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In the aftermath of the recent $1.4 billion damages judgment in a case where Morgan Stanley was sanctioned for its failure to preserve and produce certain electronic records, members of senior management are probably thinking about their company’s records retention/destruction policies more than they ever have. Indeed, many general counsel and their staffs are probably spending more time than ever balancing their company’s legal obligations to preserve records in the face of litigation with the potentially monumental costs of doing so when relevant electronic data are involved. While the courts have provided little guidance in this area in the past, the U.S. Supreme Court’s recent decision reversing Arthur Andersen’s criminal conviction for obstructing a Securities and Exchange Commission proceeding by destroying records immediately before receiving an SEC subpoena, which put the company out of business, offers a new perspective on this situation. While the court was focused primarily on the standard of culpability for document destruction in the criminal context, there is some language in the court’s opinion that is helpful in the civil context. The court acknowledged, for example, the important role that records retention/destruction policies play in corporate operations and noted that ” ‘document retention policies’ which are created in part to keep certain information from getting into the hands of others . . . are common in business.” Arthur Andersen LLP v. U.S., 125 S. Ct. 2129, 2135 (2005) (citation omitted). The court went on to state that “[i]t is, of course, not wrongful for a manager to instruct his employees to comply with a valid document retention policy under ordinary circumstances.” Id. Plainly, a company need not suspend the destruction of nonrelevant records in order to comply with its preservation obligations. A number of recent court decisions involving sanctions for spoliation have focused on companies’ efforts to preserve potentially relevant records by examining the “litigation hold” put in place by the companies, and have provided some guidance as to their obligations in this area. A litigation hold, also known as a “preservation order” or “hold order,” is a process used by companies to advise their employees of pending or anticipated litigation and of their obligation to preserve relevant records and to suspend their normal records-destruction policies as they relate to potentially relevant records. A litigation hold is a critical directive that, in many instances, is the company’s first line of defense against a “spoliation” claim. While litigation holds set forth specific procedures for employees to follow concerning the preservation of records, one of the most difficult issues for the company to address is how to devise and implement an effective litigation hold that preserves records that are potentially relevant to the litigation and at the same time allows the company to pursue, for legitimate business purposes, the destruction of nonrelevant active and archived data that the company has no business purpose to retain. The answer depends largely on how well the company has prepared for “anticipated litigation.” The planning must start well before the litigation arises with a careful analysis of how the company’s record-retention policy and its duty to preserve relevant records intersect. The duty to preserve records It is well established that the duty to preserve records-in whatever form-is triggered when a party learns of pending litigation, “reasonably anticipates” litigation or is put on notice that litigation is imminent. Once the duty to preserve arises, parties must be prepared to take affirmative steps immediately to preserve information that they know or should reasonably know is relevant to the action; is reasonably calculated to lead to the discovery of admissible evidence; is reasonably likely to be requested during discovery; or is the subject of a pending discovery request. See William T. Thompson Co. v. Gen. Nutrition Corp., 593 F. Supp. 1443, 1455 (C.D. Calif. 1984); see also Lewy v. Remington Arms Co., 836 F. 2d 1104, 1112-13 (8th Cir. 1987). These steps should include instituting, as soon as practicable, a litigation hold suspending the destruction of potentially relevant records (including active electronic data) in the ordinary course of business pursuant to the company’s record- retention policy and notifying all employees who might have potentially relevant records that the records must be preserved. Companies that fail to take these steps could face serious repercussions. For example, in Mosaid Technologies Inc. v. Samsung Electronics Co., 348 F. Supp. 2d 332 (D.N.J. 2004), the court found that the defendant, Samsung, did not meet its obligation to preserve and produce potentially relevant e-mails, and awarded the plaintiff monetary sanctions. Further, the court determined that it would issue an adverse-inference instruction to jurors, permitting them to find that the spoliated evidence would have been unfavorable to Samsung. In granting these sanctions, the court focused on the fact that “Samsung never placed a ‘litigation hold’ or ‘off switch’ on its document retention policy concerning e-mail . . . [which automatically] allowed e-mails to be deleted, or at least to become inaccessible, on a rolling basis.” Mosaid, 348 F. Supp. 2d at 333. The court noted the fact that Samsung “knew how to institute a ‘litigation hold’ and stop the spoliation of e-mails, having done so in one of its divisions in another litigation.” Id. at 338. The court concluded by stating that “[w]hen the duty to preserve is triggered, it cannot be a defense to a spoliation claim that the party inadvertently failed to [institute] a ‘litigation hold’ or ‘off switch’ on its document retention policy to stop the destruction of that evidence.” Id. at 339. Companies should implement, as part of their record-retention policy, a litigation rapid response plan that provides a roadmap for the company to quickly identify the types and locations of records-both paper and electronic-in the company’s possession, custody or control that are potentially relevant to the litigation or investigation. Just as companies have always had to identify and preserve potentially relevant paper records from their active files, as well as their archival files (offsite storage), companies must identify and preserve electronic records from both active storage systems as well as archival systems, which may include magnetic tape storage, such as backup tapes. The most critical part of the plan is identifying, capturing and preserving potentially relevant records (in the format in which the records were kept in the normal course of business, if possible). In order to supervise the implementation of the plan, the company should establish a team of dedicated and knowledgeable representatives from the legal, information technology, records management, human resources and finance departments, as well as senior management to spearhead and monitor the implementation of the plan. When litigation or a regulatory investigation is pending or “reasonably anticipated,” the team can ensure that the company takes the necessary steps to comply with its preservation obligations (initially, as well as for the long term) in a way that minimizes disruption to the business. In most cases, it is extremely difficult not only to pinpoint a particular time when litigation is reasonably anticipated, but also to determine with any degree of accuracy the scope of the potential claim-the causes of action, defenses, counterclaims and crossclaims, and the “key players” related to those pleadings. While the cases that discuss this issue do not specify a particular period of time within which it would be reasonable to implement a litigation hold, they do imply that it should be done “quickly.” A delay as brief as a few days can result in spoliation accusations if records are destroyed or if backup tapes are overwritten pursuant to the company’s record retention or disaster recovery policies. However, it may be very difficult, from a corporate perspective, for the entity to determine that litigation is reasonably anticipated. For example, in Zubulake v. UBS Warburg, 220 F.R.D. 212, (S.D.N.Y. 2003) ( Zubulake IV), Judge Shira Scheindlin found that “almost everyone” involved in the case recognized the possibility of litigation and held that the company was on notice. She went on to state, however, that merely because one or two employees contemplate the possibility of litigation, that does not impose a companywide “duty to preserve.” Id. at 217. How then is a company to act in the face of threatened litigation? The answer from the case law is that parties must act reasonably. But what does that mean in practice? A company has three options when litigation is threatened: suspend all backup tape rotation and preserve all data in the company; temporarily suspend backup tape rotation and begin a careful analysis to determine where relevant records might reside to see if the company can resume the rotation of tapes that contain information not relevant to the litigation; or continue normal backup tape rotation but immediately investigate who the key players are, interview them and the company’s information technology staff, and promptly preserve any tapes identified as containing potentially relevant records. While the “freeze everything” choice is obviously the most conservative and the one least likely to result in a spoliation claim down the road, it also has the most impact on the day-to-day operations of the company-from both a business disruption as well as a financial perspective. Indeed, this approach could result in a considerable financial burden in a situation where litigation may reasonably be anticipated, but not actually filed for years. Is it fiscally responsible to preserve all data and suspend all backup tape rotation based on the mere threat of litigation? In situations such as that, the third option-continuing backup tape rotation along with immediate investigation-is a balance of sound business judgment, fiscal responsibility and compliance with legal obligations. Even with option 3, there are some potential pitfalls to watch out for. In Zubulake IV, for example, Scheindlin noted that, as a general rule, the duty to preserve does not apply to backup tapes used for disaster recovery purposes only. However, the court went on to identify an exception when a company can identify backup tapes containing data from “key players,” which should be preserved in the face of pending or threatened litigation. Id. at 218. In the normal sequence of events, a company need not identify key players under Fed. R. Civ. P. 26(a)(1)(A) until approximately three to four months after the complaint is filed. By initiating the investigation as soon as the company “reasonably anticipates” litigation and preserving only those backup tapes that contain data from key players or relevant data not found on any active system, the company balances the need to comply with discovery requirements with its obligation to conduct business in a fiscally responsible way. Initial litigation holds In Zubulake IV, the court also noted that once a litigation hold is in place, a party and its counsel must make certain that all sources of potentially relevant information are identified and placed on hold. Implicit in that statement is the mandate that the party needs to do the best it prudently and reasonably can under the circumstances. The litigation hold notice must contain sufficient detail so that the recipients can easily understand the categories of records that are relevant to the litigation and subject to preservation. But, as discussed above, it may be very difficult for a company that “reasonably anticipates” litigation to act immediately with such specificity. What the company can and should do under these circumstances is to implement an initial litigation hold that is broadly disseminated within the company and describes as specifically as possible the types of records that need to be preserved. The initial litigation hold notice should also indicate that the litigation process is in its earliest stages and that more specific information will be forthcoming. The notice should also advise employees to notify a designated contact person if they become aware of any situation where relevant records are lost or destroyed. Record retention/destruction policies can help a company that is facing litigation. Such policies govern both “retention” and “destruction”-their purpose is to maintain business-critical information and to destroy that which is not-and can help the company successfully defend itself in future litigation. While there is no bulletproof approach for every company to follow in designing and implementing a well-reasoned and legally defensible record-retention/destruction policy and litigation hold once faced with litigation, there are some guideposts. Companies should be proactive and prepare, well in advance of litigation, a record-retention policy that is flexible enough to allow for the swift implementation of a litigation hold to preserve potentially relevant records. Companies should also institute a regular review of the litigation hold to allow for adjustments as more information becomes available. Kevin F. Brady is of counsel to the business, corporate and commercial group in the Wilmington, Del., office of Connolly Bove Lodge & Hutz. Matthew I. Cohen is counsel to the complex mass torts and insurance litigation group at New York’s Skadden, Arps, Slate, Meagher & Flom.

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