News of the recent amendments to the Federal Rules of Civil Procedure (“FRCP”), which took effect on December 1, 2006, has inundated legal articles for the past few months, but many organizations are still grappling with the impact the new rules have on their legal responsibilities. The FRCP amendments codify the evolving obligations of all organizations – from small companies to multi-national corporations – to preserve, collect and produce “electronically stored information” that is potentially relevant to litigation.
As many of the precedent setting e-discovery cases, such as Zubulake v. UBS Warburg LLC, involved litigation brought by current or former employees, employers will likely be the one group most significantly impacted by the FRCP amendments. It should come as no surprise that the majority of employment-related litigation finds its way into federal court, whether pursuant to the plethora of federal civil rights statutes or removed there from state court. Consequently, a party to even the most factually simple discrimination or harassment case will find itself obliged to engage in some form of e-discovery. Moreover, while not as progressive as the federal court system, a number of state courts have already shown a willingness to follow the established federal e-discovery case law and, accordingly, it is not inconceivable that state courts will soon establish their own e-discovery rules, regulations or guidelines. Due to the prevalence of e-discovery issues in employment cases, it is important for employers to be at the forefront when addressing their e-discovery obligations.
As a first step, companies must fully appreciate their duty to preserve evidence. Under federal and state law, it is well established that a party to litigation or a threatened dispute has a duty to preserve potentially relevant information regarding the litigation. The duty to preserve applies to both paper and electronic documents, including information that may be stored only in electronic format. With the proliferation of electronic data, the FRCP amendments were enacted to establish specific procedures for discovery of electronic data and authorize courts to sanction parties when electronic data is lost or destroyed in breach of a party’s duty to preserve.
As discussed below, companies must develop methods to prevent the loss or destruction of potentially relevant and discoverable information through policies and practices that are carefully tailored to the company’s particular needs, industry, culture and technology. Compliance with the new rules can be burdensome and expensive for companies that are not prepared and discovery missteps could potentially lead to costly and damaging sanctions. To minimize these risks, all companies should consider the following when addressing their new obligations under the FRCP.
Understand Your Organization’s Information Technology
Currently, aside from general user support, most in-house attorneys have little (if any) interaction with their Information Technology (“IT”) department. However, to ensure compliance with the new rules, in-house counsel must develop a solid understanding of their company’s IT systems. Of course, most lawyers do not learn about IT systems in law school or CLE courses. As a result, in-house attorneys should collaborate with IT employees to understand the breadth and scope of the organization’s electronic databases and servers, the location of all electronically stored information (“ESI”) and the search capabilities of these systems.
Because ESI takes many forms, responding to discovery requests may involve searching the dark crevices of unfamiliar servers for relevant digital information. A search for potentially discoverable ESI must begin at the lowest possible level, an employee’s personal digital assistant or blackberry, then proceed to the hard drive of a desktop personal computer, and ultimately culminate in a search of an organization’s internal and external operating systems and servers. No oblique system or data retention device can be ignored. In some cases, even if the IT department deems a search to be unduly burdensome or downright futile, in-house counsel needs to have knowledge sufficient to make informed decisions about the viability of the search and the potential legal implications if material, relevant and discoverable ESI is not timely discovered, retained and produced.
The time for in-house attorneys to learn about their company’s IT systems is now, not when circumstances arise that could potentially lead to litigation or after service of the summons and complaint. Indeed, the FRCP amendments obligate litigation counsel, with the assistance of their clients, to “meet and confer” with their adversaries very early in the litigation process to discuss what types of ESI will be sought by the parties, its collection, retention and ultimate disclosure. Under these circumstances, it may be advantageous for an organization to create “litigation response teams” that can quickly search, collect and preserve potentially discoverable ESI. A “litigation response team” may also be able to perform an evaluation of an organization’s operating systems and networks to determine the relative feasibility, from a cost-benefit standpoint, of searching and producing ESI. Counsel must be armed with this information prior to the required “meet and confer” sessions in order to develop a reasonable, cost-effective ESI discovery plan.
Create a Detailed Records Retention Policy
To avoid breaching their duty to preserve electronic evidence, companies should give serious consideration to developing a records retention policy. A records retention policy establishes standard procedures for the retention and routine destruction of records. Such policies can reduce the burdens of electronic discovery and protect the company against sanctions in the event that electronic data is lost through routine destruction.
Most companies produce an overwhelming number of e-mails and other electronic data on a daily basis. In the event of litigation, all of that electronic data is potentially subject to discovery. A records retention policy can be implemented to regularly and systematically eliminate information that is no longer useful or necessary. A records retention policy, including specific provisions for the handling of ESI, must be grounded in legal and defensible legitimate business-related considerations. A policy designed merely to thwart the discovery of ESI will most likely be found to be an act of bad faith and expose the party to significant sanctions and/or monetary penalties.
A records retention policy also works to limit allegations of spoliation, which is the intentional destruction, alteration or concealment of evidence. If routine destruction of data is effected pursuant to a pre-existing and reasonable retention policy without knowledge of the information’s relevance to a potential dispute, the destruction will probably not be considered spoliation. However, if litigation is pending or threatened, strict adherence to the retention policy is not a defense to spoliation. That is, if the duty to preserve evidence has attached, the policy must contain procedures that can be implemented to cease destroying potential evidence and to avoid spoliation (known as a “litigation hold” procedure).
The FRCP amendments provide a “safe harbor” provision that extends protection to a company that has adopted and followed a document retention policy in good faith. Absent exceptional circumstances, a court may not impose sanctions on a party for failing to provide ESI deleted or lost as a result of the routine, good-faith operation of the party’s electronic information systems (e.g., data retention or destruction policies). The “routine operation” of computer systems includes the alteration and overwriting of information, often without the operator’s specific direction or awareness.
A records retention policy should be communicated to all relevant employees and compliance should be monitored and enforced with regular audits. Prior to establishing a records retention policy, companies should thoroughly consider the types of information that will be covered and the types of electronic data systems in use. Companies must be aware that developing and maintaining an effective document retention policy requires a substantial commitment of time and resources. Selective or inconsistent enforcement of the policy brings its own risks and has exposed organizations to substantial penalties and sanctions. Moreover, intentional and even grossly negligent destruction of evidence in violation of a retention policy may lead a court to determine that the destruction was done in bad faith. Companies must consider all of these factors when considering and developing such a policy.
A final and important point to remember when considering the creation of a records retention policy: an organization’s record retention policy must be regularly reviewed and updated. Considering the drastic changes in technology that can occur within a relatively short period of time, as well as an organization’s changing needs and operations, it is important to regularly review and update the company’s retention and destruction policy. Periodic review of the records retention policy will prevent the inadvertent loss of ESI that was not considered, or perhaps even in existence, at the time the policy was initially drafted and distributed.
Ensure All Company Employees Understand the Records Retention Policy
Even the most airtight records retention policy can become ineffective if it is misunderstood or misapplied. In-house counsel should disseminate the records retention policy to all employees on a regular basis, and then provide training to ensure that the employees understand their e-discovery and records retention obligations. The legal department should create a brief test for supervisors to distribute to employees as a part of their annual evaluation process. In-house counsel should also schedule audits on a regular basis to ensure that each department complies with the plan. Failure to follow the policy, whether it is by junior or executive employees, could disqualify the company from protection under the “safe harbor” provision of the new amendments.
Hire a Records Retention Manager
If feasible, most medium to large companies should hire or appoint a records retention manager who can oversee the record retention policy. Ideally, this person would be a high-level executive who is familiar with the organization’s business and can determine which records serve a business purpose, and the best method for maintaining those documents. The records retention manager should also be familiar with the corporation’s IT systems. Due to the importance and time-consuming nature of these responsibilities, it may be preferable to avoid asking an existing executive to take on these additional duties and responsibilities. In the event of litigation, the manager can serve as a “go-to” person for the in-house counsel to manage a swift and effective litigation hold.
Create a Records Retention Committee
To ensure ongoing compliance, companies should create a cross-functional committee, consisting of a senior executive, the records retention manager, members of the legal department, outside litigation counsel, and key IT personnel. The team should meet on a regular basis to discuss changes in the firm’s technology, new laws or regulations, and the status of any ongoing or potential litigation. Counsel should help the committee understand the company’s legal obligations with respect to document retention and avoiding spoliation. The committee must keep minutes of these regular meetings and circulate it to all participants, as documentation may assist the organization in falling under the “safe harbor” provision.
Preserve a Copy of Former Employees’ Hard Drives
Courts will not exonerate companies who rely on the discharge or resignation of an employee as an excuse for lost ESI; the company may still be required to produce any relevant ESI the former employee had in his or her hard drive. To avoid sanctions, companies should take the preventative step of cloning an outgoing employee’s hard drive before it is cleansed for incoming staff. Although this procedure brings some cost, it will undoubtedly prove cost-effective if that former employee is involved in future litigation or the documents are otherwise revealed to be relevant to litigation. Searching through archives and deleted data is far more expensive and time-consuming, and may involve hiring outside information technology specialists.
All document destruction policies must be suspended once it is clear that a duty to preserve has attached. In the employment litigation context, the duty to preserve may attach as early as when an employee files an internal grievance or an administrative complaint, or when a supervisor becomes aware of circumstances making litigation likely. Thus, a court may impose sanctions for spoliation that occurred when litigation appeared likely, but before the employee had actually filed a complaint commencing litigation.
At the earliest indication of potential litigation, in-house counsel should send a litigation hold notice to the IT department, the records retention manager, and all persons likely to be involved in or possess information relevant to the lawsuit. An effective notice clearly defines the employees’ obligations with respect to retaining all relevant documents, and informs staff members that the hold applies to desktops, laptops, and any other company-issued electronic device. Counsel should update and reiterate the litigation hold regularly during the course of the litigation. As a party may need to prove that it instituted a timely and appropriate litigation hold in response to motion for sanctions based on spoliation, counsel should keep extensive records and documentation regarding the dissemination and implementation of the litigation hold. Failure to implement a litigation hold may lead to severe sanctions, including dismissal, monetary fines, an adverse inference, or discovery cost shifting.
Counsel will generally face two significant hurdles when attempting to implement an appropriate litigation hold: the organization’s IT director and its chief financial officer. It is not uncommon for an IT director, when faced with a barrage of questions relating to the suspension of destruction policies, restoration of back-up tapes and system-wide searches, to simply respond “no, it can’t be done.” The chief financial officer, on the other hand, is likely to object to the cost and expense of preserving and searching ESI, as well as the time spent by the organization’s employees in connection with these obligations. It is incumbent for in-house counsel to win over these executives and explain to them that, in the absence of such efforts and initial expense, the company could be exposed to staggering monetary sanctions and negative inferences which could seriously threaten the organization’s position in the litigation. While this may not be an easy task, it is absolutely necessary as e-discovery is now the norm, rather than the exception.
Retain Outside Counsel and an E-Discovery Service Provider
Finally, companies should retain outside counsel experienced with the new electronic discovery obligations. Several law firms have written on the topic extensively, and have familiarity with the various electronic discovery issues commonly raised in litigation. In-house counsel must advise their outside counsel as soon as possible when they believe there is an issue, including lost or destroyed documents, or the possibility that a duty to preserve has attached. Under certain circumstances, an organization may want to consider engaging an outside consultant to assist with the collection, preservation and production of documents. A number of service providers are available to assist parties with their e-discovery obligations.
In the wake of the new FRCP amendments, companies must determine whether their current business practices are adequate to meet their obligations under the new electronic discovery rules. Companies can obtain protection by adopting a well-conceived records retention policy; applying the policy consistently and in good faith; implementing a litigation hold as soon as the duty to preserve has attached; and training employees regarding the company’s policies. Routine and methodical preservation of ESI will assist in avoiding sanctions and will give the corporation an opportunity to prevail on the merits in litigation, rather than risking dismissal due to electronic discovery mishaps and spoliation.
If you would like to discuss any of the foregoing suggestions or have any questions or require further information regarding these or other matters, please call your regular Nixon Peabody contact or feel free to contact one of the attorneys listed below:
Tara Daub in our Long Island office at 516-832-7613 or firstname.lastname@example.org
Christopher Gegwich in our Long Island office at 516-832-7606 or email@example.com