• As Sure as Death and Taxes: Litigation Holds in the Modern Era
  • March 11, 2011 | Author: Lea Carol Owen
  • Law Firm: Waller Lansden Dortch & Davis, LLP - Nashville Office
  • Modern technology has blessed today’s financial services institutions with the ability to store vast amounts of detailed information at low cost. It has also cursed them with burdens of document retention and production that make one long for the days of carbon paper, short-hand dictation, and the IBM Selectric. Four years ago, amendments to the Federal Rules of Civil Procedure brought “litigation holds” out of obscurity and onto center stage for every piece of litigation -- as well as threatened  or anticipated litigation -- for every financial services institution. Many institutions have noted that litigation holds, which include corporate documents, email, voicemail and backup systems among others, are so expensive and onerous that they materially impact budgets and create uncertainty and unrest among those charged with implementing them. These concerns are valid and have been keenly felt in this era when the public’s impression, fueled by the plaintiff’s bar, is that the retention and production of electronic documents can occur “with the push of a button.”

    Corporate counsel, however, know that financial and human resources can be drained by the implementation of litigation holds, which are required frequently and expansively in large institutions. We also know that these concerns can be allayed with proper proactive measures. Accordingly, we have focused recent efforts on how to reduce the initial burden of implementing a document hold, as well as on how to protect our clients from suffering the consequences of failing to do so. Meeting these challenges requires an understanding of both the public policy goals and the pragmatic concerns involved. 

    As for the policy goals, courts became concerned, as inexpensive electronic storage capacity grew (and came to replace hard-copy records), that corporate defendants would engage in wholesale destruction of troublesome documents and thus eviscerate plaintiffs’ ability to prove meritorious cases. For that reason, the Federal Rules evolved to require such defendants to affirmatively anticipate disputes, to identify the locations and custodians of electronic records related to such disputes (which can include corporate email accounts, personal email accounts, voicemail records, accessible back-up systems, and legacy systems); to send a specifically tailored hold notice to employees with such records; and to suspend routine destruction policies, including auto-delete features. These steps were viewed as a reasonable burden to impose upon corporate litigants, in order to promote the ends of justice.

    On the pragmatic side, courts measure defendants’ adherence to this goal by determining whether a plaintiff can prove that: (1) documents responsive to a valid discovery request were destroyed or altered; (2) the defendant was under a duty to preserve them at the time they were destroyed or altered; (3) the defendant had a “culpable state of mind” in failing to preserve the documents; and (4) the documents in question were “relevant” to the claims or defenses of the parties. This test typically arises when a plaintiff asks the court to sanction a defendant because the defendant has failed to meet its obligations to preserve documents and thus has “spoliated” them. 

    If the court finds a defendant has done so, the court may penalize the defendant by excluding some of the defendant’s evidence or by instructing the jury to draw an adverse inference based on the spoliation. Where a court finds that a defendant willfully destroyed key documents or was grossly negligent in failing to preserve them, the plaintiff may win a default judgment. Emboldened by this express lane to victory, the plaintiff’s bar now actively uses spoliation motions to extract settlement concessions and to place defendants in a bad light with courts, hoping to affect the outcome of the case. In light of this trend, corporate citizens must become familiar with how to craft, issue, and maintain an effective litigation hold in a cost-effective manner. Our guidance on this includes these steps:

    •Adopt a written retention policy and educate all employees about it. For each category of documents that would predictably exist within your company, the policy should explain what records are to be retained, by whom, and for how long. To capture documents outside these categories, the policy should include a catch-all provision setting forth the decision-making process or principles for retention. Existence of such a policy is a factor showing reasonableness and good faith in meeting preservation obligations.

    •Be sure your electronic controls conform to this policy. Sophisticated software providers are aware of the demands of modern litigation, and they have created systems that allow for the automatic retention or deletion of electronic records. Work with your IT professionals to be sure they understand the written retention policy and can implement a litigation hold that complies with the policy when a hold is issued. Email accounts are now routinely the subject of discovery requests, and defendants must anticipate this. This means that the “auto-delete” feature that may routinely be running on your system may need to be suspended for certain users -- or that you may need to “ghost” their email accounts in order to preserve their email accounts as they existed at a certain date.

    •Know when to issue a hold. The Rules require defendants to do so when they “reasonably anticipate” litigation. “Reasonable anticipation” occurs when the organization is on notice of a credible threat that it may be sued or when it anticipates it will initiate litigation. Plan to issue the hold as soon as the dispute has been identified and described with particularity (by counsel in conjunction with a corporate representative knowledgeable of the facts), and as soon as an initial list of persons subject to the hold can be developed.

    •Know to whom a hold should be issued. When the appropriate decision-maker becomes aware of potential litigation, he or she should immediately seek to identify those persons likely to have relevant information. They will need to receive a written litigation hold as soon as one of the appropriate scope can be drafted. Some courts require that notices be given to third-parties in possession of documents that are likely to be relevant; the best practice based on recent court decisions is to send a hold notice to those third-parties so that you have taken steps to ensure preservation of documents in their possession that would otherwise be subject to auto-delete processes or document destruction policies.

    •Establish a reporting procedure. To ensure that budding disputes come to the attention of the appropriate decision-makers, establish a procedure so that employees can report information they may have about a potential dispute. This too is a factor courts consider when determining whether a litigant took reasonable measures to preserve documents.

    •Understand the proper scope of a hold. A well-crafted hold clearly defines the nature of the information to be preserved and the steps required to preserve it. “Information to be preserved” means, broadly, information that may be “relevant” to the facts underlying the dispute. Accordingly, the litigation hold should describe the dispute with enough specificity so that its recipients can readily identify the information in question or know to seek clarification. Thus, the hold is likely to include the date range of relevant events, key players involved, and a description of the nature of the dispute (employment discrimination? loan agreement? slip and fall?). It should be tailored narrowly enough to be specific, yet broad enough so that a court would find it calculated to preserve documents that an opposing party would expect to obtain in discovery.

    •Conduct a reasonable investigation when a dispute emerges. It is impossible to know what information might be relevant to a dispute if you have not explored its parameters. You must take steps to determine who has likely been involved in the situation and what they know about it. If resources permit, this investigation should be conducted by counsel so that written reports of it are protected by attorney-client privilege and the work product doctrine.

    •Review, revise, and re-circulate the hold as the dispute evolves. Few lawsuits look, at their conclusion, exactly as they looked at the outset. Surprise witnesses surface, complaints are amended, new allegations emerge in the course of discovery. To address this, the best practice requires adopting a policy that provides for the review of all litigation holds a company has in place, both periodically and upon key events such as the addition of a party or claim. If the facts have changed, the original hold may need to be modified, and the list of recipients may need to be revised.

    •Prepare to resume normal destruction procedures. Once a dispute is resolved or the threat of litigation dissipates, the duty to retain documents ends. Your litigation hold policy should provide for informing hold recipients that they no longer need to retain documents -- and it should also inform them of any duty to destroy documents that results from the end of the hold. IT personnel should be informed that the dispute has ended so that they can reinstitute auto-delete features or other destruction procedures. It is important to act promptly to accomplish these ends, as litigation sometimes reemerges. If the documents have not been destroyed, then a new hold must be instituted.

    In an ideal world, none of these steps would be necessary. Borrowers would never default, employees would never be terminated, and shareholders would never complain about officers and directors. That world is not our world. On the contrary, today’s financial services industry faces ongoing litigation threats ranging from the trivial to the profound, and industry practices must evolve to reflect courts’ expectations. By taking proactive measures such as those outlined above, corporate defendants can avoid severe sanctions such as default judgment, and they can diminish the possibility of lesser sanctions. These measures will not eliminate the costs associated with litigation, but they will minimize them. And sometimes minimizing risk while avoiding cost is all that one can ask in the modern era. There’s just no going back to the Selectric.