What Your Company Needs To Know About Records Retention

A recent industry survey reported that nearly half of large companies currently don't have policies about when to keep and when to destroy their electronic records and those that do usually don't enforce them (Cohasset Assocs. 2004; available at www.merresource.com/whitepapers/survey.htm). If your company is one of these businesses, it is risking huge legal problems if someone in your company destroys an e-mail or information on backup tapes that relates to any existing or future litigation ' because your company may wind up being hit with sanctions for spoliation.

The obvious solution is to craft and implement a records retention policy (RRP) for your company. But you'd better beware. A recent federal court ruling underscores that implementing a new RRP can also create the potential for massive legal liability.

The decision in Rambus Inc. v. Infineon Technologies AG, 2004 WL 547536 (E.D. Va. Mar 17, 2004) found that Rambus was guilty of spoliation because it formulated and instituted a RRP at an inappropriate time and therefore may have waived its privilege over communications about implementing the RRP with its outside counsel. And unfortunately, the case raises the spectre that for large companies, there may never be a legally safe time to institute a RRP.

The company's Vice-President of Intellectual Property, Joel Karp, began planning the RRP in March 1998 with help from a respected outside law firm, Cooley Godward. During the summer, Karp and other executives educated company employees about the policy, and it was officially launched on September 3. On that date, which the company dubbed “Shred Day,” Rambus employees destroyed approximately 2 million pages of documents ands apparently thousands of backup tapes.

All this would have been fine, except for one not-so-small fact: At the time Rambus' RRP was being formulated and implemented; the company was considering a strategy to possibly launch patent infringement litigation. One document and some deposition testimony suggested a possible connection between shred day and the company's general plan to consider patent litigation.

The Virginia federal court found that even if Rambus had acted in good faith to institute a valid RRP, the company had engaged in spoliation because it implemented the policy at a time when it anticipated being involved in a future litigation. “Even valid purging programs need to be put on hold when litigation is 'reasonably foreseeable,'” the court said.

Does this case mean that a company must wait until there is no reasonable threat of litigation before it can begin planning and putting a RRP in place? If so, many companies ' especially large ones ' may have to wait an awfully long time to adopt a RRP, because they are constantly threatened by some “reasonably foreseeable” actual or potential litigation.

A better interpretation would be that a company must be extremely careful when it institutes a new RRP. Any new policy must not be applied blindly and across the board. Instead, exceptions must be made for materials that might be relevant to current or potential litigations. Those materials must be kept, regardless of the RRP.

A long line of court cases has held that when litigation rears its head, a company must stop destroying documents pursuant to its usual RRP. And over the years, the courts have gradually expanded companies' legal obligations to suspend their RRP practices. The Rambus ruling is the latest expansion of this legal trend.

It is clear that once a lawsuit has been commenced, a company involved in the suit may face sanctions if it destroys records that may be discoverable in the suit. Even if the destruction was the result of negligence and not an intentional act, sanctions for spoliation will be applied when a party allows information, which it reasonably knows is relevant to the litigation, to be destroyed per an RRP. See, Prudential Ins. Co. of Am. Sales Practices Lit., 169 F.R.D. 598 (N.D. N.J. 1997) (Prudential fined $1 million). And it is not just the company that can face sanctions. In a case like this, the attorney for the company may face charges for ethical violations. See, Bradley v. Sunbeam Corp., 2003 WL 21982038 (N.D.W.Va. 2003).

A company may escape sanctions if it has no reason to know, prior to the records' destruction, that these documents are relevant to the litigation. See, U.S. v. Taber Extrusions LP, 2001 WL 1941318 (E.D. Ark 2001). However, it is unclear how much knowledge a company must have about the documents' relevance in order to incur sanctions. Some courts apply a bad faith standard, applying sanctions only if the company knows the documents are relevant at the time they are destroyed. See, Stevenson v. Union Pacific R.R., 354 F.3d 739 (8th Cir. 2004). Other courts apply a “willful blindness” standard of scienter. See, Danis v. USN Communs., Inc., 53 Fed. R. Serv. 3d 828, 835 (N.D. Ill. 2000). The Second Circuit seems unable to make up its mind, variously applying a “bad faith,” intentional, or “gross negligence” standard. See, Byrnie v. Town of Cromwell, 243 F.3d 93, 107-108 (2d Cir. 2001). Rambus applies essentially a negligence standard without any showing of substantial prejudice.

If spoliation occurs, some courts are willing to impose sanctions regardless of whether the requesting party can show it has been prejudiced by its inability to review the destroyed documents. Some courts, however, will allow sanctions only upon proof of such prejudice. See, eg, Wiginton v. C.B. Richard Ellis, Inc., 2003 WL 22439865 (N.D. Ill. Oct. 27, 2003); United States v. Koch Indus., 197 F.R.D. 463 (N.D. Okla. 1998).

One case has even held that a requesting party can obtain sanctions for spoliation only if the party can show that the destroyed records were “highly material” to the case. Concord Boat Corp., v. Brunswick Corp., 1997 U.S. Dist. LEXIS 24068 (E.D. Ark. 1997). So far, however, it appears that no other reported case has adopted this standard.

Prior to the recent Rambus ruling, it was generally accepted that companies were much better off purging their records before, rather than after, the commencement of litigation. That's because the courts had taken a more lenient view of such activities. Rambus, however, indicates such leniency is over.

The courts had traditionally found that companies could properly destroy their records relating to a potential litigation so long as this purging occurred pursuant to a properly adopted RRP. Sanctions would be imposed only if a company was found to have acted in bad faith or if the company's actions were proven to have prejudiced the other party in litigation.

For instance, in Stevenson v. Union Pacific RR Co., 354 F. 3d 739 (2004), the 8th Circuit ruled that sanctions for pre-litigation purges could be imposed only if a corporation destroyed documents in bad faith and this action prejudiced the other party in a litigation. In this case, shortly after a train wreck, the railroad had allowed the crew's radio communication tapes to be re-recorded per its RRP. The appeals court found it was proper for adverse inferences to be drawn from this destruction, because there was a clear showing of prejudice from loss of the contemporaneous communications and the record contained sufficient indicia of bad faith (ie, the railroad had preserved the tapes in other cases where the communications were likely helpful and the company had “general knowledge” that this type of record would be important in evaluating the event).

The court in Zubulake v. UBS Warburg, L.L.C., 220 F.R.D. 212 (S.D.N.Y. 2003) (Zubulake IV), applied a similar test to decide whether any adverse inferences could be drawn against UBS for its pre-litigation destruction of email backup tapes per the company's RRP. The court concluded that such a sanction was not warranted in this case because the plaintiff had failed to show that the evidence would have been favorable to her.

The Rambus case expands on the rule of these pre-litigation cases, because it tosses out the bad faith requirement for spoliation and adopts a very broad view of when a company has a duty to preserve documents. The court held that even if Rambus had not intended to destroy evidence in litigation against its specific opponent in the case, the court could find spoliation based on the company's realization “on a broad level” that it would be in litigation with some opponent on the same issues. Rambus holds that even if a company implemented an RRP for good cause ' to reduce the costs of discovery in possible future litigation ' the company can be sanctioned for spoliation. The court laid down a bright line that if a company reasonably anticipates or ought to anticipate litigation, it can't simply carry out an RRP; it must first save documents that might be relevant to the litigation.

Equally important for corporate counsel, the court held that any of the company's communications with outside counsel that were closely related to implementing the RRP's purging would not be privileged under the crime-fraud exception to the attorney-client privilege and therefore would have to be disclosed to the company's litigation opponents. The court stopped short of ordering disclosure of the withheld documents pending its review to determine whether the attorneys' communications were closely connected to Rambus's “spoliation scheme.”

The Rambus case does not give corporate counsel a precise roadmap for avoiding spoliation charges, but it does suggest the following practical pointers:

1. Make it clear to the CEO, CFO, and CIO that the company faces huge risks from not having a document management plan that includes protocols and rules to protect the company and its employees from spoliation charges; the upfront inconvenience and costs to fix the problem pales by comparison to routinely facing spoliation charges, sanctions, and potentially adverse publicity.

2. Emphasize to the IT staff and everybody else involved in the company's records management that discovery costs and inconveniences may not be considered in developing an RRP or destroying information; let them know that they may face personal sanctions if they continue business as usual and don't go along with the new required culture.

3. Develop Corporate Case Readiness Rules, including having a high level, designated capture manager to act as gatekeeper and archivist responsible for collecting all records subject to litigation and notifying all employees of preservation requirements (some companies have found it safer to select outside experts to provide this function).

4. Develop a way to compile and routinely update an inventory of every pending and reasonably anticipated litigation matter and consider various technologies that can assist in implementing automated preservation holds.

5. Work with IT and other to review and consider using any of the new technologies that make it possible for companies to more efficiently manage their electronic records and cut their discovery costs.

6. Select independent e-forensic experts with demonstrated knowledge of electronic evidence rules and methodologies for gathering, preserving and managing documents relevant to potential litigation.

A recent industry survey reported that nearly half of large companies currently don't have policies about when to keep and when to destroy their electronic records and those that do usually don't enforce them (Cohasset Assocs. 2004; available at www.merresource.com/whitepapers/survey.htm). If your company is one of these businesses, it is risking huge legal problems if someone in your company destroys an e-mail or information on backup tapes that relates to any existing or future litigation ' because your company may wind up being hit with sanctions for spoliation.

The obvious solution is to craft and implement a records retention policy (RRP) for your company. But you'd better beware. A recent federal court ruling underscores that implementing a new RRP can also create the potential for massive legal liability.

The decision in Rambus Inc. v. Infineon Technologies AG, 2004 WL 547536 (E.D. Va. Mar 17, 2004) found that Rambus was guilty of spoliation because it formulated and instituted a RRP at an inappropriate time and therefore may have waived its privilege over communications about implementing the RRP with its outside counsel. And unfortunately, the case raises the spectre that for large companies, there may never be a legally safe time to institute a RRP.

The company's Vice-President of Intellectual Property, Joel Karp, began planning the RRP in March 1998 with help from a respected outside law firm, Cooley Godward. During the summer, Karp and other executives educated company employees about the policy, and it was officially launched on September 3. On that date, which the company dubbed “Shred Day,” Rambus employees destroyed approximately 2 million pages of documents ands apparently thousands of backup tapes.

All this would have been fine, except for one not-so-small fact: At the time Rambus' RRP was being formulated and implemented; the company was considering a strategy to possibly launch patent infringement litigation. One document and some deposition testimony suggested a possible connection between shred day and the company's general plan to consider patent litigation.

The Virginia federal court found that even if Rambus had acted in good faith to institute a valid RRP, the company had engaged in spoliation because it implemented the policy at a time when it anticipated being involved in a future litigation. “Even valid purging programs need to be put on hold when litigation is 'reasonably foreseeable,'” the court said.

Does this case mean that a company must wait until there is no reasonable threat of litigation before it can begin planning and putting a RRP in place? If so, many companies ' especially large ones ' may have to wait an awfully long time to adopt a RRP, because they are constantly threatened by some “reasonably foreseeable” actual or potential litigation.

A better interpretation would be that a company must be extremely careful when it institutes a new RRP. Any new policy must not be applied blindly and across the board. Instead, exceptions must be made for materials that might be relevant to current or potential litigations. Those materials must be kept, regardless of the RRP.

A long line of court cases has held that when litigation rears its head, a company must stop destroying documents pursuant to its usual RRP. And over the years, the courts have gradually expanded companies' legal obligations to suspend their RRP practices. The Rambus ruling is the latest expansion of this legal trend.

It is clear that once a lawsuit has been commenced, a company involved in the suit may face sanctions if it destroys records that may be discoverable in the suit. Even if the destruction was the result of negligence and not an intentional act, sanctions for spoliation will be applied when a party allows information, which it reasonably knows is relevant to the litigation, to be destroyed per an RRP. See, Prudential Ins. Co. of Am. Sales Practices Lit., 169 F.R.D. 598 (N.D. N.J. 1997) (Prudential fined $1 million). And it is not just the company that can face sanctions. In a case like this, the attorney for the company may face charges for ethical violations. See, Bradley v. Sunbeam Corp., 2003 WL 21982038 (N.D.W.Va. 2003).

A company may escape sanctions if it has no reason to know, prior to the records' destruction, that these documents are relevant to the litigation. See, U.S. v. Taber Extrusions LP, 2001 WL 1941318 (E.D. Ark 2001). However, it is unclear how much knowledge a company must have about the documents' relevance in order to incur sanctions. Some courts apply a bad faith standard, applying sanctions only if the company knows the documents are relevant at the time they are destroyed. See , Stevenson v. Union Pacific R.R ., 354 F.3d 739 (8th Cir. 2004). Other courts apply a “willful blindness” standard of scienter. See , Danis v. USN Communs., Inc ., 53 Fed. R. Serv. 3d 828, 835 (N.D. Ill. 2000). The Second Circuit seems unable to make up its mind, variously applying a “bad faith,” intentional, or “gross negligence” standard. See , Byrnie v. Town of Cromwell , 243 F.3d 93, 107-108 (2d Cir. 2001). Rambus applies essentially a negligence standard without any showing of substantial prejudice.

If spoliation occurs, some courts are willing to impose sanctions regardless of whether the requesting party can show it has been prejudiced by its inability to review the destroyed documents. Some courts, however, will allow sanctions only upon proof of such prejudice. See, eg, Wiginton v. C.B. Richard Ellis, Inc., 2003 WL 22439865 (N.D. Ill. Oct. 27, 2003); United States v. Koch Indus ., 197 F.R.D. 463 (N.D. Okla. 1998).

One case has even held that a requesting party can obtain sanctions for spoliation only if the party can show that the destroyed records were “highly material” to the case. Concord Boat Corp., v. Brunswick Corp., 1997 U.S. Dist. LEXIS 24068 (E.D. Ark. 1997). So far, however, it appears that no other reported case has adopted this standard.

Prior to the recent Rambus ruling, it was generally accepted that companies were much better off purging their records before, rather than after, the commencement of litigation. That's because the courts had taken a more lenient view of such activities. Rambus, however, indicates such leniency is over.

The courts had traditionally found that companies could properly destroy their records relating to a potential litigation so long as this purging occurred pursuant to a properly adopted RRP. Sanctions would be imposed only if a company was found to have acted in bad faith or if the company's actions were proven to have prejudiced the other party in litigation.

For instance, in Stevenson v. Union Pacific RR Co ., 354 F. 3d 739 (2004), the 8th Circuit ruled that sanctions for pre-litigation purges could be imposed only if a corporation destroyed documents in bad faith and this action prejudiced the other party in a litigation. In this case, shortly after a train wreck, the railroad had allowed the crew's radio communication tapes to be re-recorded per its RRP. The appeals court found it was proper for adverse inferences to be drawn from this destruction, because there was a clear showing of prejudice from loss of the contemporaneous communications and the record contained sufficient indicia of bad faith (ie, the railroad had preserved the tapes in other cases where the communications were likely helpful and the company had “general knowledge” that this type of record would be important in evaluating the event).

The court in Zubulake v. UBS Warburg, L.L.C., 220 F.R.D. 212 (S.D.N.Y. 2003) (Zubulake IV), applied a similar test to decide whether any adverse inferences could be drawn against UBS for its pre-litigation destruction of email backup tapes per the company's RRP. The court concluded that such a sanction was not warranted in this case because the plaintiff had failed to show that the evidence would have been favorable to her.

The Rambus case expands on the rule of these pre-litigation cases, because it tosses out the bad faith requirement for spoliation and adopts a very broad view of when a company has a duty to preserve documents. The court held that even if Rambus had not intended to destroy evidence in litigation against its specific opponent in the case, the court could find spoliation based on the company's realization “on a broad level” that it would be in litigation with some opponent on the same issues. Rambus holds that even if a company implemented an RRP for good cause ' to reduce the costs of discovery in possible future litigation ' the company can be sanctioned for spoliation. The court laid down a bright line that if a company reasonably anticipates or ought to anticipate litigation, it can't simply carry out an RRP; it must first save documents that might be relevant to the litigation.

Equally important for corporate counsel, the court held that any of the company's communications with outside counsel that were closely related to implementing the RRP's purging would not be privileged under the crime-fraud exception to the attorney-client privilege and therefore would have to be disclosed to the company's litigation opponents. The court stopped short of ordering disclosure of the withheld documents pending its review to determine whether the attorneys' communications were closely connected to Rambus's “spoliation scheme.”

The Rambus case does not give corporate counsel a precise roadmap for avoiding spoliation charges, but it does suggest the following practical pointers:

1. Make it clear to the CEO, CFO, and CIO that the company faces huge risks from not having a document management plan that includes protocols and rules to protect the company and its employees from spoliation charges; the upfront inconvenience and costs to fix the problem pales by comparison to routinely facing spoliation charges, sanctions, and potentially adverse publicity.

2. Emphasize to the IT staff and everybody else involved in the company's records management that discovery costs and inconveniences may not be considered in developing an RRP or destroying information; let them know that they may face personal sanctions if they continue business as usual and don't go along with the new required culture.

3. Develop Corporate Case Readiness Rules, including having a high level, designated capture manager to act as gatekeeper and archivist responsible for collecting all records subject to litigation and notifying all employees of preservation requirements (some companies have found it safer to select outside experts to provide this function).

4. Develop a way to compile and routinely update an inventory of every pending and reasonably anticipated litigation matter and consider various technologies that can assist in implementing automated preservation holds.

5. Work with IT and other to review and consider using any of the new technologies that make it possible for companies to more efficiently manage their electronic records and cut their discovery costs.

6. Select independent e-forensic experts with demonstrated knowledge of electronic evidence rules and methodologies for gathering, preserving and managing documents relevant to potential litigation.