Guidance Software Inc. bills itself as the leading provider of technology that helps companies dig up e-mails and electronic documents that might be evidence in a lawsuit. Yet when Guidance itself had to face a judge, it was accused of bumbling its internal digital search.

Whether Guidance intentionally hid documents or just couldn’t find them is a matter of dispute. The company said it did all that was required. Its inability to cough up certain e-mails led an arbitrator to accuse it of gross negligence and proceeding in bad faith.

The mountains of digital information piling up on hard drives and backup tapes have made discovery – the exchange of information beat the start of a lawsuit – increasingly complex. “E-discovery” software boomed to nearly $2.8 billion in 2007, according to George Socha and Tom Gelbmann, directors of the industry group Electronic Discovery Resource Model.

Pasadena, Calif.-based Guidance Software is one of the largest software specialists, with sales of $89 million over the last four quarters. The company began in 1997 making tools to help criminal investigators search computer hard drives. In recent years Guidance added new programs for scouring corporate networks for digital evidence.

Guidance needed to turn that expertise on itself in the case of its former marketing director, Cassondra Todd.

Todd believed Guidance’s chairman pressured her manager to fire her, in part because she is a woman. After she got a scathing performance review in 2007, she asked for an investigation.

But Guidance told Todd it found no evidence of discrimination. It apologized for the harshness of the review but wouldn’t delete it.

Todd responded by hiring Arnold Peter, an attorney with Los Angeles-based Raskin Peter Rubin & Simon. A few weeks later, she was laid off.

Todd filed a wrongful-termination claim, and both sides were required to perform discovery, a hunt for documents that might matter to the case.

The results of Guidance’s initial e-discovery seemed scant to Todd. But she couldn’t argue Guidance was holding back until she got a break a few months later.

Tim Leehealey, Todd’s first manager at Guidance, had printed and saved some memos from the time of Todd’s bad review. When Todd reviewed his stash, she found e-mails that Guidance hadn’t turned over. In one, Leehealey questioned whether someone was setting Todd up to be fired.

“Other than (Guidance Chairman Shawn McCreight’s) hatred of her, she was a good employee and produced for me,” he wrote to Victor Limongelli, now Guidance’s chief executive.

Whether Guidance didn’t find Leehealey’s memos or it chose not to hand them over, “either one was extremely damning,” Leehealey said.

“Those documents were on people’s hard drives for sure, and they didn’t produce them,” Leehealey said..

The arbitrator handling Todd’s case ordered Guidance to do a more thorough round of e-discovery. The company came back empty-handed – except for news that one of its tapes had been corrupted. The arbitrator lost patience.

“I want this game-playing stopped,” the arbitrator, William McDonald, told Guidance’s attorney.

McDonald was disturbed that Todd kept identifying documents the company hadn’t unearthed. When he learned the corrupted tape had gone unnoticed for nearly a year, he had harsh words for the company.

“These are routine things in this business. And it wasn’t done until pulling and screaming and kicking and facing the ultimate sanction,” McDonald said. “We’re looking at people who should be very sophisticated in this area, given Guidance’s business.”

As punishment, McDonald ordered the company to pay for Todd’s expert witnesses, travel costs and the cost of rescheduling the trial. He also forced Guidance to search the backups.

Limongelli said he didn’t know why Guidance didn’t initially find many of the files Todd identified as missing. Guidance executives also say the company was not legally required to search its backup tapes at first.

Outside experts hired by Todd gave the arbitrator more critical assessments of Guidance’s actions.

Brett Harrison, a director in FTI Consulting Inc.’s electronic evidence consulting group, wrote that the way Guidance saved documents once it knew of Todd’s legal actions “was not performed to commonly accepted standards within the e-discovery field and in great part did not occur at all.”

A second expert, William Moylan of Aon Consulting Inc., questioned why Guidance asked that deleted files be ignored during discovery.

“Recovery and searching of deleted files is at the very heart of computer forensics,” he wrote.