This advisory discusses the rules governing electronic discovery in U.S. civil litigation and offers some guidelines for companies to meet their electronic discovery obligations. It focuses on a specific aspect of those e-discovery rules: instituting and enforcing compliance with a “litigation hold” when a company is faced with pending or actual civil litigation or regulatory investigation in the United States.
While companies doing business in the United States generally are not required to forever preserve non-financial business records and information, U.S. law does impose a duty on companies to preserve relevant information when a litigation or investigation is “reasonably anticipated”. This duty stems from both the common law duty to prevent spoliation of evidence, as well as under certain specific statutes and regulations, such as The Sarbanes-Oxley Act passed by the U.S. Congress.
The litigation hold is a directive within a business organization designed to meet its obligation to preserve evidence. It requires employees to preserve records and information – both paper and electronic – relevant to the subject matter of a current or impending litigation or investigation for possible later production to a civil litigant or U.S. regulatory agency. Failure to timely institute and maintain a litigation hold can lead to serious consequences for a company. Recent decisions from U.S. courts have imposed several types of sanctions for failing to adequately implement a litigation hold, such as: (i) monetary penalties, including payment of the adversary’s legal fees and costs; (ii) adverse inference instruction(s) to the jury relating to the information lost or destroyed; (iii) preclusion of the ability to introduce evidence to support a claim or defense; and/or (iv) in extreme cases, default judgment.
Accordingly, in today’s electronic world, companies and their counsel must exercise added care to ensure that relevant documents and other materials are preserved. That obligation starts with effectively implementing a litigation hold notice.
The duty to preserve electronic and paper records arises not just when you actually receive a complaint or formal order of investigation from a U.S. regulatory body. Rather, U.S. courts consistently rule that the duty to preserve occurs whenever litigation is “reasonably anticipated”. See, e.g., Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 218 (S.D.N.Y. 2003). At that time, companies must issue a “hold” and suspend their normal electronic document destruction policies to prevent the loss of information relevant to the subject matter of the proceeding.
Determining when to issue a litigation hold is a fact specific inquiry. Clearly, when a company receives a complaint in which it is named as a party or a subpoena for documents, that company has an immediate duty to preserve relevant information and issue a litigation hold notice to relevant employees. Situations where a litigation is “reasonably anticipated” may be less clear. Although no clear bright-line rules exist, a “reasonable anticipation” of litigation generally arises when a company is on notice of a credible threat that it will become involved in litigation. For example, if a company is involved in a pre-litigation dispute (e.g., upon receipt of cease and desist letters) the obligation to preserve materials will likely be triggered. Likewise, when a company decides to initiate a lawsuit it is likely under a duty to preserve. In these types of situations, a litigation hold notice should be issued expeditiously.
In other situations, for example, involving rumors and verbal threats of litigation, a U.S. court’s determination of whether a party should have “reasonably anticipated” litigation will be based on the good faith of such party. Is this a frivolous attempt from a pro se litigant to extort a settlement from the company? Or is it a warning letter from a reputable law firm representing a credible plaintiff? The latter example often triggers a duty to preserve, while the former does not. The test is whether the party reasonably evaluated the totality of facts and circumstances known to it at that time the litigation hold decision was made.
The scope of such duty to preserve includes the identification, location, maintenance and protection of potentially discoverable evidence. As one U.S. court has explained: “While a litigant is under no duty to keep or retain every document in its possession . . . it is under a duty to preserve what it knows, or reasonably should know, is relevant in the action, is reasonably calculated to lead to the discovery of admissible evidence, is reasonably likely to be requested during discovery and/or is the subject of a pending discovery request.” Wm. T. Thompson Co. v. Gen. Nutrition Corp., 593 F. Supp. 1443, 1455 (C.D. Cal. 1984).
The litigation hold must cover traditional paper records as well as electronically stored information and data. Thus, as soon as litigation is commenced or is “reasonably anticipated,” a company must suspend the operation of its ordinary document retention practices in order to preserve potentially relevant information – both paper and electronic. This means that a company may not destroy, manipulate, overwrite or modify the potentially relevant data. Practically, it means that back-up tapes for relevant electronic data, such as e-mail, must be preserved in addition to the paper files of relevant employees.
Effectively instituting and managing a litigation hold is a process that involves preparation and includes several steps.
First, we recommend that a company identify a litigation hold “team” that will oversee the litigation hold and document preservation processes. Given legal and technological issues involved in implementing a litigation hold, as well as the possible effects of such hold on the company’s business, the team should include: (i) key employees from the business units affected by the litigation or investigation; (ii) an employee from the information technology and records departments; (iii) in-house counsel; and (iv) outside U.S. counsel. This team should coordinate to determine what electronic information is available, in what form and how it can be preserved in a cost-efficient manner.
Second, a company should develop a reasonable litigation hold “plan” with respect to the scope of preservation. This will involve: (i) identifying the “key players” (i.e., potential witnesses and custodian of relevant records) associated with the subject matter of the proceeding; (ii) identifying where in the company’s data architecture the relevant information may reside (e.g., on network servers, in employee offices, e-mail inboxes, back-up tapes); and (iii) determining whether the company has “possession, custody or control” of potentially relevant information and data.
Third, the litigation hold notice should be issued in writing. The written notice should include: (i) a description of the subject matter of the litigation or investigation so that the recipient can determine if s/he possesses relevant information; (ii) advice to the recipient regarding the importance of preserving potentially relevant materials and the potential consequences of not complying with the notice; and (iii) guidelines which set forth the date ranges and the types of documents and materials that should be maintained. While outside U.S. counsel may draft such notice, the notice should be issued in the name of an individual recognized as having authority within the organization in order to be effective. Further, the hold should be in writing in order to preserve a record that the company tried to preserve documents should a later dispute arise over the company’s document preservation efforts. Attached below is a sample litigation hold notice.
Fourth, the written litigation hold notice should be communicated and distributed to the “key players” and all others within the organization that may possess relevant materials. The head(s) of the business unit(s) affected by the proceeding should be consulted for the identities of the key players. Additional employees should be added to the litigation hold list as counsel and the company conduct further investigation into the facts and review additional documents.
Fifth, compliance with the litigation hold should be periodically monitored and enforced. Initially, we recommend that the company require a “certification” or other type of writing from each recipient of the litigation hold notice that such employee has read, understands and will comply with the hold. Thereafter, the company should periodically issue reminder notices and monitor compliance with the hold and keep the hold in place until the matter is concluded. If new issues arise in the course of the proceeding, a supplemental litigation hold notice should be issued covering the new subject matter. Again, these efforts will help the company respond to arguments that its document preservation efforts were insufficient especially in situations where an employee does not adhere to the company’s document preservation directives.
Effective implementation of these litigation hold steps will assist companies comply with the law, uncover relevant facts, appear responsible to the court and/or regulatory agency and avoid costly sanctions.
For more information on this topic, please contact:
Nicholas J. Panarella