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Applying long-standing spoliation doctrine to the electronic era, the Second Circuit held that where a party breaches a discovery obligation by failing to produce evidence, the trial court has broad discretion in fashioning an appropriate sanction, including the discretion to delay the start of a trial, to declare a mistrial, or to issue an adverse inference instruction. Sanctions may be imposed where a party has not only acted in bad faith or gross negligence, but also through ordinary negligence. Residential Funding holds that delay, as well as destruction, is sanctionable. Vacating the trial court’s sanctions order, the 2d Circuit Court reversed and remanded the plaintiff’s favorable $96.4 million jury verdict even though the unproduced evidence--email that resided on old backup tapes--was felt to contain little if any significant material for the defense’s case. Comparable holdings go back at least sixteen years to the decision in National Assoc. of Radiation Survivors v. Turnage, 115 F.R.D. 543 (D.C., N.D., California, 1987).

Ouch!

I get at least two or three calls a month from law firms or corporate counsel enquiring how long they should hold on to data – and how they should go about storing and purging data, should the eventuality of a lawsuit arise. There are a several good reasons (beyond dodging sanctions) for advising your clients to establish a digital document retention protocol. An established protocol can lessen your client’s liability, should they be implicated in a lawsuit. It can put your client in a position to easily access data that might be exculpatory, or at least, supportive of the company in defense of a claim and, in the process, implies litigation readiness that may help you settle on more favorable terms or be in a better position to try your case. Adopting a proactive stance toward electronic discovery requests also conveys a spirit of transparency that can aid your clients in the court of public opinion, something palpably important in the current business and investment climate.

What To Keep

In the relatively short history of corporate electronic data retention, earlier default corporate policies have been fairly straightforward--if in doubt, delete it. This philosophy resulted from the precept that a proactive policy can streamline discovery…and perhaps save a company’s reputation! As we’ve learned from the debacles at Enron, Arthur Andersen and Merrill Lynch (to name a few), this is not a wise protocol. Nor is it wise or cost-effective to retain all electronic data. A responsible approach shifts the focus from “what to destroy” to “what electronic documents to retain.” It’s fair to say that, given the ease at which potentially needed electronic data can be stored, searched, and preserved relative to reams of paper documents, the default corporate position should be, when in doubt, retain electronic data rather than purge it.

A records protection bias makes an excellent foundation for a sound electronic document retention policy that can withstand the rigors of modern litigation in the Sarbanes-Oxley era.

There are several questions that need to be answered to address the larger question of “what to keep.” The first is, “what type of documents and what sort of key words or phrases are deemed sensitive?” The second is, “does the company allow documents to be created and saved on local machines, or is everything saved on a central server(s)?”

Regarding the first question, there are some obvious answers. For example, words or phrases that have a sexual or racial content would obviously be deemed sensitive--they might prove important in an employment law-related case. To isolate e-mails containing such matter, an e-mail filtering program could be customized to search both messages and attachments and save copies of any that contained keywords or phrases deemed sensitive. This would safeguard the organization from relying on end-users to save these messages, and would guarantee that all e-mails are retained in a universal format in a single location. It would also save money and storage space by not archiving every message that passes through the company’s servers. By indexing these messages and attachments, an organization will greatly streamline future data requests--and save significant dollars in the process.

An organization might also wish to copy and retain copies of certain file types, depending on the nature of their business. For example, a high tech manufacturer who creates potentially patentable designs might want to retain all Acrobat PDF files or other graphics-oriented documents that might contain design information, should a patent-infringement oriented matter surface.

The question of whether documents are to be created and saved on local machines or stored exclusively on a central network server inherently implies the backup and preservation procedures that a good retention policy should implement. If files are created and saved on local machines, an organization can set-up workstations so that duplicate files are centrally backed-up or otherwise saved on central servers. This gives an organization much better control of potential evidence. Otherwise, records managers would need to periodically review the content of each machine, a time-consuming and expensive process.

Another thing to consider in crafting a retention policy is whether or not employees are allowed to take notebook computers on the road or home, or to work on company business from a home computer. In the case of notebook systems, synchronization software can be used to update the files on central servers the next time the notebook systems log into the network, so all information is accounted for. Once the files are on the network, forensic search tools can be deployed to identify key files that would fall under the retention policy. They can then be copied and archived according to the procedures established in the policy. The tools one would use depend upon the operating environment and server access. Text Search Pro (published by New Technologies, Inc.) and DTSearch (by DTSearch Corp.) both work well depending on the server configurations and types of data to be searched.

Going forth, your clients should consider limiting access to company information from home, because this may potentially require reviewing and archiving data from employee’s home computers in order to stay in compliance with retention policies…another headache!

Ensuring Compliance

A good digital document retention policy is, of course, only as good as the method in which it is implemented. Here a few compliance guidelines you should have your clients consider:

• Establish a records compliance task force, so there are easily identifiable “go-to” people regarding retention activities.
• The compliance task force should create detailed logs of record-purging and back-up activities.
• Archiving procedures should be periodically reviewed and tested. More times than your clients would care to admit, electronic record back-ups are not properly performed or aren’t being performed at all. Incompetence is not a sound defense strategy! If back-up tape hardware is updated, be sure that there’s a back up plan for accessing date on old tapes--these likely will not work with newer hardware. Old back-up tapes stored in a seldom visited closet could pose an unpleasant surprise if they appear suddenly in discovery proceedings, particularly if your client is unable to find the hardware needed to review them.
• Make certain that all media are considered and accounted for in the purging policy. This includes not only servers, desktops, and laptops, but also PDAs, BlackBerries, and various removable media devices.
• It’s a good idea to have an objective third party periodically review and validate that policies are being followed. In doing so, the vendor should interview key personnel and review a sampling of data using forensic tools.

Email

There are a number of computer forensic principles that are applicable to e-mail retention procedures. For example, e-mail filtering programs can be customized to search both messages and attachments and save copies of any that contained keywords or phrases deemed sensitive. This would safeguard the organization from relying on end-users to save these messages, and would guarantee that all e-mails are retained in a universal format in a single location. It would also save money and storage space by not archiving every message that passes through the company’s servers. By indexing only pertinent messages and attachments, an organization will greatly streamline future data requests – and save significant dollars in the process.

If The Call Comes

Your client might do everything right, operate a distinguished business adhering to all protocols of integrity and fair play, and a lawsuit, groundless or otherwise, might still be filed--requiring you to defend your organization or client. Should this occur, every organization must be prepared to meet the challenges posed by demands for discovery data--the duty of preservation, the duty of retention, and the duty of production. By having a suitable electronic document retention policy in place, and by being able to prove that the policy has been implemented, your client will be prepared. They’ll be able to show that general employees of the company as well as the IT Department are well-schooled in the disciplines of good-faith preservation.

There are several other steps you should advise your clients to pursue:

• Before the demand for production is served, the firm should have developed comprehensive document retention and risk management protocols, strong compliance mechanisms addressing electronic documents, e-mails and attachments (as well as paper records), regulating both individual personnel in their document retention behavior, and the IT Department in the back-up of electronic data and rotation of storage media.
• A joint “Electronic Discovery Rapid Response Team” composed of management and IT personnel, outside counsel, and a computer forensics provider should be proactively assembled.
• Select and prepare an IT employee of the client to be the designated witness for a Rule 30(b)(6) deposition taken for the purpose of gaining knowledge of a party’s computer network and data storage methodology. This individual should be well-schooled in the implemented records management and retention protocols, and capable of participating in conferences under Rules of Federal Procedure 26 and 16 in order to stipulate to a plan for electronic discovery. Such a conference should be sought early, both to make a showing of reasonableness to the Court and also to avoid a broad demand that may, for whatever reason, successfully defeat the discovery restrictions found in Rule 26 (b) (2) (i), (ii) and (iii), which both controls evidentiary fishing expeditions on the part of the demanding party and which requires the responding party to have discoverable data readily accessible.
• Secure all storage media containing potentially discoverable data immediately upon demand including hard drives of PCs and notebook computers. Making a true and complete image of each such PC hard disk and notebook computer should suffice to preserve the electronic evidence and avoid claims of spoliation. All preservation efforts should be documented in a consistent manner similar to a scientist’s formal laboratory notebook. This process should be carried out in a way that does not place the company’s day-to-day business in a state of limbo. At this point, your client should retain forensic experts for the segregation, imaging, and examination of potentially discoverable electronic media both to responsively meet early disclosure deadlines and also to be in a better position to avoid abusive fishing expeditions.
• Advise your client to keep all personnel with a "need-to-know" clearly informed about the status of threatened or actual litigation and about what is expected of them. Be sure that they understand that they must stress the preservation of potential evidence, not its destruction--they certainly don’t want to repeat the mistakes of the “former Arthur Anderson.”

Demonstrating to the Court the existence of a reasonable, well thought out, comprehensively distributed, and carefully adhered to and monitored records preservation and retention program with rigorously enforced penalties for non-compliance is critical in limiting the exposure of a client, its management, and its attorneys to potentially serious statutory and spoliation sanctions. A proactive records preservation retention program can also help prevent a potentially ruinous criminal prosecution for obstruction of justice and protect the organization’s outside counsel itself from claims of negligent representation or even malpractice.