Originally published Summer 2004

The digital revolution has changed the landscape of American culture. Computers are a constant fixture in our daily lives, and with the migration from desktops to mobile platforms, the ability to "stay connected" is virtually limitless. E-mail, for example, is at least as popular, if not more so, than telephone for business communications. In 2002 alone, businesses in North America generated an estimated 3.25 trillion e-mail messages — more than 16 times the total volume of mail processed by the US Postal Service that same year! The capacity to store all this generated data is virtually limitless as well. Whereas a few thousand pages of paper documents fill a standard filing cabinet drawer, millions of printed pages can occupy a single computer tape or disk drive. Unfortunately, the migration from paper to ether has led many companies to become lax in establishing and enforcing document retention and destruction policies, simply because they no longer need to make more room in their filing cabinets. As a result, more and more companies (including, ironically, technology companies) have found themselves in hot water because they have failed to maintain documents which, by law, must be preserved.

The duty to preserve arises in two principal ways. First, many federal and state statutes, regulations, and agency rules impose mandatory retention periods on certain kinds of documents generated in the ordinary course of business. For example, the Internal Revenue Service, the Occupational Safety Health Administration, the Age Discrimination in Employment Act of 1967, the Employment Retirement Income Security Act of

1974, the Consolidated Omnibus Budget Reconciliation Act of 1985, the Immigration Reform and Control Act of 1986, the Family Medical Leave Act of 1993, and the Sarbanes-Oxley Act of 2002 each prescribe preservation protocols. Although these protocols can cover significant amounts of data, statutes, regulations, and agency rules provide reasonably clear guidance as to what to preserve and for how long. Moreover, the quality and quantity of software tools that can be used to store these relatively finite sets of data in unobtrusive, yet easily retrievable formats, increases and improves with each passing day.

The second way in which the duty to preserve can trigger is when company data is "relevant" to the claims or defenses in a litigation or potential litigation. In stark contrast to statutory requirements, however, the duty to preserve relevant documents necessarily requires resolving at the outset two significant unknowns — namely, precisely what types of documents are "relevant" to the dispute, and just when does the obligation to preserve those documents arise? Thus, unlike under most statutes and regulations, the duty to preserve documents for pending or probable litigation has no clearly defined time period, subject matter, or scope, and thereby poses a potential logistical and financial nightmare for companies involved in even the most basic litigation. Luckily, a few recent court decisions provide companies with some guidance on how to grapple with the electronic preservation conundrum, even as other courts continue to define or refine the parameters of the duty to preserve in the litigation context.

What Must be Preserved? Given the obvious hurdles in knowing before the onset of formal litigation just what will – or will not – be relevant to a claim or defense, must a company faced with pending or threatened litigation save every relevant hard copy and electronic document? The answer is "clearly ‘no’," according to a New York federal district court judge in the latest in a series of important electronic discovery decisions, Zubulake v. UBS Warburg ("Zubulake IV"). What then must be preserved? Recognizing that the digital universe presents unique challenges to potential litigants, the Court in Zubulake IV held that "upon reasonable anticipation of litigation," a party must suspend routine document retention and destruction policies (assuming any exist at all) and institute a "litigation freeze." The freeze should apply to all "accessible" data and, in some cases, can extend to "inaccessible" data that concerns "key players" in the underlying dispute. According to the Court in Zubulake IV, whether electronic data is "accessible" or "inaccessible" depends "largely on the type of media on which the data is stored." Given the dynamic and tangled nature of information technology systems, however, the line between "accessible" and "inaccessible" data will not always be clear. In fact, the line may best be viewed as a continuum — ranging from data stored in a readily usable format (such as hard copy files, active web sites, networks, or optical disks or drives), to data that requires extensive manipulation to be retrieved and restored (such as disaster recovery back-up tapes, obsolete software applications, and "deleted" network files). Ironically, given that most "inaccessible" data resides outside the easy reach of any active network, in practice, it actually may be more difficult (and costly) to maintain "accessible" data once the duty to preserve arises.

Still, the cost of complying with the duty to preserve – regardless of the technology demands to do so – may pale in comparison to the potential consequences of failing to comply, or "spoliating" evidence. Court-ordered sanctions for altering or destroying evidence can vary significantly – ranging from no sanctions at all to the harshest of sanctions, including dismissal of the spoliator’s claims or defenses or entry of judgment against the spoliator – and are highly dependent on the facts and circumstances of each case.

When is the Duty to Preserve Triggered? Although determining what documents must be preserved can prove challenging, even more vexing is recognizing precisely when the duty to preserve arises. To be sure, the obligation to preserve hard copy and electronic evidence often pre-dates the onset of litigation – particularly when a party is in "reasonable anticipation of litigation." For example, the receipt of a demand letter from a licensor, the review of a patent opinion, or known concerns that a recently departed employee may possess company trade secrets, among many other pre-litigation events, can each trigger the duty to preserve. Despite the inherent murkiness of such triggering events, what is clear, however, is that once the duty to preserve triggers, parties should immediately guard against routine alteration or destruction of relevant documents until the matter has been finally resolved.

Zubulake IV is illustrative of the often subjective and difficult nature of pinpointing the moment in time when the duty to preserve arises. In that case, the plaintiff filed a complaint for gender discrimination against her former employer in February 2002. Throughout discovery, the plaintiff maintained that the evidence she needed to prove her case existed in e-mail sent among various of the defendant’s employees and stored on the defendant’s computer systems. The Court ordered the defendant to restore certain backup tapes containing "key player" e-mails relevant to the plaintiff’s claims. In the restoration effort, the parties discovered that certain backup tapes were missing and that certain e-mails had been deleted from the defendant’s computer system. In analyzing whether sanctions were appropriate for spoliation of relevant evidence, the Court first addressed the question of just when the duty to preserve arose. According to the Court, "[t]he obligation to preserve evidence arises when the party has notice that the evidence is relevant to litigation or when a party should have known that the evidence may be relevant to future litigation." Applying this standard, the Court held that the defendant’s duty to preserve triggered four months prior to the plaintiff’s filing of an EEOC charge in August 2001 and ten months prior to the actual filing of her civil complaint. The Court based its conclusion on a series of e-mails indicating that the key players at least recognized the possibility that the plaintiff might sue as early as April 2001.

Turning to the facts surrounding the missing backup tapes and deleted e-mails, the Court found that the defendant had a preservation policy in place but that its employees had ignored it. In addressing the issue of sanctions, however, the Court noted that the plaintiff failed to establish that she likely would have discovered relevant information within the destroyed tapes; thus, the Court declined to impose the harshest sanctions (such as judgment against the defendant). Still, the Court did award the plaintiff her costs and attorneys’ fees incurred pursuing the missing data and re-deposing certain witnesses.

Zubulake IV serves as an important reminder that inadvertent actions, or even actions taken in the ordinary course, may cost a company a great deal in litigation expenses alone, if such conduct results in the spoliation of relevant electronic evidence. Because of this danger, a company should seek to preserve relevant electronic data as soon as litigation becomes reasonably foreseeable.

Preservation Practice Pointers. Among other precautionary measures, a company should consider:

  • Creating, implementing, publicizing, and ensuring strict compliance with reasonable electronic document and e-mail management policies.
  • Upon reasonable anticipation of litigation, suspending all routine document destruction or alteration required by the document management policies, instituting a "freeze" for all likely relevant documents, and involving counsel as soon as possible to ensure compliance with all preservation obligations.
  • Circulating a litigation freeze memorandum to all employees that may have relevant documents (including information technology personnel). The memo should clearly identify the subject matters covered by the freeze and the types of "accessible" and "inaccessible" documents that must be preserved.
  • Prior to circulating the freeze memorandum, counsel should develop a working knowledge of the company’s IT systems and may want to consult with a computer technology consultant to formulate a coherent e-discovery strategy.
  • Designating an employee to work with counsel to ensure proper distribution of the memorandum and full compliance with the freeze, including quarantining the frozen data to satisfy applicable chain of custody and authentication criteria.

These are just a few of the steps that can be taken when the duty to preserve triggers. Of course, each matter is unique, and just what should and should not be preserved, and when, will turn on the particular facts and circumstances of each case. Thus, management may want to confer with counsel when a business dispute looks like it may deteriorate into full-blown litigation.

In short, an ounce of prevention is still worth a pound of cure (or, more appropriately perhaps, a kilobyte of prevention is worth a gigabtye of cure). Well-conceived electronic document management protocols can go a long way toward minimizing a company’s litigation risk profile in the digital age, particularly where winning and losing no longer turns solely on whether the company’s position on the merits is correct. Today, whether a company acted with proper dispatch and caution in responding to a perceived litigation risk may be every bit as important.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.