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In today’s business world, corporate directors are involved in many complicated decisions and, for the most part, if a decision (and the board’s decision-making process) is adequate, even if ultimately it is determined to be off the mark or dead wrong, board members are not subject to liability. This aspect of the business judgment rule affords directors a certain amount of freedom to make decisions regarding corporate matters so they can efficiently and effectively govern the complex affairs of the company. Directors cannot be “looking over their shoulder” and worrying whether they might be punished for a misstep. In today’s electronic world, corporations facing litigation must deal with significant logistical and financial challenges, not the least of which is correctly deciding when the duty to preserve relevant information is triggered. Recent decisions by certain federal courts have sent conflicting messages to corporations as to when they should take action to preserve relevant information in anticipation of litigation. Unfortunately, a failure to “get it right” can have serious ramifications, such as sanctions in the form of adverse inferences, monetary fines and dismissal of actions. Courts facing these issues have focused on companies’ efforts to preserve potentially relevant records by examining when the litigation hold was instituted. As a result, many corporate law departments are scrambling to balance their companies’ legal obligations under the changes to the Federal Rules of Civil Procedure to preserve information in the face of “potential” litigation with the implementation of litigation holds and the potentially monumental costs of preserving relevant electronic data. Similar to the problem facing boards in determining whether their decisions regarding corporate actions were appropriate, companies do not have the luxury of 20/20 hindsight like someone who is challenging the company’s decision regarding the preservation of information. Do the federal rules changes offer any guidance as to how a company should implement a litigation hold when it reasonably anticipates litigation? Is there a way to provide adequate protection and certainty to companies that reasonably operate with due care and loyalty, including good faith, through the use of established principles of corporate governance when it comes to deciding the trigger for the preservation of relevant information related to future litigation? Should the application of the business judgment rule, which is grounded in such principles, provide such protection and be used as a framework for evaluating claims regarding preservation of documents? From a potential defending party’s perspective, it can be difficult to pinpoint a time when litigation is “reasonably anticipated” because of the limited amount of information that is typically available. It may also be difficult to determine with any degree of accuracy the scope of the potential claim: what the potential causes of action, possible defenses, third-party claims, counterclaims and cross-claims are, as well as who the key players are related to each of those categories. While the case law mostly has failed to provide any benchmark against which to measure a point in time when it would be reasonable to implement a litigation hold, numerous cases addressing this issue note that the defending party needs to move with a sense of urgency because of the way e-data are created, altered and destroyed. A delay as brief as a few days can result in accusations of spoliation if the records are destroyed or if backup tapes are overwritten or destroyed pursuant to the company’s record-retention and/or disaster-recovery policies. Indeed, based upon recent decisions regarding backup tapes, it may be difficult for the target corporation to determine the trigger and scope of the duty to preserve when litigation is threatened. For example, in Keir v. Unumprovident Corp., No. 02 Civ. 8781, 2003 U.S. Dist. Lexis 14522 (S.D.N.Y. Aug. 22, 2003), the court found that the company’s obligation to preserve information when litigation is “imminent” includes preserving backup tapes. However, in Zubulake v. UBS Warburg LLC, 220 F.R.D. 212 (S.D.N.Y. 2003), the court noted that as a general rule the duty to preserve does not apply to backup tapes used for disaster-recovery purposes, although UBS Warburg should have anticipated litigation (thus triggering the duty to preserve) when the “possibility” existed that the plaintiff might sue, which was months before she filed her Equal Employment Opportunity Commission claim. From the potential plaintiff’s perspective, it would seem, at first blush, to be much easier to figure out when a corporation would “anticipate litigation” because a corporation knows when it has decided to institute litigation. However, looks can be deceiving. In the corporate environment, it can be just as difficult for the potential initiating party as it is for the potential defending party to pinpoint a time when the initiation of litigation is “reasonably anticipated” because of a number of variables. For instance, does a company “reasonably anticipate” litigation if, as part of its strategic business plan, it will use litigation to enforce its rights under its various patent licensing agreements? If so, does the simple act of creating the business plan trigger a duty to preserve relevant information or does something else have to happen to cause the duty to be triggered? While these might be difficult questions to answer, the good news is that two different courts addressed those very issues in cases involving the same facts with the same company. The bad news is that they arrived at two different results. The courts’ analyses are very informative in these cases because it is rare that a court discusses the trigger for the duty to preserve from the perspective of a company that might be filing the lawsuit. Rambus Inc., a company that develops and licenses technology to companies that manufacture semiconductor memory devices, brought an infringement action in Virginia against Infineon Technologies A.G. Rambus Inc. v. Infineon Techs. A.G., 220 F.R.D. 264 (E.D. Va. 2004). Three weeks later, Hynix Semiconductor sued Rambus in California seeking a declaratory judgment of noninfringement with regard to 11 Rambus patents. Hynix Semiconductor Inc. v. Rambus Inc., No. C-00-20905, 2006 WL 565893 (N.D. Calif. Jan. 5, 2006). The federal district court in Virginia proceeded with discovery first, and Infineon found evidence that Rambus had destroyed approximately 2 million pages as part of its “Shred Day” program. Infineon claimed that the destruction was part of Rambus’ overall business strategy to protect its portfolio of patents (which expressly included filing lawsuits if necessary to protect its patents). As a result, Infineon argued that, at the same time Rambus was planning to destroy information related to its patents, it was “anticipating litigation” involving those same patents. The Virginia federal court found that Rambus should have “anticipated litigation” when it instituted its document-retention program and there was the “possibility” that Rambus would sue the manufacturers regarding the Rambus patent. 220 F.R.D. at 285. The federal district court in California, however, took another view. It decided that although Rambus included litigation as part of its licensing strategy, the institution of litigation could not be said to have been “reasonably probable” at the time the document-retention program was instituted because several contingencies had to occur before Rambus would be involved in litigation concerning those patents. In discussing the distinction between “possible” and “probable,” the federal district court in California referred to the American Bar Association Section of Litigation, Civil Discovery Standards, August 1999, Standard No. 10, which noted that “probable” means “litigation must be more than a possibility” because as a practical matter, “[l]itigation ‘is an ever-present possibility in American life.’ ” 2006 WL 565893, at *21. Impact of recent amendments The Federal Rules of Civil Procedure were amended, effective on Dec. 1, 2006, to address the escalating costs of discovery regarding e-data and to increase the effectiveness and uniformity of the practice regarding e-discovery. The changes are an attempt to codify the best practices of parties and courts taking into account experience in these issues. While the changes present a framework for the parties and the courts to give early attention to e-discovery issues, they left untouched the critical area regarding the implementation of preservation obligations before the start of litigation. The commentary to the new rules specifically notes that the changes do not undermine or reduce the common law obligations or the statutory requirements with respect to preservation obligations. The commentary also notes that a balance must be struck between the compelling need to preserve relevant information (identified in the commentary as one of the most frequent sources of difficulty) and a company’s need to continue operations critical to ongoing activities. Moreover, while the steps that need to be taken to implement an effective preservation notice focus on good faith, the new rules fail to provide any real practical guidance as to how to implement a litigation hold other than to mention that a complete or broad cessation of a party’s routine computer operations could paralyze the party’s activities. Taking the underlying principles of the changes to the new rules, which are “reasonableness” (see, e.g., Rule 26(b)(2), dealing with reasonably accessible information) and “good faith” (see, e.g., Rule 37(f), dealing with the good-faith routine operations of information systems), can we use some common law examples of corporate governance to add to those underlying principles and generate practical and defensible guidelines for implementation of a litigation hold when litigation is “reasonably anticipated”? Many companies are developing and implementing programs regarding litigation holds that establish a collaborative process that invites the collective input from representatives of various groups within the company as well as outside consultants and advisors. Then, when the company is faced with potential litigation — whether it is “possible” or “probable” or some other standard — the guidelines in the company’s program can be followed by competent staff in making a determination as to when litigation is anticipated. Even with such an approach, companies may find out that the process was insufficient to allow a company to avoid being penalized for making a mistake about the preservation trigger. The business judgment rule’s protection afforded to directors who properly implement and oversee such a program could be an appropriate framework for companies in designing and implementing guidelines for a litigation hold once the company is threatened with litigation. The business judgment rule is a yardstick used to measure the appropriateness of a director’s actions or conduct. It carries with it a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action was taken in the best interest of the company. As long as the director complies with the business judgment rule, the director cannot be liable for an injury to the corporation. Generally, the presumptions of the rule can be overcome only by a factual showing that the directors breached their fiduciary duty of care or loyalty. Two recent decisions in the Delaware Supreme Court specifically address the appropriate standard for director oversight liability. Most recently, in Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006), the Delaware Supreme Court affirmed the historical standard for director oversight liability: “(a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.” Earlier last year, the court, in In re The Walt Disney Co. Derivative Litigation, 906 A.2d 27 (Del. 2006), affirmed the chancery court’s decision that, although the Disney directors’ conduct in approving an executive’s employment and termination arrangements fell “significantly short of the best practices of ideal corporate governance,” their conduct was protected by the business judgment rule because boards do not need to adhere to “best practices” to be protected from liability. As with board action, courts must recognize that a determination to preserve electronic data made by a corporation cannot be done with pinpoint accuracy. There is, however, an appropriate framework for making such an evaluation. “In the absence of red flags, good faith in the context of oversight must be measured by the directors’ actions ‘to assure a reasonable information and reporting system exists’ and not by second-guessing after the occurrence of employee conduct that results in an unintended adverse outcome.’ ” Stone, 911 A.2d at 373. The company should be held to a standard to achieve a correct result on each occasion. Companies should not be required to institute “best practices” but rather they should be required to have in place a standard for acting in good faith to achieve the correct result. Companies should prepare and implement programs and adequately oversee the programs with appropriate staff. Companies should also adequately document the process in establishing and monitoring the program. A company may not, however, know that its policy or oversight is not proper until it is too late. As a result, as with the business judgment rule, if a company implements and adequately oversees a program utilizing informed individuals (such as those from the information technology, legal and security departments) to prepare for and follow an established process for approving material decisions regarding preservation issues, even if the program established by the company does not satisfy “best practice” standards, the company should be shielded from liability as to when it “reasonably anticipates” litigation triggering a duty to preserve electronic information. As long as the company acts in good faith in implementing reporting or information systems or controls by devoting sufficient time and resources and, having implemented such a system or controls, does not consciously fail to monitor or oversee such controls, the company’s decision about the preservation trigger should not be second- guessed and it should not be liable even if it destroyed documents that, in hindsight, should have been retained. Kevin F. Brady and Matthew M. Greenberg are partners in the business law group of Wilmington Del.-based Connolly Bove Lodge & Hutz.

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