The Untapped Data Goldmine: IoT Devices in Due Diligence and Discovery
10.10.2024
The Internet of Things, commonly referred to as IoT, has rapidly evolved from a futuristic concept to an omnipresent reality, revolutionizing how we interact with our environment and conduct business. For commercial litigators and transactional attorneys, understanding IoT is no longer optional – it’s becoming essential to effective legal practice. From smart thermostats and lighting systems to industrial sensors and connected supply chains, IoT devices are now integral to modern commercial infrastructure, continuously collecting and transmitting data to enhance efficiency and operations.
Despite the proliferation of these devices and the vast amounts of data they generate, this information often remains an untapped resource in both due diligence processes and litigation discovery. This oversight represents a significant missed opportunity. The data from IoT devices can provide unprecedented insights into property usage, operational efficiency and even human behavior within commercial spaces.
For commercial litigators navigating the IoT landscape, a basic understanding of these devices is crucial. IoT devices in commercial settings encompass a wide range of smart technologies, from building management systems and security cameras to inventory trackers and industrial equipment sensors. These devices collect data from their environment and transmit it over the internet to central systems for analysis and storage.
The data collection process is often continuous and can include information on energy usage, occupancy patterns, environmental conditions, equipment performance and employee movements. For instance, a smart HVAC system might track temperature fluctuations, occupancy and energy consumption, while IoT-enabled forklifts in a warehouse could monitor operational hours, maintenance needs and cargo-handling efficiency.
The scale of data generation in commercial environments is staggering. A single modern office building equipped with IoT devices can generate terabytes of data annually. This vast pool of information, when properly analyzed, can offer invaluable insights into operational efficiency, compliance with lease terms, maintenance issues and potential legal liabilities.
In the realm of due diligence, IoT devices offer a wealth of untapped information that can significantly enhance traditional practices. While conventional due diligence might rely on historical records and financial statements, IoT-enhanced due diligence provides real-time, granular data on a property or business’s operations.
For example, in a commercial real estate transaction, IoT data can reveal patterns in energy consumption, space utilization and maintenance needs that may not be apparent from standard reports. This data can have a substantial impact on property valuation and risk assessment. A building with optimized energy usage demonstrated through IoT data might command a premium, while frequent equipment failures logged by IoT sensors could signal potential liabilities.
In mergers and acquisitions, IoT data from manufacturing equipment or logistics systems can provide insights into operational efficiency and potential areas for post-acquisition improvements. However, accessing and interpreting this data during due diligence presents unique challenges. Legal teams may need to negotiate access to IoT platforms, work with IT specialists to extract relevant data and collaborate with data analysts to derive meaningful insights.
Moreover, the existence of extensive IoT infrastructure itself becomes a factor in due diligence, raising questions about data ownership, privacy compliance and cybersecurity risks. Attorneys must now consider these technological assets and their associated data as integral parts of the due diligence process, adapting their strategies to fully leverage the insights IoT can provide.
In the realm of discovery, IoT devices represent a new frontier of potentially crucial evidence. The data generated by these devices can provide detailed, objective records of events and conditions relevant to a wide range of commercial disputes. For instance, in a lease dispute, data from smart meters and occupancy sensors could provide irrefutable evidence of energy usage patterns or space utilization. In product liability cases, IoT-enabled manufacturing equipment could offer precise data on production conditions and quality control measures.
However, the use of IoT data in discovery presents unique challenges. Identifying relevant IoT devices and the data they generate can be complex, especially in large commercial environments with numerous interconnected systems. Preserving this data is equally challenging, as IoT devices often have limited storage capacity and may overwrite old data continuously. Attorneys must work closely with information technology professionals to ensure proper data preservation protocols are in place.
Authentication of IoT data as evidence presents another hurdle. Lawyers may need to demonstrate the reliability of the devices, the integrity of the data transmission process and the accuracy of any data analysis. This often requires collaboration with technical experts who can testify to the functionality and reliability of the IoT systems.
Privacy concerns add another layer of complexity. IoT devices may collect personal data on employees or customers, raising issues of consent and data protection. Attorneys must navigate the delicate balance between the need for relevant evidence and compliance with privacy regulations like the General Data Protection Regulation or the California Consumer Privacy Act.
As IoT devices become increasingly prevalent in commercial settings, attorneys must adapt their practices to effectively address this new data source. Due diligence checklists should be updated to include specific inquiries about IoT devices and systems. This includes identifying all connected devices, understanding their data collection and storage practices and assessing any associated risks or liabilities.
In the context of discovery, developing robust protocols for IoT data preservation and collection is essential. This may involve working with information technology professionals to create data maps of IoT systems and implementing procedures to ensure relevant data is not overwritten or lost. Attorneys should also address IoT data in e-discovery plans and protocols, specifying how this data will be identified, collected and analyzed.
The use of IoT data in commercial litigation raises several legal and ethical considerations. Admissibility of IoT data as evidence is a primary concern. While courts are increasingly accepting of digital evidence, attorneys may need to overcome challenges related to hearsay, authentication and relevance when introducing IoT data. The potential for spoliation claims related to IoT data is another significant issue, given the often-continuous nature of data collection and limited storage capacity of many IoT devices.
Looking ahead, the landscape of IoT in commercial settings is rapidly evolving. As IoT devices become more sophisticated, the volume and complexity of data they generate will continue to increase. This trend is likely to be accompanied by advancements in data analytics, potentially offering even deeper insights into commercial operations and behaviors.
Legal standards and practices are expected to evolve in response to these technological developments. Courts may establish new precedents regarding the admissibility and weight of IoT evidence, while regulatory bodies might introduce new rules governing the collection and use of IoT data in commercial contexts.
The integration of artificial intelligence with IoT systems could further transform the legal landscape, potentially automating aspects of due diligence and initial discovery reviews. This could significantly alter the role of attorneys in these processes, emphasizing the need for legal professionals to develop technological competence.
As we move forward, it is incumbent upon legal professionals to embrace these technological advancements, continually educate themselves on IoT developments and collaborate with technical experts when necessary. By doing so, attorneys can turn the challenges presented by IoT data into opportunities for more thorough due diligence and more effective litigation strategies in our increasingly connected commercial world.
Alexander Paykin is the owner of The Law Office of Alexander Paykin, P.C., a boutique commercial and real estate litigation and complex transaction firm serving co-op and condo boards and corporations of all sorts. He is the chair of the Committee on Technology and the Legal Profession of the New York State Bar Association and is a member of NYSBA’s Committee on Law Practice and Court Rules, Committee on Civil Practice Law and Rules (CPLR), the Law Practice Management Committee, and the Committee on Law, Youth and Citizenship, as well as the ABA TechShow Board, the Legal Technology Resource Committee of the ABA and the Technology & Resource Center Committee of ABA’s GPSolo Division.
This article appears in a forthcoming issue of the Commercial and Federal Litigation Section Newsletter. For more information, please visit NYSBA.ORG/COMFED.
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