Ethical Issues in E

Ethical Issues in
Matthew D. Lerner
[email protected]
(202) 429-8024
May 2013
Copyright 2013, All Rights Reserved
ABA Model Rules of Professional Conduct
 The Model Rules consist of standards of conduct and
comments. They are advisory and serve as the model
for the ethics rules adopted by most states.
 Tax Court Rule 201(a): “General: Practitioners before
the Court shall carry on their practice in accordance
with the letter and spirit of The Model Rules of
Professional Conduct of the American Bar
Circular 230
 Circular 230, 31 C.F.R. 10, governs practice before the Internal
Revenue Service.
– The ethical rules imposed on practicing attorneys in Circular 230 are
in addition to those imposed by state bars and courts.
 “Practitioners” include attorneys, certified public accountants,
enrolled agents, enrolled actuaries, enrolled retirement plan
agents, and registered tax return preparers. § 10.3
 “Practice before” the IRS is defined as “all matters connected
with a presentation to the [Service] or any of its officers or
employees relating to a taxpayer’s rights, privileges, or liabilities
under laws or regulations administered by the [Service]. Such
presentations include, but are not limited to, preparing
documents; filing documents; corresponding and communicating
with the [Service]; rendering written advice with respect to any
entity, transaction, plan or arrangement, or other plan or
arrangement having a potential for tax avoidance or evasion; and
representing a client at conferences, hearings, and meetings.”
General Obligations of Counsel
 Competency
– ABA Model Rule 1.1
• A lawyer shall provide competent representation to a client.
Competent representation requires the legal knowledge, skill,
thoroughness and preparation reasonably necessary for the
• Maintaining competence includes knowledge of the benefits and risks
of relevant technology. See Comment 8.
– Circular 230 Prop. Reg. §10.35
• A practitioner must possess the necessary competence to engage in
practice before the Internal Revenue. Competent practice requires
the knowledge, skill, thoroughness, and preparation necessary for the
matter for which the practitioner is engaged.
 E-Discovery issues require distinct skills and knowledge, so
lawyers should know the limits of their abilities and have
assistance when needed.
General Obligations of Counsel
 Circular 230 §10.20
– Tax practitioners must promptly submit records or information
requested by IRS officers or employees.
– If the documents or information requested are not in the
possession of, or subject to the control of, the practitioner or
the practitioner’s client, the practitioner must promptly notify the
requesting IRS officer or employee.
– The practitioner must make reasonable inquiry of his or her
client regarding the identity of any person who may have
possession or control of the requested records.
• But the practitioner is not required to make inquiry of any other
person or independently verify any information provided by the
client regarding the identity of such person.
General Obligations of Counsel
 Circular 230 §10.34(b)(2)
– A practitioner may not advise a client to submit a document, affidavit or
other paper to the IRS • The purpose of which is to delay or impede the administration of the Federal
tax laws;
• Is frivolous; or
• Contains or omits information that demonstrates an intentional disregard of
a rule or regulation unless the practitioner also advises the client to submit a
document that evidences a good faith challenge to the rule or regulation.
 Circular 230 §10.34(d)
– A practitioner can rely in good faith without verification upon
information furnished by the client.
– A practitioner must make reasonable inquiries if the information
provided appears to be incorrect, inconsistent, or incomplete.
General Obligations of Counsel
 A lawyer cannot improperly withhold documents from an
opposing party.
– Model Rule 3.4: Fairness to Opposing Party and Counsel
• A lawyer shall not unlawfully obstruct another party’s access to
evidence or unlawfully alter, destroy or conceal a document or other
material having potential evidentiary value.
• Documents and other items of evidence are often essential to
establish a claim or defense. Subject to evidentiary privileges, the
right of an opposing party, including the government, to obtain
evidence through discovery or subpoena is an important procedural
right. Rule 3.4, Comment 2.
 A lawyer cannot create an undue delay when producing
General Obligations of Counsel
 Duty to third parties
– Model Rule 4.4(b): A lawyer who receives a document or
electronically stored information relating to the representation of
the lawyer’s client and knows or reasonably should know that
the document or electronically stored information was
inadvertently sent shall promptly notify the sender. See also
D.C. Ethics Opinion 256.
 Candor Toward the Tribunal
– Model Rule 3.3: A lawyer may not knowingly: 1) make a false
statement of fact or law to a tribunal or fail to correct a false
statement of material fact or law previously made to the tribunal
by the lawyer; … or 3) offer evidence that the lawyer knows to
be false.
– The IRS is not a “tribunal.” ABA Formal Opinion 314 (1965).
General Obligations of Counsel
 Certain cases address spoliation and provide significant
guidance regarding counsel’s duties for electronic document
retention, preservation, and production.
 Zubulake v. UBS Warburg LLC, 229 F.R.D. 422 (S.D.N.Y, 2004) (Zubulake V).
 The Pension Committee of the University of Montreal Pension Plan v. Banc of
America Securities, 685 F.Supp.2d 456 (S.D.N.Y. 2010).
 Phoenix Four, Inc., v. Strategic Resources Corporation, 2006 WL 1409413
 Metropolitan Opera Association, Inc., v. Local 100, Hotel Employees and
Restaurant Employees International Union, 212 F.R.D. 178 (S.D.N.Y. 2003).
 Qualcomm Inc. v. Broadcom, 2008 WL 66932 (S.D.Cal.) vacated in part, 2008
WL 638108 (S.D.Cal.).
 Victor Stanley, Inc. v. Creative Pipe, Inc., 269 F.R.D. 497 (D. Md. 2010).
Duty to Preserve
 Spoliation
– “[T]he destruction or significant alteration of evidence or
failure to preserve property for another’s use as evidence
in pending or reasonably foreseeable litigation.”
United Med. Supply Co. v. United States, 77 Fed. Cl. 257, 263 (2007)
– Can lead to sanctions for the client.
– Can lead to sanctions for counsel.
– Counsel may be responsible for sanctions incurred by the
 Counsel must be aware of when the duty may attach
and ensure that the client implements necessary
Duty to Preserve
 An audit or appeals proceeding does not automatically
trigger the duty to preserve.
• “[C]orporate taxpayers should not have to immediately
conclude that all audits by the IRS, or even extensive,
IRS administrative proceedings to challenge results of
those audits negative to the taxpayer, necessarily will
lead to litigation.”
• “Although there is a point in time during interaction with
the IRS that it is reasonable to conclude that litigation is
likely or should be anticipated.”
Consolidated Edison Co. of NY v. U.S., 90 Fed. Cl. 228
Duty to Preserve
 Although cases provide some comfort that there is not
an automatic duty to preserve for an audit, it is
recommended that counsel ensure that clients
preserve documents and take necessary measures to
retain any relevant documents once an audit starts.
– Destruction of documents could result in a lack of
contemporaneous documents to support the position
taken on the return. I.R.C. § 6001
– Willful destruction could create significant criminal and
ethical violations.
– It is not always clear when litigation is anticipated.
Duty to Preserve
 Electronic documents can create unique challenges
for document preservation.
– Documents can disappear.
– Computers and servers can disappear.
– Files, documents, and computers can be corrupted.
– Documents can be changed.
– Privileged documents may be shared more widely.
– Large amounts of data can be lost inadvertently.
– Multiple copies of documents may exist.
– Metadata must be preserved.
Monitoring and Directing Retention Efforts
 Counsel has a duty to monitor and direct retention efforts.
– Once litigation is anticipated counsel must advise the client to suspend
routine document retention/destruction policies for all accessible
– Counsel must communicate the preservation duty to persons with
relevant information; must speak directly to the key players in the
• Litigation holds must be written and direct employees to preserve both paper
and electronic records.
– Counsel must oversee compliance with the litigation hold and monitor
the client’s efforts to retain and produce relevant documents.
See Zubulake V, 229 F.R.D. 422 (S.D.N.Y, 2004); The Pension Committee of the
University of Montreal Pension Plan v. Banc of America Securities, 685 F.Supp.2d
456 (S.D.N.Y. 2010)
Monitoring and Directing Retention Efforts
 Counsel must properly communicate with the client to
ensure that all sources of relevant information are
 Counsel may not simply ask the client for documents,
but has a duty to search for the sources of information.
 Counsel may not simply accept a client’s representation
that there is nothing to search.
 If the client cannot answer technical questions, counsel
must coordinate the retention of technical expertise to
help determine if relevant documents exist.
See Phoenix Four, Inc. v. Strategic Resources Corporation, 2006 WL
1409413 (S.D.N.Y)
Monitoring and Directing Retention Efforts
 Counsel has an affirmative duty to make a reasonable inquiry into the basis
of discovery responses.
 Counsel must make an adequate inquiry to ensure that the client has
provided all the relevant information and documents available.
 Counsel should keep records of the retention and production process to
support discovery responses and to show compliance.
 Counsel must assist in implementing a systematic procedure for document
production or for the retention of documents, including electronic
 Counsel must provide adequate supervision to junior attorneys,
laypersons, and vendors involved in the production and retention process.
See Metropolitan Opera Association, Inc., v. Local 100, Hotel Employees and
Restaurant Employees International Union, 212 F.R.D. 178 (S.D.N.Y. 2003); See also
DC Bar Opinion 21-12.
Measures Recommended for E-Discovery
 Understand the Information Technology (IT) architecture and
practices of the client, so that the location of potentially relevant
documents can be identified.
– Where can custodians save documents?
– In practice, where do custodians save documents? (on computer harddrives, on thumb-drives, on company servers, as e-mail attachments, etc.)
– How are e-mails stored and archived?
– What are the potential risks to document retention for server migrations,
software updates, or e-mail conversions?
– What happens to the hard drives of the computers of personnel who leave
the company?
– Can documents or files be “locked” so only specific individuals have
– How are mobile devices integrated into the system?
– What are possible search terms or other unique identifiers?
Measures Recommended for E-Discovery
 Collect electronic documents before or during the audit and
repeat measures once litigation is anticipated and a formal
litigation hold is in place.
– Ensure that employees know that documents will need to be
– Collect documents, including metadata, from each custodian in
every possible location.
• Documents saved to the server.
• Documents saved on local hard drives.
• Documents on mobile devices.
• Documents on thumb-drives or other removable data storage device.
• E-mails relating to the transaction.
• Restoration of back-up tapes may be required if that is the only source
for certain documents or information.
Measures Recommended for E-Discovery
 Ensure that all collected documents are kept outside of the
automatic document retention and destruction procedures.
 Do not assume each employee uses the same
preservation approach.
– Interview employees so you know how to locate their
 Any searches of documents may need to be updated once
a discovery request is issued.
 Decisions regarding any search parameters (search terms,
date limitations, custodians, etc.) should be well
documented and disclosed. Cooperation with the opposing
party is also important for this process.
Measures Recommended for E-Discovery
 Keep records about the document collection process.
 What custodians were involved.
 Where the documents came from.
 What was collected.
 Who created the documents.
 When they were created.
 Any other relevant information.
 Preserve metadata.
Specific Considerations for E-Discovery
 Metadata
– Provides information about electronic documents, such as how,
when and by whom an electronic document was collected, created,
accessed, and modified. Types of metadata include:
• Application metadata: information required to create the file, such as
fonts, styles, and spacing;
• Document metadata: information about the properties of the file, such as
document author, creation, and revision dates and times;
• File System metadata: stored externally from the document and
generated by the system to track information, such as the name, size,
and location of an electronic document;
• Email metadata: information within the email program, such as blind
carbon copy, received date, and sent date;
• Embedded metadata: information that is generally hidden but a part of
the file, such as spreadsheet formulas, hidden columns, track changes,
comments, and notes.
Specific Considerations for E-Discovery
 Metadata
– Ethical issues around metadata generally focus on
confidentiality and preservation of evidence, but can also
involve competency and adequate supervision.
– Ethical issues vary based on whether the production of
documents is in a discovery or non-discovery context.
– The ethical rules relating to metadata vary significantly by
– Not all metadata will be relevant or helpful.
Specific Considerations for E-Discovery
 Metadata Outside of Discovery
– Counsel has a duty to ensure the confidentiality of client
information and to prevent disclosure.
– Duty of confidentiality may require counsel to remove
metadata through “scrubbing” or converting documents to
– Some states prohibit metadata “mining” or attempts by
counsel to examine a received file for metadata. Other states
have no restrictions or limited restrictions on reviewing the
metadata of received files.
– A lawyer that receives confidential metadata that he knows or
reasonably should know was inadvertently sent must treat it
as if he received a confidential document and promptly notify
the sender. See ABA Model Rule 4.4(b) and comments.
Specific Considerations for E-Discovery
 Metadata in Discovery
– Metadata must be produced if it is requested, relevant, and not
privileged, but production of metadata is generally not required if it is
not specifically requested.
– The form of production can affect how metadata is involved.
• Electronic documents must be produced in a “usable format”. Fed.R.Civ.P.
Rule 34 (b)(2)(E)(ii). This generally requires a searchable electronic
format, such as TIFF or PDF with some metadata to make the files
useable. Documents may also be produced in “native” format.
• Production in native format is not obligatory. See e.g., Covad
Communications Co. v. Revonet, Inc., 267 F.R.D. 14 (D.D.C. 2010).
– Counsel must review metadata for privileged information.
• Privileged metadata may exist in a non-privileged file.
• Privileged metadata must be redacted and included on a privilege log.
– Duty to preserve includes preservation of metadata.
Specific Considerations for E-Discovery
 Privilege
– Electronic documents can create challenges for preserving and
documenting privilege.
• Documents can be easily shared.
• Documents can be easily accessed by people outside of a privilege
• Multiple copies of documents may result in the discovery that a
document previously marked as privileged was not privileged.
• Redaction of electronic documents may require additional attention
to detail and technical expertise.
– For example, various branches or parts of an e-mail chain may be
– Electronic documents can create a greater risk of inadvertent
waiver of privilege, and the need to “clawback” documents. See
F.R.E. 502.
Specific Considerations for E-Discovery
 What is the continuing obligation?
– A party must supplement or correct its disclosure or response in
a timely manner if the party learns that in some material respect
the disclosure or response is incomplete or incorrect and if the
additional or corrective information has not otherwise been made
known to the other parties. Fed.R.Civ.P. Rule 26(e).
 Is there an obligation to alert opposing counsel to a waiver of
– If a document that was previously asserted to be privileged loses
that status, it likely must then be disclosed.
– One should not be required to disclose a document if he believes
in good faith that the document remains privileged or that any
waiver does not apply to the discovery request.
Specific Considerations for E-Discovery
 When the Federal Rules of Civil Procedure Don’t
– Rule 3.4 prohibits concealing a document from opposing
– Under ABA Formal Opinion 314, a lawyer has a duty not
to mislead the Service either by misstatements or by
– Circular 230 §10.51(a)(4) provides that a practitioner
can be sanctioned for giving, or participating in giving,
false or misleading information.
Specific Considerations for E-Discovery
 Proportionality
– E-Discovery can involve significant costs for collection
and review.
– In signing a discovery request an attorney certifies that:
• The request is “neither unreasonable nor unduly burdensome
or expensive, considering the needs of the case, prior
discovery in the case, the amount in controversy, and the
importance of the issues at stake in the action.” Fed.R.Civ.P.
Rule 26(g)(1)(B)(iii).
 Over the past several years sanctions related to e-discovery
have increased.
 The IRS Office of Professional Responsibility has the authority to
propose censure, suspension, or disbarment of a practitioner; or
propose a monetary sanction (not exceeding the gross income
derived or to be derived from the conduct giving rise to the
misconduct) on a practitioner or a firm. OPR has discretion to
reprimand in lieu of a proceeding for sanctions. §10.60(a).
 Although relatively rare, lawyers have been sanctioned by courts
for clear violations of the standards for preservation and
disclosure of documents.
 Qualcomm Inc. v. Broadcom, 2008 WL 66932 (S.D.Cal.) vacated in part,
2008 WL 638108 (S.D.Cal.): Individual attorneys were sanctioned and
referred to the State Bar of California for failure to disclose emails that
were discovered during trial; “the Sanctioned Attorneys violated their
discovery obligations and also may have violated their ethical duties.”
 Phoenix Four, Inc., v. Strategic Resources Corporation, 2006 WL
1409413 (S.D.N.Y.): District court awarded monetary sanctions against
defendant and its counsel for destruction and late production of
evidence. Counsel failed in its obligation to locate and timely produce
evidence stored on its client’s servers. Accepting the client’s
representation that there were no computers or electronic collections to
search was not adequate.
 Metro. Opera Ass’n v. Local 100, Hotel Emps. & Rest. Emp. Int’l Union,
212 F.R.D. 178 (S.D.N.Y. 2003): Court imposed monetary sanctions on
defendant and counsel due to the failure to conduct adequate discovery
and the unreasonable obstruction and delay of discovery.

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