Introduction: This is the fourth article in a series of short informational pieces relating to one of the hottest topics in litigation over the past five years - electronic discovery. The purpose of these articles is to provide your business entity with some guidelines on how to most efficiently organize to deal with electronic discovery. The articles will continue to be emailed regularly over the next few months. If you are new to our distribution, or if you would like to view previous articles in this series relating to ESI, visit our website.

"Aside perhaps from perjury, no act serves to threaten the integrity of the judicial process more than the spoliation of evidence. Our adversarial process is designed to tolerate human failings - erring judges can be reversed, uncooperative counsel can be sheparded, and recalcitrant witnesses compelled to testify. But, when critical documents go missing, judges and litigants alike descend into a world of ad hocery and half measures and our civil justice system suffers." United Medical Supply Co. v. United States, 77 Fed. Cl. 257, 258-59 (Fed. Cl. 2007).

The key concept in understanding litigation holds is "reasonable anticipation." Organizations have the duty to preserve traditional and electronic documents when litigation or investigation is reasonably anticipated, which is often before the service of a lawsuit or a subpoena. An organization's duty to preserve such documents for litigation or investigation supersedes its data retention policy. Once the duty to preserve arises, the destruction of the information raises a presumption that disclosure of materials would be damaging.

Courts have significantly different ideas of when litigation should be reasonably anticipated thus triggering the litigation hold duty. For example:

  • Duty to preserve can arise based on oral threats. In re Napster, Inc. Litigation, 462 F. Supp. 2d 1060, 1068 (N.D. Cal. 2006)
  • Defendant should have reasonably anticipated the employee's discrimination claim when employee filed EEOC complaint, at the very latest. However, the court found that the defendant should have reasonably anticipated litigation five months before the filing of the EEOC action based on emails from several employees revealing that they knew that the plaintiff intended to sue. Zubulake v. UBS Warburg, 220 FRD 216-17 (SDNY 2003) (Zubulake IV)
  • Adversary parties exchanged correspondence over a dispute to see if they could resolve the problem amicably over a two year period. Duty to preserve did not arise until a lawsuit was filed two years later. The court held that "back and forth equivocal letters about a dispute" were not sufficient to raise the reasonable anticipation of litigation: "A demand letter alone may be sufficient to trigger an obligation to preserve evidence and support a subsequent motion for spoliation sanctions. However, such a letter must be more explicit and less equivocal than [the correspondence at issue]. Given the dynamic nature of electronically stored information, prudent counsel would be wise to ensure that a demand letter sent to a putative party also addresses any contemporaneous preservation obligations." Cache La Poudre Feeds, LLC v. Land of Lakes, Inc., 244 F.R.D. 614, 623 (D. Colo. 2007)

As noted in earlier ESI Alerts, every organization should adopt a formal, written preservation plan as part of its records management program. The program must include an adequate litigation hold provision. An organization must retain all relevant documents (but not multiple identical copies) in existence at the time the duty to preserve attaches and any relevant documents created thereafter. The duty to preserve extends to those employees likely to have relevant information, otherwise known as the "key players." The number of key players can be extensive. For example, in In re NTL, Inc. Securities Litigation, 244 F.R.D. 179 (S.D.N.Y. 2007), sanctions were imposed for destruction of evidence including emails of approximately 44 of the defendants' key players.

Given the potential sanctions for failure to preserve (discussed below), a conservative approach is warranted; the organization should be more inclusive than exclusive when preparing a list of sources to be examined and possibly preserved. It is also very important for the organization to document all steps it takes in connection with the litigation hold, i.e. "tracking" the litigation hold. If there is ever a question regarding the rationale of the company's actions, the ability to prove to the court what steps were taken is often the difference in a finding of good faith, thereby invoking the "safe harbor" provisions of Rule 37, Federal Rules of Civil Procedure (See ESI Alert # 3) and sanctions.

A litigation hold can take many forms, from evidentiary copies prepared by a forensic professional, to simply taking custody of a laptop or backup tapes. It is important to preserve the integrity of the contents of electronically stored information (ESI). This includes the formatting of a document, its metadata and, where applicable, its revision history. Preservation should focus on preserving media, e.g. hard drives, floppy disks, CDs, backup tapes and mobile devices rather than particular files, folders or other forms of data. Preserving media, as opposed to preserving just the ESI, preserves not only data that appears to be initially relevant, but also data that could become relevant. Preserving media also preserves other information such as metadata, deleted material that could later become important. All relevant backup media should be pulled out of service and stored in a safe place, preferably in the custody of someone who can later establish a chain of custody for authentication purposes.

All persons who have potentially relevant documents or information (key players) must be notified of the litigation hold. Notices must be sent as soon as possible after litigation or a subpoena is anticipated, and the date and time of the Notice must be noted. The Notice should include information regarding the general nature of the litigation or investigation and the scope of preservation (i.e. subjects and time frames of potential relevance to the litigation or investigation). The Notice must be explicit that potentially relevant ESI must not be destroyed. The Notice must note specific steps to ensure that ESI is preserved and the identity of person in charge of monitoring preservation activities (check lists are recommended). The Notice should include procedures for collecting information. The Notice should require a confirmation from involved employees that they have received it and will comply. (See, Stio and Quigley, Getting a Grip on the Litigation Hold, e-discovery, ABA Section on Litigation, 2007, p.20) Here is a sample litigation hold notice.

Not all relevant ESI will be on the organization's systems. Responsive ESI may be in the possession of third parties, such as vendors, consultants, former employees, outside directors, etc. If the organization has control over this information, these sources of potentially relevant ESI must be considered when distributing litigation hold notices.

Courts impose significant sanctions for failing to preserve evidence, i.e. spoliation. Such sanctions can range from a monetary award to the party seeking information that has been lost, to adverse jury instructions, to entering default against the offending party. Some examples of these situations follow:

  • Lack of litigation hold can constitute gross negligence and can justify monetary sanctions. Phoenix Four, Inc. v. Strategic Resources corp., 2006 WL 1409413 (SDNY 2006)
  • Defendant's failure to suspend its destruction of electronic documents at any time after receiving notification of litigation did not satisfy good faith requirement of Rule 37 (f) and was at least grossly negligent, if not reckless, justifying adverse inference and costs. Doe v. Norwalk Community College, 248 FRD 372 (D.Conn 2007)
  • Court grants adverse inference instruction and deeming certain facts established as sanctions for failure to establishing litigation hold, resulting in loss of emails. 3M Innovative Properties Co. v. Tomar Electronics, 2006 WL 2670038 (D. Minn. 2006)
  • Appropriate spoliation sanctions where government over a five year period repeatedly failed to maintain relevant records and repeatedly misstated steps being taken to prevent spoliation included prohibition of cross-examination of opposing expert and costs and fees. United Medical Supply Co. v. United States, 77 Fed. Cl. 257, 258-59 (Fed.Cl. 2007)
  • Party's failure to preserve relevant documents, including email, were inadequate and resulted in a $1 million sanction. In re Prudential Ins. Co. of Am. Sales Practices Litigation, 169 FRD 598, (D. NJ 1997)
  • Attorney's fees and costs awarded for destruction of computer hardware during discovery. Lauren Corp. v. Century Geophysical Corp., 953 P.2d 200 (Colo. App. 1998)
  • Attorney's fees and costs awarded to plaintiff after opposing party untruthfully claimed its computer system was unable to produce requested data. GTFM, Inc. v. Wal-Mart Stores, Inc., 2000 U.S. Dist. LEXIS 3804 (S.D.N.Y. 2000)
  • Destruction of word processing files by employee of defendant company warranted sanctions of ten percent of plaintiff company's total attorney fees and costs. Gates Rubber Co. v. Bando Chemical Industries, Ltd. 167 F.R.D. 90 (D.Colo.,1996)
  • Plaintiff produced an email in response to a discovery request, and subsequent inspection of the hard drive revealed that the produced email was altered from its original wording, so the court dismissed plaintiff's claim and awarded defendant its attorney's fees and costs. Munshani v. Signal Lake Venture Fund, 2001 Mass Super. LEXIS 496, 3-4 (Oct. 9, 2001)

Because of the potentially serious implications for the failure to properly administer the litigation hold, the organization should involve its counsel to evaluate the extent to which retention policies must be suspended because of impending litigation. 
                              
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In the next Legal Watch Series: Preparing for E-Discovery newsletter, we will cover the concept of accessibility of ESI.

About the Author
For more information or questions regarding E-Discovery and the Rules for Electronically Stored Information Management, contact Michael R. Palumbo.

Michael R. Palumbo focuses his practice on commercial and real estate litigation. Particular areas of experience include banking (UCC Articles 3 & 4) litigation; title insurance, escrow agent and Deed of Trust litigation; and quiet title, adverse possession, homeowners' associations and real estate agent disputes. He has participated in more than 50 trials in the Superior Courts of Arizona and District Court of Arizona, in most of which he was lead counsel. Mr. Palumbo can be reached at 602.262.5931 or mpalumbo@jsslaw.com.

Resources Used for This Legal Watch

1. Arkfeld, Electronic Discovery and Evidence, Chapter 5, Law Partner Publishing (2003)

2. Grenig, Marean and Poteet, Electronic Discovery and Records Management Guide: Rules, Checklists and Forms, Chapter 7, Thomson West, 2009

3. Cohen and Lender, Electronic Discovery- Law and Practice, Chapter 4, Aspen Publishers (2009)

4. The Sedona Conference Commentary on Legal Holds: The Trigger & The Process

5. Zubulake v. UBS Warburg, 229 F.R.D. 422 (S.D.N.Y. 2004) (Zubulake V)