Your company was served with a complaint alleging that your new salesperson is violating a non-compete (of which you had no prior knowledge) she had with her former employer.  Being litigation-savvy and knowing that the law forbids the destruction of evidence relevant to a lawsuit, you instruct your employees not to throw out any documents relating to her hiring or employment, collect all the relevant documents and deliver them to counsel.  Have you done all the law requires of you to preserve evidence?

The ascendance of electronic communication and information storage has led most courts to require more.  A company’s failure to adopt appropriate document retention/destruction policies for electronic evidence and to take reasonable steps to preserve that evidence can result in sanctions ranging from monetary penalties, to the preclusion of evidence, to the forfeiture of civil claims or defenses, to indictment by federal or state prosecutors for willful misconduct (recall Arthur Anderson/Enron).

The law has long forbidden what is known as “spoliation” of evidence – the failure to preserve evidence that is “relevant to pending, imminent or reasonably foreseeable litigation.”  Note that the obligation to preserve evidence may be triggered before a lawsuit is filed, if litigation is “reasonably foreseeable.”  Note also that spoliation is not limited to the destruction of evidence.  The failure to take reasonable steps to preserve evidence may also result in sanctions.

The preservation obligation takes on new dimensions in the electronic information age.  Companies store electronic data in a variety of forms.  Most computer users work with “active” word processing files or other applications in which data is designed to be easily retrieved and accessed.  Electronic data, however, is also stored in a variety of other forms transparent to ordinary users.  Most companies wisely back up data periodically to magnetic tapes or offsite locations, creating “snapshots” of the entire system for uploading if the system fails.  These backup files are commonly overwritten, recycled or discarded in the ordinary course of business, after a new backup “snapshot” is taken.

There lies the “rub” for spoliation purposes.  Routinely overwritten backup files may contain evidence relevant to a pending, imminent or “reasonably foreseeable” litigation.

Must a business interrupt its regular e-document retention and destruction practices whenever a lawsuit appears on the doorstep, or even on the horizon?  Unfortunately, the courts are still working to reconcile the tension between preservation of evidence and the realities of businesses’ routine e-document handling procedures.  No definitive rule has emerged.  To make matters more difficult, companies doing business in more than one locale – as most now do – face potentially differing rules in each jurisdiction.

Nevertheless, one can draw some lessons from the cases that have been decided so far.  The courts have focused on two issues in deciding whether to impose sanctions:  the culpability of the party that lost the evidence and the prejudice to the party that sought the evidence.  The most severe sanctions have been reserved for willful destruction of evidence, but even a negligent failure to preserve evidence can have adverse consequences. 

In contrast, the courts have been slow to penalize when a loss of evidence resulted from an ordinary-course-of-business document retention policy and the company took reasonable steps to avoid destruction of data likely to be evidence.  The most important steps to minimizing exposure to spoliation sanctions, therefore, are to adopt and implement two related policies.

First, a company should have a document retention/destruction policy with a clear business purpose.  That policy should be consistently followed in the ordinary course of business – it will carry little weight with the courts if it is implemented sporadically (or only when litigation looms!).

Second, the company should adopt a “litigation hold” policy.  This should include a statement that can be disseminated throughout the organization as soon as litigation begins or appears reasonably likely.  The statement should require all employees to retain information  that management, with counsel’s assistance, has identified as potentially relevant.  It should be issued by top management, to emphasize its importance to staff and demonstrate management’s seriousness of purpose to a future reviewing court.

These two recommendations track a proposed change to the Federal Rules of Civil Procedure.  If adopted (and it may be by the time this article goes to press), the rule change would create a “safe harbor” prohibiting a court from sanctioning a party that took “reasonable steps” to preserve potentially relevant information but inadvertently destroyed it as part of the “routine operation of the party’s electronic information system.”  The rule change would apply only in the federal courts, but it reflects the tendencies of the reported cases from the state courts, too.

As the courts contend with the new realities of electronic evidence, the requirements for retention of that evidence are still developing.  Here, as elsewhere, though, an ounce of prevention can be worth a pound of cure.