Electronic Data Preservation

June 2005

Last week the U.S. Supreme Court reversed Arthur Andersen’s conviction for failing to preserve records relating to Enron’s accounting practices.  That decision does nothing to diminish concerns about a growing trend to punish corporate defendants who fail to take effective steps to preserve electronic and other records whenever litigation is “reasonably anticipated.”

This is a difficult problem because 10 years ago there was a limit to how much paper even the largest business could generate, and it took a conscious effort to destroy some portion of those paper records.  Today businesses generate exponentially more electronic data, retain it on servers, and much of it is routinely purged or written over.  When a litigant can convince a judge that some of that improperly purged data might have helped him prove his case, the court sanctions the party that failed to preserve the records.  Such sanctions have included instructing the jury to presume that the destroyed records would have helped prove the other side’s case, and effectively reversing the normal burden of proof so that a defendant accused of fraud has to prove its innocence.

The Arthur Andersen case involved a criminal conviction based on flawed jury instructions.  The cases discussed below involve routine commercial litigation which turns disastrously wrong because of a failure to preserve electronic records – usually emails – that may not have harmed the defense even if they had been retained. 

United States v. Philip Morris:

In July 2004, the federal court in Washington D.C. levied sanctions against Philip Morris in the amount of $2.75 million.   In this case, the court instructed Philip Morris to place a “litigation hold” on electronic data to prevent destruction of information that may have been relevant.  Despite this order, the corporation maintained its normal email deletion policy in which all messages older than 60 days were automatically deleted from the system.  Among the emails that were routinely deleted were messages from numerous company senior executives and officials.  This policy was allowed to continue for nearly two years.  Although the court ruled that there was no bad faith on the part of Philip Morris, it determined that the corporation failed to affirmatively take steps to ensure that its document and data retention policies complied with the order.  This case illustrates that in addition to intentional wrongdoing, courts punish unintentional or negligent destruction of electronic data. 

Perelman v. Morgan Stanley

Earlier this year, a Florida jury awarded $1.4 billion in damages to a plaintiff on the claim that Morgan Stanley made fraudulent representations in the plaintiff’s sale of the controlling interest in the Coleman Co. to the Sunbeam Corp.   The verdict included an award of $850 million in punitive damages.  The court determined that Morgan Stanley failed to adequately preserve electronic data by allowing email messages to be overwritten after one year.   The emails were destroyed despite the fact that the SEC requires that all email be retained in an accessible form for a minimum of two years.  Although Morgan Stanley claimed that its failure to preserve the emails was not a sign that it intended to actively conceal evidence in bad faith, the court found that its actions deserved substantial sanctions.  The judge sanctioned the defendants for the discovery violations by instructing the jury to assume that Morgan Stanley defrauded Perelman by helping Sunbeam inflate its earnings.

Zubulake v. UBS Warburg:

In Zubulake, the United States District Court for the Southern District of New York issued a $29.3 million verdict in a gender discrimination and illegal retaliation case.   The plaintiff claimed that key evidence in emails exchanged among UBS Warburg employees existed only on backup tapes and archived media.  The defendant failed to preserve and produce the electronic evidence, resulting in a significant delay in the production of some relevant emails and in the complete destruction of others.   Furthermore, the defendant's counsel failed to fully communicate the “litigation hold” to the corporation’s key players which resulted in significant compliance failure.  The court held that the defendant and its counsel had not taken the necessary steps to “guarantee” that relevant data was preserved and produced.  The court further determined that the destruction of the emails was willful.  As a result, the court allowed an adverse inference instruction to the jury, telling it to presume that the destroyed emails would have helped the plaintiff.

In Summary:

These cases demonstrate how failure to meet the demands of electronic discovery can lead to unanticipated adverse results.   Attorneys and businesses have continuously struggled to ensure that potentially relevant information is preserved for discovery.   The current e-discovery environment increases these challenges.  One of the biggest obstacles to preserving electronic evidence is that despite being easily created and duplicated, it is extremely fragile and is highly susceptible to inadvertent destruction.

The possibility of electronic discovery issues exists in every case.   While the duty to preserve evidence attaches, at the very latest, when litigation commences, the growing trend is for courts to attach the obligation to preserve relevant evidence as soon as the party has knowledge that the information may be relevant to any future litigation.  It is imperative that companies and legal counsel work together to deal with the unique e-discovery challenges facing businesses today.

There are preventative steps that can be taken to improve your company’s ability to preserve electronic evidence and avoid the risk of sanctions for failing to properly preserve information.  These steps may include:

Technological advancements and current judicial trends have forced businesses to change the way they think about information and electronic discovery.  Today, courts expect businesses and legal counsel to be much more informed of the responsibilities and duties related to e-discovery.  Accordingly, we strongly recommend that you carefully review your policies, procedures and practices concerning information retention and electronic data preservation.

If you have any questions regarding this advisory, please contact a member of the Frost Brown Todd Labor and Employment Department.

Additional Documents: