Document Management and Retention Post Arthur Andersen L.L.P.
March 2006
© Copyright 2006. All rights reserved, Emergency Envelopes, Volume 1, Issue 2
Recent cases like Arthur Andersen LLP v. U.S., 125 S.Ct. 2129 (2005) have left many companies wondering what to do about document management and retention. Although the Supreme Court reversed the Arthur Andersen conviction, the Court was clear that a company can be held criminally liable when it implemented a document destruction policy with an intent for wrongdoing.
In 2001, Enron Corporation’s financial difficulties became public.[1] Arthur Andersen LLP had served as Enron’s auditor. As Enron’s tribulations came to light, Arthur Andersen instructed its employees to destroy documents pursuant to its document retention policy. During this time, Arthur Andersen became aware that the SEC had opened an investigation on Enron. Arthur Andersen was also on notice that the SEC had requested certain documents and information from Enron.[2] Arthur Andersen employees nevertheless destroyed a substantial number of paper and electronic documents under its document retention policy.[3] Thereafter, the SEC served Arthur Andersen and Enron with subpoenas for records. Only then did Arthur Anderson notify its employees to stop shredding documents because it had been “officially served” for its documents.[4]
In March 2002, the government indicted Arthur Andersen for obstruction of justice.[5] Arthur Andersen was charged with “knowingly, intentionally and corruptly persuad[ing]” employees to destroy documents for use in an official proceeding and investigation-a criminal act.[6] Violation of the provision carries criminal sanctions. After its conviction by a jury, Arthur Andersen appealed, and the Fifth Circuit affirmed.[7]
On appeal, the Supreme Court focused its attention on what it means to “knowingly corruptly persuade” another person with an intent to cause that person to destroy documents.[8] According to the Court, the act of persuading a person with the intent to cause that person to withhold documents from a government official or proceeding “is not inherently malign.”[9] The Court noted that document retention policies are common and often created, at least in part, “to keep certain information from getting into the hands of others, including the Government.”[10] In other words, a regularly enforced document retention policy is not in and of itself legally problematic. Issues may arise depending on the context, including notice or awareness of a criminal investigation.
Ultimately, the Court found that criminal liability for encouraging others to shred documents requires knowledge of the wrongdoing. As the Court explained, a “‘knowingly … corrupt[t] persuade[r]’ cannot be someone who persuades others to shred documents under a document retention policy when he does not have in contemplation any particular official proceeding in which those documents might be material.” Id. at 2137. The jury instructions upon which Arthur Andersen’s conviction was based failed to convey the requisite consciousness of wrongdoing. The Court reversed the conviction and remanded the case for further proceedings. Id. at 2137.
So what does this decision mean to a company in its everyday business practice? First, a company must consider its general policies on document management and retention, including electronically-stored data and information. A company must have sound document retention policies in place as part of its day-to-day business practice. Second, a company must know when to adapt or suspend its document retention policy in light of litigation or other similar needs.
When Does the Duty to Preserve Arise?
Spoliation is the intentional destruction of evidence, including the significant alteration of or the failure to preserve evidence.[11] No company wants to be accused of spoliation simply because it followed a standard, document management policy. The execution of a successful document management policy requires knowing when the duty to preserve attaches and what evidence must be preserved. Recent civil and criminal cases have addressed when a company must determine whether to change or suspend its regular document management and retention policies, including halting regularly-scheduled document destruction.
Generally speaking, when a company reasonably anticipates litigation, it has a common law duty to preserve relevant information.
[12] The obligation to avoid spoliation of evidence applies to electronically stored information and electronic records as well.
[13] A company’s duty to preserve relevant documents arises when the company knows, or should know, through notice that the documents will become material to litigation or an investigation at some point in the future. Under the Supreme Court’s formulation, “[c]ircumstances constituting such notice may include, but are not limited to: an inquiry from the government, service of a complaint or petition commencing litigation or a third-party request for documents.”[14] Courts consider the “totality of the circumstances” when determining if a reasonable person or company would have anticipated the litigation based on the information available. The duty to preserve, therefore, may attach even before a party manifests an intent to sue.[15]
One court explained it this way: “[t]he obligation to preserve begins when a party knows or should have known that the evidence is relevant to future or current litigation.”[16] If document destruction occurs before litigation has begun, the party seeking sanctions must show that the destruction occurred in bad faith.[17] Bad faith may be shown by circumstantial evidence and the facts surrounding the destruction, such as the decision to preserve some evidence while failing to retain other evidence; or, a company’s use of the same type of evidence to its advantage in another case.[18]
Two Eighth Circuit cases show how closely courts will focus on a case’s particular facts to determine if a reasonable company would have anticipated litigation and whether it acted in bad faith. In Stevenson v. Union Pac. R.R., 354 F.3d 739, 748 (8th Cir. 2003), the court held that a company destroyed evidence in bad faith before the lawsuit was filed. The company knew that accidents which caused a certain type of injuries were likely to lead to lawsuits and that audio tapes were the only source of certain relevant information. The court held that it was bad faith for Union Pacific to destroy audio tapes after learning that this type of accident had occurred, even though no lawsuit had been filed.[19]
Bad faith need not be shown by direct evidence. Rather, bad faith can be implied by a party’s behavior. In Stevenson, the court inferred bad faith by Union Pacific’s prompt decision to selectively preserve some evidence while advantageously failing to retain other evidence. Id. at 746. The court explained that this fact created a “sufficiently strong inference of an intent to destroy [the tape] for the purpose of suppressing evidence of the facts surrounding the operation of the train at the time of the accident.”[20]
Despite facts somewhat similar to Stevenson, the Eighth Circuit reached a different conclusion in Morris v. Union Pacific R.R., 373 F.3d 896 (8th Cir. 2004). In Morris, the court held that destruction of audio tapes did not warrant an adverse inference instruction.[21] The plaintiff in Morris was a tow truck operator who was injured by a train while attempting to clear damaged trailers from a wreckage at the crossing.[22] Union Pacific’s claims representative assigned to the accident was not aware of the extent of the plaintiff’s injuries when he assessed the scene of the accident. In fact, the claims representative had determined that the railroad had no liability. According to company officials, it had no reason to alter its standard policy of destroying the audio tapes after ninety days.[23] Although the district court had found that Union Pacific’s document retention document retention policy was reasonable under the circumstances and that Union Pacific “did not intentionally destroy the tape,” it permitted an adverse inference instruction to the jury because Union Pacific showed “bad faith” as it was “on notice” that litigation was likely to ensue after the accident.[24]
Reversing the judgment, the Eighth Circuit remanded the case for a new trial.[25] The court found that Union Pacific could not have reasonably anticipated litigation under the specific facts of that case.[26] The court also gave special weight to the trial court’s specific finding that Union Pacific did not intentionally destroy evidence.[27] Acknowledging that the distinction between Morris and Stevenson was “modest,” the Eighth Circuit explained that the facts in Morris did not demonstrate that Union Pacific “went about selecting and preserving documentary evidence” relating to the accident while deciding to preserve other evidence.[28]
What Evidence Must be Preserved?
A company need not preserve every document in the company’s electronic files and an organization need not retain all electronic information ever generated or received.[29] Rather, a company has the duty to preserve what (1) it knows or reasonably should know is relevant to the litigation; (2) is reasonably calculated to lead to the discovery of admissible evidence; (3) is likely to be requested during discovery; (4) or is the subject of a discovery sanction.[30] At the time the duty to preserve attaches, the company must initiate a “litigation hold” to suspend any document retention or destruction policy, and thus retain all documents relevant to the anticipated litigation then in existence and all relevant documents created thereafter.[31]
A company should be aware that the type of electronic data that may be discoverable includes more than just electronic mail and computer drafts. Deleted data is also discoverable. Indeed, “it is a well accepted proposition that deleted computer files, whether they be e-mails or otherwise, are discoverable.”[32] Similarly, metadata—information stored in a computer that describes how, when, and by whom a computer file or document was created—may also be discoverable.[33]
What Does Your Company Risk by Failing to Preserve?
The court has the inherent power to impose a variety of sanctions on a party who violates discovery rules.[34] When discovery misconduct occurs after the court has issued an order to compel, the court may enter a default judgment against the offending party.[35] Other sanctions may include giving an adverse inference instruction at trial, ordering monetary sanctions, or imposing criminal liability.[36] If destruction occurs before any litigation has begun, sanctions are justified if the destruction was the result of bad faith.[37]
No company should be the target of a discovery sanction or criminal prosecution because of flawed document management. By following a sound document management and retention policy that can be adapted during anticipated or pending litigation, a company can avoid unwanted civil and criminal penalties. And when in doubt, a company should seek the advice of counsel.
A Starting Point
The Sedona Conference publishes guidelines which are an excellent primary source for companies that want to adopt a sound document management policy. In managing information and records in the electronic age, companies should consider the following general guidelines as a starting point. Professional assistance may also be of service in setting the metes and bounds of a document retention program:
[1] Arthur Andersen LLP v. U.S., 125 S.Ct at 2131.
[5] Id at 2134 (citing 18 U.S.C. § 1512(b)(2)(A) and (B)).
[11] E*TRADE Securities v. Deutsche Bank, 230 F.R.D. 582, 587 (D. Minn. 2005).
[12] Zubulake v. UBS Warburg LLC, 229 F.R.D. 422, 433-35 (S.D.N.Y., July 20, 2004) (“Zubulake V”).
[14] Arthur Andersen, 125 S.Ct. at 2131-33.
[15] Dillon v. Nissan Mot. Co., 986 F.2d 263, 267 (8th Cir. 1993).
[16] E*TRADE Securities v. Deutsch Bank, 2005 U.S. Dist. LEXIS 302 at *17 *D. Minn. Feb. 17, 2005).
[29] Quoting Ragan, et al., The Sedona Guidelines 3 and Comments
[30] Wm. T. Thompson Co. v. Gen. Nutrition Corp., 593 F. Supp. 1443, 1455 (C.D. Cal. 1984), aff’d, 104 F.R.D. 119 (C.D. Cal. 1985).
[31] Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 218 (S.D.N.Y. Oct. 22, 2003) (“Zubulake IV”).
[32] See, e.g., Antioch Co. v. Scrapbook Borders, Inc., 210 F.R.D. 645, 652 (D. Minn. 2002).
[33] See, e.g., Williams v. Sprint/United Mgmt. Co., 2005 U.S. Dist. LEXIS 21966 (D. Kan. Sept. 29, 2005).
[34] See, e.g., Fed. R. Civ. P. 37.
[35] E*TRADE Securities, 2005 U.S. Dist. LEXIS at *29-30.
[36] Id; Arthur Andersen, 125 S.Ct. at 2137.
[37] E*TRADE Securities, 2005 U.S. Dist. LEXIS at *18 (citing Stevenson, 354 F.3d at 747); see also Coleman Holdings, Inc. v. Morgan Stanley & Co., Inc., 2005 LEXIS 94 (Fl. Cir. Ct. Mar. 23, 2005) (imposing sanctions including an adverse inference instruction to the jury and entry of partial default judgment for defendant’s electronic discovery abuse).
[38] See Best Practices Guidelines & Commentary for Managing Information & Records in the Electronic Age, The Sedona Conference, The Sedona Guidelines at 10-12 (Charles R. Ragan et al. eds., 2005) (Sedona Guidelines).
Generally speaking, when a company reasonably anticipates litigation, it has a common law duty to preserve relevant information. The obligation to avoid spoliation of evidence applies to electronically stored information and electronic records as well.
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