Blockchain-Concept Credit: Sashkin/Shutterstock.com |

New technology is always exciting to watch unfold as it percolates through various phases and industry adaptations. While the disruptive nature to existing paradigms and processes is what get all the attention, we would be remiss if we don't evaluate risks and liabilities associated with implementing any new technology.

Blockchain

As an example, blockchain is a method of enhancing and securing transactions. Most of the press for blockchain circulates around cryptocurrency, volatile market caps, and the disruption it can have with global currency markets due to its decentralized infrastructure and immutable ledger. However, there are many different ways it may be implemented within business beyond currency.

This technology has been slowly evolving and gaining tracking in the consumer and public spaces since the idea was proposed by Satoshi Nakamoto in a 2008 whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System“. The mysterious creator suggests that a ledger can be managed in a distributed manner where the network forms “a record that cannot be changed.” Since then, we've seen Bitcoin rolled out as a cryptocurrency where platforms such as Coinbase have established trading desks for the currency along other blockchains that have come onto the scene such as Ethereum and Litecoin.

This technology is only gaining momentum in use cases, formation of startups building on top of the blockchain, and corporate adoption to replace existing processes. It has been evolving to not only mange a ledger but also overlay smart contracts. Smart contracts “not only define the rules and penalties around an agreement in the same way that a traditional contract does, but also automatically enforce those obligations.”

Within the private sector, the Linux Foundation along with members like IBM and Microsoft have formed an alliance to establish a privatized set of blockchains under the Hyperledger banner. Most recently, Amazon launched Blockchain Templates to allow developers to rollout an Ethereum or Hyperledger Fabric network “in a matter of minutes and with just a few clicks.”

There are various frameworks being created and tested within Hyperledger such as the above mentioned Fabric, Indy, and Sawtooth. The various flavors of blockchain will allow companies to select which version best fits their operational goals.

The use cases of streamlining manufacturing, managing complex contracts in B2B, inventory control, tracking real estate deals, and automating transactions are abundant. However, the underlying theme of the public and private block chains are record keeping stored ad infinitum. Immutable record keeping raises a red flag when dealing with corporate record keeping.

E-discovery: What is it?

Within the legal process there is a time where discovery information is swapped between parties. Basically, it is information that one has compiled from documents, emails, text messages, and other data sources to enforce your side of the case. This process of identifying and collecting records may be simple when it is an argument between two people; however, the volume of data is exponential when it involves a corporation.

Data is being produced at enormous rates minute-by-minute across many different types of gadgets. Email is still one of strongest methods of business communication and one of the most voluminous. It's estimated that in 2017 there were 225 billion emails sent. 65 percent of them will be done via a mobile device! Corporations spends tens of thousands of dollars each year collecting, organizing, analyzing, and reviewing data for purpose of complying with the discovery phase in litigation.

The Impact of Blockchain in E-discovery

Correctly enforced document retention policies provide a roadmap to what information may or may not still be held in-house or on backup. In litigation, the ability to prove that particular documentation no longer exists may protect the company from any Federal Rule of Civil Procedure (FRCP) Rule 37(e) spoliation issue and/or an EU GDPR privacy violation. Additionally, storing beyond the retention period set in a policy, such as in an immutable ledger, may bring unwanted costs and liability exposure.

Don't assume that you're absolved from the risk of litigation discovery even if your corporate policies are updated to include newly introduced technology such as a blockchain. There needs to be a proactive discussion between IT/development and general counsel regarding the proposed use cases for blockchain and how that may affect privacy and record retention. Is there a legitimate business need for this data to receive a retention label of “permanent” or is it only because of the technology framework?

One area where blockchain and smart contracts provide a solid foothold is contract management. But, technology isn't an end all be all to contract management or contract disputes.

Hypothetically, if two or more parties are in agreement with the creation of a set of smart contracts it should minimize disagreements on when certain requirements were met and delivered. Of course, the foundation or coding of the smart contracts could lead to a code base review in a dispute; especially if only one party is the sole designer and developer of the platform. This would be in addition to searching and reviewing emails discussing terms between parties as well as the technical team's directives and internal discussions of workflow.

The immutable and encrypted data creates a challenge with searching the chain for responsiveness and creating a usable record for discovery.

How does this increase risk and costs?

Unlike a paper contract, smart contracts are written in computer language that most non-coders cannot decipher with ease. This creates a challenge in discovery where it is critical that the contract is analyzed in its entirety. Not to mention that the contracts have been programmed into small executables designed by coders. This may constitute the unlicensed practice of law and could be a criminal offense in some jurisdictions.

In the public blockchain space, the first step would be to identify all smart contracts' addresses in order to capture the payload containing the logic for the contract. The next step would be to find all transactions on the blockchain executed against these smart contracts. Finally, any application code that was written to interact with the smart contracts located in the blockchain. All of this information would need to be deciphered and presented in a way that would make sense to the non-techies through reports, summaries, and/or visual demonstratives. For any private blockchain, the process may be the same as well as the entire blockchain may be potentially responsive.

Of course, there would need to be independent experts hired to evaluate the source code and construct usable demonstratives for any transactions. One would also need to find attorneys who have some knowledge of blockchain or pay to have them read in on the technology.

Then there are questions around exposing the smart contracts, exposing third parties who are apart of this blockchain, and any application code that one may deem trade secret.

How complicated is it to argue against releasing the entire chain along with the underlying code and credentials via FRCP Rule 34(b)(2)(c) “objection to part of a request”? What extra expense is needed to explain the transactions to the other side?

These additional technical hurdles seem to be quite an additional cost risk for any litigation prone company looking to store critical data in the blockchain. Though the time is right for blockchain to disrupt, I'm not sure it is something every business should be rushing to implement. Nonetheless, I urge any and all general counsel to begin speaking with other business units like IT to understand what technology upgrades may be on the horizon in order to assess undue exposure to expensive discovery costs for the sake of being cutting edge.

Aaron Vick is Chief Strategy Officer for Cicayda, a leading legal technology firm that combines powerful cloud-based eDiscovery and Legal Hold software with analytics and legal expertise. Early in his career, Aaron was part of the Rocket Science team that designed the first document research product, CaseLogistix, for the legal discovery market. After CaseLogistix's acquisition by Thomson Reuters, Aaron played an integral part in developing its Litigation Product Specialists team.