Document Retention and Destruction in Indiana: Business Record Management in Anticipation of Litigation

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August 07, 2018
Author: Mark Miller
Organization: Bowers Harrison, LLP

Business Record Management in Anticipation of Litigation

From major manufacturing disasters to wrongful termination claims, businesses often find themselves dealing with events that give rise to litigation. When those events develop and a lawsuit or claim is filed, the organization may be subjected to the discovery process by a state or federal agency or an opposing party. The discovery process allows a party or agency to request documentation and information from another party that is relevant to a claim. Unless the documentation or information is protected by a specific rule (e.g., attorney-client privilege), it must be produced. Failure to do so may result in various, negative consequences to the party. In order to reasonably ensure that an organization can produce relevant evidence, that organization must have the proper policies and practices in place, so that the evidence is preserved.

When it comes to electronically stored information (“ESI”) and an organization is faced with a potential lawsuit, attorneys on both sides have a responsibility to inform their clients of the duty to preserve and disclose relevant hard copy documents and ESI. Unlike traditional paper-based discovery, failure to immediately preserve ESI can result in its loss. ESI can easily be inadvertently or intentionally deleted or altered. Loss of ESI can occur during daily operation of a computer, rotating backup tapes, editing database records and deleting user files. Data on computer systems can be overwritten in seconds or may remain for months or years. For this reason, it is important that, if the relevant information is stored electronically, one must act quickly to preserve the data.

Best practices tell us that businesses must understand their duties regarding the preservation of paper documentation and electronic information, well in advance of any dispute. In today’s world of daily and continuous electronic communications, both within an organization and communications to the outside, businesses must develop policies and practices to ensure their duty to preserve documents for potential litigation is satisfied. Such practices and policies, called “litigation holds”, are in addition to regular document retention policies. Their purpose is to reasonably ensure evidence relevant to a dispute is not destroyed. Without a litigation hold, such information may purged as part of the organization’s normal document retention policy, and as a result, that organization may be subjected to sanctions by a court. Early implementation of a litigation hold policy can often diminish the burden of ensuring relevant evidence is retained, so the event giving rise to the lawsuit does not also become a discovery disaster.

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A. What is a “litigation hold”?

A litigation hold is a written directive instructing all employees (most importantly custodians of paper documents and ESI to suspend their routine document retention and destruction policy for paper and electronic files and to preserve potential evidence that is relevant to the subject matter of a current or impending litigation. A litigation hold is communicated internally within an organization and may come in the form of a “preservation letter” or “litigation hold letter”, or “litigation hold notice” and generally advises employees of the possibility of (or pending) litigation, identifies the subject matter of the potential evidence that must be preserved. However, an opposing party to a lawsuit may also serve an organization with a litigation hold request that is intended to notify that organization that such preservation protocols should be taken/

B. What is the legal basis for a litigation hold?

The Federal Rules of Civil Procedure note that companies must preserve, collect, and produce “electrically stored information.” The Advisory Committee Notes to 2006 amendeds to Rule 37 states, “When a party is under a duty to preserve information because of pending or reasonably anticipated litigation, intervention in the routine operation of an information system is one aspect of what is often called a “litigation hold.” However, the Rules themselves are not specific when it comes to how an organization must implement a “litigation hold”.

As a result, the legal foundation for a litigation hold policy is rooted in many sources, including common law, statutes, regulations, or a court order in the case. Fed. R. Civ. P. 37 advisory committee’s note 2006. For instance:

  • Civil Rights Act of 1964, Title VII
  • Age Discrimination in Employment Act
  • Equal Pay Act
  • American With Disabilities Act
  • Fair Labor Standards Act
  • Family and Medical Leave Act
  • Federal Insurance Contribution Act
  • Federal Unemployment Tax Act
  • Federal Income Tax Withholding
  • Employment Retirement Income Security Act
  • Immigration Reform and Control Act
  • Occupational Safety and Health Act
  • Employee Polygraph Protection Act
  • Davis Bacon Act
  • Walsh-Healy Public Contracts Act
  • Service Contract Act
  • Executive Order 11246
  • Rehabilitation Act of 1973
  • Uniform Guidelines on Employee Selection Procedures
  • Landrum-Griffin Act

In addition, many courts have echoed the duty on counsel that, once a party reasonably anticipates litigation, counsel has a duty to institute a litigation hold to preserve relevant information. Yahnke v. County of Kane, 2013 WL 4537865, *6 (N.D. Ill. 2013). Courts have recognized that the failure to preserve information may lead to sanctions. See Trask–Morton v. Motel 6 Operating L.P.,534 F.3d 672, 681 (7th Cir.2008).

Generally, those sources require an organization (and individuals) to preserve potential evidence when it knows, or should have known, that litigation is (was) imminent. Trask–Morton v. Motel 6 Operating L.P., 534 F.3d 672, 681 (7th Cir. 2008). Because certain professional fields may have additional, specific duties when it comes to preserving documents, it is important for organizations to research relevant state and federal laws and agency rules. For example, corporations subject to lawsuits stemming from securities infractions have a duty to preserve documents pursuant to both the Federal Rules as well as the Public Securities Litigation Reform Act (“PSLRA”). Laron v. Bank One Corp., 2005 WL 4652509, *8 (N.D. Ill Aug. 18, 2005). The PSLRA requires that “[d]uring the pendency of any stay of discovery pursuant to this paragraph, unless otherwise ordered by the court, any party to the action ... shall treat all documents, data compilations (including electronically recorded or stored data) ... as if they were the subject of a continuing request for production of documents from an opposing party.” See 15 U.S.C. § 78u- 4(b)(3)(C). Once litigation begins, parties to any litigation have the duty to preserve documents within the scope of discovery allowed under Federal Rule of Civil Procedure 26.

Litigation Holds Practices and Policies

A. What is the scope?

The duty to preserve evidence is broad and encompasses any relevant evidence that any party, including the non-preserving party, knew or reasonably could foresee would be relevant to the action. Danis v. USN Communications, Inc., 2000 WL 1694325, *32 (N.D.Ill. Oct.20, 2000). The Federal Rules of Civil Procedure permits discovery of matters that are not privileged or otherwise protected and “relevant to any party’s claim or defense” if “the discovery appears reasonably calculated to lead to the discovery of admissible evidence . . . .” Fed. R. Civ. P. 26(b)(1). “For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action. . . .” Id. In addition, a party may have an obligation to preserve ESI in the possession of outside parties. Fed. R. Civ. P. 34(a). Such a request must be directed to documents or electronically stored information “in the responding party’s possession, custody, or control . . . .” For example, if an organization outsources its accounting or payroll, the organization has a duty to ensure that data, held by the outside firm, is preserved if it is relevant to the litigation. The policy must contain enough specificity regarding the subject matter of the litigation, or scope of the hold, to ensure that relevant documents are preserved.

Furthermore, a corporation’s duty to preserve documents in the face of pending litigation is not a passive obligation. See Marrocco, 966 F.2d at 224-25; In re Prudential Ins. Co. of Am. Sales Practices Litig., 169 F.R.D. 598, 615 (D.N.J.1997). Rather, it is an active duty that requires the organization to communicate to its employees that relevant documents must be preserved. One court has gone so far as to prescribe the general practice that must occur: a large corporation only can discharge its duty by: 1) creating a comprehensive document retention policy that will ensure that relevant documents are retained, and 2) disseminating that policy to its employees.” Therefore, it must go above and beyond the organization’s normal document retention and destruction policy. For instance, in one case, the offending party continued normal electronic document retention and destruction policies after the onset of litigation and warned employees not to destroy any documents relating directly to the plaintiff. Id. However, the organization did not warn its employees to retain emails that might be “relevant” to the case. Id. The court held that the defendant breached its duty to preserve documents because its retention policy lacked the appropriate scope for not instructing employees to retain “relevant” emails. Id. The In re Prudential Court held that “[i]t was incumbent on senior management to advise its employees on the pending ... litigation” and to go so far as “to provide them with a copy of the Court's [discovery] order, and to acquaint its employees with the potential sanctions” for violating that order. 169 F.R.D. at 615. The Court further stated that “[w]hen senior management fails to establish and distribute a comprehensive document retention policy, it cannot shield itself from responsibility because of [its underlying employees] actions. The obligation to preserve documents that are potentially discoverable materials is an affirmative one that rests squarely on the shoulders of senior corporate officers.” Id

Courts have even held that if a party cannot fulfill this duty to preserve because he does not own or control the evidence, he still has an obligation to give the opposing party notice of access to the evidence or of the possible destruction of the evidence if the party anticipates litigation involving that evidence.

Organizations also cannot implement a litigation hold that is narrower in scope than the organization’s normal document retention policies. Diersen v. Walker, 2003 WL 21317276 at *5 (N.D.Ill. June 6, 2003). If the organization has a good-faith basis for narrowing their scope, court approval should first be sought, prior to implementation. Id.

While the duty to preserve is broad, it “does not require a party to keep every scrap of paper.” Danis v. USN Communications, Inc., 2000 WL 1694325, *32 (N.D. Ill. 2000). Rather, a party is obligated to retain “any relevant evidence over which the nonpreserving entity had control and reasonably knew or could reasonably foresee was material to a potential legal action.” China Ocean Shipping (Group) Co. v. Simone Metals, Inc., 1999 WL 966443, *3 (N.D. Ill. 1999).

B. When does it begin?

Some organizations believe that the duty to preserve documents in anticipation of litigation begins when a lawsuit is filed, when they receive an order from the court, or when they receive a letter from the opposing party asking for a litigation hold. That is not good practice and often not the case. Rather, the duty to preserve relevant evidence arises not only when litigation occurs but also extends to that period of time before the litigation when a party reasonably knows or should have known that the evidence may be relevant, for either party, to anticipated litigation. Trask-Morton v. Motel 6 Operating L.P., 534 F.3d 672, 681 (7th Cir. 2008). Therefore, the duty arises before the lawsuit is even file.

At the very latest, the duty begins when the organization is notified of the potential for or the filing of a claim. That notification could be informal or formal, written or verbal, and could take the form of a substantial breach by either party to a contract, a demand letter, an EEOC complaint, the filing of a complaint, discovery requests or court orders, and common law. In other words, the duty to preserve also begins when the organization itself has a potential or actual claim against another entity. Once the organization receives that notification, it must implement the policy and practice–which should already be in place–to find and preserve relevant evidence. For example, a court has ruled that an organization should have known litigation was imminent and, therefore, should have implemented a litigation hold at the time the organization learned an employee had filed EEOC charges. Jones v. Bremen High School Dist. 228, 2010 WL 2106640, *6 (N.D.Ill. May 25, 2010). Another example is when the organization received notice of sexual harassment charge filed by employee with state department of human rights, it should have have preserved sexually explicit emails. Wells v. Berger, Newmark & Fenchel, P.C., 2008 WL 4365972, *7 (N.D. Ill. Mar. 18, 2008).

As a result, unfortunately, there is no specific even that triggers the duty to preserve evidence, as it varies on a case-by-case basis. The effect of that unknown can cause organizations to implement a litigation hold too early or in situations when litigation never occurs, which may cost the organization precious time and money. Or, an organization may hold off on such implementation until too late in the process, which may lead to the destruction of important evidence that is relevant to the organization’s defense or the plaintiff’s case. If such information was important to the opposing party, sanctions may occur. Therefore, each dispute that arises within an organization should be met with careful analysis and a determination of when it rises to a level that preservation must occur.

C. What happens if a party does not institute a litigation hold?

When litigation holds are not implemented, documentation, electronic information, and other discoverable items may be destroyed as part of the organization’s normal course of document retention policy. Such destruction is called the “spoliation of evidence” and can lead to sanctions by a court, which may have a great impact upon the pending lawsuit.

The Court’s ability to sanction a party for spoliation of evidence stems from both statutory creation as well as the Court’s inherent authority for failure to preserve or produce documents. See Chambers v. Nasco, 501 U.S. 32, 50-51 (1991) (stating that federal courts may sanction bad faith under either its inherent authority or under the Federal Rules of Civil Procedure). Under the Federal Rules, courts have broad discretion on what sanctions to impose against a violating party. Those Rules are primarily limited by the fact that such rules are generally applicable to pending lawsuits, rather than the “reasonably anticipated” standard as described above. The second bases for the court’s authority, its inherent power to control the administration of justice, allows the courts to reach back into to any spoliation that may have occurred prior to the lawsuit and impose sanctions on a party for those actions.

Courts have routinely imposed sanctions on organizations for failure to abide by this duty when it was done willfully, in bad faith, or when the non-compliant party was at fault. National Hockey League v. Metropolitan Hockey Club, Inc., 427 U.S. 639, 640 (1976). The underlying policy for sanctions are to: 1) eliminate the prejudice to an innocent party; 2) punish the offending party; and 3) to deter future misconduct. See Nat’l Hockey League v. Metro. Hockey Club, Inc., 427 U.S. 639, 643, 96 S.Ct. 2778, 49 L.Ed.2d 747 (1976). Those sanctions may range from attorneys’ fees and costs, fines, jury instructions, and even dismissal of the lawsuit. For determining what sanction fits the situation, no specific elements-test exists. Rather, courts balance the facts and effects of the spoliation, including: the intent, if any, of the offending party, the effect on the other party(ies), whether a sanction exists to cure the spoliation or prevent further effects, deterrence for further actions, and punishment of the party or attorney. The Seventh Circuit has mandated that sanctions be proportionate with the circumstances surrounding the failure to comply with discovery orders. Larson v. Bank One Corp., 2005 WL 4652509, *8 (N.D. Ill. 2005). Also, when selecting the powerful option of terminating the underlying action in favor of one party, the court must use a certain measure of restraint, though a court is not required to “fire a warning shot” before imposing stiff sanctions. Id. Because dismissal is “considered ‘draconian’ [the Court] must be ‘vigilant’ in [its] review.” Id. For instance, in Danis v. Communications Inc., after the defendant learned that it had been sued, it did not institute a litigation hold to capture and preserve relevant information. It did not notify its employees the subject-matter of the litigation, instruct them to preserve relevant evidence, or potential penalties the organization faced, if such preservation did not occur. In Danis, the court also found that, as part of the litigation hold, the organization should have had an attorney review the destroyed documentation that was potentially relevant before uninformed persons were sent to throw away dumpsters full of documents. Ultimately, the court determined that the organization did not act in bad faith, in that it did not intentionally destroy the documentation to avoid disclosure. However, it found that the “failure to put into place clear procedures and standards concerning document preservation, and the failure to do any follow-up to see that the general oral directive was broadly disseminated and followed, constitutes fault that is, ‘extraordinarily poor judgment’ or ‘gross negligence.’ The court levied fines and other penalties on the defendant, as a result.

In addition to fines, court may also order a party to preserve certain information, if that party is not already doing so. See In re African–American Slave Descendants’ Litigation, 2003 WL 24085346, *2 (N.D.Ill. July 15, 2003). Such preservation holds are generally broader than typically litigation holds, and as such, organizations should attempt to implement their own rather than wait for a judge’s order.

However, a party need not suffer actual prejudice as the result of another party’s misconduct to merit a default judgment; some types of misconduct evince such flagrant contempt that to allow the offending party's use of the judicial system for its benefit would challenge the system's integrity. Larson, 2005 WL 4652509; see Pyramid Energy, Ltd. v. Heyl & Patterson, Inc., 869 F.2d 1058, 1062 (7th Cir.1989) (holding that a trial court is entitled to say “enough is enough” and dismiss a claim absent actual prejudice to the non-offending party).

D. Discovery and E-Discovery Practices and policies

Once the litigation hold has been put into effect, what is next? As discussed above, in the last decade, the discovery process has undergone an enormous change with the addition of electronic information and documentation, as a part of most law suits. That change has been reactive to organizations’ storage practices and policies, which have moved from a world of primarily paper storage to an electronic one. As a result, in large, complex dispute, attorneys have shifted the focus of discovery from a primarily paper production to an electronic one, in which hard drives and servers are combed for information.

E. Electronic Information is discoverable

The Federal Rules of Civil Procedure guide the general rules of legal disputes in the federal legal system. Many states have adopted similar rules that are used in their courts. When it comes to the production of documents, both paper and electronic, Federal Rules 26 and 34 provide a party access to any other party’s documentation, with some limitation. When information is requested, unless agreed to otherwise, a party is under the obligation to “produce it in a form or forms in which it is ordinarily maintained or in a reasonably usable form or forms.” Fed. R. Civ. P. 34(b)(2)(E)(ii). While courts are conscience of the difficulties that parties  often face when attempting to locate all, relevant electronic information, parties are required to make a “good faith” effort. That “good faith” effort can even encompass the search of employees' home computers and deleted electronic data. Simon Property Group L.P. v. Mysimon, Inc., 194 F.R.D. 639 (S.D. Ind. 2000).

F. Prior to discovery, parties must first meet and confer

The first step in the litigation process, regarding discovery, often entails the parties’ counsel coming together to formulate the general guidelines that will govern discovery. Those guidelines now must incorporate how the parties shall exchange electronically stored information (“ESI”). By each party understanding the other’s technical infrastructure, the plan should be able to reduce the costs on all parties. Specifically, the plan should proscribe the form or format in which the ESI will be produced. Without that amount of specificity in the plan, parties may attempt to convert individual files into formats that are unrecognizable to the other side, which will inevitably cause delays and additional costs.

G. Parties must begin by disclosing certain information

Federal Rule of Civil Procedure 26(a)(1)(A) begins the discovery process by requiring that all parties must “without awaiting a discovery request, provide to the other parties: … a copy—or a description by category and location—of all documents, electronically stored information, and tangible things that the disclosing party has in its possession, custody, or control and may use to support its claims or defenses, unless the use would be solely for impeachment.” That Rule requires organizations to begin actively search their file (both electronic and paper) for relevant information that they may use to prove their claim or defense in the pending law suit. At that time, an organization, together with counsel and the keepers of the records, should come together to map out the location of potential information within the organization’s infrastructure. Failure to make a good-faith effort to locate and preserve such information can lead to sanctions by the court under Federal Rule of Civil Procedure 37.

H. Scope of Discovery

Rule 26(b)(1) describes the limits of discovery:
Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense—including the existence, description, nature, custody, condition, and location of any documents or other tangible things and the identity and location of persons who know of any discoverable matter. For good cause, the court may order discovery of any matter relevant to the subject matter involved in the action. Relevant information need not be admissible at the trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.

In general, courts stay out of the discovery process and allow the parties to settle disputes amongst themselves. The reason stems from numerous courts’ ruling that “pretrial discovery is normally to be accorded a broad and liberal treatment.” Hickman v. Taylor, 329 U.S. 495, 507 (1947). However, when courts do become involved, they are granted broad discretion in settling discovery disputes and in limiting the scope of discovery in a given case. As a practical effect, such limitation generally only occurs when a party seeks to protect privileged information (e.g., attorney-client material, doctor-patient), and even in those situations, privileges can be waived and parties may be forced to produce such information.

I. Discovery Requests

Federal Rule 34 affords the guidance for parties requesting documentation from other parties during a pending law suit. Rule 34(a) provides that any party may serve a request, within the scope of Rule 26(b):

(1) to produce and permit the requesting party or its representative to inspect, copy, test, or sample the following items in the responding party's possession, custody, or control:

(A) any designated documents or electronically stored information—including writings, drawings, graphs, charts, photographs, sound recordings, images, and other data or data compilations—stored in any medium from which information can be obtained either directly or, if necessary, after translation by the responding party into a reasonably usable form.

Practically, Rule 34 can open up organizations to large costs, since, traditionally, the responding party bears the burden of producing responsive, relevant information during the discovery process. For large organizations, that burden can be considerable.

J. Statutes of Limitation and Document Retention Policies

In Indiana, when formulating document retention and litigation hold policies, the applicable statutes of limitations should be considered. Statutes of limitations are laws passed by the legislature that place limitation on the amount of time an individual can bring suit against another individual or organization based for some type of wrongful conduct. After the expiration of that period of time, with some exceptions, an individual cannot bring such an action. In addition, to statutes of limitation, a statute of repose is an ultimate time bar, without exception, to the bringing of lawsuit. In Indiana, Indiana Code 34-11-2 governs specific statutes of limitations, including:

- Contracts:

  • Contract for payment of money – 6 years;
  • Employment Contracts, 2 years.
  • Not in writing - 6 years;
  • Written - 10 years;

- Fraud – 6 years.

- Injury to personal property: 2 years.

- Professional services (e.g., medical/legal malpractice) – 2 years.

- Personal Injury – 2 years.

- Libel / Slander / Defamation – 2 years.

- Product Liability – 2 years;

- Use, rents, and profits of real property – 6 years

Other statutes are applicable to specific claims. (See e.g., I.C. § 34-20-3-2 for asbestos actions.)

K. Practice Points and Spoliation Issues

Do not wait! Organizations should not wait until a lawsuit is filed before they formulate their plan on how to preserve evidence, if a lawsuit is filed. It is too late at that point. Therefore, they must think ahead and become proactive rather than reactive.

Prepare for when a litigation hold should be implemented
While courts have not agreed on when a litigation hold must take effect, that does not mean an organization should not make such an attempt. Together with counsel, organizations should review the type of business activity in which they most commonly find themselves and set forth a policy or practice that explains when they believe the duty to preserve begins for a reasonable number of situations (e.g., contract disputes with vendors, employment law matters).

Understand your organization’s information infrastructure
To effectively and efficiently create a litigation hold policy, an organization must understand where its information is located. Is it server-side or employee workstations? Company-owned or employee-owned mobile devices? Locating the information will help you assess the potential individuals who have access to the relevant evidence and who can therefore destroy that relevant evidence.

Create a document retention team
For large organizations, the proactive steps that you can take to institute a team of individuals who can quickly locate information will save you time and money. That team should consist of both legal counsel/advisors and technology employees who can work together to understand what information should be kept, where it is located, and how best to store it. The technology side can work to switch from a standard document retention and destruction policy period to a litigation hold period, by changing the software protocols to fit the legal department’s need. The IT portion of the team should also be able to safely preserve and backup necessary data. The legal portion can work to identify important employees who will hold the key evidence for particular situations (“key custodians”).

Communicate the litigation hold policy quickly
When an organization believes litigation is “reasonably anticipated” and a litigation hold is necessary, it must work quickly to implement that hold. The hold should include the following information:

  • A description of the legal matter which can be understood by the average employee;
  • A description of the types of information, documentation, and data that should be preserved and brought to the attention of the document retention team;
  • Instructions to employees that they must not delete and must preserve relevant evidence and bring to the attention of the document retention team;
  • Instructions to employees that they must actively search their records (both paper and electronic) for evidence relevant to the subject matter of the litigation;
  • Instructions to employees that any automatic deletion software must be turned off until reviewed by the document retention team;
  • Instruction to employees concerning the risk for sanctions to the organization, if the litigation hold policy is not followed; and
  • Employees should contact the document retention team, if they have any questions.

Organizations should not rest on a litigation policy that was created years ago, but rather, periodically review their litigation hold and standard document retention policy to ensure it is updated in accordance with the latest technology, the organization’s latest practices, and legal rulings. Such reviews will help organizations identify and fix critical, missing elements to their policies and will help prove to any court, in the event that spoliation of evidence does occur, that reasonable steps were taken by the organization and any spoliation was not caused by neglect.

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