Records retention policies for Small and Mid-Sized Businesses: Part Two- Abiding by your policy and honoring the litigation hold

By: Charles B. Jimerson, Esq.

In Part One of this Blog post, we focused on what document retention policies are, who should have them and what documents should be kept for what length of time. Please click here to review Part One. In Part Two of this Blog post, we will focus on what the legal ramifications of failing to comply with your document retention policy are, with special attention given to responsibilities of the retaining company once litigation is anticipated or underway.

If I do not have a document retention policy, what are the legal ramifications that my company might face if faced with a lawsuit?

In the litigation context, as an extreme, a company that does not have a document retention policy may be sanctioned, subject to adverse jury instructions and/or may automatically be found liable for the underlying action.

If I have a document retention policy, but do not abide by it, what are the legal ramifications that my company might face?

Companies have been held liable for failing to abide by their document retention policies. A corporation will not have acted fraudulently or in bad faith if the documents are no longer required to be kept by law and are destroyed according to the company policy. Moor v. Gen. Motors Corp., 558 S.W. 2d 720, 737 (Mo. Ct. App. 1977). However, a corporation cannot “blindly destroy documents” and then expect to be protected by a document retention policy that was not carefully followed. Gumbs v. International Harvester, Inc., 718 F.2d 88, 96 (3d Cir. 1983).

Special circumstances may require certain documents to be retained for longer periods, such as those documents subject to a litigation hold. If a document covered by a litigation hold is not retained, then the company could be subject to an adverse inference instruction, attorneys’ fees, exclusion of evidence, or some other judicial sanction. One of the more notable cases involving a litigation hold was Arthur Andersen LLP v. United States. In that case, once Enron’s financial difficulties were known, the Arthur Andersen firm reminded partners working on Enron matters to ensure compliance with its document retention policy, which resulted in substantial paper and electronic documents being destroyed. Although the jury determined that Arthur Andersen was guilty of knowingly, intentionally, and corruptly persuading employees to withhold documents from a regulatory proceeding, the U.S. Supreme Court ruled that company managers could instruct employees to comply with a valid document retention policy so long as there was no “nexus” between the “persua[sion] to destroy documents and a particular proceeding” and remanded the case for the jury to make this determination.

Ultimately, it is within the court’s discretion on how to penalize a party who destroys documents, including the ability to assess sanctions or render a default judgment. Telectron, Inc. v. Overhead Door Corp., 116 F.R.D. 107, 109-10 (S.D. Fla. 1987) (finding that a default judgment was appropriate when the party destroyed documents willfully and intentionally and the corporate officer who initiated destruction lied about the destruction during his testimony).

How do I know if our document retention policy is adequate?

In litigation, the court looks at a three part test to determine whether a company’s document retention policy was reasonable:

1. Was the policy reasonable concerning the facts and circumstances surrounding the relevant documents,

2. Whether lawsuits have been filed regarding the issue and the frequency of those complaints; and

3. Whether the document retention policy was instituted in bad faith.

Lewy v. Remington Arms Co., Inc., 836 F.2d 1104, 1112 (8th Cir. 1988).

Is there a particular way that documents should be kept and where should I look for guidance?

There is no particular way that documents should be maintained. The company can preserve its documents electronically, in hard copy, or in a combination of both. No matter how the documents are to be kept, it is important to keep the method of preservation consistent. This way, if a corporation is sued, the corporation will be able to comply with the discovery request to produce the documents.

An effective records management program will ensure the records necessary in conducting business and fulfilling legal responsibilities are kept and are available. Though you are not required to keep every shed of paper, email or electronic document, as this would “cripple corporations,” it is imperative to understand the needs of your business in order to set standards and mitigate liability. Zubulake v. UBS Warburg LLC, 2004 U.S. Dist. LEXIS 13574 (July 20, 2004). To offset discovery productions, under certain circumstances, courts have allowed cost-shifting to divide the costs of production between parties if the production is difficult or expensive. See generally Zubulke v. UBS Warburg LLC, 217 F.R.D. 309 (S.D.N.Y. 2003).

In n 2006, the U.S. Supreme Court’s amendments to the Federal Rules of Civil Procedure created a category for electronic records that, for the first time, explicitly named emails and instant message chats as likely records to be archived and produced when relevant. One type of preservation problem arose during the Zubulake v. UBS Warburg LLC lawsuit. Throughout the case, the plaintiff claimed that the evidence needed to prove the case existed in emails stored on UBS’ own computer systems. Because the emails requested were either never found or destroyed, the court found that it was more likely that they existed than not. The court found that while the corporation’s counsel directed that all potential discovery evidence, including emails, be preserved, the staff that the directive applied to did not follow through. This resulted in significant sanctions against UBS. The formalized changes to the Federal Rules of Civil Procedure in December 2006 and in 2007 effectively forced civil litigants into a compliance mode with respect to their proper retention and management of electronically stored information. Improper management of ESI can result in a finding of spoliation of evidence and the imposition of one or more sanctions including an adverse inference jury instructions, summary judgment, monetary fines, and other sanctions. In some cases, such as Qualcomm v Broadcom, attorneys can be brought before the bar and risk their livelihood.

Zubulake has been a leading case for e-discovery and document recovery. It has set important practices relating to both the legal and technical aspects of electronic discovery and document retention, as the relevant communication among interested parties was available in digital form. The main issues raised and precedential value conveyed were:

  • The scope of a party’s duty to preserve digital evidence during the course of litigation or even when first acknowledged that a chance of litigation exists;
  • Lawyer’s duty to monitor their clients’ compliance with electronic data preservation and production (litigation hold);
  • Data sampling, so that knowledge about costs and effectiveness of the recovering process are known in advance;
  • The ability for the disclosing party to shift the costs to the requesting party of recovering inaccessible media (backup tapes, for example);
  • The imposition of sanctions for the spoliation of digital evidence.

In typical lawyer fashion, my answer to this question is it depends on what you are preserving and what reasons and policies you are preserving them for. Whatever you preserve, however, you should be prepared for it to be discoverable in the event of subsequent litigation.

When does a litigation hold attach?

Once a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and implement a litigation hold to ensure the preservation of relevant documents. There is no bright line test to determine when the duty to preserve documents and implement a litigation hold attaches. Indeed, the duty arises independent of a court declaration and can be triggered by pre-suit events; however, courts employ a case-by-case analysis to determine when the party reasonably knew or should have known that future litigation was likely.

When I anticipate litigation, what must I do to implement a “litigation hold?”

The short answer is that the retaining company must retain all relevant documents (but not multiple identical copies) in existence at the time the litigation hold should be implemented, and any relevant documents created thereafter. There is a duty to preserve what the party knows, or reasonably should know, is relevant in the action, is reasonably calculated to lead to the discovery of admissible evidence, is reasonably likely to be requested during discovery and/or is the subject of a pending discovery request. While this standard may be somewhat nebulous, overbroad and burdensome, in cases past I have identified the “key players” in the litigation early on, which in turn helped to identify which documents must be preserved.

Once any judicial or investigative proceeding is contemplated or begins, companies should automatically suspend their document retention policies. A company should send out a litigation hold letter that will tell employees to save documents related to the proceeding. Upon receiving a subpoena, the company should suspend any document destruction policy it has in order to prevent the destruction of responsive documents. Employees of the retaining company should be constantly reminded that destruction of documents in the midst of litigation is expressly prohibited.

Conclusion

A document retention policy is only as good as its implementation. Small and mid-sized businesses should regularly enforce their policies to ensure certain documents are stored for the time periods necessary, but also to ensure those documents are destroyed after its retention cycle has passed. This will be a preparation tool so as to persuade the court that certain records and data were purged pursuant to a policy and not deliberately destroyed once litigation ensues. Auditing your policies will ensure that a company maintains the records prescribed by law while simultaneously protecting a business’ interests in the long run. Once litigation commences, it is very important to work with your counsel to ensure that the appropriate litigation holds are enforced.