A Company’s Obligation to Preserve Electronically Stored Information

While non-lawyers may not have heard of the term “spoliation,” most people intuitively know that destroying evidence related to an ongoing litigation is a bad thing to do.  Conversely, even many lawyers do not know the breadth of a company’s obligation to preserve evidence, particularly electronically stored information (which is quaintly referred to as “ESI”).  Further, knowing the basics of this obligation is critical because failing to preserve ESI can lead to monetary penalties, affirmative claims being dismissed and/or defenses being barred.

Perhaps the most common misconception about the obligation to preserve ESI is that a company runs no risk of punishment for having destroyed ESI pursuant to a document retention/destruction policy, as long as such policy (i) is objectively reasonable and (ii) was  implemented at a time when no litigation could have been anticipated.  Further, at first glance, Rule 37(e) of the Federal Rules of Civil Procedure would appear to support this notion:

Absent exceptional circumstances, a court may not impose sanctions under these rules on a party for failing to provide electronically stored information lost as a result of the routine, good-faith operation of an electronic information system.

While this rule seems simple enough, the Advisory Committee Notes go on to explain that:

Good-faith in the routine operation of an electronic information system may involve a party’s intervention to modify or suspend certain features of that routine operation to prevent the loss of information if that information is subject to a preservation obligation. [Emphasis added.]

So when does a “preservation obligation” requiring a modification or suspension of a document retentions/destruction policy arise?  A recent Federal Case, Naaco Materials Handling Group, Inc. v. Lilly Co., explained that a company has such an obligation when “it knows or should know” that it has information “relevant to any present or future litigation.”  Thus, not only does a company have an obligation to modify its document retention/destruction protocols when a claim has been filed or threatened, but such an obligation could arise even well before a formal demand, or even an informal threat, has been made.

Because in-house counsel usually have responsibilities for both legal and business issues, they often are the first to anticipate when a situation has the potential to devolve into litigation.  As such, in-house counsel also are in the best position to raise with management the issue as to what might/could/should be done to preserve ESI related to the situation at hand.  While management, no doubt, will not be thrilled to learn that it may have to modify its protocols based on speculation as to a possible future claim, in-house counsel could save the company a lot of time, money and pain by raising and vetting the issue at such an early stage.