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Tax Court Okays Use of Predictive Coding to Review Documents - IMS ExpertServices

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Reprinted with permission.

IMS ExpertServices periodically sends me e-mails that highlight recent key court cases that can significantly affect the effectiveness of expert testimony, both for the plaintiff and for the defendant.

This article by Joshua Fruchter, writing for IMS ExpertServices, expands on the subject of predictive coding as submissible evidence on court proceedings that began with an article written in 2006 by Maggie Tamburro, The Future of Predictive Coding - Rise of the Evidentiary Expert? Ms. Tamburro noted, "At the heart of predictive coding lies the concept of 'supervised learning,' defined as 'an algorithm that learns from human decisions and then has the ability to apply those decisions to new data.'" It seems from reading both stories that the courts are not allowing results from predictive coding to be used as conclusive evidence of wrong-doing, but merely as a tool during the discovery process to uncover potential wrongdoing, and then to investigate farther. While that seems innocent enough, I equate it somewhat with the claim that if you have nothing to hide, then you should not object to allowing the police to search your person or possessions without due cause. It is not much of a step from using algorithms to simply search for a specific pattern of behavior under investigation, but to expand it to search for a range of improprieties unrelated to the case at hand, and thereby open the potential for charging parties with crimes not originally alleged. Time will tell.

Joshua Fruchter, Esq.

Joshua Fruchter, Esq. is the principal of eLawMarketing, a leading provider since 2002 of website development, email marketing, blogging, search engine optimization (SEO), and social media services to law firms of all sizes. Joshua is a graduate of NYU School of Law, a member of the New York Bar Association, and a former attorney at a large NYC firm. Joshua combines his legal background and marketing technology expertise to help law firms generate leads and business from Internet marketing. Joshua has published articles on legal marketing technologies in numerous law-related periodicals, and has presented on legal marketing technologies before various bar and legal marketing associations. Joshua is also the editor of LawyerCasting, a blog covering "best practices" in online marketing for lawyers and law firms. 

Tax Court Okays Use of Predictive Coding to Review Documents

Posted by Joshua Fruchter, Esq.

November 26, 2014

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Because so many documents are stored nowadays in electronic form, the expense of electronic discovery has become a major concern in litigation. To address this concern, vendors have developed technologies to search through large pools of electronically stored documents for material responsive to e-discovery requests efficiently and expeditiously. One such new technology is "predictive coding" – a technique that uses computers to assist with review of large volumes of documents.

The United States Tax Court recently approved the use of predictive coding to respond to a large document request by the IRS. Dynamo Holdings, Ltd. v. Commissioner, 143 T.C. 9 (September 17, 2014).

The IRS alleged that various transfers (characterized as loans) from one entity (Beekman) to an affiliate (Dynamo) were disguised gifts to Dynamo's individual owners. To substantiate its claim, the IRS asked the entities to produce electronic information stored on backup tapes. The entities objected to the cost of manually reviewing each document on the tapes, and petitioned the court to use "predictive coding" to efficiently and economically identify the non-privileged material responsive to the IRS's request. The IRS opposed use of predictive coding as an "unproven technology," and demanded manual review. According to the testimony of the electronic discovery expert retained by the petitioners, the difference in the time and expense between the alternative approaches was staggering – 200,000 to 400,000 documents subject to review at a cost of $80,000 to $85,000 using predictive coding versus 3.5 million to 7 million documents subject to review at a cost of $500,000 to $550,000 under the manual approach advocated by the IRS.

After providing a brief overview of predictive coding technology, the Tax Court rejected the view that predictive coding was an unproven technology. Citing opinions by several federal district courts, the Tax Court concluded that predictive coding has gained wide acceptance as a reliable tool to reduce the burdens of electronic discovery (tangentially, the Court also noted that a form of predictive coding is used by email applications to filter out unwanted spam).

The Tax Court's conclusion relied heavily on testimony from the petitioners' e-discovery technology expert, James Scarazzo (interestingly, the Court did not share the testimony of the IRS's expert). Mr. Scarazzo opined that predictive coding was a superior technology because it eliminates (or least minimizes) human error and expedites review. As part of his mandate, Mr. Scarazzo reviewed the backup tapes targeted by the IRS, and compared the two approaches (predictive coding vs. manual review) in terms of time and cost. In doing so, Mr. Scarazzo assumed that the parties would use predictive coding to search the data using specific search criteria while the manual approach would not use search criteria. Mr. Scarazzo concluded that predictive coding would "minimize review time and expense and ultimately result in a focused set of information germane to the matter."

Given that the Federal Rules governing discovery are to "be construed to secure the just, speedy, and inexpensive determination of every case," the Tax Court sensibly authorized the use of predictive coding to respond to the IRS's discovery request.

Related article:  The Future of Predictive Coding - Rise of the Evidentiary Expert?

Have you had an opportunity to use predictive coding in litigation? If so, did you encounter any opposition from opposing counsel? Based on your experiences, do you feel that predictive coding is reliable?


This article was originally published in BullsEye, a newsletter distributed by IMS ExpertServices™. IMS Expert Services is the premier expert witness search firm in the legal industry, focused exclusively on providing custom expert witness searches to attorneys. To read this and other legal industry BullsEye publications, please visit IMS Expert Services' recent articles. For your next expert witness search, call us at 877-838-8464 or visit our website.


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