Many US firms with operations in the UK are at risk of major fines and legal sanctions under new US legislation that requires them to disclose all relevant electronic documents relating to court cases.

The rules were introduced last December in amendments to the Federal Rules of Civil Procedure and require firms that are being sued to divulge the existence of relevant electronic records and plans for their discovery. Firms are obliged to disclose the documents in an auditable manner that proves nothing is held back.

The law affects both public and private US firms, and all their subsidiaries and outsourcing partners, including those located outside the US. However, experts are convinced that few firms are making the necessary investments in discovery and archiving systems to mitigate the legal risks.

“This is going to be bigger than Sarbanes-Oxley,” said Mike Davis of analyst firm Ovum. “We won’t know for sure how many firms are complying until more cases come through, but I would suggest most large firms are in no position to deliver the level of e-discovery required to comply with the amendments.”

Ian Black, chief executive of e-discovery specialist Aungate, said that many organisations are now at risk from litigants that are increasingly likely to target their inability to quickly discover electronic documents.

“We currently have three large clients that are installing our software in response to requests for documents made under the new rules,” Black said. “This is the tip of the iceberg. It is going to expose the fact that in many firms 80 percent of their stored data is unstructured.”

John Tardif of lawyers Eversheds said the situation in the US mirrored that in the UK, where many firms are also guilty of ignoring the legal risks posed by similar civil procedure rules for electronic documents introduced in 2005.

IT lawyer George Gardiner agreed many firms are guilty of “burying their heads in the sand” over the discovery issue. He added that firms that fail to get their document management systems in order are also missing out on commercial benefits.