Know when to hold 'em, when to destroy 'em: based on recent court decisions, companies must follow minimum guidelines to ensure their retention schedule and legal holds policy are effective and legally defensible.

• Author: Isaza, John J.

In the aftermath of the Sarbanes-Oxley Act, concerns over discovery, spoliation, and what is considered pending or potential investigations or litigation have catapulted to the priority lists of most companies. After all, severe penalties, including the possibility of jail time, are at stake for those involved in the destruction of relevant documents. Companies, therefore, must balance such severe consequences with proper management of all records, including electronic ones, during litigation.

A central and difficult issue surrounding otherwise sound retention policies is determining how and what records must be held from destruction. This is especially diffilicult when making the distinction between what is considered "potential" (or threatened) litigation as opposed to clearly "pending" litigation.

Spoliation is traditionally defined as intentional or unintentional destruction or disappearance of things or documents during litigation. The spoliation rule doctrine drives the duty to preserve documents in the context of litigation or agency investigations. However, various state and federal acts, such as Sarbanes-Oxley, broaden the reach of the spoliation doctrine from mere litigation matters to pending federal or state agency investigations.

States vary widely on whether or not to recognize spoliation as a separate cause of action or whether to give courts, at minimum, discretion for sanctions. A court's ability to sanction parties for spoliation has existed for hundreds of years, although the law has developed substantially over the past few years in light of high-profile investigations such as Enron and Arthur Andersen.

Whether or not a court sanctions a party for spoliation depends on several factors, including whether the conduct was intentional, the prejudice to the other side, and the availability of alternative evidence. Some states have gone so far as to recognize a separate tort or cause of action for spoliation. Thus, the range of sanctions that courts apply to spoliation includes:

* instructions to the jury that it may infer misconduct

* evidentiary sanctions (i.e., the inability to present relevant evidence because some pieces are missing)

* dismissal of the case

* recognition of a full-blown separate cause of action for either intentional or negligent spoliation

Legal Holds and the Duty-to-Preserve Continuum

Courts can exercise great discretion to impose sanctions for destroying records relevant to pending or potential litigation. Underscoring this discretion is a variety of sources that prescribe duties to preserve potentially relevant evidence, including:

1. statutory or regulatory obligations

2. statutes of limitations

3. potential or threatened litigation or investigation

4. preservation letters from opposing counsel or agency

5. service of a complaint and resulting civil discovery statutes, discovery requests, or court orders

   The first two should be considered in creating actual records retention schedules. They are not factors in determining legal holds because these laws simply set forth proactive obligations to preserve records until the expiration specified retention or limitations period. On the other hand, the last two items set forth easily identifiable reactive events that should trigger a legal hold. Finally, the third item is critical to the legal hold decision, yet it is difficult to standardize as all sources point to reasonable foreseeability and, at times, outright prediction. This makes the ultimate decision regarding legal holds fact-specific and thus impossible to standardize.

   Notice of pending, potential, or threatened litigation or agency investigations can be in the form off

   * a preservation letter or other written notice from opposing counsel

   * pre-litigation discussions, demands, and agreements

   * facts or circumstances that would otherwise put a reasonable person on notice

   Preservation Letters or Other Written Notice from Opposing Counsel

   Prudent counsel seeking to obtain discoverable records can formally trigger the duty to preserve simply by sending notice to the opposing party spelling out a request to preserve certain data that might otherwise be deleted in the ordinary course of business. The letter may simply state:

   "Our firm has been retained by Mr. Plaintiff regarding his recent termination from employment at your company. We are currently evaluating whether or not Mr. Plaintiff has a claim against your company for wrongful termination, among other potential...