[18] For example, the study notes the overlay auction process can be “extremely slow and cumbersome.”[19] The analysis cannot end there, however. The important questions to be answered include (1) are overlays slow and cumbersome compared to the available alternatives and (2) which process is more likely to improve social welfare?

[9]       Economist Ronald Coase pointed out that a policy should (as much as possible) be compared with other real-world policy alternatives and their economic effects.[20] Here, as in many debates, all available policy choices are costly. Regulators must consider how their rules influence relocation decisions relative to other real-world alternatives. In this paper, I make the case that private ordering through overlay auctions performs admirably when compared to the regulation-intensive spectrum-sharing regime recommended in the President’s Council of Advisors on Science and Technology (PCAST) report.[21] By examining how overlay auctions and sharing techniques have worked in practice, regulators have a better understanding of the costs and benefits associated with spectrum policy decisions.[22]

II. Background

[10]     Command-and-control spectrum allocation methods prevailed at the FCC and NTIA for decades, drawing comparisons to the former Soviet Union’s State Planning Committee, known as Gosplan, “which allocated scarce resources by administrative fiat among factories and other producers in the Soviet economy.”[23] Economists such as Ronald Coase pointed out during this era that spectrum has many attributes of real property, and that it might be more efficiently used by private users who (1) internalize the benefits and costs of deploying the input and (2) can sell it to parties who value it more.[24] Market-based spectrum reform—if not always practiced—essentially won the day both on the commercial side and at the FCC since the early 1990s. Auctions are held for spectrum, secondary markets permit license transfers to profit-maximizing firms, and the FCC generally avoids prescribing which wireless services must be provided. Therefore, scholars are increasingly focused on injecting market reform into the reordering of federal spectrum,[25] which the NTIA assigns to agencies through command and control.

[11]     The 3,200 MHz segment of spectrum spanning 300 MHz to 3,500 MHz is in high demand for both government and commercial users. This range of frequencies, or similar approximations to it, represents the so-called “beachfront spectrum” because it has optimal propagation characteristics for many popular wireless services.[26] Lower frequencies in this range permit transmissions over long distances, whereas higher frequencies transmit shorter distances, but have a higher capacity for transmitting things like web data and streaming video. National mobile broadband carriers—the primary purchasers of available spectrum—such as Sprint and AT&T Mobility take a diversified approach. They acquire both low and high bands so that they can provide both good regional coverage (via low bands) and localized high capacity (via high bands).

[12]     NTIA manages federal spectrum, and it estimated in 2012 that federal operations use about 40 percent of the in-demand spectrum.[27] Of the 3,200 MHz of beachfront spectrum, NTIA is currently analyzing close to 1,000 MHz to either share with or transfer to commercial users.[28] To that end, in late 2014, the FCC auctioned off federal spectrum in the AWS-3 auction.[29] The biggest bidders included AT&T Mobility, Verizon Wireless, Dish Network, and T-Mobile.[30] The 50 MHz band of paired spectrum (25 MHz of federal spectrum was paired with another nonfederal 25 MHz block) raised over $40 billion.[31] Several empirical studies show that the annual consumer surplus derived from wireless broadband approximates the auction value of the underlying spectrum.[32] Therefore, the $40 billion paired block of AWS-3 spectrum (when deployed) will provide about $40 billion worth of consumer surplus annually.

[13]     Federal agencies are market participants for many indispensable inputs but not, anomalously, for spectrum. Agencies compete with private firms for supply of most inputs, such as labor, real estate, electricity, automotive fleets, and office supplies. Spectrum, however, is given to federal agencies very cheaply, and underused or excess spectrum cannot be sold to commercial operators.[33] Agency spectrum is removed from market processes, and agencies have little economic incentive to use or manage spectrum efficiently.[34] With little sense of the opportunity costs of the spectrum they use, agencies are largely exempt from economic pressures to use more efficient radios, outsource wireless services to commercial operators, or substitute wireless communications with wired communications.

[14]     Market mechanisms for repurposing federal spectrum are currently unavailable, so members of Congress and the executive branch rely mostly on scrutiny from government audits and congressional hearings, which have limited effectiveness.[35] Policymakers understand the urgency, but the Obama administration’s June 2013 memorandum to federal agencies, like the PCAST report that informed the memorandum, does little about the underlying problem.[36] On the issue of efficient use of federal spectrum, the memorandum merely directs agencies to determine what spectrum could potentially be made available for sharing or clearing and requests that agencies “use the minimum spectrum reasonably necessary to most effectively meet mission requirements.”[37]

[15]     These sorts of requests have been around for decades. The problem is not that a president has not asked for efficient use forcefully enough; rather, the problem is that federal agencies face few economic tradeoffs.[38] Agencies have acceded—slowly—to congressional mandates to clear spectrum for auction. However, agencies are increasingly resistant to relocating their operations.[39] For this reason, the White House is contemplating several spectrum-clearing and spectrum-sharing methods, though no alternative has emerged as the consensus.[40]

III. Rival Approaches

[16]     Repurposing federal spectrum is a pressing economic problem that has received increasing attention. Several solutions have been proposed. A 2014 study commissioned by the White House found, every federal spectrum-repurposing proposal, including overlays, faces implementation challenges.[41] Comparisons between policies are therefore necessary for informed policymaking. Below, the PCAST dynamic sharing proposal is analyzed and compared to recent overlay auctions and the clearing of federal users.

A.    PCAST’s Dynamic Sharing Proposal

[17]     The political difficulties in transferring a valuable resource from one group (federal agencies) to another (commercial wireless operators and consumer device makers) guided the PCAST recommendation to do away with traditional clearing and auctioning procedures such as overlays.[42] Instead, PCAST recommended simply changing the nature of the obligations of spectrum users—a do-no-harm standard—and relying on the future advancement of technologies that enable dynamic spectrum sharing.[43] With dynamic sharing, commercial devices such as smartphones, tablets, and small cells detect and avoid—possibly in real time—interference with federal systems, such as radar and video surveillance, that use the same frequencies at the same time in the same geographic area. The benefit is that dynamic sharing eliminates the need to clear resistant federal users.

[18]     The PCAST recommendations are modeled on the FCC’s TV white spaces proceeding.[44] That permitted unlicensed devices and cognitive radios in the unused “white spaces” that comprise about 240 MHz of the 294 MHz allocated to television broadcasters.[45] Like federal users, television broadcasters are legacy users that, generally speaking, cannot sell their spectrum to mobile carriers.[46] After a 2002 staff recommendation for this type of spectrum sharing, the FCC issued a 2008 order allocating spectrum for white space devices’ use. The first device was approved in 2012.[47] White space devices must protect incumbent broadcasters but can transmit and receive signals in geographic areas and on frequencies that do not contain television broadcasters.

[19]     The device specifications formulated by the FCC have strict power limits and are quite complex because of interference concerns.[48] White space-sharing techniques rely on accurate geolocation information; yet those crucial databases of registered devices contain hundreds of errors.[49] Seven years after the 2008 order, white space–sharing technology has been used only marginally. As of this writing, only about 600 devices are in use,[50] providing data services (e.g., connecting municipal water-monitoring systems) and Wi-Fi-like Internet access (at a handful of libraries and schools).[51]

            B. Auction of Overlay Licenses

[20]     An alternative proposal for spectrum reform (resembling Commissioner Rosenworcel’s proposal) is to auction overlay licenses which permit the commercial use of spectrum currently encumbered by federal users.[52] These licenses are called overlays because they geographically surround an existing spectrum assignment. Overlays have enabled the relocation and clearing of state government systems and public safety systems from a few hundred MHz of spectrum. Overlays have not been used for federal spectrum because agencies cannot directly receive consideration from commercial users.[53]

[21]     Overlay licenses grant auction winners (1) primary rights to any unused spectrum in the band, (2) secondary rights to spectrum in the band that is being used by an incumbent, and (3) exclusive rights to bargain directly with existing users occupying portions of the band. In the case of auctioning spectrum occupied by federal users, the winning overlay licensee is required to protect the incumbent federal users but can negotiate directly with them. Overlay licensees might induce incumbents to use more efficient devices (thereby freeing up spectrum for new uses), to tolerate certain amounts of interference, to move to a different band entirely, or to cease operations altogether.[54]

[22]     The policy innovation lies in combining transferable federal spectrum rights with the overlay auction framework. These rights would give agencies the ability to bargain with potential suitors and to be directly compensated for vacating or otherwise reducing their use of a band. Federal agencies are not profit-maximizing firms, but they do face budget constraints, and tradeoffs are more transparent when agencies are faced with priced assets. If permitted, agencies might improve their input mix by selling unused assets and reinvesting the revenue. For instance (as described later) several agencies have transferable real property rights. That is, they have the authority to lease and sell federal real estate and buildings to private developers and to retain some of the proceeds.[55] Transferable spectrum rights make agencies residual claimants in a similar fashion. Overlay auctions give regulators a process to induce spectrum incumbents to sell their underused assets quickly.

[23]     Although the compensation should be negotiated, successful overlay auctions have featured a command-and-control element. As explained infra, it is likely necessary for federal incumbents to have a deadline to vacate their bands.[56]

                        1. Case Study of the PCS Auction

[24]     Overlays have been used a few times to repurpose encumbered nonfederal spectrum, including the major auctions like the PCS auction and AWS-1 auction.[57] Congress first authorized the FCC to conduct spectrum auctions in 1993 to avoid wasteful command-and-control prescriptions and to permit more spectrum for the nascent cellular phone industry.[58] With that authority, the FCC used overlay auctions for the new Broadband Personal Communications Service (PCS), a type of cellular phone technology, in the mid-1990s.[59] The FCC auctioned 120 MHz of encumbered beachfront spectrum, and cellular phone companies were the major bidders. Incumbent users were mostly public utilities, railroads, and local governments operating thousands of microwave communication links, but they also included state public safety operations such as firefighters, police, and other emergency responders.[60] The auction and clearing proposals faced resistance and, echoing today’s objections from federal agencies, public safety incumbents warned that the FCC’s auction would disrupt their communications reliability and could “have a devastating effect on . . . millions of inhabitants” relying on their services.[61] Nevertheless, the auctions for this encumbered spectrum commenced in 1995.[62] The auction winners could deploy services where there were no incumbents and had secondary rights to the spectrum where incumbents operated.

[25]     To relocate those incumbents and to free up spectrum for PCS, the FCC mandated that the PCS license winners pay the incumbents’ relocation costs. But the FCC also did something novel: it gave the incumbent users transferable spectrum rights. That is, the FCC permitted the incumbent users to bargain with the overlay auction winners and, in exchange for an additional payment or in-kind benefit, move before a relocation deadline.[63]

 [26]     The FCC gave non–public safety users a two-year voluntary negotiation period during which they were not required to negotiate with the PCS overlay winners.[64] This period was followed by a one-year mandatory negotiation period during which the PCS licensee and the incumbent were required to bargain in good faith.[65] After that deadline—three years from commencement—PCS licensees could force the incumbent to move, while compensating it for relocation costs. Public safety users had a three-year voluntary negotiation period followed by a two-year mandatory negotiation period.[66]

[27]     This PCS auction grossed $7.7 billion in bids.[67] There are no public records of the payments made for early relocation, but good-faith negotiations were reportedly the norm.[68] By January 1998, over half of the microwave links had been moved out of the band,[69] and the spectrum was deployed for cellular service. Most incumbent microwave links were upgraded to work on new frequencies, but about 10% shifted to wired connections or ceased operation.[70] Today PCS spectrum supplies about 20% of all licensed spectrum used for mobile broadband and is a major part of each national carrier’s spectrum holdings.[71] Looking back, the concerns about widespread public safety communications disruption never materialized.

2. Case Study of AWS-1

[28]     The 2006 Advanced Wireless Services (AWS-1) auction was an auction of 90 MHz of paired (45 MHz) spectrum that contained nonfederal and federal users.[72] The nonfederal spectrum was auctioned off via overlay licenses; the federal spectrum wasn’t. Post auction, 12 federal agencies in the 1.7 GHz band[73] relocated to other bands and several nonfederal users in the 2.1 GHz band relocated. The nonfederal users included various state and commercial microwave systems, as well as Broadband Radio Service systems—which provided services like two-way broadband and public safety communications.[74]

[29]     The federal users had a clearing deadline with no direct compensation from winning bidders. However, federal users received some indirect compensation. AWS-1 was the first band auctioned under the 2004 Commercial Spectrum Enhancement Act, a law giving federal agencies a limited share of pooled auction proceeds—compensation for their relocation costs.[75] The 45 MHz occupied by nonfederal users, on the other hand, was assigned via an overlay license. The FCC permitted the nonfederal incumbents—much like the incumbents in the PCS bands—to enter into private cost-sharing agreements with the new AWS licensees.[76] Despite the encumbrances, the 1.7 GHz band grossed almost $7 billion.[77] Like the agreements between overlay licensees and incumbents in the PCS auction, the post-auction cost-sharing agreements relocating the nonfederal incumbents in the 2.1 GHz band are unavailable.

[30]     The federal users did not have overlay licensees to bargain with and merely faced relocation deadlines. NTIA tracked the relocation costs of federal systems in the 1.7 GHz band so that agencies could be reimbursed through the relocation fund created by the Commercial Spectrum Enhancement Act.[78] The Government Accountability Office (GAO) estimated that the encumbered 1.7 GHz band grossed almost $7 billion.[79] Relocation costs of federal users totaled around $1.5 billion[80] ($1 billion less than a Congressional Budget Office estimate but exceeding NTIA’s original estimates by about 50 percent),[81] for net revenue of $5.5 billion.

[31]     Once the auction was completed, even though little financial incentive was provided beyond the benefit of upgraded wireless systems, the clearing of agencies happened fairly rapidly. Presumably, overlay licensees paying agencies to relocate would be even more effective. By December 2008, two years after the auction, dozens of federal wireless systems had been moved from the 1.7 GHz band, and licensees had deployed mobile broadband in some cities.[82] Four agencies—the Department of the Treasury, the Department of Homeland Security, the US Postal Service, and the Department of Housing and Urban Development—had vacated the band completely.[83] By late 2010, four years after the completion of the auction, seven agencies representing 81% of eligible systems had been relocated.[84] By 2011, 95% of systems were relocated,[85] and by 2012, six years after the auction, NTIA reported that all seven agencies had ceased operations in the band.[86]

[32]     Representatives from the wireless industry expressed publicly that they were satisfied with the relocation process, but some systems and agencies were more difficult.[87] Representatives from MetroPCS, the fourth-biggest bidder in the auction, with licenses mostly in the West and the Northeast, stated that the relocation process “worked relatively well.”[88] Carriers’ discussions with agencies about information like channel bandwidth, antenna power, and height for each system to be relocated expedited the process.[89] Steve Sharkey, T-Mobile’s chief of engineering and technology policy, said that these technical discussions with federal users “resulted in T-Mobile being able to deploy services years earlier than originally anticipated.”[90]

[33]     Clearing federal agencies and allowing nonfederal incumbents to bargain with the overlay licensees allowed productive use of much of the encumbered AWS-1 bands within a few years. T-Mobile was the top bidder, paying over $4 billion for AWS-1 licenses covering nearly the entire United States,[91] and illustrating the efficacy of overlays and clearing. A mere two years after the auction, T-Mobile—after the clearing of federal users and negotiating with nonfederal incumbents—launched 3G service in 27 markets covering over 100 million people.[92] This included the lucrative San Francisco[93] and New York City[94] markets. By 2010, it completed most of its nationwide mobile broadband network using AWS-1 spectrum. Auction winners like MetroPCS and Leap Wireless covered millions more after clearing their AWS-1 spectrum.[95] Today that 90 MHz of AWS-1 spectrum, now cleared of incumbents, supplies about 15% of licensed mobile broadband spectrum and is used by more than 200 million Americans through technologies such as 4G LTE.[96]

IV. Comparison of Dynamic Sharing and Overlay Auctions

[34]     Decades of assigning spectrum to agencies for free has locked valuable frequencies into inefficient wireless uses. Choosing the superior set of policies for repurposing federal spectrum in a timely manner means capturing tens of billions of dollars annually—from consumer welfare gains, industry investment, and jobs—that would otherwise evaporate.^[97] The experiences described suggest that clearing and relocating federal systems through a system of overlay auctions yield greater economic benefit than do dynamic sharing proposals like the one contemplated by PCAST.

[35]     Direct comparison of unlicensed dynamic sharing with overlays is difficult because, as mentioned, dynamic sharing technologies do not have widespread deployment. This is a red flag given the substantial costs for every year that implementation is delayed. NTIA has proposed the use of dynamic sharing strategies since at least 1991.[98] But to date these technologies have permitted very little sharing between commercial and government users.[99] The PCAST authors are aware of some of these difficulties and therefore predict that its proposed overhaul of policy would take “perhaps two to three decades.”[100]

[36]     That prediction is a best-case scenario. It would likely take much longer to implement a widespread complex sharing regime. Even if it becomes technically feasible to share spectrum across a wide band of frequencies in real time, the regulatory process either halts or substantially delays inter-organization sharing.[101] The unlicensed sharing approach shifts the tasks of devising certifications and regulating spectrum-sharing etiquette from market actors to regulators.[102] Nearly all wireless operators, including government agencies and commercial licensees, vigorously resist sharing spectrum with other users and technologies. There have been costly episodes of agencies and licensees fiercely objecting to even minute possibilities of interference to their own wireless operations.[103]

[37]     The multitude of federal systems with vastly different performance characteristics—radar, satellite communications, air-to-ground communications, video surveillance, unmanned aircraft systems, to name a few—means that the complex challenges for consumer device makers are multiplied. No amount of engineering ingenuity can tell regulators what the “correct” probability of harmful radio interference is. In sharing disputes, the incumbents invariably commission technical analyses that highlight remote, worst-case interference scenarios. The entrants respond with their own studies showing “typical” scenarios in which their systems pose little interference threat to existing users. Regulators are caught in the middle of a tug-of-war of competing technical papers and have no propensity to make a decision that optimizes wireless output between the systems. Even after a decision is made to allow shared use, a federal system technology upgrade or a change in federal supplier could simply restart the process anew (at best) or stymie necessary and life-saving agency upgrades (at worst).

[38]     Incumbents present delays and resistance toward any scheme. However, overlays and clearing have an established history of delivering spectrum to private markets, where millions of subscribers can use it productively in a few years’ time. It is too early to say, as the PCAST report intimates, that clearing federal users is impractical.[104] As the PCS and AWS-1 examples show, much of the spectrum cleared by overlay auctions and clearing deadlines is typically redeployed commercially in under five years.[105]

[39]     By giving agencies greater rights to their spectrum and a mechanism—overlay auctions—that allows the agencies to transfer those rights and to retain revenues, federal spectrum could be repurposed for consumer uses. Overlay auctions have been completed before and represent an off-the-shelf technique that FCC staff members have experience implementing.[106] Overlays present great flexibility in auction design because licenses can be nationwide, regional, or can cover narrow geographic locations. Importantly, overlays rationalize band usage by creating residual claimants who internalize the gain from spectrum investments.[107] When an overlay licensee moves an agency to another band or medium, its spectrum is more valuable. It is this increase in value that gives the parties room to negotiate.

[40]     After 25 years of forecasts that dynamic sharing is right around the corner, dynamic sharing is still largely in the research and development stage.[108] Dynamic sharing depends on complex cognitive radios or central database look-up functions that may never be deployed en masse. Despite access to some 240 MHz of prime spectrum, only 600 or so unlicensed devices in the market use TV white spaces, utilizing a crude sharing technology.[109] I am not aware of any reliable estimates, but the total investment in the white space ecosystem seven years after its 2008 allocation likely totals only a few million dollars and attracts only a few thousand users.

[41]     In contrast, clearing incumbents with overlays in similar swaths of spectrum leads to investment and consumer welfare gains orders of magnitude larger, sometimes within months of auction. Hazlett et al. estimated in 2004 that the repurposing of 120 MHz of spectrum for PCS induced over $45 billion of network investment in the five-year period following the auction, from 1994 to 1998.[110] The 220 MHz of spectrum freed by the combined broadband PCS and AWS-1 auctions supplies about one-third of spectrum holdings of mobile carriers,[111] an essential input for an industry that in 2014 had revenues of nearly $188 billion and capital investment of $32 billion.[112]

[42]     Dynamic sharing technology simply will not enable similar economic benefits in the next several years. Given the tremendous opportunity costs of inaction in the interim, waiting for dynamic technology to be widespread is a speculative and costly option relative to clearing alternatives.[113]

V. Final Notes

A. Response to the Counter that Federal Agencies May Not Respond to Financial Incentives

[43]     Some scholars argue that giving agencies self-funding ability through transferable spectrum rights would be ineffective.[114] They counter that any gain in revenue from spectrum sales would be viewed by Congress as a windfall and would be offset in subsequent rounds of appropriations, thereby diminishing the incentive of agencies to sell their spectrum.[115]

[44]     The logic is sensible, but existing evidence appears to undermine that theory. Admittedly, the literature on agency self-funding is limited,[116] and literature on the incentive effects from agency self-funding through asset sales is even scarcer. Therefore, predictions about how Congress and agencies will respond to the vestment of additional spectrum rights are largely conjectural. However, existing programs indicate that agencies (1) do not generally believe they will be penalized in the appropriations process for perceived windfalls from asset sales and (2) can be incentivized to relinquish property if they can pocket some of the gains.

[45]     The examples where agencies self-fund indicate that agencies favor such arrangements, provided that they have significant control over distributing the revenue.[117] For instance, GAO analysis of financial regulatory agencies that self-fund through examination fees and the like indicates that self-funded agencies generally prefer self-funding to funding through the appropriations process.[118]

[46]     More to the point, in responding to the notion that Congress will penalize agencies for monetary windfalls provided by asset sales, Dorothy Robyn—who was in an excellent position to view such dynamics while at the General Services Administration and the Department of Defense—concluded in her influential spectrum policy paper, “[t]hat has emphatically not been my experience.”[119] Robyn points out that it was the agencies themselves that lobbied Congress for agency retention of revenue from land sales during a round of painful military base closures.[120] These sales can occasionally be quite large. The Navy, for instance, sold two Marine Corps bases for $850 million[121]—likely substantial enough to receive congressional notice—but there is no evidence the Navy saw decreased appropriations as a result.

[47]     Further, Congress authorizes the secretaries of the military departments to lease underused real property and personal property that the department controls in exchange for cash and in-kind consideration.[122] The military has used that authority to enter into complex leases, called enhanced use leases, which might grant, for example, a 50-year lease of military land to a private developer.[123] A 2011 GAO report noted that there were 17 enhanced use leases in place, with in-kind consideration valued at hundreds of millions of dollars, and dozens more were either under review or in negotiation.[124] On the basis of agency use of these programs, Robyn concluded “the ability to retain the proceeds from the disposal of property is a key motivator for federal agencies.”[125]

[48]     There are risks, such as improper incentives and decreased accountability to Congress and to the president, when agencies self-fund.[126] Self-funding programs should be monitored and perhaps have mandatory sunsets, but there is some real-world evidence that allowing agencies to retain some proceeds of asset sales motivates the types of behaviors intended—namely, disposition of underused public assets into private markets, where the assets can be used more productively.

B. Need for Mandatory Clearing Deadlines for Federal Users after an Overlay Auction

[49]     One lesson from the PCS overlay auction, identified by Cramton, Kwerel, and Williams, was that relocating state government systems was significantly slowed when the agencies were permitted to stay indefinitely.[127] Such delays led the scholars to conclude that, in fact, government agencies may need weaker rights to stay than do nongovernment incumbents “because they [government users] may be too likely to stay when they should terminate or relocate.”[128]

 [50]     Absent a deadline, economically efficient improvements tend to be underproduced or substantially delayed because incumbents have an incentive to reject the bidder’s offers indefinitely.[129] Incumbents know that their consent is required and that they can extract a portion of the producer surplus in excess of their opportunity costs—the so-called holdout problem.[130] This problem is likely exacerbated when public agencies are involved. Further, for an appreciating asset like spectrum, hoarding may be a lucrative strategy.[131]

[51]     The benefit of a deadline to move wireless systems is that negotiations focus on the relocation costs (with a premium paid for speedy relocation) and not on the value to the entrant of clearing the spectrum.[132] Incumbent users thus have an incentive to settle early.[133] In the broadband PCS and AWS-1 auctions involving federal and nonfederal incumbents, deadlines helped make relocations largely successful in encouraging positive-sum settlements.[134]

C. Role of Political Entrepreneurship in Spectrum Reallocation

[52]     Overlay licenses of encumbered federal spectrum would represent uncertain investments with substantial risk discounting, so economic modeling is challenging. Information about many defense and law enforcement systems is difficult to acquire and stymies bargaining between commercial bidders and agencies. Hence, knowledgeable former federal officials will likely need to use their expertise to make deals possible between agencies and commercial bidders.

[53]     Such political entrepreneurship has a storied history in spectrum allocation. In the 1980s and 1990s a former wireless regulator at the FCC, acquired wireless licenses held by taxi and pizza delivery dispatchers.[135] The FCC agreed to waive rules regarding the licenses, and the purchaser aggregated the new, flexible licenses that enabled cellular phone technology.[136] His actions increased the economic value of those fragmented licenses and led to the creation of Nextel, which was one of the nation’s largest mobile phone companies when it was acquired by Sprint.[137]

[54]     Since 2000, following the financial failures of several satellite communications operators, the FCC has waived rules requiring satellite communications in certain bands so that the same spectrum can be used instead for ground-based cellular mobile broadband. In the mid-2000s, though they were less successful at navigating the regulatory issues than was O’Brien, financier Phil Falcone and his business partners acquired spectrum licensed to satellite communications firms SkyTerra and Inmarsat. They devoted billions of dollars to developing a new wireless network.[138] The company, LightSquared, petitioned the government for waivers, and the FCC agreed to loosen its rules to permit traditional mobile phone service in that spectrum.[139] Likewise, in 2011 Dish Network acquired 40 MHz of satellite spectrum through a fire sale purchase of two bankrupt satellite communications companies.[140] The FCC again waived most of its satellite rules and permitted traditional mobile broadband services.

[55]     Finally, most relevantly, in the AWS-1 auction, T-Mobile hired defense experts, including a former general and former director of the Defense Information Systems agency, to assist in negotiating with federal agency heads.[141] Successful political entrepreneurship requires institutional knowledge of federal systems and of the idiosyncratic personalities and hierarchies that may otherwise confound successful transactions.[142] Political entrepreneurship is difficult to identify and to model formally, but it will likely play an important role if agencies are vested with spectrum rights that they can transfer for payment.

VI. Conclusion

[56]     Overlay auctions are one of several tools policymakers should consider for repurposing federal spectrum. There are several plans for approaching the problem of inefficient government use, but all, to various degrees, are time consuming and costly. If overlays and clearing deadlines are time consuming because relocations typically take two to six years, what does that imply for PCAST-style unlicensed dynamic sharing that take decades to fully implement? No other reform proposal has enabled widespread consumer use and economic investment as rapidly as have overlay auctions combined with clearing deadlines. Federal agencies lack some of the incentives that private firms have to use resources efficiently. Nevertheless, when spectrum users have the ability to sell their rights and overlay auctions are used, experience suggests that spectrum can be repurposed from legacy government systems to high-value commercial uses within a few years.

 

* The author is a research fellow at the Mercatus Center at George Mason University. He has an economics degree from Wheaton College and a law degree from the George Mason University School of Law. He extends thanks to Ted Bolema and two anonymous reviewers for helpful comments on earlier drafts, and special thanks to Thomas Hazlett, whose conversation precipitated this article.

 

[1] See 47 U.S.C. § 309(a) (2012) (the FCC “shall determine, in the case of each application filed with it . . . whether the public interest, convenience, and necessity will be served by the granting of such application.”); see also Nat’l Telecomms. & Info. Admin., U.S. Dep’t of Commerce, Manual of Regulations and Procedures for Federal Radio Frequency Management 8.1.1 (May 2013, rev. 2014), http://www.ntia.doc.gov/page/2011/manual-regulations-and-procedures-federal-radio-frequency-management-redbook, archived at https://perma.cc/LVU9-H7F9 (describing NTIA’s spectrum assignment procedures).

[2] See Thomas W. Hazlett, Assigning Property Rights to Radio Spectrum Users: Why Did FCC License Auctions Take 67 Years?, 41 J.L. & Econ. 529, 532–33 (1998).

[3] See Robert M. Rast, The Dawn of Digital TV, IEEE Spectrum (Oct. 3, 2005, 4:18 AM), http://spectrum.ieee.org/consumer-electronics/audiovideo/the-dawn-of-digital-tv, archived at https://perma.cc/Y2RF-K7PY (describing the clearing of analog broadcast television systems to allow for the 700 MHz auction).

[4] See infra Part B(1) (describing the PCS auction).

[5] See Gregory L. Rosston, Increasing the Efficiency of Spectrum Allocation, 45 Rev. Indus. Org. 221, 231 (2014).

[6] See infra Part B(1) (describing the PCS auction).

[7] President Barack Obama concurs with this assessment. In June 2010, he issued a memorandum directing the NTIA to identify federal spectrum that can be made available for wireless broadband by 2020. See Unleashing the Wireless Broadband Revolution, 3 C.F.R. 348, 348–49 (2011); see also Thomas M. Lenard, Lawrence J. White & James L. Riso, Increasing Spectrum for Broadband: What Are the Options? 23 (Tech. Pol’y Inst.. Working Paper, 2010), https://techpolicyinstitute.org/wp-content/uploads/2010/02/increasing-spectrum-for-broadb-2007661.pdf, archived at https://perma.cc/G8YV-NQBV (“There appears to be a widespread consensus that spectrum in government hands is likely not being used efficiently . . . .”); Jeffrey A. Eisenach, Spectrum Reallocation and the National Broadband Plan, 64 Fed. Comm. L.J. 87, 130 (2011); Harvey J. Levin, The Radio Spectrum Resource, 11 J.L. & Econ. 433, 434 (1968) (“Most other users (like those in public safety and local or federal government radio) are not directly constrained in their use of spectrum by pressures in any ‘markets’ for their end products or services.”); Kenneth R. Carter & J. Scott Marcus, Improving the Effectiveness and Efficiency of Spectrum Use by the Public Sector: Lessons from Europe (Sept. 27, 2009), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1488852, archived at https://perma.cc/54M5-DJDD (“To a significant degree, these [efficiency] improvements have not worked their way into spectrum use by public sector users, including the military, emergency services, or aeronautical or maritime transport.”); James Losey & Sascha Meinrath, Free the Radio Spectrum, IEEE Spectrum (June 28, 2010, 7:59 PM), http://spectrum.ieee.org/telecom/wireless/free-the-radio-spectrum/0, archived at https://perma.cc/TW26-NMXW (stating that “the 270 000 [assignments] held by government agencies . . . are woefully underutilized.”).

[8] See Coleman Bazelon & Giulia McHenry, LocustPoint Networks, Staying on Track: Realizing the Benefits from the FCC’s Incentive Auction Without Delay ii (2015), http://apps.fcc.gov/ecfs/document/view;ECFSSESSION=Kk3QJpkhFvcQwklx1G3Rz6tF8p3LBhxBWph1ZmjDp4nkr60XTZRG!156529071!809722108?id=60001031918, archived at https://perma.cc/DU6R-D5Z5 (estimating that the social costs of delaying the “Incentive Auction” of TV bands two or three years could approach $200 billion).

[9] See, e.g., Harold Furchtgott-Roth, Hudson Inst., Granting Licensed Spectrum Flexibility: How to Spur Economic Growth and Innovation in America 6 (2012), http://www.hudson.org/content/researchattachments/attachment/1084/hfr–spectrumflexibility–dec12.pdf, archived at https://perma.cc/N4EN-VJB5; see also Thomas W. Hazlett & Roberto E. Muñoz, A Welfare Analysis of Spectrum Allocation Policies, 40 RAND J. of Econ. 424, 425 (2009).

[10] Agencies pay only a small, annual fee for their spectrum—$122 for each frequency assignment. See U.S. Gov’t Accountability Office, GAO-13-7, Spectrum Management: Incentives, Opportunities, and Testing Needed to Enhance Spectrum Sharing 11 n.14 (2012), http://www.gao.gov/assets/660/650019.pdf, archived at https://perma.cc/3BRP-BVNT.

[11] The Miscellaneous Receipts Act requires “an official or agent of the Government receiving money for the Government from any source” to “deposit the money in the Treasury as soon as practicable without deduction for any charge or claim.” 31 U.S.C. § 3302(b) (2012). Thus, under current law, any payment to agencies would have to be submitted to the Treasury rather than be retained by the agency receiving the payment for relocation purposes. Once revenue is submitted to the Treasury, it may only be disbursed pursuant to a specific congressional directive. See Commerce Spectrum Mgmt. Advisory Comm., Recommendations for Improving the Process for Identifying Spectrum for Future Reallocation or Sharing 25 n.55 (2008), http://www.ntia.doc.gov/files/ntia/publications/081508_csmac_wg3_report_revised_clean_final.pdf, archived at https://perma.cc/P872-TP5V.

[12] One meritorious “stick” proposal is to charge agencies approximately the opportunity cost of their spectrum, much like the United Kingdom does. Long-term spectrum fees should be budgeted for as an operating expense so that agencies can sensibly weigh the tradeoffs between acquiring spectrum and other inputs that further their agency mission. This proposal resembles a “GSA for spectrum.” See Lenard, White, & Riso, supra note 7, at 26; see also Brent Skorup, Reclaiming Federal Spectrum: Proposals and Recommendations, 15 Colum. Sci. & Tech. L. Rev. 90, 110–12 (2013). For a thoughtful analysis on the merits of this proposal, see generally Dorothy Robyn, Econ. Studies at Brookings, Buildings and Bandwidth: Lessons for Spectrum Policy from Federal Property Management 2 (2014), http://www.brookings.edu/~/media/research/files/papers/2014/09/23_buildings_bandwidth_spectrum_property/23_buildings_bandwidth_spectrum_property, archived at https://perma.cc/9QFS-4VBE.

[13] My thanks are extended to an anonymous reviewer for suggesting this term.

[14] Comm’r Jessica Rosenworcel, Remarks at CTIA 2013–The Mobile Marketplace 4 (May 22, 2013), http://www.fcc.gov/document/commissioner-rosenworcels-speech-ctia-2013, archived at https://perma.cc/5SYN-47JG (“So I propose we auction 2155–2180 MHz along with an additional right . . . the exclusive right to negotiate with federal incumbents [in the 1755–1780 MHz band].”).

[15] See Brent Skorup, Getting Away From GOSPLAN, 36 Reg. 14, 18 (Winter 2013–2014), http://object.cato.org/sites/cato.org/files/serials/files/regulation/2014/1/regulation-v36n4-7.pdf, archived at https://perma.cc/4MAT-W7AH.

[16] See id. at 18.

[17] Rosenworcel, supra note 14, at 4.

[18] See Karen D. Gordon et al., IDA Sci. & Tech. Policy Inst., A Review of Approaches to Sharing or Relinquishing Agency-Assigned Spectrum 2 (2014), https://www.ida.org/upload/stpi/pdfs/p5102final.pdf, archived at https://perma.cc/FD24-7HBA.

[19] Id. at 54.

[20] See Ronald H. Coase, The Problem of Social Cost, 3 J.L. & Econ. 1, 43 (1960) (“A better approach would seem to be to start our analysis with a situation approximating that which actually exists, to examine the effects of a proposed policy change and to attempt to decide whether the new situation would be, in total, better or worse than the original one.”).

[21] See President’s Council of Advisors on Sci. & Tech., Exec. Office of the President, Realizing the Full Potential of Government-Held Spectrum to Spur Economic Growth ix (July 2012) [hereinafter PCAST], http://www.whitehouse.gov/sites/default/files/microsites/ostp/pcast_spectrum_report_final_july_20_2012.pdf, archived at https://perma.cc/T5J5-L6PU.

[22] See Thomas W. Hazlett, Efficient Spectrum Reallocation with Hold-Ups and Without Nirvana 31 (George Mason Univ. Law & Econ. Research Paper Series, No. 14-16), http://iep.gmu.edu/wp-content/uploads/2014/04/nirvana.pdf, archived at https://perma.cc/QVF3-CWB5.

[23] See Skorup, supra note 15, at 14.

[24] See, e.g., Yochai Benkler, Some Economics of Wireless Communications, 16 Harv. J.L. & Tech. 25, 29–30 (2002) (citing the property rights and auctions framework as “the standard economists’ view”); Thomas W. Hazlett, The Wireless Craze, the Unlimited Bandwidth Myth, the Spectrum Auction Faux Pas, and the Punchline to Ronald Coase’s “Big Joke”: An Essay on Airwave Allocation Policy, 14 Harv. J.L. & Tech. 335, 532 (2001); Eli Noam, Spectrum Auctions: Yesterday’s Heresy, Today’s Orthodoxy, Tomorrow’s Anachronism, Taking the Next Step to Open Access Spectrum, 41 J.L. & Econ. 765, 766 (1998).

[25] See, e.g., Eisenach, supra note 7, at 89; Lenard, White & Riso, supra note 7, at i.

[26] See PCAST, supra note 21, at 141–42.

[27] NTIA defined “high-value spectrum” as “spanning 225 MHz to 3,700 MHz.” Mark . Goldstein, Dir. Phys. Infrastructure Issues, Testimony before the H. Comm. on Energy & Commerce, Subcomm. on Commc’n & Tech., Spectrum Management: Federal Government’s Use of Spectrum and Preliminary Information on Spectrum Sharing 3 (Sept. 13, 2012) (transcript on file with U.S. Gov’t Accountability Office) [hereinafter Goldstein Testimony], http://www.gao.gov/assets/650/648206.pdf, archived at https://perma.cc/Z4EA-LRTM.

[28] See Penny Pritzker & Lawrence E. Strickling, U.S. Dep’t of Commerce, Fifth Interim Progress Report on the Ten-Year Plan and Timetable 6, table B-1 (2015), http://www.ntia.doc.gov/files/ntia/publications/ntia_5th_interim_progress_report_on_ten-year_timetable_april_2015.pdf, archived at https://perma.cc/Z2YN-KXPW.

[29] See id. at 3.

[30] See Phil Goldstein, AWS-3 Auction Results: AT&T Leads with $18.2B, Verizon at $10.4B, Dish at $10B and T-Mobile at $1.8B, FierceWireless (Jan. 30, 2015), http://www.fiercewireless.com/story/aws-3-auction-results-att-leads-182b-verizon-104b-dish-10b-and-t-mobile-18b/2015-01-30, archived at https://perma.cc/2Z73-C7FG.

[31] The paired spectrum grossed $42.5 billion, and the unpaired 15 MHz of federal spectrum grossed $2.43 billion. See George S. Ford & Lawrence J. Spiwak, Auction 97 and the Value of Spectrum, Phoenix Center 1, 2 (Feb. 4, 2015), http://www.phoenix-center.org/perspectives/Perspective15-02Final.pdf, archived at https://perma.cc/2SUV-CYX4.

[32] See Bazelon & McHenry, supra note 8, at 9.

[33] Agencies pay only a small, annual fee for their spectrum—$122 for each frequency assignment. Goldstein Testimony, supra note 27, at 12 & n.13.

[34] PCAST concluded that, “[f]ederal users currently have no incentives to improve the efficiency with which they use their own spectrum allocation.” PCAST, supra note 21, at ix. Some of the inefficiency is undoubtedly to be expected. Any large organization has bureaucratic friction, and federal agencies—particularly defense agencies—are especially risk averse. A lack of transparency regarding federal uses of spectrum and the fragmented authority over federal spectrum management certainly contributed to the government failure. Transparency in spectrum use is generally unrewarded and is therefore undersupplied. See Harold Feld & Gregory Rose, Breaking the Logjam: Some Modest Proposals for Enhancing Transparency, Efficiency and Innovation in Public Spectrum Management 6 (2010), http://www.publicknowledge.org/pdf/pk-fed-spectrum-transparency-whitepaper.pdf, archived at https://perma.cc/8LNG-QB5G. The fragmentation of authority over federal spectrum may unfortunately be intractable. A 1994 effort to consolidate Department of Defense spectrum management lasted only a year because the chiefs of Army, Navy, Air Force, and intelligence organizations all wanted to retain their own spectrum management office. U.S. Gov’t Accountability Office, GAO-NSIAD-97-131, Defense Communications: Federal Frequency Spectrum Sale Could Impair Military Operations 15 (June 1997), http://www.gao.gov/archive/1997/ns97131.pdf, archived at https://perma.cc/86LG-F7JH.

[35] The slow relocation of government systems leads to verbal haranguing of federal administrators and to visible frustration. See Carl Franzen, Congress blasts military and national telecom agency for not sharing wireless spectrum faster, Verge (June 27, 2013), http://www.theverge.com/2013/6/27/4470738/congress-house-wireless-spectrum-hearing-june-2013, archived at https://perma.cc/L26N-GZ6P (“Do you [NTIA and Department of Defense administrators] sit down and talk to each other? Why wouldn’t the two of you sit down and talk about it. Why am I even having to ask this question again?”) (quoting Rep. Eshoo).

[36] See Presidential Memorandum on Expanding America’s Leadership in Wireless Innovation (June 14, 2013), 78 Fed. Reg. 37,431 (June 20, 2013), http://www.whitehouse.gov/the-press-office/2013/06/14/presidential-memorandum-expanding-americas-leadership-wireless-innovatio, archived at https://perma.cc/AMD3-JGXZ.

[37] Id. at 37,433.

[38] See Federal Management of Radio Spectrum: Hearing Before the Subcomm. on Telecomm. & Fin. of the H. Comm. on Commerce, 104th Cong. 10 (1995) (statement of James L. Gattuso, Vice President, Citizens for a Sound Economy).

[39] See PCAST, supra note 21, at 9 (discussing the increasing difficulties of relocating incumbent federal systems).

[40] See Gordon et al., supra note 18, at 61.

[41] See id. at 13 (noting the significant challenges implementing, for example, spectrum use fees).

[42] See PCAST, supra note 21, at 1 (“Clearing and reallocation of Federal spectrum for exclusive use is not a sustainable basis for spectrum policy.”).

[43] See id. at 11 (“T]he key to the new architecture is to create very wide bands and implement dynamic, real-time, spectrum sharing.”).

[44] See id. at 24 (“We envisage that access to large Federal bands authorized for shared use can be coordinated primarily by registering and communicating with a management database, similar in concept to the White Space Databases certified by the FCC to provide permission to transmit in the TV Bands.”).

[45] See Thomas W. Hazlett & Evan T. Leo, The Case for Liberal Spectrum Licenses: A Technical and Economic Perspective, 26 Berkeley Tech. L.J. 1037, 1049 n.50 (2011) (explaining the strict rules for unlicensed devices mean much of the available frequencies cannot be exploited).

[46] See PCAST, supra note 21, at 16.

[47] See id. at 11–13.

[48] See Evaluation of the Performance of Prototype TV-Band White Space Devices Phase II, Office of Engineering & Tech., FCC/OET 08-TR-1005, iv (Oct. 14, 2008), http://apps.fcc.gov/ecfs/ document/view; jsessionid=7qp3P1VbdnpcVyFWySl2N52n318pmkvNznfvhcyWdnPhqGTpyhzP!1471562840!-321460796?id=6520183093, archived at https://perma.cc/D2MJ-4C59.

[49] See Robert McDowell, The FCC Should Fight for Our Right to TV White Space, Wired (Apr. 17, 2015), http://www.wired.com/2015/04/fcc-white-spaces-database/, archived at https://perma.cc/QQ6Y-GE9U; see also Mike Dano, FCC promises to clean up error-ridden TV white space databases, FierceWireless (Mar. 20, 2015), http://www.fiercewireless.com/tech/story/ fcc-promises-clean-error-ridden-tv-white-space-databases/2015-03-20, archived at https://perma.cc/2X27-C3B2.

[50] See McDowell, supra note 49.

[51] See Lyndsey Gilpin, White Space broadband: 10 communities doing big projects, TechRepublic (Mar. 19, 2014), http://www.techrepublic.com/article/white-space-broadband-10-communities-doing-big-projects/, archived at https://perma.cc/B8UR-LTY5.

[52] See Richard M. Nunno, Cong. Research Serv., SPR 97-218, Radiofrequency Spectrum Management 23 (1998) (A wireless industry association opposed this proposal in the AWS-3 auction, but the crux of its opposition was that the federal users were not required to relocate by a certain date).

[53] See Comments of 4G Americas in the Matter of Amendment of the Commission’s Rules with Regard to Commercial Operations in the 1695-1710 MHz, 1755-1780 MHz, and 2155-2180 MHz Bands 8, GN Docket. No. 13-185 (2013), http://www.hwglaw.com/siteFiles/News/3C0FD0FD14FA23AEC2FC7013E082AEB5.pdf, archived at https://perma.cc/SQ5Q-X8DB.

[54] Theoretically, overlay licensees could also bargain with incumbents to share spectrum by the millisecond or by the hour, but it is unlikely, at present, that the economics of spectrum sharing permit such agreements in practice.

[55] See U.S. Gov’t Accountability Office, GAO-11-574, Defense Infrastructure: The Enhanced Use Lease Program Requires Management Attention 1–2 (2011), http://www.gao.gov/assets/330/320465.pdf, archived at https://perma.cc/XKX6-7JFJ.

[56] See Peter Cramton, Evan Kwerel & John Williams, Efficient Relocation of Spectrum Incumbents, 41 J.L. & Econ. 647, 649 (1998) (Overlays, then, may not be appropriate for bands where shutdown deadlines are especially unpredictable or long term).

[57] See id. at 661.

[58] See id. at 660.

[59] See Nunno, supra note 52, at 13 (“Overlay licenses were auctioned in the PCS auctions since there were already incumbent licensees . . . using that spectrum.” The auctioned spectrums were 1850–1910 MHz and 1930–1990 MHz. Id.

[60] See Cramton et al., supra note 56, at 660, 668.

[61] Reply Comments of the Los Angeles County Sheriff’s Dept., In the Matter of Redevelopment of Spectrum to Encourage Innovation in the Use of New Telecommunications Technologies, ET Docket No. 92-9 (July 6, 1994), at 2, http://apps.fcc.gov/ecfs/document/view?id=1320380001, archived at https://perma.cc/ZHM2-STQF.

[62] See Cramton et al., supra note 56, at 660–61 (FCC rulemaking for the auction commenced in 1993, and the PCS auctions were carried out in 1995, 1996, and 1997).

[63] See id. at 668–69 (“[T]here have been reports of incumbents demanding premiums of several times actual relocation costs to relocate before the involuntary relocation period.”).

[64] See id. at 663, 666 (noting that in 1997, this voluntary period was shortened to one year).

[65] See id. at 665–66.

[66] See Cramton et al., supra note 56, at 665–66 (noting these negotiation periods and conditions were occasionally fine-tuned by the FCC.).

[67] Evan R. Kwerel & Gregory L. Rosston, An Insiders’ View of FCC Spectrum Auctions, 17 J. Reg. Econ. 253, 275 (2000).

[68] See Cramton et al., supra note 56, at 668.

[69] See id.

[70] See id.

[71] See Federal Commc’n Commission, Seventeenth Report, in Matter of Annual Report and Analysis of Competitive Market Conditions with Respect to Mobile Wireless, Including Commercial Mobile Services 50, WT Docket No. 13-135 (2014), https://apps.fcc.gov/edocs_public/attachmatch/DA-14-1862A1.pdf, archived at https://perma.cc/3YVY-3HAW (estimating there is about 580 MHz of spectrum used for mobile broadband and 120 MHz (PCS spectrum) out of 580 MHz is a little over 20%.).

[72] See Rosston, supra note 5, at 235–36 (“The Commission adopted procedures by which new AWS licensees may relocate incumbent [nonfederal] BRS and fixed microwave service operations in a manner similar to that developed for clearing the PCS band.”); see also Hazlett & Leo, supra note 45, at 1072.

[73] See U.S. Dep’t. Of Commerce, NTIA, Relocation of Federal Radio Systems from the 1710–1755 MHz Spectrum Band, Second Annual Progress Report 2 (Mar. 2009), http://www.ntia.doc.gov/legacy/osmhome/reports/Final2ndAnnualRelocationReport20090416.pdf, archived at https://perma.cc/8CD9-UWJT (listing those agencies: Department of Agriculture, the Department of Defense, the Department of Energy, the Department of Homeland Security, the Department of Housing and Urban Development, the Department of the Interior, the Department of Justice, the Department of Transportation, the Department of the Treasury, the National Aeronautics and Space Administration, the Tennessee Valley Authority, and the United States Postal Service).

[74] See FCC, Ninth Report and Order and Order in the Matter of Service Rules for Advanced Wireless Services in the 1.7 GHz and 2.1 GHz Bands 5, WT Docket No. 02-352 (Apr. 21, 2006), https://apps.fcc.gov/edocs_public/attachmatch/FCC-06-45A1.pdf, archived at https://perma.cc/B9VD-2SHR.

[75] See 47 U.S.C. § 928(c) (2012).

[76] See, e.g., 47 C.F.R. §§ 27.1160; 27.1170 (2015).

[77] U.S. Gov’t Accountability Office, GAO-13-472, Spectrum Management: Federal Relocation Costs and Auction Revenues 16 (2013), http://www.gao.gov/assets/660/654794.pdf, archived at https://perma.cc/N5N9-D692.

[78] See id. at 15–16.

[79] See id. at 16.

[80] See Howard Buskirk, NTIA Says Cost of Clearing AWS Spectrum Will Be Below $1 Billion, Comm. Daily (Dec. 29, 2005), www.communicationsdaily.com/articleview?s=73088&id=273162, archived at https://perma.cc/E7G9-RNRX (Estimates for relocation costs and for upgrading technologies like outdated analog surveillance systems varied widely before the auction. On the low end, NTIA projected in a report that the cost of 2,240 frequency assignments across 12 agencies would be $936 million. In 2005, the Congressional Budget Office estimated that costs could run as high as $2.5 billion. Agencies included the Department of Defense (mostly the Navy), Department of Energy, Department of Homeland Security, and Federal Aviation Administration. The Forestry Service had 579 assignments and the Department of Energy had 596.).

[81] See GAO, supra note 75, at 11–12; see generally U.S. Dep’t. Of Commerce, NTIA, Relocation of Federal Radio Systems from the 1710–1755 MHz Spectrum Band, Sixth Annual Progress Report 2–3 (Mar. 2013) [hereinafter NTIA Relocation], http://www.ntia.doc.gov/files/ntia/publications/sixth_annual_report_1710-1755_mhz_04042013.pdf, archived at https://perma.cc/CEE2-V5CM (estimating relocation costs set by the NTIA and Dep’t of Commerce).

[82] See NTIA Relocation, supra note 79, at 1.

[83] Id. at 2.

[84] See U.S. Dep’t. Of Commerce, NTIA, Relocation of Federal Radio Systems from the 1710–1755 MHz Spectrum Band, Fourth Annual Progress Report 2 (Mar. 2011) [hereinafter NTIA Relocation Fourth], http://www.ntia.doc.gov/files/ntia/publications/1710-1755mhz_cseareport_03302011.pdf, archived at https://perma.cc/63NR-U9WS.

[85] See U.S. Dep’t. Of Commerce, NTIA, Relocation of Federal Radio Systems from the 1710–1755 MHz Spectrum Band, Fifth Annual Progress Report 2 (Mar. 2012) [hereinafter NTIA Relocation Fifth], http://www.ntia.doc.gov/files/ntia/publications/fifth_annual_report_1710-1755mhz_03302012.pdf, archived at https://perma.cc/A6MB-3R62.

[86] See NTIA Relocation Fourth, supra note 82, at 2–3; see also NTIA Relocation Fifth, supra note 85, at B-11 (The types of federal wireless systems varied widely in terms of services and relocation costs. The Department of Housing and Urban Development had only five systems, for instance, that transmitted video and communications. The total relocation costs were around $21,000.); Id. at B-14 (The Department of Justice’s Bureau of Alcohol, Tobacco, Firearms and Explosives likewise had five systems (mostly for video communications), but it had many more components, and the estimated relocation outlays totaled over $48 million); Id. at B-16 (The Drug Enforcement Agency had a single system, identified only as “video surveillance,” that was estimated to take three years and $75 million to relocate.); Id. at B-21 (The U.S. Postal Service also had a single video surveillance system consisting of about 500 devices that took one year and $1.8 million to relocate.).

[87] See Dep’t of Commerce, Comments of T-Mobile in the Matter of Relocation of Federal Systems in the 1710–1755 MHz Frequency Band: Review of the Initial Implementation of the Commercial Spectrum Enhancement Act 1, 5, Docket. No. 0906231085-91085-01 (Aug. 21, 2009), http://www.ntia.doc.gov/files/ntia/t-mobile_csea_noi_comments_8-21-09_0.pdf, archived at https://perma.cc/N5EL-2DZQ (supporting the idea that some regions were difficult to clear, T-Mobile representatives noted in 2009 to NTIA that “T-Mobile’s launch of service in the AWS band was delayed by several months, if not longer, in many markets. Indeed, even today—nearly three years after Auction No. 66—there are certain parts of the country such as the southeast w[h]ere no wireless carrier has been given access to AWS frequencies. Such delays jeopardize investment, hinder broadband deployment, and harm consumers”).

[88] Dep’t of Commerce, Comments of MetroPCS, In the Matter of Relocation of Federal Systems of 1710-1755 MHz Frequency Band: Review of the Initial Implementation of the Commercial Spectrum Enhancement Act 2, Docket No. 0906231085-91085-01 (Aug. 21, 2009), http://www.ntia.doc.gov/files/ntia/metropcs_-_comments_on_ntia_csea_notice84803305_5_0.doc, archived at https://perma.cc/2EBV-MEGV.

[89] See Comments of T-Mobile, supra note 87, at 5.

[90] Creating Opportunities Through Improved Government Spectrum Efficiency: Hearing Before the Subcomm. on Comm’n & Tech. of H. Comm. on Energy & Commerce, 112th Cong. 6 (2012) (statement of Steve Sharkey, Director, Chief Engineering & Tech. Policy, T-Mobile USA, Inc.); Howard Buskirk, Spectrum Shortfall Tops Concerns at CTIA, But Signs Growing Carriers Might Embrace Sharing, Comm. Daily (May 11, 2012) (“‘I think we’re at the point of let’s get engineers into a room to figure out and solve the problems,’ [Sharkey] said. ‘Neither side has a complete understanding of the way each other’s systems work and operate.’ During AWS-1 clearance when industry first tried to clear spectrum on the West Coast, the immediate reaction of government users was ‘no way, it’s all redlined out and it’ll be a long time,’ [Sharkey] said. ‘But we gave them more information about how our systems really operate and the power levels that they would expect—it cleared up practically a whole coast almost immediately.’”).

[91] See Press Release, T-Mobile USA, Statement on the Conclusion of Bidding in the FCC Auction of Advanced Wireless Services (Sept. 18, 2006), https://newsroom.t-mobile.com/news/t-mobile-usa-statement-on-conclusion-of-bidding-in-the-fcc-auction-of-advanced-wireless-services.htm, archived at https://perma.cc/8YW6-5LDP.

[92] See Global View Partners, Mobile Broadband in the Americas: Momentum Building in the AWS Band 14 (2009), http://www.gsma.com/latinamerica/wp-content/uploads/2012/06/momentumbuildingintheawsbandreport.pdf, archived at https://perma.cc/8QNQ-PH4B.

[93] See Comments of T-Mobile, supra note 87, at 6.

[94] See Katherine Noyes, T-Mobile’s 3G Network Touches Down in NYC, TechNewsWorld (May 5, 2008), http://www.technewsworld.com/story/62876.html, archived at https://perma.cc/YH3B-YHJZ.

[95] See Global View Partners, supra note 92, at 14–15.

[96] See FCC, supra note 69, at 50, 62 (showing that the 90 MHz of cleared AWS-1 spectrum constitutes around 15.5% of the total amount (580.5 MHz) of spectrum).

[97] See Bazelon & McHenry, supra note 8, at 13 (attachment A) (discussing the economic costs of delay in the TV broadcaster incentive auction).

[98] See NTIA, U.S. Spectrum Management Policy: Agenda for the Future 6 (1991), http://www.ntia.doc.gov/report/1998/us-spectrum-management-policy-agenda-future#ch3, archived at https://perma.cc/J4T9-SEMS.

[99] See Gerald R. Faulhaber, Commentary on “The Spectrum Opportunity: Sharing as the Solution to the Wireless Crunch,” 8 Int’l J. Comm. 116, 119 (2014).

[100] PCAST, supra note 21, at v, ix.

[101] See Thomas W. Hazlett & Brent Skorup, Tragedy of the Regulatory Commons: LightSquared and the Missing Spectrum Rights, 13 Duke L. & Tech. Rev. 1, 21 (2014).

[102] See Jerry Brito, The Spectrum Commons in Theory and Practice, 2007 Stan. Tech. L. Rev. 1, P36–37, P54 (2007).

[103] See, e.g., Hazlett & Skorup, supra note 99, at 3–4 (discussing the LightSquared-GPS dispute); Examination of the Government’s Spectrum Management Process: Hearing Before the Subcomm. on Telecomm. and the Internet of H. Comm. on Energy and Commerce, 107th Cong. 42–43 (2002), http://www.gpo.gov/fdsys/pkg/CHRG-107hhrg80674/pdf/CHRG-107hhrg80674.pdf, archived at https://perma.cc/UUC4-K5A6 (Ultrawideband (UWB) users struggled for more than a decade to coordinate with federal users, NTIA, and the FCC to share spectrum: “It took 13 years, including three and one half years of intensive efforts, to gain regulatory approval for UWB.”); Brito, supra note 100, at P64 (describing how satellite incumbents objected to the FCC’s exclusion zone sizes when permitting unlicensed devices).

[104] PCAST Report, supra note 21, at 1.

[105] The PCS auctions took place from 1995 to 1997. See Cramton et al., supra note 56, at 660–61. Sprint was the largest bidders and by the end of 1996 had already deployed PCS operations in several major markets, including Washington, D.C. and San Diego, with planned deployments in several more markets by mid-1997. Press Release, Qualcomm, Sprint PCS Launches Advanced Wireless Service in San Diego (Dec. 27, 1996), https://www.qualcomm.com/news/releases/1996/12/27/sprint-pcs-launches-advanced-wireless-service-san-diego, archived at https://perma.cc/3G2M-XG7Y. T-Mobile was the largest bidder in the 2006 AWS-1 auction and by the end of 2008 had deployed 3G networks that covered over 100 million Americans by using AWS-1 bands. See Global View Partners, supra note 92.

[106] Overlay auctions include the PCS and AWS-1 auctions described supra, as well as smaller auctions like the BRS auction. See Cramton et al., supra note 56, at 660–61; Rosston, supra note 5, at 235–36.

[107] See Hazlett, supra note 22, at 18 (“Overlay licenses empower private [decision] agents, who internalize substantial gains [from spectrum reassignment] . . .These actors not only have superior information and incentives to those of government administrators . . .but they bring a different tool kit to the task at hand. In particular, private firms can write contracts and access capital markets.”).

[108] See GAO, supra note 77, at 24; Paul Barbagallo, For TV “White Spaces,” the Global Outlook is Hopeful but Cautious, Bloomberg BNA (July 16, 2014), http://www.bna.com/tv-white-spaces-n17179892333/, archived at https://perma.cc/CXM4-VFRX (noting that “spectrum sensing, is still nascent”).

[109] See McDowell, supra note 47.

[110] Thomas W. Hazlett et al., Report to U.S. Chamber of Commerce, Sending the Right Signals: Promoting Competition through Telecommunications Reform 1, 103 (Sept. 2004), http://www.rutledgecapital.com/pdf_files/20041006_telecom_dereg_complete_study.pdf, archived at https://perma.cc/4M2N-FJ97.

[111] FCC, supra note 69, at 50 (estimating that there is about 580 MHz of spectrum used for mobile broadband).

[112] CTIA, Annual Wireless Industry Survey, CTIA.org (2015), http://www.ctia.org/your-wireless-life/how-wireless-works/annual-wireless-industry-survey, archived at https://perma.cc/L48C-ZL9X.

[113] Regulators in the recent past ignored the huge consumer welfare losses that delay inflicts. See Jerry A. Hausman, Valuing the Effect of Regulation on New Services in Telecommunications, 28 Brookings Papers on Econ. Activity: Microeconomics 1, 24 (1997), http://www.brookings.edu/~/media/Projects/BPEA/1997-micro/1997_bpeamicro_hausman.PDF, archived at https://perma.cc/2TE2-MQUF (“It appears that delay in cellular service was the commission’s way to avoid confronting a very difficult decision. Potential losses in consumer welfare did not appear to figure into the FCC’s regulatory approach.”).

[114] See, e.g., Thomas Lenard & Lawrence White, Digital Age Communications Act: Report from the New Spectrum Policy Working Group, Tech. Pol’y Inst. 1, 20 (Mar. 2006), http://www.pff.org/issues-pubs/books/060309dacaspectrum1.0.pdf, archived at https://perma.cc/S7H9-TYNP; Dorothy Robyn, Making Waves: Alternative Paths to Flexible Use Spectrum, Aspen Inst. 1, 36 (2015), http://csreports.aspeninstitute.org/documents/Spectrum_Making_Waves.pdf, archived at https://perma.cc/TL4Y-5WVR (“[The argument against transferable federal spectrum rights] that has gotten the most traction in the spectrum community—is that the ability to retain the proceeds will not motivate federal agencies to transfer their spectrum because of the nature of the budget process . . . . In anticipation of this zero-sum dynamic, agencies would forego the opportunity to trade spectrum for money.”).

[115] See Robyn, supra note 114, at 42.

[116] See Charles Kruly, Self-Funding and Agency Independence, 81 Geo. Wash. L. Rev. 1733, 1737 (2013).

[117] U.S. Gov’t Accountability Office, GAO-02-864, SEC Operations: Implications of Alternative Funding Structures 11–12 (2002), http://www.gao.gov/new.items/d02864.pdf, archived at https://perma.cc/7246-JD69.

[118] See id. at 12–13 (stating that, if self-funding agencies in fact do receive more punitive scrutiny from Congress, the drawbacks are likely diminished in the case of spectrum sales, where agencies are merely supplementing their budgets. Presumably, Congress is more likely to scrutinize totally self-funded agencies than partially self-funded agencies).

[119] Robyn, supra note 12, at 14.

[120] See id.

[121] See Robyn, supra note 114, at 37.

[122] See 10 U.S.C. § 2667(a) (2012); T. Randolph Beard et al., Market Mechanisms and the Efficient Use and Management of Scarce Spectrum Resources, 66 Fed. Comm. L.J. 263, 291 (2013) (stating that leasing spectrum has been proposed, but the government’s inefficient management of spectrum leads scholars to conclude that it is preferable for agencies to sell spectrum rather than to lease it).

[123] See GAO, supra note 55, at 2, 8 (stating that these leases often include revenue sharing between the private developer and the agency).

[124] See id. at 2.

[125] Robyn, supra note 12, at 14.

[126] See Kruly, supra note 116, at 1737.

[127] See Cramton et al., supra note 56, at 664­–65.

[128] Id. at 665.

[129] See generally Lloyd Cohen, Holdouts and Free Riders, 20 J. Legal Stud. 351 (1991), https://web2.uconn.edu/ciom/Cohen.pdf, archived at https://perma.cc/NX7N-NUJX.

[130] See Glen Whitman, Law & Economics Lecture 2: Externalities, Cal. St. Univ. Northridge, http://www.csun.edu/~dgw61315/L&Elect2.pdf, archived at https://perma.cc/NPN7-WSNR (last visited Jan. 27, 2016).

[131] See Robyn, supra note 114, at 35.

[132] See Cramton et al., supra note 56, at 649–50.

[133] See id. at 658.

[134] See id. at 649.

[135] See Thomas W. Hazlett, Inching Toward Wireless Capitalism, Wall Street J. Europe (Jan. 12, 2004), http://mason.gmu.edu/~thazlett/opeds/Inching%20Toward%20Wireless%20Capitalism.pdf, archived at https://perma.cc/MZ5V-Q3TK.

[136] See id.

[137] See id.

[138] See Daniel Fisher, Lightscrewed, Forbes (Jan. 3, 2012), http://www.forbes.com/forbes/2012/0116/feature-phil-falcone-gps-senator-grassley-communication-commission.html, archived at https://perma.cc/8HD8-LEWD.

[139] See id.

[140] See FCC, Report and Order and Order of Proposed Modification in the Matter of Service Rules for Advanced Wireless Services in the 2000–2020 MHz and 2180–2200 MHz Bands, WT Docket. No. 12-70, 2, 8 (Dec. 11, 2012), http://transition.fcc.gov/Daily_Releases/Daily_Business/2012/db1218/FCC-12-151A1.pdf, archived at https://perma.cc/4V8C-2QBR.

[141] T-Mobile Lobbies on Wireless Airwaves (Dec. 12, 2007), Yahoo!, http://web.archive.org/web/20071217213319/http://biz.yahoo.com/ap/071212/t_mobile_lobbying.html?.v=1, archived at https://perma.cc/8T9A-USHY. T-Mobile’s lobbyists included those at the Cohen Group, headed by former Clinton defense secretary William Cohen. Id.

[142] Political entrepreneurship admittedly resembles and likely overlaps with the notorious revolving door phenomenon in politics. It is beyond the purposes of this paper to distinguish between damaging rent-seeking and socially beneficial deal-making. Suffice it to say that in some circumstances former insiders, possessing a depth of knowledge that disinterested outsiders cannot reasonably attain, can effect Pareto improvements in regulated industries. The analysis presented supra suggests that Pareto improvements here are fairly easy to identify—it is likely that most transfers of spectrum from agencies to the private sector result in substantial social welfare gains. See also Bazelon & McHenry, supra note 8, at 9 (citing economics research that suggests the consumer benefits generated by spectrum deployed for wireless broadband are 10 to 20 times the value of the spectrum to producers).