A Practical Framework for Implementing Legal Holds
By Ben Kerschberg
Consider the following scenario. Your company (A) decides to sue a supplier (B) in a contract dispute worth millions. Company (A) has had an amicable 12-year working relationship and no litigation history with (B). Your VP of Supply Chain—not your General Counsel—conveys by phone to her counterpart at (B) Company (A)’s intent to sue. Company (A) does not engage its regular outside counsel to begin proceedings because a three-year statute of limitations applies. No other communication is sent to (B). From a procedural legal standpoint, there is no need to hurry. Given your cordial relationship with (B) and the relatively informal manner in which the possibility of litigation was conveyed, (B) does not believe that possibility is credible.
This simple fact pattern raises important questions. Does company (A), as a potential plaintiff, have an obligation to institute a legal hold with respect to this matter? If so, when must the hold begin? What information must be collected and from whom? How should it be preserved? Moreover, almost all electronically stored information (“ESI”) can be changed or deleted, a reality that must give any Legal department serious pause. And what are company (B)’s obligations? The answers are alarmingly uncertain: It depends. This piece organizes these issues into an understandable and practical framework for instituting legal holds.
“Reasonable Anticipation” of Litigation
When a party “reasonably anticipates” litigation, it has an affirmative duty to institute a legal hold in order to suspend all ordinary processes by which computer systems retain and dispose of ESI.[i] In its broadest terms, a legal hold involves five distinct steps: (i) a triggering event; (ii) creation of the hold; (iii) notifying corporate and third-party custodians of the hold; (iv) collecting, segregating, and preserving the relevant data; and (v) releasing the hold when appropriate.
The affirmative obligation to institute legal holds stems from a party’s common law duty to avoid spoliation, the destruction or alteration of evidence. Federal Rule of Civil Procedure 37 (collectively, the “Rules”) (i) defines the common law duty to preserve ESI and (ii) both establishes and limits a court’s right to impose sanctions for spoliation.[ii] Spoliation is no small matter. U.S. District Court Judge Shira Scheindlin, an expert on e-discovery, has ruled that spoliation may constitute gross negligence. Numerous courts have followed her lead.[iii]
Despite its foothold as the judicial standard that triggers a party’s duty to implement a legal hold, the definition of “reasonable anticipation” remains elusive. A credible threat suffices, as does litigation that is actually threatened or pending. For a plaintiff, sending a cease and desist letter satisfies the standard, as does engaging outside counsel to handle the matter. Naturally, potential plaintiffs know more about when a given suit can be reasonably anticipated. But what about defendants? Certain triggers are clear—e.g., a plaintiff’s filing of a Complaint and service of a summons or the defendant’s receipt of a demand letter. Beyond those, rising to the level of “reasonable anticipation” requires more than vague rumor or the mere possibility that litigation might occur. It must actually be likely.[iv]
A review of these subjective standards leads to an important conclusion. The uncertainty resulting from the courts’ case-by-case consideration of legal holds strongly counsels corporations to implement well-defined legal hold policies. Such policies should include at least the following six important elements:
- The prior existence of a robust document retention policy. Numerous experts have written about information governance. The Sedona Conference, a highly respected legal technology think tank, advises that any document retention program should include provisions for legal holds.[v] The widely accepted Sedona Principles state: “By following an objective, pre-existing policy, an organization can formulate its responses to electronic discovery not by expediency, but by rational consideration.”[vi] This, in turn, should be a “significant consideration in any spoliation analysis” that might lead to sanctions.[vii] Without such a policy, attempts to formalize legal hold policies will prove to be difficult, if not impossible, or may force unnecessary and costly backtracking to remedy serious mistakes.
- Internal corporate instructions as to how to identify when notice has been received such that litigation can be reasonably anticipated. Determining “reasonable anticipation” is hardly a surefire judgment call and should thus be made by the Legal department in coordination with other departments that know relevant facts. In order to make such a determination, of course, Legal must be able to examine what actually may constitute notice. Corporations must train employees, almost any of whom may receive notice (as in my initial hypothetical) so that they know what to look for and both when and how to escalate a potential matter to Legal. Without this step, any legal hold program may be ineffective from its inception.
- Reasonable investigation into whether a hold has been triggered. The procedures for such an investigation must be highly formalized and focus on the difficulty associated with defining “reasonable anticipation.” Courts judge a corporation’s investigation based on its demonstration of “good faith, reasonableness, and reasonable investigation, and an evaluation of the relevant facts and circumstances.”[viii] Timing is also a key issue. The reasonableness of the investigation can only be judged based on the facts and circumstances available to a party at the time of its decision. While hindsight should not affect a court’s consideration of that judgment, it is wise for investigation procedures to require revisiting these facts regularly. Should a company discover new information that indicates the need for a legal hold, it must act accordingly. Moreover, because months or years may lapse between the potential triggering of a legal hold and actual legal action, it is imperative to document formally the bases for any decision either not to institute a hold or to do so and subsequently release it.
- Reasonable steps to identify and preserve the relevant information. This can be very difficult. Rule 34 provides initial guidance: an organization should consider information within its “possession, custody, and control.”[ix] At the same time, courts routinely cite Rule 26(b)(1) for the proposition that parties do not have to preserve everything. A measure of proportionality is critical to prevent parties from becoming crippled by the discovery process.[x] That determination should be left to the courts. Rule 34’s standard for preserving relevant information within one’s “possession, custody and control” should thus be treated as a baseline. Other parties—e.g., outside counsel and outsourcing providers—may have information just as or even more material to the matter. That information also must be identified and preserved. Identifying custodians on a reactionary basis is unwise both in terms of (i) educating existing (and new) custodians as to retention policies, and also (ii) identifying relevant information at the critical moment. In this respect, data maps are not only indispensible from a legal standpoint; they also make good business sense. A streamlined preservation and collection regime will yield substantial ROI beyond “just” expected risk management.
- Instituting an Effective Written Legal Hold and Informing Relevant Custodians. Written legal holds are necessary in order to avoid Judge Scheindlin’s admonitions in Pension Committee.[xi] Holds should be as simple as possible without compromising effectiveness, as most custodians will not understand complex legal instructions. Holds must define not only what to preserve, but also how to preserve it. In this respect and in terms of the practical implementation of the hold, the Legal department and/or e-discovery team should work closely with IT to define preservation protocol. Finally, the process should be reviewed regularly. Corporations acquire new technology. Custodians leave companies, which requires capturing their knowledge of both the organization’s information and the systems in which it is stored. These factors must be incorporated into existing and future legal holds.
- Releasing Legal Holds. Legal holds do not remain in place in perpetuity, although a single hold may require years of enforcement. The lifespan of a hold depends on the legal matter (or anticipation thereof) that triggers it. Most cases settle; many are dismissed or disposed of before trial; some see the courtroom. Legal departments must carefully establish their own benchmarks for lifting holds and provide specific “how to” instructions to all relevant custodians. The Sedona Conference gives excellent advice with respect to lifting holds: Legal departments should always check with custodians to see whether information is subject to other legal holds.[xii]
Conclusion
It is not easy to implement effective, defensible legal holds. Identifying, collecting, and preserving data requires an intimate knowledge of a corporation’s data map. Who are the custodians? Where is the data stored?
Custodians change. ESI is ephemeral, and thereby presents serious risk management issues. Legal standards remain in flux, including the centerpiece of judicial review of legal holds—“reasonable anticipation” of litigation.
Corporations must implement policies and procedures that ensure the efficacy of their holds from the moment litigation is reasonably anticipated to the determination that they may be released.
Ben Kerschberg filed this content as a paid contributor to Xerox. The content is the author’s opinion and does not necessarily reflect the views of Xerox.
[ii] See Fed. R. Civ. P. 37(d) & (d)(3) (types of sanctions); Fed. R. Civ. P. 37(e) (safe harbor establishing that “[a]bsent exceptional circumstances, a court may not impose sanctions under [the Rules] on a party for failing to provide [ESI] lost as a result of the routine, good-faith operation of an electronic information system.”). It is important to note that Rule 37(e)’s limits do not supersede the courts’ well-recognized inherent authority to manage their own affairs, which includes levying sanctions.
[iii] See Pension Comm. of Univ. of Montreal Pension Plan v. Banc of American Secs., 685 F. Supp.2d 456 (S.D.N.Y. 2010) (“Failure to preserve evidence resulting in the loss or destruction of relevant information is surely negligent, and, depending on the circumstances, may be grossly negligent or willful.”). Judge Scheindlin noted that this is also true of at least five other e-discovery transgressions that are relevant here: failure (i) to institute a written hold in a timely manner; (ii) to identify custodians and to ensure that their electronic and paper records are preserved; (iii) to cease email deletion; (iv) to preserve the relevant records of former employees; and (v) to preserve backup tapes when they are the only source of relevant information or are the only accessible source of information for custodians. See id.; see also Wilson v. Thorn Energy LLC, 2010 WL 1712236 (S.D.N.Y. 2010) (holding that the loss of a USB flash drive that was the only place where relevant ESI was stored constituted gross negligence); Acorn (New York Ass’n of Community Organizations for Reform Now) v. County of Nassau, 2009 WL 605859 (E.D.N.Y. 2009) (gross negligence for failure to institute a written legal hold). In Victor Stanley v. Creative Pipe Inc., 269 F.R.D. 497 (D. Md. 2010) (Victor Stanley II), Judge Paul Grimm warned that “if a party fails to issue a written litigation hold, the court finds that it is grossly negligence, in which case relevance and prejudice and presumed. Point. Game. Match.”
[iv] See Hynix Semiconductor Inc. v. Rambus, Inc., 591 F. Supp. 1038, 1061 (N.D. Cal 2006) (reasonable anticipation requires “more than a possibility” of legal action).
[v] See The Sedona Principles at 12-13 cmt. b (June 2007), available at http://www.thesedonaconference.org/content/miscFiles/TSC_PRINCP_2nd_ed_607.pdf.
[vii] Id. (citing Arthur Andersen LLP v. United States, 544 U.S. 696 (2005) (“reasonable records and an information management policy instituted and applied in good faith should be considered in determining appropriate consequences for the destruction of evidence”)).