The scene plays out every day across the country: an injured worker, a demand letter comes in, a subsequent lawsuit. What are the company's responsibilities when it comes to preserving documents? In days past, the question was simpler due to the smaller volumes and fewer document types. Today, almost all business communication occurs electronically from word processing programs to internal and external e-mail accounts. University of California at Berkeley researchers announced that 93 percent of all information created during 1999 was generated in digital form, on computers of some sort. Only 7 percent came from other media, like paper, phonograph records, clay tablets, or smoke signals. And that was 1999.

This change in landscape has complicated the discovery process and increased costs across the board. However, an effective and reasonable document preservation program can serve as an active and early tool in preparing for and responding to broad electronic discovery demands. Such a program should respond to the organization's business, regulatory, and tax needs, including the need to maximize electronic storage space on the entity's server.

At a high level, a company's document retention policy should retain only e-mails with business record significance, to avoid the dangers associated with disclosing damaging information that might appear in personal communications. Such a system should include "litigation holds" to prevent destruction of documents related to ongoing or anticipated litigation. That general pronouncement is often of little use in real-world cases, as litigants in recent cases have discovered. In fact, the dangers in this area have proven quite significant. One of the more notable decisions of 2009, Phillip Adams v. Dell, 2009 WL 910801 (D. Utah Mar. 30, 2009) focused on one such hot spot—the issue of when the duty to preserve begins.

Background
Before turning to Phillip Adams, some background might help. The challenge to determine the proper scope of litigation holds is hardly new, although it has changed over time. For years, companies have understood that failing to implement and monitor document retention programs effectively can result in severe consequences, even without intentional wrongdoing. For example, in In re Prudential Sales Practices Litigation, 169 F.R.D. 598 (D.N.J. 1997), the court imposed a $1 million sanction upon Prudential after finding management had implemented a "haphazard and uncoordinated" policy of notifying employees about their responsibilities to preserve electronic documents. A few years later, one court ordered Phillip Morris to pay a $2.75 million monetary sanction for destroying relevant e-mails. United States v. Phillip Morris USA Inc., 327 F. Supp. 2d 21 (D.D.C. July 21, 2004). The court further ordered that 11 key witnesses could not testify at trial because they collectively failed to comply with the document retention policies.

Having no hold policy in place can be worse. In Keithley v. The HomeStore.com, Inc., 2008 WL 3833384 (N.D. Cal. 2008), the court sanctioned the defendant, HomeStore.com, more than $1.4 million, and entered multiple adverse inferences due to its "lackadaisical attitude with respect to discovery." In Keithley, the defendant conceded that no litigation hold policy existed during the relevant time periods underlying the claims.

When Does the Duty Begin?
Knowing when a litigation threat is "real" is subjective—and much easier in retrospect. This decision often requires analyzing overall claim risk, the scope of claim knowledge within your company, and the risk of data destruction absent a legal hold. No single (or easy) answer exists. The economic situation facing most companies, as well as the expense associated with establishing and maintaining a litigation hold, creates significant pressure to respond only when the litigation threat is absolutely concrete.

Yet, all is not lost. Courts are generally sympathetic to these challenges as companies attempt to determine when the preservation obligation arises. For example, in a non-e-discovery case, the Texas Supreme Court held that a producing party does not abuse the discovery process (by failing to produce) unless the opposing party proves that the nonproducing party had a duty to preserve the evidence at issue. Wal-Mart Stores, Inc. v. Johnson, 106 S.W.3d 718 (Tex. 2003). In Johnson, a Wal-Mart employee stocking merchandise accidentally knocked a decorative reindeer onto Johnson's head and arm. The court held that nothing in the investigation surrounding the accident gave Wal-Mart notice of Johnson's intent to sue or that there was a substantial chance that Johnson would sue. Thus, Wal-Mart had no duty to preserve the reindeer because Wal-Mart did not anticipate litigation.

In the e-discovery context, in Cache La Poudre Feeds, LLC v. Land O'Lakes, Inc., 244 FRD 614 (D. Colo. 2007), the court held that the duty to preserve was not triggered by "back and forth equivocal letters about a dispute," noting the "less than adamant tone" of plaintiff's letters. Absent a clear litigation threat, Land O'Lakes did not need to presume litigation, and, therefore, there was no duty to implement the legal hold until Cache La Poudre Foods filed the lawsuit. Similarly, Judge Lee Rosenthal held that e-mail destruction automatic deletion was not sanctionable, absent demonstrated bad faith when good faith was evident in preserving the other potentially relevant data. Escobar v. City of Houston, 2007 WL 2900581 (S.D. Tex. Sept. 29, 2007).

With this backdrop, the District of Utah decided Phillip Adams v. Dell. In that patent case, the plaintiff challenged one of the defendants' efforts and timing preserving electronic information. The underlying claims addressed whether that defendant reverse engineered plaintiff's patented programs for solving a defect in floppy disk controllers. When the plaintiff compared the defendant's produced documents with documents produced in other related cases (involving other defendants), it found the production lacking. Simply, the defendant did not produce enough documents relevant to the dispute. The defendant responded, saying that its servers were "not designed for archival purposes" and it had instructed employees to preserve only e-mail "of long term value" locally. Therefore, only a limited number of documents were available for production. Further, the defendant said that it preserved documents only when it was clear that the company would be sued, and not when the first of these related cases appeared at the courthouse.

The court disagreed and held that the defendant had not established good faith in handling data given the threat of potential litigation. The court specifically noted that the company's ability to preserve financial data demonstrated that the company knew how to preserve important electronic information. Therefore, the safe harbor of FED. R. CIV. P. 37(e)—which prevents judicial sanctions when electronically stored information is destroyed during the good faith routine use of a computer system—did not protect the defendant's years of data destruction.

Remarkably, even though this particular defendant received a demand letter in 2005 and was not sued until 2007, the court held that component manufacturers like the defendant "were sensitized" to the floppy disk controller errors by class action lawsuits filed in 1999-2000, and the defendant should have preserved documents and other information related to those errors since that time. Further, as with Prudential years ago, the court held that the defendant's "lack of a retention policy and irresponsible data retention practices are responsible for the loss of significant data."

The judge's criticism on the defendant's retention policies informs other companies about the importance of getting ahead of the problem. The defendant's retention policies allowed individual employees to decide which e-mails to save. This unfettered discretion—combined with a perceived absence of relevant documents—led the court to find the retention policy unreasonable and sanctions appropriate.

The Phillip Adams story is not at an end. The magistrate judge's decision is on appeal. That said, the opinion presents a significant cautionary tale on what might trigger the duty to preserve information and when that duty is triggered.

What to Preserve and What to Discard?
Generally, electronic information falls into three categories: active, backup, and residual. Active data files contain information readily available and accessible from personal computers. Active data can include e-mail, word processing documents, spreadsheets, databases, and calendars and is relatively easy to view and obtain. "Easy" means "inexpensive," such that, unless special circumstances exist, companies should limit their production (but not necessarily their collection and preservation) efforts to active data.

E-mail is particularly problematic, because of its sheer volume, and the lack of logical filing methods for most e-mail systems. As a result, business e-mails are mixed with personal e-mails, ranging from love letters to chain-forwarded jokes. Accordingly, retrieving and screening of e-mail messages for relevance and privilege can prove difficult, costly, and time-consuming. Further, while requests for e-mail are common, valuable responsive discoverable documents exist in numerous other formats as well.

Backup data include files created automatically by various applications. These documents were never saved, and the user is probably not aware that they exist. Nevertheless, they may still be retrievable, and therefore discovered. Automatically backing up a file creates a file clone stored on the user's hard drive, but usually not on the network server. These backups continue to reside on the user's hard drive even after the document or file is deleted from the network server. These documents are rarely well organized, at least not from a human's point of view.

Over the years, backup tapes have generated great consternation and concern. While restoring backup tapes was once expensive, it is more economical now. The infamous Morgan Stanley case turned on backup tape production. Morgan Stanley could not restore its tapes in a timely fashion, resulting in an adverse inference instruction against it. Prepared future litigants know that if backup tapes are only used for disaster recovery, it will be much less likely that the company will need to restore those tapes.

Courts are increasingly less sympathetic to parties forced to expend significant resources in recovering data from inaccessible sources such as backup tapes when the party failed to preserve the equivalent accessible data. For example, in AAB Joint Venture v. United States, 75 Fed. Cl. 432 (Fed. Cl. 2007), the government did not produce any e-mail, and then argued that relevant e-mails were inaccessible because they only existed on backup tapes. The court rejected this argument, noting that a party is not excused from the obligation to produce relevant evidence simply because its preservation system is costly or inefficient. Importantly, the court held that if the government instituted a legal hold when it first became aware of a credible litigation threat, it might have preserved active e-mail, without having to rely on more costly backup tapes. This mistake sank the government's arguments.

In sum, companies must make a measured, considered response to potential litigation threats. Ignoring the issue is a recipe for disaster; courts are more understanding if the company has taken documented steps to evaluate the issues related to the potential dispute, even if the company determines that it does not yet have any duty to preserve.

How to Handle a Hold
The basics of a litigation hold include issuing a hold notice, identifying the right custodians (or key players), coordinating data identification and preservation, monitoring the implementation of the hold, and then releasing the hold.

Issuing a legal hold is the critical first step in satisfying the preservation obligation. However, even before any hold is needed, all employees should understand the company's legal hold policy and how to respond to any hold notice they receive. Representatives from legal, IT, and records management (if applicable) must have a thorough working knowledge of the policy and their various responsibilities under that policy.

Once a lawsuit is filed or hold notice issued, the company must suspend its document retention policies to prevent discarding data, and must notify employees to refrain from deleting e-mails or other computer documents.

This process becomes inefficient and ultimately unproductive if a lawyer does not know who to ask or how to ask for the information sought. It is often useful to interview individual data custodians so that the lawyer can best understand how the data are organized and what they contain. Such an interview would identify what resources the custodian uses and address more substantive issues as well. Topics also should include passwords, e-mail accounts used, and any idiosyncratic shorthand used at the company or in the industry.

With this information in hand, a lawyer can conduct a more focused, reasonable, and cost-effective search that will help undermine objections that discovery demands for electronic evidence are overbroad, unduly burdensome, or cumulative. Time spent analyzing personnel and corporate structure could prove valuable in locating the right employee for deposition or to shape the initial discovery requests.

Once counsel has identified all regular or automatic deletion or alteration operations affecting the company's data, users must understand the need to preserve data and work closely with IT personnel. The company should clearly document how this information is sent to the users. Documenting the process can provide protection against future sanctions and provide assurance that the proper steps are being taken. Importantly, documenting also can, hopefully, avoid problems. Such documentation may include detailing the origin of computer evidence, which computer contains what data, hard drive contents, the computer's location, the computer's custodian, who was authorized to use the computer, and how the drive was imaged. Continuously documenting electronic data collection efforts assists in collecting less nonrelevant data and ensures that data that should be collected are not overlooked.

The case of Treppel v. Biovail Corp., 2008 WL 866594 (S.D.N.Y. Apr. 2, 2008), illustrates some of the pitfalls of failing to send litigation holds and failing to follow up with the custodians. When discussing Biovail's efforts in implementing its litigation hold, the court found the corporation was slow to start its preservation program and that, although the general counsel claimed to have instructed two custodians to preserve electronically stored information, it was unclear when they actually began preserving evidence or what materials they preserved. In the end, Biovail's failings led to significant distractions within the underlying litigation.

Parties face another challenge in determining how to remove litigation holds once put into place. Since the Federal Rules of Civil Procedure were amended in 2006, companies understand the need to implement effective document preservation in order to avoid spoliation claims or other sanctions. However, those same companies typically do not have a process for releasing those holds after the litigation concludes. Automatically retaining data from concluded cases could cause problems because those databases might become sources of evidence in future matters. If counsel and parties are not careful, the company may incur the fixed costs of searching these databases without any real benefit (and potential detriment) in future litigation.

Conclusion
Electronic discovery can result in substantial costs to the parties, even when those parties do everything right. However, the situation becomes worse when those parties do not adequately prepare for litigation, creating the potential for sanctions and other distractions. Courts have been reluctant to sanction companies that have (and follow) well-developed (and documented) processes that can be demonstrated at a later date, but judges are quite willing to sanction companies whose policies are haphazard, poorly implemented, or poorly documented. Phillip Adams presents an important shot across the bow, another warning of the dangers of ignoring the e-discovery obligations facing companies today. The lesson is clear: you can't benefit from the safe harbor if you don't know when to get out of the water. In other words, if you don't know when to hold 'em, you might find yourself holding a losing hand.